10-Q 1 ministry10q093012.htm MINISTRY PARTNERS INVESTMENT COMPANY, LLC FORM 10-Q FOR THE QARTERLY PERIOD ENDED SEPTEMBER 30, 2012 ministry10q093012.htm


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2012
 
OR
 
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the period from _____ to _____

333-4028la
(Commission file No.)
 
MINISTRY PARTNERS INVESTMENT COMPANY, LLC
(Exact name of registrant as specified in its charter)
 
CALIFORNIA
(State or other jurisdiction of incorporation or organization
26-3959348
 (I.R.S. employer identification no.)
 
 
 915 West Imperial Highway, Brea, Suite 120, California, 92821
(Address of principal executive offices)
 
(714) 671-5720
(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 þ  No o.
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, 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  þ  No 
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company filer.  See the definitions of  “accelerated filer, “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (check one):
 
 Large accelerated filer o
 Accelerated filer o
 Non-accelerated filer o
Smaller reporting company filer þ

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

At September 30, 2012, registrant had issued and outstanding 146,522 units of its Class A common units.  The information contained in this Form 10-Q should be read in conjunction with the registrant’s Annual Report on Form 10-K for the year ended December 31, 2011.
 

 
 
 

 
MINISTRY PARTNERS INVESTMENT COMPANY, LLC
FORM 10-Q
TABLE OF CONTENTS

 
PART I — FINANCIAL INFORMATION
 
   
Item 1.  Consolidated Financial Statements
F-1
   
Consolidated Balance Sheets  (unaudited) at September 30, 2012 and December 31, 2011 (audited)
F-1
   
Consolidated Statements of Operations (unaudited) for the three and nine months ended September 30, 2012 and 2011
F-2
   
Consolidated Statements of Cash Flows (unaudited) for the nine months ended September 30, 2012 and 2011
F-3
   
Notes to Consolidated Financial Statements
F-5
   
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations
3
   
Item 3. Quantitative and Qualitative Disclosures About Market Risk
16
   
Item 4.  Controls and Procedures
17
   
PART II — OTHER INFORMATION
 
   
Item 1.  Legal Proceedings
17
Item 1A.  Risk Factors
17
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds
17 
Item 3.  Defaults Upon Senior Securities
17
Item 4.  Mine Safety Disclosures
17
Item 5.  Other Information
17
Item 6.  Exhibits
18
   
SIGNATURES
18
   
Exhibit 31.1 — Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15(d)-14(a)
 
   
Exhibit 31.2 — Certification of Principal Financial and Accounting Officer pursuant to Rule 13a-14(a) or Rule 15(d)-14(a)
 
   
Exhibit 32.1 — Certification pursuant to 18 U.S.C. §1350 as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002
 
   
Exhibit 32.2 — Certification pursuant to 18 U.S.C. §1350 as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002
 
 
 
 

 
PART I - FINANCIAL INFORMATION
 
Item 1.  Financial Statements
MINISTRY PARTNERS INVESTMENT COMPANY, LLC
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2012 AND DECEMBER 31, 2011
 (Dollars in Thousands Except Unit Data)

   
2012
   
2011
 
    (Unaudited)    
 (Audited)
 
Assets:
           
             
Cash
  $ 11,711     $ 11,167  
                 
Loans receivable, net of allowance for loan losses of $3,985 and $4,127 as of September 30, 2012 and December 31, 2011, respectively
    153,649       165,355  
                 
Accrued interest receivable
    633       725  
                 
Property and equipment, net
    241       303  
                 
Debt issuance costs
    79       104  
                 
Foreclosed assets
    3,050       1,374  
                 
Other assets
    332       253  
                 
Total assets
  $ 169,695     $ 179,281  
                 
Liabilities and members’ equity
               
Liabilities:
               
                 
Borrowings from financial institutions
  $ 104,650     $ 110,280  
                 
Notes payable
    54,680       59,030  
                 
Accrued interest payable
    22       15  
                 
Other liabilities
    487       478  
                 
Total liabilities
    159,839       169,803  
                 
Members' Equity:
               
                 
Series A preferred units, 1,000,000 units authorized, 117,100 units issued and outstanding at September 30, 2012 and December 31, 2011 (liquidation preference of $100 per unit)
      11,715         11,715  
                 
Class A common units, 1,000,000 units authorized, 146,522 units issued and
outstanding at September 30, 2012 and December 31, 20111,509
    1,509       1,509  
                 
Accumulated deficit
    (3,368 )     (3,746 )
                 
Total members' equity
    9,856       9,478  
                 
Total liabilities and members' equity
  $ 169,695     $ 179,281  
 
The accompanying notes are an integral part of these consolidated financial statements.
 
F-1

 
 MINISTRY PARTNERS INVESTMENT COMPANY, LLC
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(Dollars in Thousands)
 
   
Three months ended
September 30,
   
Nine months ended
September 30,
 
   
 
 2012
   
 
 2011
   
 
 2012
   
 
 2011
 
Interest income:
                       
                         
Interest on loans
  $ 2,480     $ 2,657     $ 7,493     $ 8,258  
                                 
Interest on interest-bearing accounts
    37       22       111       69  
                                 
Total interest income
    2,517       2,679       7,604       8,327  
                                 
Interest expense:
                               
                                 
Borrowings from financial institutions
    676       1,150       2,050       3,601  
                                 
Notes payable
    601       641       1,843       1,962  
                                 
Total interest expense
    1,277       1,791       3,893       5,563  
                                 
Net interest income
    1,240       888       3,711       2,764  
                                 
Provision (credit) for loan losses
    87       822       (49 )     1,305  
                                 
Net interest income after provision (credit) for loan losses
    1,153       66       3,760       1,459  
                                 
Non-interest income
    30       28       90       166  
                                 
Non-interest expenses:
                               
                                 
Salaries and benefits
    509       399       1,423       1,136  
                                 
Marketing and promotion
    43       37       112       98  
                                 
Office operations
    333       341       1,131       1,091  
                                 
Legal and accounting
    107       132       536       557  
                                 
Total non-interest expenses
    992       909       3,202       2,882  
                                 
Income (loss) before provision for income taxes
    191       (815 )     648       (1,257 )
                                 
Provision for income taxes
    4       3       12       11  
                                 
Net income (loss)
  $ 187     $ (818 )   $ 636     $ (1,268 )
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
F-2

 
 
MINISTRY PARTNERS INVESTMENT COMPANY, LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011
(Dollars in Thousands)
 
 
   
2012
   
2011
 
CASH FLOWS FROM OPERATING ACTIVITIES:
           
             
Net income (loss)
  $ 636     $ (1,268 )
                 
Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities:
               
                 
Depreciation
    94       90  
                 
Amortization of deferred loan fees
    (105 )     (139 )
                 
Amortization of debt issuance costs
    126       172  
                 
Provision (credit) for loan losses
    (49 )     1,305  
                 
Accretion of allowance for loan losses on restructured loans
    (46 )     (67 )
                 
Accretion of loan discount
    (5 )     (56 )
                 
Changes in:
               
                 
Accrued interest receivable
    91       (6 )
                 
Other assets
    (80 )     (145 )
                 
Other liabilities and accrued interest payable
    16       (89 )
                 
Net cash provided (used) by operating activities
    678       (203 )
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
                 
Loan purchases
    (10,894 )     --  
                 
Loan originations
    (8,999 )     (4,307 )
                 
Loan sales
    2,425       5,390  
                 
Loan principal collections, net
    27,703       12,539  
                 
Purchase of property and equipment
    (32 )     (8 )
                 
Net cash provided by investing activities
    10,203       13,614  
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
                 
Net change in borrowings from financial institutions
    (5,629 )     (10,844 )
                 
Net changes in notes payable
    (4,350 )     (3,103 )
                 
 
 
 
 
F-3

 
 
 
 
Debt issuance costs
    (100 )     (109 )
                 
Purchase of preferred units
    --       (45 )
                 
Dividends paid on preferred units
    (258 )     (234 )
                 
Net cash used by financing activities
    (10,337 )     (14,335 )
                 
Net increase (decrease) in cash
  $ 544     $ (924 )
                 
Cash at beginning of period
    11,167       7,078  
                 
Cash at end of period
  $ 11,711     $ 6,154  
                 
Supplemental disclosures of cash flow information
               
                 
     Interest paid
  $ 3,886     $ 5,446  
                 
     Income taxes paid
  $ 14     $ --  
                 
     Transfer of loans to foreclosed assets
  $ 1,676     $ 1,374  
                 
 
The accompanying notes are an integral part of these consolidated financial statements.
  

 
F-4

 
MINISTRY PARTNERS INVESTMENT COMPANY, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
The accounting and financial reporting policies of MINISTRY PARTNERS INVESTMENT COMPANY, LLC (the “Company”, “we”, or “our”) and our wholly-owned subsidiaries, Ministry Partners Funding, LLC, MP Realty Services, Inc., and Ministry Partners Securities, LLC, conform to accounting principles generally accepted in the United States and general financial industry practices.  The accompanying interim consolidated financial statements have not been audited.  A more detailed description of our accounting policies is included in our 2011 annual report filed on Form 10-K.  In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position, results of operations and cash flows at September 30, 2012 and for the three and nine months ended September 30, 2012 and 2011 have been made.
 
Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. The results of operations for the periods ended September 30, 2012 and 2011 are not necessarily indicative of the results for the full year.
 
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 on December 31, 2008.  The Company is owned by a group of 12 federal and state chartered credit unions, none of which owns a majority of the voting equity units of the Company.  One credit union owns only preferred units while the others 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.  Most of the Company’s loans are purchased from its largest equity investor, the Evangelical Christian Credit Union (“ECCU”), of Brea, California. The Company also 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 33 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”), for the purpose of warehousing church and ministry mortgages purchased from ECCU or originated by the Company for later securitization.  MPF’s loan purchasing activity continued through early 2010, after which its operations ceased and its assets, including loans, were transferred to the Company.  MPF has no liabilities and is currently inactive. The Company closed down active operations of MPF effective as of December 31, 2009 but intends to maintain MPF’s existence as a Delaware limited liability company for possible future use as a financing vehicle to effect debt financing transactions.  MPF did not securitize any of its loans.

On November 13, 2009, the Company formed a wholly-owned subsidiary, MP Realty Services, Inc., a California corporation (“MP Realty”).  MP Realty provides loan brokerage and other real estate services to credit unions, financial institutions, churches and ministries in connection with the Company’s mortgage financing activities and services it provides to federal and state chartered credit unions. 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. On September 24, 2012, MP Securities received a no objection letter from FINRA, thereby authorizing MP Securities to act as a selling agent for the Company’s Class A Notes offering that will be offered under a registration statement filed with the U.S. Securities and Exchange Commission (“SEC”).  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, as well as by business members of credit unions it serves and act as a selling agent in placing mortgage backed business loans made by credit unions to institutional investors.

 
F-5

 
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.

By operation of law, the converted entity continued with all of the rights, privileges and powers of the corporate entity and is managed by a group of managers that previously served as the Board of Directors.  The executive officers and key management team remained intact.  The converted entity by operation of law possessed all of the properties and assets of the converted corporation and remains responsible for all of the notes, debts, contract claims and obligations of the converted corporation.

Since the conversion became effective, the Company is managed by a group of managers that provides oversight of the affairs and carries out their duties similar to the role and function that the Board of Directors performed under the previous bylaws.  Operating like a Board of Directors, the managers have full, exclusive and complete discretion, power and authority to oversee the management of Company affairs.  Instead of Articles of Incorporation and Bylaws, management structure and governance procedures are now governed by the provisions of an Operating Agreement that has been entered into by and between the Company’s managers and members.

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.

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 straight-line method, which results in an amortization that is materially the same as the interest method.  Loan discounts represent an offset against interest accrued and unpaid which has been added to loans that have been restructured.  Loan discounts are accreted to interest income over the term of the loan using the interest method once the loan is no longer considered impaired and is no longer in its restructure period.  Loan discounts may also represent the difference between the purchase price of a loan and the outstanding principal balance of the loan.  These discounts are accreted to interest income over the term of the loan using the interest method.

The accrual of interest is discontinued at the time the loan is 90 days past due.  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.
 
 
F-6

 

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.

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.  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 our 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.

In determining the general component of the allowance, we examine the performance characteristics of our loan portfolio, 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.  In 2009, we also added a factor relating to the portion of our loan portfolio that is held in a loan participation interest.  The net effect of adding this factor in our analysis resulted in an increase in the allowance for loan losses that reflects the greater risk of loss associated with holding a loan participation interest in which we do not serve as the lead lender for the loan.

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.  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.  As a result, management has increased the weight of these factors for loans with a higher risk rating.   This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

All loans in the loan portfolio are subject to impairment analysis.  The Company reviews its loan portfolio monthly by examining delinquency reports, information related to the financial condition of its borrowers and the 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.

 
F-7

 
Impairment is measured on a loan-by-loan basis by either the present value of expected future cash flows discounted at the loan's original effective interest rate, the obtainable market price, or the fair value of the collateral if the loan is collateral dependent.    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 foreclosure is completed.  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. 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.  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.

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.

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.

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 our borrowers to keep their ministries intact and avoid foreclosure.  With a successful loan restructure, we avoid a loan charge-off and protect the interests of the investors and borrowers we serve.

Loan Portfolio Segments and Classes

Management segregates the loan portfolio into portfolio segments for purposes of evaluating the allowance for loan losses. A portfolio segment is defined as the level at which the Company develops and documents a systematic method for determining its allowance for loan losses. The portfolio segments are segregated based on loan types and the underlying risk factors present in each loan type. Such risk factors are periodically reviewed by management and revised as deemed appropriate.
 
 
 
F-8

 

The 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.

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 at the time of foreclosure is charged to the allowance for loan losses.  If the fair value, less costs to sell, of the foreclosed property decreases during the holding period, a valuation allowance is established with a charge to operating expenses taken.  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-9

 

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.

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

Property and Equipment

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

Debt Issuance Costs

Debt issuance costs are related to borrowings from financial institutions and offerings of debt securities and are amortized into expense over the contractual terms of the debt or the life of the offering, respectively.

Income Taxes

Effective December 31, 2008, the Company converted from a C corporation to a California limited liability company (LLC). As a result, the stockholders of the Company became members of the LLC on the conversion date. The LLC is treated as a partnership for income tax purposes; therefore, the Company is no longer a tax-paying entity for federal or state income tax purposes, and no federal or state income tax will be recorded in its financial statements after the date of conversion. Income and losses of the Company are passed through to the members of the LLC for tax reporting purposes. The Company is subject to a California gross receipts fee of approximately $12,000 per year for years ending on and after December 31, 2009.  The Company’s subsidiaries are LLCs except for MP Realty, which was organized as a California corporation.  MP Realty incurred a tax loss for the year ended December 31, 2011 and recorded a provision of $800 for the state minimum franchise tax.

Although the Company is not a federal or state income tax-paying entity, it is nonetheless subject to Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) for Income Taxes for all “open” tax periods for which the statute of limitations has not yet run.  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.

 
F-10

 
Employee Benefit Plan

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

Recent Accounting Pronouncements

In December 2011, the FASB issued new guidance Accounting Standards Update (ASU) No. 2011-11, “Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities.” This new guidance requires expanded information about financial instruments or derivatives that are either presented on a net basis in the balance sheet or subject to an enforceable master netting arrangement or similar arrangement. The new guidance does not change existing offsetting criteria in U.S. GAAP or the permitted balance sheet presentation for items meeting the criteria. The new disclosure requirements in the ASU are intended to enhance comparability between financial statements prepared using U.S. GAAP and those prepared using International Financial Reporting Standards (IFRS). The amendments in this guidance are effective during interim and annual periods beginning on or after January 1, 2013.  The Company does not expect this guidance to have a material impact on its consolidated financial statements.

2.  Related Party Transactions
 
We maintain most of our cash funds at ECCU, our largest equity investor. Total funds held with ECCU were $11.0 million and $10.9 million at September 30, 2012 and December 31, 2011, respectively. Interest earned on funds held with ECCU totaled $110.6 thousand and $68.2 thousand for the nine months ended September 30, 2012 and 2011, respectively.
 
We lease physical facilities and purchase other services from ECCU pursuant to a written lease and services agreement. Charges of $77.3 thousand and $85.7 thousand for the nine months ended September 30, 2012 and 2011, respectively, were incurred for these services and are included in office operations expense. The method used to arrive at the periodic charge is based on the fair market value of services provided.  We believe that this method is reasonable.
 
From time to time, we purchase mortgage loans, including loan participation interests from ECCU, our largest equity owner.  During the nine month period ended September 30, 2012, we purchased $5.8 million of loans from ECCU.  We did not purchase any loans from ECCU during the nine months ended September 30, 2011.  With regards to all loans purchased from ECCU, we recognized $3.8 million and $5.8 million of interest income during the nine months ended September 30, 2012 and 2011, respectively.  ECCU currently acts as the servicer for 70 of the 126 loans in the Company’s loan portfolio.  Under the terms of the loan servicing agreement we entered into with ECCU, a servicing fee of 50 to 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 generally have pass-through rates which are 50 to 75 basis points lower than the loan’s contractual rate.  On a limited number of loan participation interests purchased from ECCU, representing $5.4 million of loans at September 30, 2012, the pass-through rate is between 88 and 135 basis points lower than the contractual rate.  The Company negotiates the pass-through interest rates with ECCU on a loan by loan basis.  At September 30, 2012, the Company’s investment in wholly-owned loans serviced by ECCU totaled $43.3 million, while the Company’s investment in loan participations serviced by ECCU totaled $42.6 million.  From time to time, the Company pays fees for additional services ECCU provides for servicing these loans.  These fees amounted to $3.8 thousand during the nine months ended September 30, 2011. We paid fewer than one thousand dollars of these fees during the nine months ended September 30, 2012.

ECCU has also repurchased mortgage loans from us as part of our liquidity management practices.  In addition, ECCU has from time to time repurchased from the Company fractional participations in the loan investments which ECCU already services, usually around 1% of the loan balance, to facilitate compliance with National Credit Union Association (“NCUA”) rules when participations in those loans were sold to federal credit unions.  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.  No whole loans or loan participations were sold to ECCU during the nine months ended September 30, 2012 and 2011, respectively.

 
F-11

 
Other Related Party Transactions

On December 28, 2011, we entered into a Loan Purchase Agreement with ECCU, pursuant to which ECCU agreed to repurchase two of our impaired mortgage loan interests in exchange for a cash purchase price of $4.5 million. In addition to the delivery of the cash purchase price, ECCU also transferred to us a 1% participation interest and second deed of trust in a loan which resulted in us holding a 100% interest in such loan. While the 1% loan participation interest and second deed of trust we acquired had a principal balance of $25 thousand and $500 thousand, respectively, we received no value for these loan interests since the acquired loans were in default and the value of the real property was estimated to be approximately $1.2 million less than the outstanding principal balance of the mortgage loan interest we owned prior to entering into the Loan Purchase Agreement.

Prior to entering into negotiations with ECCU, we notified ECCU that we believed that ECCU had breached certain representations and warranties set forth in mortgage loan purchase agreements we had entered into with ECCU to purchase three (3) mortgage loan interests for an aggregate sum of $6.6 million. In exchange for the delivery of the $4.5 million purchase price and mortgage loan interests acquired from ECCU, we agreed to grant a release, waiver and discharge of certain claims we had made for an alleged breach of representations and warranties made by ECCU in connection with three (3) loans we had acquired from ECCU. We also agreed to grant a complete release and discharge for any claims arising out of the purchase, servicing and any actions undertaken by ECCU as the lead lender for an additional nine (9) loans we previously acquired from ECCU which no cause for claims had been identified, or which were reasonably expected to be, subject to any claims arising in connection with the purchase of such loans.  This loan sale enabled us to recover $914 thousand of allowance for loan losses that had been previously recorded on two of the loans we sold to ECCU.

While no independent valuation was made in determining the value of the claims we released in favor of ECCU, we believe that litigation risks and uncertainties in pursuing such claims resulted in an arms-length purchase price mutually agreed upon with ECCU in exchange for granting a release of such claims. Prior to entering into the Loan Purchase Agreement, we requested and received independent market valuations for the impaired loan interests that were transferred to and received from ECCU pursuant to the terms of the Loan Purchase Agreement. In addition, we relied upon the advice of independent legal counsel in evaluating litigation risks we faced in pursuing an action against ECCU arising from our purchase of these mortgage loan interests. None of our managers that serve as an officer, director or employee of ECCU participated in any of the discussions, review and approval of the Loan Purchase Agreement. As a result, the terms, conditions and provisions of the Loan Purchase Agreement were negotiated and approved by our independent managers in accordance with our Related Party Transaction Policy.

On December 14, 2007, the Board of Directors appointed R. Michael Lee to serve as a Company director.  Mr. Lee serves as Vice President Member Relations, Midwest Region, of Alloya Corporate Federal Credit Union (“Alloya”), formerly Members United Corporate Federal Credit Union (“Members United”).  See Note 6 for information regarding the Company’s borrowings from Members United.  The Company has $92.0 thousand on deposit with Alloya as of September 30, 2012.

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 $224.3 thousand of our Class A Notes. Another of our Board members, Mr. Van C Elliott, owns $83.6 thousand of our notes.

We have also entered into a selling agreement with our wholly-owned subsidiary, MP Securities, pursuant to which MP Securities will assist us in distributing our 2012 Secured Investment Certificates, which are notes we sell under a private placement memorandum and which are secured by loans or cash. 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 will also act as a selling agent for our Class A Notes offering pursuant to a Registration Statement which was declared effective by the SEC on October 11, 2012.  Our affiliate, MP Securities, will sell most of the Class A Notes being registered.  Each participating broker in the Class A Notes offering, including MP Securities, will be entitled to receive commissions ranging from .5%, plus an amount equal to .25% per annum on the average note balance for a Variable Series Note to 5% for a Flex Series or 60 month Fixed Series Note depending on whether it sells a Fixed Series, Variable Series or Flex Series note and the term of the respective note sold (12 months to 84 months).  For repeat purchasers of our Class A Notes, the gross commissions payable to the managing broker for the Offering and share of commissions payable to MP Securities will be reduced by 0.25% of the total amount of Class A Notes sold in the offering to a repeat investor who is then, or has been within the immediately preceding thirty (30) days, a noteholder.

 
F-12

 
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.

3.  Loans Receivable and Allowance for Loan Losses
 
We originate church mortgage loans, participate in church mortgage loans and also purchase entire church mortgage loans.  The loans fall into four classes:  whole loans for which the Company possesses the first collateral position, whole 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.  All of the loans are made to various evangelical churches and related organizations, primarily to purchase, construct or improve facilities. Loan maturities extend through 2022. Loans yielded a weighted average of 6.43% as of September 30, 2012, compared to a weighted average yield of 6.40% as of September 30, 2011.

On May 15, 2012, the Company entered into a Loan Purchase Agreement with Trinity Pacific Investments and Trinity Pacific OC involving two mortgage loan interests it had acquired from ECCU, which were the subject of foreclosure proceedings.  In exchange for transferring all rights, title and interest in these two mortgage loan interests, the Company received $2.425 million in cash and was relieved of any further obligations regarding the mortgage loan interests sold. Both loans were considered impaired.  The recorded investment in these loans was $2.460 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 an an allowance for loan losses.  $35 thousand of these specific reserves were charged off against our allowance for loan losses.  The Company reversed the remaining $265 thousand of specific reserves related to these two loans, reducing the Company’s provision and allowance for loan losses and improving the Company’s balance sheet and statement of operations as of and for the nine month period ended September 30, 2012.

In addition, on September 18, 2012, the Company entered into a Deed in Lieu of Foreclosure Agreement with one of its borrowers.  As a result of this agreement, the Company received the property securing one of its impaired mortgage loan interests.  The Company has recorded the entire outstanding amount of the loan, $958.8 thousand, as a real estate owned asset on its financial statements.  As the value of the collateral less estimated costs to sell is greater than the the Company’s investment, no valuation allowance has been recorded on this property.

Allowance for Loan Losses

An allowance for loan losses of $4.0 million as of September 30, 2012 and $4.1 million as of December 31, 2011 has been established for loans receivable. For the nine month period ended September 30, 2012, we reported total charge-offs of $47 thousand on three of our mortgage loan investments. Pursuant to the Trinity Loan Purchase Agreement we entered into on May 15, 2012, we also reversed $265 thousand of provisions for loan losses related to two impaired loans that we sold.  Management believes that the allowance for loan losses as of September 30, 2012 and December 31, 2011 is appropriate. Changes in the allowance for loan losses for the three and nine months ended September 30, 2012 and the year ended December 31, 2011 are as follows:

 
F-13

 

 
Three Months Ended
September 30, 2012
   
Nine months ended
September 30, 2012
   
Year Ended
December 31, 2011
 
                 
Balance, beginning of period
$ 3,921     $ 4,127     $ 3,997  
       Provisions for loan loss
  87       (49 )     1,487  
       Chargeoffs
  --       (47 )     (1,279 )
      Accretion of allowance
          related to restrusctured
          loans
$ (23 )     (46 )     (78 )
                       
Balance, end of period
$ 3,985     $ 3,985     $ 4,127  
 
Non-Performing Loans

Non-performing loans include non-accrual loans, loans 90 days or more past due and still accruing, restructured loans, and other impaired loans where the net present value of estimated future cash flows is lower than the outstanding principal balance.  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 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 or the present value of projected future cash flows.  The following is a summary of our nonperforming loans:

   
September 30
   
December 31
   
September 30
 
   
2012
   
2011
   
2011
 
                   
Impaired loans with an allowance for loan loss
  $ 11,617     $ 18,168     $ 22,337  
Impaired loans without an allowance for loan loss
    7,054       4,774       4,369  
Total impaired loans
  $ 18,671     $ 22,942     $ 26,706  
                         
Allowance for loan losses related to impaired loans
  $ 2,967     $ 3,064     $ 2,860  
                         
Total non-accrual loans
  $ 18,449     $ 22,942     $ 26,706  
                         
Total loans past due 90 days or more and still accruing
    --       --     $ 614  

We had eleven nonaccrual loans as of September 30, 2012 and fifteen at December 31, 2011.  As of September 30, 2012, we have completed foreclosure proceedings on two loan participation interests we acquired from ECCU.  We also acquired a property under the provisions of a Deed in Lieu of Foreclosure Agreement we entered into with one borrower.  In addition, we have two loans totaling $3.4 million that are currently in foreclosure proceedings.  There is a reserve of $275.6 thousand that has been recorded as an allowance for loan losses on these loans.  In April 2012, we completely wrote off one nonaccrual loan as uncollectible.  However, as this loan carried a discount for the entire principal balance, our recorded investment in the loan was zero and the write-off had no impact on our net loans receivable balance.  As of September 30, 2011, we had one loan with a balance of $614 thousand that was past due 90 days and still accruing.  This loan matured on July 1, 2011, but was in the process of being extended as of September 30, 2011.  In October, 2011, the extension was completed and payment received to bring the loan current.   The loan has remained current since the extension was completed.
 
The Company’s loan portfolio is comprised of one segment – church loans. The loans fall into four classes: whole loans for which the Company possesses the first collateral position, whole 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.
 
 
F-14

 
 
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).
 
   
Loans and Allowance for Loan Losses (by segment)
As of
 
 
   
September 30, 2012
   
December 31, 2011
 
             
Loans:
           
             
Balance
  $ 158,536     $ 170,920  
                 
Individually evaluated
               
for impairment
  $ 18,671     $ 22,942  
                 
Collectively
               
evaluated for impairment
  $ 139,865     $ 147,978  
                 
Allowance for loan losses:
               
                 
Balance
  $ 3,985     $ 4,127  
                 
Individually evaluated
               
for impairment
  $ 2,967     $ 3,064  
                 
Collectively
               
evaluated for impairment
  $ 1,018     $ 1,063  
 

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 its debt service obligations.  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.

 
F-15

 
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.

The following table is a summary of the loan portfolio credit quality indicators by loan class at September 30, 2012 and 2011, which is the date on which the information was updated for each credit quality indicator (dollars in thousands):

 
  Credit Quality Indicators (by class)
As of  September 30, 2012
   
                                 
   
Wholly-Owned
First
     
Wholly-Owned Junior
     
Participation First
     
Participation Junior
     
Total
   
Grade:
                               
Pass
  $ 82,777     $ 2,272     $ 38,231     $ 981     $ 124,261  
Watch
    10,284       3,710       4,534       -       18,528  
Substandard
    4,070       3,880       -       -       7,950  
Doubtful
    4,956       -       2,841       -       7,797  
Loss
    -       -       -       -       -  
Total
  $ 102,087     $ 9,862     $ 45,606     $ 981     $ 158,536  

 
   
 Credit Quality Indicators (by class)
As of December 31, 2011
 
 
   
Wholly Owned First
   
Wholly Owned Junior
   
Participation First
   
Participation Junior
   
Total
 
                               
Grade:
                             
Pass
  $ 89,597     $ 8,173     $ 32,782     $ -     $ 130,552  
Watch
    4,616       3,448       7,210       -       15,274  
Substandard
    3,237       3,883       4,089       1,006       12,215  
Doubtful
    8,091       1,155       3,633       -       12,879  
Loss
    -       -       -       -       -  
Total
  $ 105,541     $ 16,659     $ 47,714     $ 1,006     $ 170,920  
 

 
F-16

 
The following table sets forth certain information with respect to the Company’s loan portfolio delinquencies by loan class and amount at September 30, 2012 and 2011 (dollars in thousands):
 
Age Analysis of Past Due Loans (by class)
 
As of September 30, 2012
 
 
                                           
                                       
Recorded
 
               
 
                     
Investment
 
   
30-59 Days
   
60-89 Days
   
Greater Than
   
Total
         
Total
   
90 Days or more
 
   
Past Due
   
Past Due
   
90 Days
   
Past Due
   
Current
   
Loans
   
and Accruing
 
                                           
Church loans:
                                         
Wholly-Owned First
  $ 8,697     $ -     $ 814     $ 9,511     $ 92,576     $ 102,087     $ -  
Wholly-Owned Junior
    3,719       -       -       3,719       6,143       9,862       -  
Participation First
    -       1,453       2,611       4,064       41,542       45,606       -  
Participation Junior
    -       -       -       -       981       981       -  
                                                         
Total
  $ 12,416     $ 1,453     $ 3,425     $ 17,294     $ 141,242     $ 158,536     $ -  

 

Age Analysis of Past Due Loans (by class)
 
As of December 31, 2011
 
                                           
                                       
Recorded
 
               
 
                     
Investment
 
   
30-59 Days
   
60-89 Days
   
Greater Than
   
Total
         
Total
   
90 Days or more
 
   
Past Due
   
Past Due
   
90 Days
   
Past Due
   
Current
   
Loans
   
and Accruing
 
                                           
Church loans:
                                         
Wholly-Owned First
  $ 6,537     $ 613     $ 7,522     $ 14,672     $ 90,869     $ 105,541     $ -  
Wholly-Owned Junior
    3,448       -       1,159       4,607       12,052       16,659       -  
Participation First
    -       -       3,633       3,633       44,081       47,714       -  
Participation Junior
    -       -       -       -       1,006       1,006       -  
                                                         
Total
  $ 9,985     $ 613     $ 12,314     $ 22,912     $ 148,008     $ 170,920     $ -  
 



 
F-17

 
 
The following table is a summary of impaired loans by loan class at September 30, 2012 and December 31, 2011.  The recorded investment in impaired loans reflects the balances in the financials statements, whereas the unpaid principal balance reflects the balances before discounts and partial chargeoffs (dollars in thousands):
 
Impaired Loans (by class)
 
As of and for the three months ended September 30, 2012
 
                               
         
Unpaid
         
Average
   
Interest
 
   
Recorded
   
Principal
   
Related
   
Recorded
   
Income
 
   
Investment
   
Balance
   
Allowance
   
Investment
   
Recognized
 
                               
With no related allowance recorded:
                             
Church loans:
                             
Wholly-Owned First
  $ 4,063     $ 4,478     $ -     $ 4,073     $ 28  
Wholly-Owned Junior
    216       222       -       216       3  
Participation First
    2,611       2,744       -       2,611       -  
Participation Junior
    -       -       -       -       -  
                                         
With an allowance recorded:
                                       
Church loans:
                                       
Wholly-Owned First
    7,384       7,854       2,620       7,597       44  
Wholly-Owned Junior
    3,595       3,671       328       3,595       40  
Participation First
    230       252       19       231       -  
Participation Junior
    -       -       -       -       -  
                                         
Total:
                                       
Church loans
  $ 18,099     $ 19,221     $ 2,967     $ 18,323     $ 115  
 

 
Impaired Loans (by class)
 
As of and for the nine months ended September 30, 2012
 
                               
         
Unpaid
         
Average
   
Interest
 
   
Recorded
   
Principal
   
Related
   
Recorded
   
Income
 
   
Investment
   
Balance
   
Allowance
   
Investment
   
Recognized
 
                               
With no related allowance recorded:
                             
Church loans:
                             
Wholly-Owned First
  $ 4,063     $ 4,478     $ -     $ 4,153     $ 85  
Wholly-Owned Junior
    216       222       -       217       9  
Participation First
    2,611       2,744       -       2,633       -  
Participation Junior
    -       -       -       -       -  
                                         
With an allowance recorded:
                                       
Church loans:
                                       
Wholly-Owned First
    7,384       7,854       2,620       8,144       141  
Wholly-Owned Junior
    3,595       3,671       328       3,597       107  
Participation First
    230       252       19       565       -  
Participation Junior
    -       -       -       -       -  
                                         
Total:
                                       
Church loans
  $ 18,099     $ 19,221     $ 2,967     $ 19,309     $ 342  
 
 

 
 
F-18

 

 
Impaired Loans (by class)
 
As of and for the Year Ended December 31, 2011
 
                               
         
Unpaid
         
Average
   
Interest
 
   
Recorded
   
Principal
   
Related
   
Recorded
   
Income
 
   
Investment
   
Balance
   
Allowance
   
Investment
   
Recognized
 
                               
With no related allowance recorded:
                             
Church loans:
                             
Wholly-Owned First
  $ 1,678     $ 1,685     $ -     $ 1,691     $ 98  
Wholly-Owned Junior
    -       434       -       -       -  
Participation First
    2,655       2,655       -       2,699       -  
Participation Junior
    -       -       -       -       -  
                                         
With an allowance recorded:
                                       
Church loans:
                                       
Wholly-Owned First
    11,893       12,587       1,773       12,053       254  
Wholly-Owned Junior
    4,511       4,603       1,111       4,520       146  
Participation First
    978       978       180       983       -  
Participation Junior
    -       -       -       -       -  
                                         
Total:
                                       
Church loans
  $ 21,715     $ 22,942     $ 3,064     $ 21,946     $ 498  

A summary of nonaccrual loans by loan class at September 30, 2012 and December 31, 2011 is as follows (dollars in thousands):

Loans on Nonaccrual Status (by class)
 
As of September 30, 2012
 
       
Church loans:
     
Wholly-Owned First
  $ 11,949  
Wholly-Owned Junior
    3,658  
Participation First
    2,842  
Participation Junior
    -  
         
Total
  $ 18,449  

Loans on Nonaccrual Status (by class)
 
As of December 31, 2011
 
       
Church loans:
     
Wholly-Owned First
  $ 14,272  
Wholly-Owned Junior
    5,037  
Participation First
    3,633  
Participation Junior
    -  
         
Total
  $ 22,942  
 

 
 
F-19

 

The following are summaries of troubled debt restructurings by loan class that were modified during the period ended September 30 (dollars in thousands):

Troubled Debt Restructurings (by class)
 
For the three months ended September 30, 2012
 
                         
                         
                         
         
Pre-Modification Outstanding
   
Post-Modification Outstanding
   
Recorded
 
   
Number of Loans
   
Recorded Investment
   
Recorded Investment
   
Investment At Period End
 
                         
Church loans:
                       
Wholly-Owned First
    1     $ 981     $ 995     $ 995  
Wholly-Owned Junior
    -       -       -       -  
Participation First
    -       -       -       -  
Participation Junior
    -       -       -       -  
                                 
Total
    1     $ 981     $ 995     $ 995  


Troubled Debt Restructurings (by class)
 
For the nine months ended September 30, 2012
 
                         
                         
                         
         
Pre-Modification Outstanding
   
Post-Modification Outstanding
   
Recorded
 
   
Number of Loans
   
Recorded Investment
   
Recorded Investment
   
Investment At Period End
 
                         
Church loans:
                       
Wholly-Owned First
    3     $ 5,571     $ 5,585     $ 5,427  
Wholly-Owned Junior
    2       430       430       420  
Participation First
    1       271       249       230  
Participation Junior
    -       -       -       -  
                                 
Total
    6     $ 6,272     $ 6,264     $ 6,077  

 
 

 
 
F-20

 
Troubled Debt Restructurings (by class)
 
For the three months ended September 30, 2011
 
                         
                         
                         
         
Pre-Modification Outstanding
   
Post-Modification Outstanding
   
Recorded
 
   
Number of Loans
   
Recorded Investment
   
Recorded Investment
   
Investment At Period End
 
                         
Church loans:
                       
Wholly-Owned First
    -     $ -     $ -     $ -  
Wholly-Owned Junior
    -       -       -       -  
Participation First
    -       -       -       -  
Participation Junior
    -       -       -       -  
                                 
Total
    -     $ -     $ -     $ -  


Troubled Debt Restructurings (by class)
 
For the nine months ended September 30, 2011
 
                         
                         
                         
         
Pre-Modification Outstanding
   
Post-Modification Outstanding
   
Recorded
 
   
Number of Loans
   
Recorded Investment
   
Recorded Investment
   
Investment At Period End
 
                         
Church loans:
                       
Wholly-Owned First
    9     $ 15,246     $ 15,323     $ 15,214  
Wholly-Owned Junior
    4       4,467       4,561       4,510  
Participation First
    -       -       -       -  
Participation Junior
    -       -       -       -  
                                 
Total
    13     $ 19,713     $ 19,884     $ 19,724  

For 9 of the 11 restructured loans in our portfolio, 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, and thus did not increase our 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 13 restructured loans, the interest rate was lowered.  Each borrower involved in a troubled debt restructuring was experiencing financial difficulties at the time the loan was restructured.

A summary of troubled debt restructurings that defaulted during the periods ended September 30, 2012 and 2011 is as follows (dollars in thousands):

There were no loan modifications classified as TDRs within the last twelve months that defaulted during the three months ended September 30, 2012.
 
 

 
 
F-21

 
 
Troubled Debt Restructurings Defaulted (by class)
During the nine months ended September 30, 2012
 
             
   
Number of
   
Recorded
 
   
Loans
   
Investment
 
             
Troubled debt restructurings that subsequently defaulted:
           
Church loans:
           
Wholly-Owned First
    1     $ 2,054  
Wholly-Owned Junior
    1       420  
Participation First
    1       230  
Participation Junior
    -       -  
Total:
               
Church loans
    3     $ 2,704  
 

 
Troubled Debt Restructurings Defaulted (by class)
During the three months ended September 30, 2011
 
             
   
Number of
   
Recorded
 
   
Loans
   
Investment
 
             
Troubled debt restructurings that subsequently defaulted:
           
Church loans:
           
Wholly-Owned First
    -     $ -  
Wholly-Owned Junior
    1       3,173  
Participation First
    -       -  
Participation Junior
    -       -  
Total:
               
Church loans
    1     $ 3,173  
 

 
Troubled Debt Restructurings Defaulted (by class)
During the nine months ended September 30, 2011
 
             
   
Number of
   
Recorded
 
   
Loans