10-Q 1 c130-20150630x10q.htm 10-Q 10-Q_Taxonomy2015

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

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

For the quarterly period ended June 30, 2015

 

OR

 

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  No .

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    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 

 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 .

 

At June 30, 2015, 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, 2014.

 


 

 

 

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  at June 30, 2015 (unaudited) and December 31, 2014 (audited) 

F - 1

 

 

Consolidated Statements of Operations (unaudited) for the three and six months ended June 30, 2015 and 2014 

F - 2

 

 

Consolidated Statements of Cash Flows (unaudited) for the six months ended June 30, 2015 and 2014 

F - 3

 

 

Notes to Consolidated Financial Statements 

F - 4

 

 

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

3

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

18

 

 

Item 4.  Controls and Procedures

18

 

 

PART II —OTHER INFORMATION

 

 

 

Item 1.  Legal Proceedings

18

Item 1A.  Risk Factors

19

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

19

Item 3.  Defaults Upon Senior Securities

19

Item 4.  Mine Safety Disclosures

19

Item 5.  Other Information

19

Item 6.  Exhibits

20

 

 

SIGNATURES 

20

 

 

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) Material Contract: Severance and Release Agreement with former Chief Executive Officer

 

 

 

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

 

 

 

 

3

 


 

 

PART I - FINANCIAL INFORMATION

 

Item 1.  Financial Statements

 

MINISTRY PARTNERS INVESTMENT COMPANY, LLC

CONSOLIDATED BALANCE SHEETS

JUNE 30, 2015 AND DECEMBER 31, 2014

 (Dollars in Thousands Except Unit Data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2015

 

2014

 

 

(Unaudited)

 

(Audited) 

Assets:

 

 

 

 

 

 

Cash

 

$

9,516 

 

$

17,251 

Loans receivable, net of allowance for loan losses of $2,403 and $2,454 as of June 30, 2015 and December 31, 2014, respectively

 

 

132,398 

 

 

131,586 

Accrued interest receivable

 

 

563 

 

 

562 

Property and equipment, net

 

 

74 

 

 

87 

Debt issuance costs, net

 

 

165 

 

 

112 

Foreclosed assets, net

 

 

3,872 

 

 

3,931 

Other assets

 

 

559 

 

 

366 

Total assets

 

$

147,147 

 

$

153,895 

Liabilities and members’ equity

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

Borrowings from financial institutions

 

$

92,060 

 

$

93,880 

Notes payable

 

 

46,640 

 

 

49,914 

Accrued interest payable

 

 

13 

 

 

19 

Other liabilities

 

 

461 

 

 

2,132 

Total liabilities

 

 

139,174 

 

 

145,945 

Members' Equity:

 

 

 

 

 

 

Series A preferred units, 1,000,000 units authorized, 117,100 units issued and outstanding at June 30, 2015 and December 31, 2014 (liquidation preference of $100 per unit); See Note 8

 

 

11,715 

 

 

11,715 

Class A common units, 1,000,000 units authorized, 146,522 units issued and outstanding at June 30, 2015 and December 31, 2014; See Note 8

 

 

1,509 

 

 

1,509 

Accumulated deficit

 

 

(5,251)

 

 

(5,274)

Total members' equity

 

 

7,973 

 

 

7,950 

Total liabilities and members' equity

 

$

147,147 

 

$

153,895 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

F-1

 


 

 

 MINISTRY PARTNERS INVESTMENT COMPANY, LLC

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

(Dollars in Thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended

 

Six months ended

 

 

June 30,

 

June 30,

 

 

2015

 

2014

 

2015

 

2014

Interest income:

 

 

 

 

 

 

 

 

 

 

 

 

Interest on loans

 

$

2,073 

 

$

2,271 

 

$

4,093 

 

$

4,566 

Interest on interest-bearing accounts

 

 

 

 

10 

 

 

10 

 

 

23 

Total interest income

 

 

2,078 

 

 

2,281 

 

 

4,103 

 

 

4,589 

Interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

Borrowings from financial institutions

 

 

585 

 

 

621 

 

 

1,166 

 

 

1,241 

Notes payable

 

 

440 

 

 

473 

 

 

909 

 

 

937 

Total interest expense

 

 

1,025 

 

 

1,094 

 

 

2,075 

 

 

2,178 

Net interest income

 

 

1,053 

 

 

1,187 

 

 

2,028 

 

 

2,411 

Provision for loan losses

 

 

--

 

 

217 

 

 

--

 

 

221 

Net interest income after provision for loan losses

 

 

1,053 

 

 

970 

 

 

2,028 

 

 

2,190 

Non-interest income

 

 

234 

 

 

61 

 

 

489 

 

 

107 

Non-interest expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and benefits

 

 

665 

 

 

593 

 

 

1,315 

 

 

1,141 

Marketing and promotion

 

 

21 

 

 

27 

 

 

46 

 

 

48 

Office operations

 

 

364 

 

 

303 

 

 

716 

 

 

618 

Foreclosed assets, net

 

 

55 

 

 

726 

 

 

50 

 

 

760 

Legal and accounting

 

 

110 

 

 

111 

 

 

301 

 

 

302 

Total non-interest expenses

 

 

1,215 

 

 

1,760 

 

 

2,428 

 

 

2,869 

Net income (loss) before provision for income taxes

 

 

72 

 

 

(729)

 

 

89 

 

 

(572)

Provision for income taxes

 

 

 

 

(2)

 

 

 

 

Net income (loss)

 

$

67 

 

$

(727)

 

$

80 

 

$

(574)

 

 

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 SIX MONTHS ENDED JUNE 30, 2015 and 2014 

(Dollars in Thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2015

 

2014

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

Net income (loss)

 

$

80 

 

$

(574)

Adjustments to reconcile net income (loss) to net cash used by operating activities:

 

 

 

 

 

 

Depreciation

 

 

24 

 

 

24 

Amortization of deferred loan fees

 

 

(92)

 

 

(109)

Amortization of debt issuance costs

 

 

58 

 

 

37 

Provision for loan losses

 

 

--

 

 

221 

Provision for losses on foreclosed assets

 

 

23 

 

 

899 

Accretion of allowance for loan losses on restructured loans

 

 

(11)

 

 

(30)

Accretion of loan discount

 

 

(24)

 

 

(10)

Changes in:

 

 

 

 

 

 

Accrued interest receivable

 

 

(1)

 

 

(13)

Other assets

 

 

(193)

 

 

(112)

Other liabilities and accrued interest payable

 

 

(1,680)

 

 

(352)

Net cash used by operating activities

 

 

(1,816)

 

 

(19)

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

Loan originations

 

 

(11,861)

 

 

(9,685)

Loan sales

 

 

5,993 

 

 

1,818 

Loan principal collections

 

 

5,183 

 

 

7,604 

Proceeds from foreclosed asset sales

 

 

36 

 

 

205 

Purchase of property and equipment

 

 

(11)

 

 

(3)

Net cash used by investing activities

 

 

(660)

 

 

(61)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

Net change in borrowings from financial institutions

 

 

(1,820)

 

 

(1,743)

Net change in notes payable

 

 

(3,274)

 

 

1,211 

Debt issuance costs

 

 

(111)

 

 

(37)

Dividends paid on preferred units

 

 

(54)

 

 

(46)

Net cash used by financing activities

 

 

(5,259)

 

 

(615)

Net decrease in cash

 

 

(7,735)

 

 

(695)

Cash at beginning of period

 

 

17,251 

 

 

7,483 

Cash at end of period

 

$

9,516 

 

$

6,788 

Supplemental disclosures of cash flow information

 

 

 

 

 

 

Interest paid

 

$

2,081 

 

$

2,185 

Income taxes paid

 

$

14 

 

$

14 

Transfer of loans to foreclosed assets

 

$

--

 

$

1,170 

The accompanying notes are an integral part of these consolidated financial statements.

 

F-3

 


 

 

 

 

 

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 2014 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 June 30, 2015 and for the six months ended June 30, 2015 and 2014 have been made.

Certain information and note 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 June 30, 2015 and 2014 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 (“LLC”) on December 31, 2008.  The Company is owned by a group of 11 federal and state chartered credit unions, as well as the Asset Management Assistance Center of the National Credit Union Administration (“NCUA”), none of which owns a majority of the voting equity units of the Company.  The Asset Management Assistance Center owns only Series A Preferred Units, while our credit union equity holders own both our Class A Common Units and Series A Preferred Units.  Offices of the Company are located in Brea, California.  The Company provides funds for real property secured loans 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.  When the Company was formed, substantially all of the Company’s loans were purchased from its largest equity investor, the Evangelical Christian Credit Union (“ECCU”), of Brea, California. 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 30 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.  In December 2014, the Company reactivated MPF to hold loans used as collateral for our new Secured Notes.

 

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 has conducted limited operations since its inception.

 

On April 26, 2010, we formed Ministry Partners Securities, LLC, a Delaware limited liability company (“MP Securities”). MP Securities has been formed to provide financing solutions for churches, charitable institutions and faith-based organizations and act as a selling agent for securities offered by such entities. Effective as of July 14, 2010, MP Securities was qualified to transact business in the State of California.  On March 2, 2011, MP Securities’ application for membership in the Financial Industry Regulatory Authority (“FINRA”) was approved.  Since 2011, MP Securities has received approval to act as a Resident Insurance Producer d/b/a Ministry Partners Insurance

F-4

 


 

 

Agency, on a fully disclosed basis with a clearing firm, and to provide registered investment advisory services.  MP Securities also acts as the selling agent for our various note offerings in addition to offering a broad scope of investment services.  

 

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 has been managed by a group of managers that provides oversight and carries out their duties similar to the role and function that the Board of Directors performed when the Company was organized and governed as a corporate entity.  Operating like a Board of Directors, the managers have full, exclusive and complete discretion, power and authority to oversee the management of the Company’s affairs.  Instead of Articles of Incorporation and Bylaws, management and governance procedures are now set forth in 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.

 

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 June 30, 2015 and December 31, 2014. 

 

A portion of the our cash held at credit unions is insured by the National Credit Union Insurance Fund, while a portion of cash held at other financial institutions is insured by the Federal Deposit Insurance Corporation (“FDIC”).  The Company maintains cash that may exceed insured limits.  The Company does not expect to incur losses in its cash accounts.

 

We have the ability to pledge cash as collateral for our borrowings and our Secured Notes. At December 31, 2014, $2.9 million of our cash was pledged as collateral for our borrowings and was considered restricted cash.  We did not have any cash pledged as collateral on our borrowings or our secured notes at June 30, 2015.    At December 31, 2014, $326 thousand in cash was pledged as collateral for our outstanding Secured Notes.

F-5

 


 

 

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.

 

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 U.S. and global economic markets encountered commencing in 2008. The specific component of the Company’s allowance for loan losses relates to loans that are classified as impaired.  For such

F-6

 


 

 

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.

 

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. 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 meetings that occur at least quarterly 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.

F-7

 


 

 

 

In the recovering U.S. 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. 

 

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.

 

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:

 

F-8

 


 

 

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.  If the value of a foreclosed asset, less selling costs, is less than the loan balance on a foreclosed loan, the deficiency is charged against the allowance for loan losses.  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.  If the fair value, less costs to sell, of the foreclosed property decreases after the property becomes a real estate owned asset or “REO”, a valuation allowance is established with a charge to foreclosed property 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.

 

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

F-9

 


 

 

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

 

We have elected to be treated as a partnership for income tax purposes. Therefore, our income and expenses are passed through to its members for tax reporting purposes. We are subject to a California gross receipts LLC fee of approximately $12,000 per year.  MP Securities was subject to a California gross receipts LLC fee of approximately $2,500 for the year ended December 31, 2014.  MP Realty incurred a tax loss for the years ended December 31, 2014 and 2013, 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 $319,000 and $316,000, respectively which begin to expire in 2030. Management assessed the realizability of the deferred tax asset and determined that a 100% valuation against the deferred tax asset was appropriate at December 31, 2014 and 2013.

 

We use 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, 2011 through December 31, 2014 remain subject to examination by the Internal Revenue Service and the tax years ended December 31, 2010 through December 31, 2014 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.

 

 

F-10

 


 

 

Recent Accounting Pronouncements

In February 2015, the Financial Accounting Standards Board (FASB) amended  Accounting Standards Codification (ASC) Topic 810, Consolidation. The amendments in this Update make targeted changes to the current consolidation guidance and ends a deferral available for investment companies. The amendments modify the evaluation of whether limited partnerships and similar legal entities are VIEs or voting interest entities. Consolidation conclusions may change for entities that already are VIEs due to changes in how entities would analyze related-party relationships and fee arrangements. The amendments relax existing criteria for determining when fees paid to a decision maker or service provider do not represent a variable interest by focusing on whether those fees are “at market.” The amendments eliminate both the consolidation model specific to limited partnerships and the current presumption that a general partner controls a limited partnership. Application of the new amendments could result in some entities being deconsolidated or considered a VIE and subject to additional disclosures. The amendments are effective for public business entities for the first interim and annual reporting periods beginning after December 15, 2015. Early adoption is permitted, including adoption in an interim period with any adjustments reflected as of the beginning of the reporting year that includes the interim period. A reporting entity may apply the amendments using a modified retrospective approach by recording a cumulative-effect adjustment to equity as of the beginning of the reporting year of adoption or may apply the amendments retrospectively. The Company is currently evaluating the impact of these amendments, but does not expect them to have a material effect on the Company’s financial position or results of operations.

 

In April 2015, the FASB issued guidance simplifying the presentation of debt issuance costs. Under the new guidance, the debt issuance costs related to a recognized debt liability will be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The guidance should be applied retrospectively and is effective for annual and interim periods beginning after December 15, 2015, with early adoption permitted. The Company is currently evaluating the potential impact from the new guidance on the consolidated financial statements.

 

2.  Related Party Transactions

 

We maintain some of our cash funds at ECCU, our largest equity investor. Total funds held with ECCU were $1.3 million and $733 thousand at June 30, 2015 and December 31, 2014, respectively. Interest earned on funds held with ECCU totaled $9.6 thousand and $19.9 thousand for the six months ended June 30, 2015 and 2014, respectively.

 

We lease physical facilities and purchase other services from ECCU pursuant to a written lease and services agreement. Charges of $57.3 thousand and $55.1 thousand for the six months ended June 30, 2015 and 2014, 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 have purchased mortgage loans, including loan participation interests from ECCU, our largest equity owner.  During the six month periods ended June 30, 2015 and 2014, we did not purchase any loans from ECCU.  With regard to loans purchased from ECCU in prior years, we recognized $889.4 thousand and $895.2 thousand of interest income during the six months ended June 30, 2015 and 2014, respectively.  ECCU currently acts as the servicer for 16 of the 148 loans held in the Company’s loan portfolio.  Under the terms of the loan servicing agreement we entered into with ECCU, a servicing fee of 65 basis points is deducted from the interest payments the Company receives on wholly-owned loans ECCU services on our behalf.  In lieu of a servicing fee, loan participations the Company purchases from ECCU generally have pass-through rates which are up to 75 basis points lower than the loan’s contractual rate.  The Company negotiates the pass-through interest rates with ECCU on a loan by loan basis.  At June 30, 2015, the Company’s investment in wholly-owned loans serviced by ECCU totaled $6.1 million, while the Company’s investment in loan participations serviced by ECCU totaled $17.7 million.  From time to time, the Company pays fees for additional services ECCU provides for servicing these loans.  We paid fewer than one thousand dollars of such fees during the six months ended June 30, 2015 and 2014.

 

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.  The Company sold $541.0 thousand in whole loans to ECCU during the

F-11

 


 

 

six month period ended June 30, 2014No gains or losses were recognized on these transactions.  We did not sell any loans to ECCU during the six months ended June 30, 2015.

 

On October 6, 2014, MP Securities, our wholly-owned subsidiary, entered into a Networking Agreement with ECCU pursuant to which MP Securities will assign one or more registered sales representatives to one or more locations designated by ECCU and offer investment products, investment advisory services, insurance products, annuities and mutual fund investments to ECCU’s members. MP Securities has agreed to offer only those investment products and services that have been approved by ECCU or its Board of Directors and comply with applicable investor suitability standards required by federal and state securities laws and regulations. MP Securities will offer these products and services to ECCU members in accordance with NCUA rules and regulations and in compliance with its membership agreement with FINRA. MP Securities has agreed to compensate ECCU for permitting it to use the designated location to offer such products and services to ECCU’s members under an arrangement that will entitle ECCU to be paid a percentage of total revenue received by MP Securities from transactions conducted for or on behalf of ECCU members.  The Networking Agreement may be terminated by either ECCU or MP Securities without cause upon thirty days prior written notice.  MP Securities paid $9.6 thousand to ECCU under the terms of this agreement during the six months ended June 30, 2015.

 

Other Related Party Transactions

 

From time to time, our Board and members of our executive management team have purchased investor notes from us. Investor notes payable to related parties totaled $275 thousand and $274 thousand at June 30, 2015 and December 31, 2014, respectively. 

 

On August 14th, 2013, the Company entered into a Loan Participation Agreement with Western Federal Credit Union (“WFCU”).  WFCU is an owner of both the Company’s Class A Common Units and Series A Preferred Units.  Under this agreement, we sold WFCU a $5.0 million loan participation interest in one of our mortgage loan interests.  As part of this agreement, we retained the right to service the loan, and we charge WFCU 50 basis points for servicing the loan.

 

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. 

 

We also entered into a selling agreement with MP Securities pursuant to which MP Securities served as our selling agent in distributing our Class A Notes.  Under the terms of the Class A Notes Offering, MP Securities received 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 receives an additional 0.5% on all new note sales as well as 0.25% on note sales made to a repeat purchaser.  No concessions were 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.  In addition, we have signed an Administrative Services Agreement with MP Securites which stipulates that we will provide certain services to MP Securities.  These services include the lease of office space, use of equipment, including computers and phones, and payroll and personnel services. 

 

Effective as of January 2015, we have discontinued the sale of our Class A Notes.  Pursuant to a Registration Statement filed with the SEC and declared effective on January 6, 2015, we are offering our Class 1 Notes as a replacement debt security for our Class A Notes.  We have also entered into a Managing Participating Broker Agreement with MP Securities pursuant to which MP Securities will act as the managing broker for the offering of our Class 1 Notes.  As the managing participating broker, MP Securities will maintain sales records, process and approve investor applications, conduct retail and wholesale marketing activities for sales of the Class 1 Notes and undertake its own due diligence review of the offering.  MP Securities does not serve as a lead underwriter, distribution manager or syndicate manager for the offering.

 

F-12

 


 

 

Under the terms of the Managing Participating Broker Dealer Agreement (the “MPB Agreement”) entered into with us and MP Securities and possible participating brokers in the future, we will pay gross selling commissions ranging from 1.25% to 1.75% for the sale of Fixed Series Class 1 Notes and an amount equal to .50% of the amount of Variable  Series Class 1 Notes sold plus an amount equal to .25% per annum on the average note balance of such Variable Series Class 1 Note.  Both the gross commissions and managing participating broker commissions will be reduced by .25% of the total amount of each note sold in the offering to a repeat purchaser who is then, or has been within the immediately preceding thirty (30) days, an owner of one of our investor notes.  No commissions are paid on the accrued interest deferred and added to the principal balance of a note when an investor elects to defer interest received on a note.  In the event MP Securities provides wholesale services in connection with the Class 1 Notes offering, we may reimburse MP Securities and any other selling group member up to $40,000 in wholesaling expenses.  As of the date of this Report, no wholesaling expenses have been paid to MP Securities or any other selling group member under the Class 1 Notes offering.

 

In connection with the Company’s Secured Note offering, the Company has engaged MP Securities to act as the Company’s managing broker for the offering.  Under the terms of a Managing Broker-Dealer Agreement entered into by and between the Company and MPS Securities, the Company will pay selling commissions ranging from 2% on our Secured Notes with a 18-month maturity to 5% on Secured Notes with a 54-month maturity, with total selling commissions not to exceed 5%.

 

Pursuant to a Loan and Security Agreement, dated December 15, 2014, entered into by and among the Company, MPF and the holders of our Secured Notes (the “Loan Agreement”), MPF will serve as the collateral agent for the Secured Notes.  The Company will pledge and deliver mortgage loans and cash to MPF to serve as collateral for the Secured Notes.  As custodian and collateral agent for the Secured Notes, MPF will monitor the Company’s compliance with the terms of the Loan Agreement, take possession of, hold, operate, manage or sell the collateral conveyed to MPF for the benefit of the Secured Note holders.  MPF is further authorized to pursue any remedy at law or in equity after an event of default occurs under the Loan Agreement.

 

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, all transactions that we undertake with an affiliate or related party are on terms believed by our management to be no less favorable than are available from unaffiliated third parties and are 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 2024. Loans yielded a weighted average of 6.33%  and 6.28% as of June 30, 2015 and December 31, 2014, respectively. A summary of the Company’s mortgage loans owned as of June 30, 2015 and December 31, 2014 is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

F-13

 


 

 

 

 

June 30,

 

December 31

 

 

2015

 

2014

 

 

 

 

 

 

 

Loans to evangelical churches and related organizations:

 

 

 

 

 

 

Real estate secured

 

$

136,128 

 

$

135,243 

Unsecured

 

 

145 

 

 

158 

Total loans

 

 

136,273 

 

 

135,401 

 

 

 

 

 

 

 

Deferred loan fees, net

 

 

(691)

 

 

(565)

Loan discount

 

 

(781)

 

 

(796)

Allowance for loan losses

 

 

(2,403)

 

 

(2,454)

Loans, net

 

$

132,398 

 

$

131,586 

 

Allowance for Loan Losses

 

The Company has established an allowance for loan losses of $2.4 million and $2.5 million as of June 30, 2015 and December 31, 2014, respectively, for loans held in the Company’s mortgage portfolio. For the six month period ended June 30, 2015, we recorded $40 thousand in charge-offs on our mortgage loan investments.  For the year ended December 31, 2014, we recorded  $584 thousand in charge-offs on our mortgage loan investments. Management believes that the allowance for loan losses as of June 30, 2015 and December 31, 2014 is appropriate.

 

Changes in the allowance for loan losses for the six month period ended June 30, 2015 and the year ended December 31, 2014 are as follows (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six months ended

 

Year ended

 

 

June 30, 2015

 

December 31, 2014

 

 

 

 

 

 

 

Balance, beginning of period

 

$

2,454 

 

$

2,856 

Provision for loan loss

 

 

--

 

 

252 

Chargeoffs

 

 

(40)

 

 

(584)

Transfer to loan discount

 

 

--

 

 

(54)

Accretion of allowance related to restructured loans

 

 

(11)

 

 

(16)

Balance, end of period

 

$

2,403 

 

$

2,454 

 

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 the recorded balance of our nonperforming loans (dollars in thousands) as of June 30, 2015, December 31, 2014 and June 30, 2014:

F-14

 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

December 31,

 

June 30,

 

 

2015

 

2014

 

2014

 

 

 

 

 

 

 

 

 

 

Impaired loans with an allowance for loan loss

 

$

9,443 

 

$

8,696 

 

$

11,895 

Impaired loans without an allowance for loan loss

 

 

2,199 

 

 

3,290 

 

 

4,906 

Total impaired loans, before discounts

 

 

11,642 

 

 

11,986 

 

 

16,801 

Discounts on impaired loans

 

 

693 

 

 

693 

 

 

679 

Total impaired loans, net of discounts

 

$

10,949 

 

$

11,293 

 

$

16,122 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses related to impaired loans

 

$

1,620 

 

$

1,670 

 

$

2,160 

 

 

 

 

 

 

 

 

 

 

Total non-accrual loans

 

$

8,495 

 

$

8,805 

 

$

15,495 

 

 

 

 

 

 

 

 

 

 

Total loans past due 90 days or more and still accruing

 

$

--

 

$

--

 

$

--

 

We had eight nonaccrual loans as of June 30, 2015 and December 31, 2014. 

The Company’s loan portfolio is comprised of one segment – church and ministry 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.

 

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

 

 

 

 

 

 

 

 

 

June 30, 2015

 

December 31, 2014

 

 

 

 

 

 

 

Loans:

 

 

 

 

 

 

Individually evaluated for impairment

 

$

11,642 

 

$

11,293 

Collectively evaluated for impairment 

 

 

124,631 

 

 

124,108 

Balance

 

$

136,273 

 

$

135,401 

 

 

 

 

 

 

 

Allowance for loan losses:

 

 

 

 

 

 

Individually evaluated for impairment

 

$

1,620 

 

$

1,670 

Collectively evaluated for impairment 

 

 

783 

 

 

784 

Balance

 

$

2,403 

 

$

2,454 

 

The Company has established a standard loan grading system to assist management and loan review personnel in their analysis and supervision of the loan portfolio.  The following table is a summary of the loan portfolio credit

F-15

 


 

 

quality indicators by loan class at June 30, 2015 and December 31, 2014, 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 June 30, 2015

 

 

Wholly-Owned First

 

Wholly-Owned Junior

 

Participation First

 

Participation Junior

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Grade:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

$

94,389 

 

 

4,943 

 

 

18,041 

 

 

--

 

 

117,373 

Watch

 

 

5,607 

 

 

3,148 

 

 

1,651 

 

 

--

 

 

10,406 

Substandard

 

 

7,530 

 

 

213 

 

 

--

 

 

--

 

 

7,743 

Doubtful

 

 

--

 

 

--

 

 

751 

 

 

--

 

 

751 

Loss

 

 

--

 

 

--

 

 

--

 

 

--

 

 

--

Total

 

$

107,526 

 

$

8,304 

 

$

20,443 

 

$

--

 

$

136,273 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Credit Quality Indicators (by class)

As of  December 31, 2014

 

 

Wholly-Owned First

 

Wholly-Owned Junior

 

Participation First

 

Participation Junior

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Grade:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

$

89,708 

 

 

2,347 

 

 

19,981 

 

 

925 

 

 

112,961 

Watch

 

 

4,512 

 

 

2,637 

 

 

1,672 

 

 

--

 

 

8,821 

Substandard

 

 

9,472 

 

 

3,396 

 

 

--

 

 

--

 

 

12,868 

Doubtful

 

 

--

 

 

--

 

 

751 

 

 

--

 

 

751 

Loss

 

 

--

 

 

--

 

 

--

 

 

--

 

 

--

Total

 

$

103,692 

 

$

8,380 

 

$

22,404 

 

$

925 

 

$

135,401 

 

 

The following table sets forth certain information with respect to the Company’s loan portfolio delinquencies by loan class and amount at June 30, 2015 and at December 31, 2014 (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

F-16

 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Age Analysis of Past Due Loans (by class)

As of June 30, 2015

 

 

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

Church loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Wholly-Owned First

 

$

3,148 

 

 

1,151 

 

 

1,073 

 

 

5,372 

 

 

102,154 

 

 

107,526 

 

 

--

Wholly-Owned Junior

 

 

--

 

 

213 

 

 

--

 

 

213 

 

 

8,091 

 

 

8,304 

 

 

--

Participation First

 

 

--

 

 

2,399 

 

 

751 

 

 

3,150 

 

 

17,293 

 

 

20,443 

 

 

--

Participation Junior

 

 

--

 

 

--

 

 

--

 

 

--

 

 

--

 

 

--

 

 

--

Total

 

$

3,148 

 

$

3,763 

 

$

1,824 

 

$

8,735 

 

$

127,538 

 

$

136,273 

 

$

--

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Age Analysis of Past Due Loans (by class)

As of December 31, 2014

 

 

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

Church loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Wholly-Owned First

 

$

2,783 

 

 

2,125 

 

 

1,082 

 

 

5,990 

 

 

97,702 

 

 

103,692 

 

$

--

Wholly-Owned Junior

 

 

--

 

 

--

 

 

--

 

 

--

 

 

8,380 

 

 

8,380 

 

 

--

Participation First

 

 

1,785 

 

 

--

 

 

751 

 

 

2,536 

 

 

19,868 

 

 

22,404 

 

 

--

Participation Junior

 

 

--

 

 

--

 

 

--

 

 

--

 

 

925 

 

 

925 

 

 

--

Total

 

$

4,568 

 

$

2,125 

 

$

1,833 

 

$

8,526 

 

$

126,875 

 

$

135,401 

 

$

--

 

 

The following tables are summaries of impaired loans by loan class as of and for the six months ended June 30, 2015 and 2014, and the year ended December 31, 2014, respectively.  The recorded investment in impaired loans reflects the unpaid principal balance less discounts and interest payments taken against principal, whereas the unpaid principal balance reflects the contractual principal balance owed by the borrower (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

F-17

 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired Loans (by class)

As of and for the three months ended June 30, 2015

 

 

Recorded Investment

 

Unpaid Principal Balance

 

Related Allowance

 

Average Recorded Investment

 

Interest Income Recognized

With no allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Church loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Wholly-Owned First

 

$

1,826 

 

$

2,693 

 

$

--

 

$

1,851 

 

$

--

Wholly-Owned Junior

 

 

207 

 

 

213 

 

 

--

 

 

207 

 

 

Participation First

 

 

--

 

 

--

 

 

--

 

 

--

 

 

--

Participation Junior

 

 

--

 

 

--

 

 

--

 

 

--

 

 

--

With an allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Church loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Wholly-Owned First

 

 

5,062 

 

 

6,199 

 

 

1,034 

 

 

5,107 

 

 

18 

Wholly-Owned Junior

 

 

3,103 

 

 

3,148 

 

 

293 

 

 

3,108 

 

 

39 

Participation First

 

 

751 

 

 

883 

 

 

293 

 

 

751 

 

 

--

Participation Junior

 

 

--

 

 

--

 

 

--

 

 

--

 

 

--

Total:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Church loans

 

$

10,949 

 

$

13,136 

 

$

1,620 

 

$

11,024 

 

$

59 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired Loans (by class)

As of and for the six months ended June 30, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recorded Investment

 

Unpaid Principal Balance

 

Related Allowance

 

Average Recorded Investment

 

Interest Income Recognized

With no allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Church loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Wholly-Owned First

 

$

1,826 

 

$

2,693 

 

$

--

 

$

1,890 

 

$

--

Wholly-Owned Junior

 

 

207 

 

 

213 

 

 

--

 

 

207 

 

 

Participation First

 

 

--

 

 

--

 

 

--

 

 

--

 

 

--

Participation Junior

 

 

--

 

 

--

 

 

--

 

 

--

 

 

--

With an allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Church loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Wholly-Owned First

 

 

5,062 

 

 

6,199 

 

 

1,034 

 

 

5,152 

 

 

29 

Wholly-Owned Junior

 

 

3,103 

 

 

3,148 

 

 

293 

 

 

3,117 

 

 

79 

Participation First

 

 

751 

 

 

883 

 

 

293 

 

 

751 

 

 

--

Participation Junior

 

 

--

 

 

--

 

 

--

 

 

--