MINISTRY PARTNERS INVESTMENT COMPANY, LLC – 10-K – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Edgar Online, Inc.

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

Overview

  We are a Brea, California-based business that was incorporated in 1991 as a credit union service organization whose mission is to make evangelical ministries more effective by providing ministries with Biblically-based, value-driven financial services and by providing funding services to the credit unions who serve these ministries. We do this by originating and investing in mortgage loans made to churches, most of which are secured by church and church-related real property owned by and/or maintained for the benefit of evangelical churches or church organizations, including Christian schools, ministries and related organizations.  We are continuing to position the Company for future growth in the areas where we have historically been successful through our investments in church and ministry mortgage loans, while diversifying the sources of revenue generated by our business. In order to take advantage of our market opportunities and maximize the value of our equity holders' investment, we will continue to focus on:             · improving our liquidity and strengthening our balance sheet;               · building our capital while developing new financing sources;   

· increasing our revenue generating capabilities through the expansion of our

loan origination and servicing capabilities, and selling loan participation

     interests;    

· increasing our revenue from broker-dealer related services by offering a full

array of wealth management products and services, including the development of

    Registered Investment Advisor capabilities;   

· recruiting sales representatives, investment advisers and sales personnel that

will help us make MP Securities a fee-generating source of revenue for the

    Company;   

· substantially increasing the sale of our investor debt securities, thereby

enabling us to grow our balance sheet and generate new investment capital;

· managing and strengthening our loan portfolio through aggressive and proactive

efforts to resolve problems in our non-performing assets, increasing cash

    flows from our borrowers and ultimately realizing the benefit of our     investments;   

· prudently managing and carrying-out strategies for our real estate owned

assets to minimize losses, or, realize a gain where possible on these mortgage

    loan investments;                                             48

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    · broadening the number of investors in our investor debt securities and     effectively implementing strategies designed to ensure MP Securities'     compliance with FINRA's suitability and regulatory standards;   

· developing capital funding sources that are not dependent on the sale of

    mortgage-backed securities or institutional credit facilities; and   

· managing the size and cost structure of our business to match our operating

environment and capital funding efforts.

    On May 15, 2012, we successfully sold two non-performing mortgage loan investments with a carrying value of $2.5 million and through this sale recouped $265 thousand in loan loss reserves. Further, we have reduced our unsecured note borrowings by $6.5 million (10.95%) thereby continuing to deleverage the balance sheet without significantly eroding our liquidity. We are continuing to make significant investments in our broker-dealer infrastructure through strategic recruitment of key personnel while expanding our offering of products and services.  

For the year ended December 31, 2012, we generated net income of $417 thousand. The primary items affecting our operating performance were the following:

· recovery of $265 thousand of provisions for loan losses, related to the sale

    of two of our non-performing loans;   

· increase in net interest margin from 2.10% to 2.82% due to reduced borrowing

    costs;   

· a $1.5 million decrease in our provision for loan losses, as compared to 2011;

· an increase in salaries and benefits expenses as we hired individuals to

assist in managing and expanding our loan portfolio, as well as in marketing

    our debt securities;   

· increased operating expenses related to the management of our loan portfolio

    and real estate owned properties; and   

· increased legal and audit fees resulting from our efforts to transition the

sale of our investor debt securities from Company employees to MP Securities.

    We expect to see significant improvements in our operating results for 2013 as we implement the core strategic objectives set forth above. We have also seen further improvements in the performance and stability of our church and ministry borrowers.  Financial Condition  We obtain funds for our mortgage loan investments from the sale of our debt securities, which are sold primarily to investors who are in or associated with the Christian community, including individuals, ministries and organizations associated with evangelical churches and their governing associations. We also have relied upon credit facilities with institutional lenders to increase the size of our balance sheet, improve our earnings and purchase mortgage loan assets.                                          49 --------------------------------------------------------------------------------

During 2009, we deleveraged our balance sheet by making several principal reductions on our BMO Facility and paid off the facility on November 30, 2009. We made several smaller principal reductions to our credit facilities during 2011 and 2012. Our total assets as of December 31, 2012 decreased to $166.6 million, as compared to $179.3 million at December 31, 2011. Our total liabilities were $157.1 million at December 31, 2012, as compared to $169.8 million at December 31, 2011.

  The following table sets selected measures of our financial performance for the years ended December 31, 2012 and 2011, respectively (dollars in thousands):                                                        2012          2011             Total income                             $  10,173     $  11,276            Provision (credit) for loan losses              (9 )       1,487            Net income (loss)                              417        (1,044 )            Total assets                               166,645       179,281            Borrowings from financial institutions     103,833       110,280            Notes payable                               52,564        59,030            Total equity                                 9,548         9,478     2012 Developments  Enhancing our Capital Funding Sources. Since 2008, we have primarily relied upon institutional credit facilities to generate the capital sources needed to fund our mortgage loan investments. Our Members United and BMO Facility financing arrangements enabled us to rapidly increase our mortgage loan investments and benefit from favorable net interest rate margins on our mortgage loan investments. With the advent of the global credit crisis that commenced in 2008, our major institutional credit facility lenders sought to reduce their exposure on these facilities, thereby requiring us to undertake efforts to deleverage our balance sheet. While the refinancing transactions we entered into on November 4, 2011 with the NCUA to amend and restate our Members United and WesCorp credit facilities have significantly contributed to our return to profitability in 2012, these refinancing transactions are not sources of new funding and do not provide the resources we need to grow our business.  During 2012, we continued to take steps to develop capital funding sources that are not dependent on the sale of mortgage-backed securities or institutional credit facilities. With the registration of our wholly-owned subsidiary, MP Securities, under the Securities Exchange Act of 1934 and its approval for membership in FINRA, we expect to increase our ability to sell our debt securities and reduce our reliance on institutional credit facility lenders. MP Securities launched its broker-dealer operations in the first quarter of 2012 and it has begun to develop a sales force of registered representatives dedicated to the distribution of our debt securities. Effective as of September 24, 2012, MP Securities received approval to sell our Class A Notes offered under a Registration Statement that was declared effective by the SEC on October 11, 2012. In addition, we may seek to enter into distribution and selling agreements with other broker-dealer firms who demonstrate a compatible company culture and share our desire to provide funding for church and ministry lenders. By increasing funding through sales of our debt securities, we expect to reduce our dependency on large credit facilities provided by institutional lenders, enhance our liquidity and funding capabilities and gain greater control over our asset / liability management process.                                          50 --------------------------------------------------------------------------------  Strengthen the Quality of our Loan Portfolio. Unlike the previous two years when most lenders reduced their participation in the church and ministry lending market, 2012 brought increased competition for church and ministry loans from financial institutions that aggressively sought to make inroads into this niche market by enabling churches to refinance their mortgage loans at historically low interest rates. In addition to the sale of impaired loans and the transfer of $1.7 million in loans to foreclosed assets, these competitive factors contributed to the $13.5 million (7.9%) reduction in our loan portfolio, as some larger and better capitalized churches were able to refinance their loans at historically low rates. In response to this change in the market place, we have made a strategic decision to reposition our loan portfolio by originating lower balance loans to smaller ministries where we can achieve more favorable yields and avoid deteriorating our margins while reducing our overall risk exposure to any one borrower. Further, in 2012, we have added additional sales support staff to assist with our loan origination and underwriting processes.  The real estate market for church and ministry properties showed significant improvement in 2012, as compared to the preceding year. The performance of our mortgage loan portfolio for 2012 was consistent with this trend as we had no new delinquent loans at December 31, 2012. From time to time, however, borrowers who have previously been granted a mortgage modification may later default on their loan. During 2012, two mortgage loans we had previously restructured defaulted and we initiated foreclosure proceedings against the borrower. We continued to devote substantial attention and staff resources in 2012 on efforts to manage, restructure, liquidate or undertake foreclosure actions where necessary to protect our mortgage loan investments. We were able to sell two of our non-performing mortgage investments on May 15, 2012 in exchange for a cash payment of $1.5 million. Further, on September 18, 2012, we entered into a Foreclosure Agreement with one of our borrowers to accept a deed in lieu of foreclosure. We reduced our recorded investment in non-accrual loans by $3.7 million in 2012 and reduced the delinquency rate on our mortgage loan investments from 7.5% at the end of 2011 to 2.2% as of December 31, 2012, thereby strengthening our balance sheet and liquidity position. We recorded a credit for loan losses of $9 thousand during the year ended December 31, 2012, as compared to a provision for loan losses of $1.5 million for the year ended December 31, 2011.  Diversify Our Revenue Sources. Since inception, our primary source of revenue has come from the net interest margin we earn on our mortgage loan investments. After the financial crisis of 2008 and a resulting lack of liquidity in the credit markets, we deleveraged our balance sheet, which reduced the net interest income we receive on our investments. In response to these developments, in 2012 we undertook efforts to expand the scope of revenue generating services we offer in an effort to make us less dependent on a favorable net interest rate margin from our mortgage loan investments and make the Company less susceptible to unfavorable changes in interest rates. Because we possess the capability to service our own loans, we have continued to increase the portion of our wholly-owned loan portfolio that we service ourselves, thereby reducing the costs of third party servicers and increasing net interest earned on those loans.  Our loan participation activity resulted in increased revenue from loan servicing of $21 thousand. We also continue to develop relationships with several credit unions and CUSOs to enhance our capacity to sell additional loan participations into the market for these participation interests.                                          51 --------------------------------------------------------------------------------  Demand for quality business loans, which includes church and ministry loans, remains robust in the credit union industry, and we are developing working relationships with credit unions and CUSOs that have expressed an interest in investing in ministry and church mortgage loans. According to data published by the NCUA, it appears that federally insured credit unions have room on their balance sheets to expand their business loan investments. The appetite for business loans, which typically yield higher rates than residential mortgages or other investments, has also continued to grow. Total business loan balances in credit union portfolios have increased annually in recent years, growing from $22.8 billion in 2006 to $39.08 billion in 2011, and growing further to $41.7 billion in 2012. We plan to originate more loans and sell more loan participations into this attractive market, with the objective of generating increased fee income and recurring loan servicing revenue.  In order to reduce our dependence on our institutional credit facilities, in 2012 we expanded the operations of our broker-dealer subsidiary, MP Securities, by opening a branch office in Fresno California and hiring two additional registered representatives. We also expanded MP Securities' product offerings by entering into selling agreements with several mutual fund companies. We are also seeking FINRA approval of our request to change our membership agreement to allow MP Securities to offer a full array of wealth management products and services in 2013. We also anticipate registering MP Securities as a Registered Investment Advisor firm during 2013. In addition to offering these expanded products and services, we have an application pending with the State of California to establish a life insurance agency. With the addition of these capabilities, we expect that MP Securities will be able to recruit a sales force of registered representatives dedicated to managing our clients' wealth in a manner consistent with the principles of Biblical stewardship, and act as a selling agent in the distribution of our debt securities. This will enable us to reduce our dependency on large credit facilities provided by institutional lenders and enhance our liquidity and funding capabilities.  Sale of Investor Notes. Effective as of May 15, 2009, we began offering debt securities in various series and categories which we refer to as our "Class A Notes". The Class A Notes consist of a Fixed Series, Flex Series and Variable Series of debt instruments. Since that date, we have filed various post-effective amendments and registration statements with the SEC to enable us to continue to offer and sell these debt securities. Pursuant to a Registration Statement filed on July 3, 2012 on Form S-1 with the SEC, the Company sought to register $75 million of its Fixed Series, Flex Series and Variable Series debt instruments (the "Class A Notes Offering"). The Class A Notes are offered in various categories based upon amounts invested and maturity terms of each series.                                             52

--------------------------------------------------------------------------------  After MP Securities commenced its operations as a broker-dealer firm during the first quarter of 2012, it filed documentation with FINRA under FINRA Rule 5110 regarding its intent to serve as a participating broker in the Class A Notes Offering. On September 21, 2012, FINRA issued a no-objections letter, thereby enabling MP Securities to act as a participating broker in our Class A Notes Offering. On October 11, 2012, the Registration Statement for our Class A Notes was declared effective by the SEC and on October 15, 2012, we filed our prospectus for the Class A Notes with the SEC pursuant to Rule 424(b)(3).  In addition to serving as a selling agent for the Company's Class A Notes and other debt securities, MP Securities intends to distribute debt securities issued by religious organizations, as well as private offerings by business members of credit unions we serve, and may act as a selling agent in placing mortgage backed business loans made by credit unions to institutional investors.  In 2012, we began offering our Secured Investment Certificates in a limited offering to qualified investors that meet the requirements of Rule 506 of Regulation D, promulgated by the SEC. Certificates will be sold for such period as authorized by any state or jurisdictions where such offering is qualified and/or exempt. MP Securities serves as the sales agent for the sale of these Secured Certificates. Further, Wilmington Savings Fund Society, FSB, will serve as trustee for the Certificates. We believe that these certificates will offer a diversified investment opportunity for qualified investors and enable us to access additional funding sources for our church and ministry loans.  With MP Securities' enhanced products and services anticipated to launch in the first six months of 2013, we expect to commit additional resources, employ a team of sales representatives and enter into selling agreements with other broker-dealer firms as part of an effort to increase our sale of debt securities to fund our business. In order to facilitate this, we have added a Director of Institutional Relations, an additional Investor Services Representative, and a Financial Consultant to our sales team. At December 31, 2012, our outstanding investor notes totaled $52.6 million.  

Significant Accounting Estimates and Critical Accounting Policies

Critical Accounting Policies

  Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosures. On an on-going basis, we evaluate these estimates, including those related to the allowance for loan losses, and estimates are based on historical experience, information received from third parties and on various other assumptions that are believed to be reasonable under the circumstances, which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under conditions different from our assumptions. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.                                          53 --------------------------------------------------------------------------------

Valuation of Loans

  All of our loans are held for investment and are carried at their outstanding principal balance, less an allowance for loan losses and loan discount, and adjusted for deferred loan fees and costs. We defer loan origination fees and costs and recognize those amounts as an adjustment to the related loan yield on the asset using the interest method. Loan discounts reflect an offset against accrued interest that has been added to a loan balance under a restructuring arrangement. They also represent the difference between the purchase price of a loan and the loan balance when a loan is purchased at a discount. Loan discounts are accreted to interest income as a yield adjustment using the interest method. Loan discounts on impaired loans are not accreted into income until repayment of the loan is reasonably assured.  

Allowance for Loan Losses

  Determining an appropriate allowance for loan losses involves a significant degree of estimation and judgment. The process of estimating the allowance for loan losses may result in either a specific amount representing the impairment estimate or a range of possible amounts. We accrue a loss when it is probable that an asset has been impaired and the amount of the loss can be reasonably estimated. A loss is recorded when the outstanding balance of an impaired loan is greater than either 1) the value of the underlying collateral less estimated selling costs for collateral-dependent loans, or 2) the present value of expected cash flows for non-collateral-dependent impaired loans.  When management concludes that a loan is uncollectible, a loan loss is charged against our allowance for loan losses. If there are subsequent recoveries, we credit such amounts to the allowance. We recognize the amount that is the best estimate within the estimated range of loan losses. The determination of an amount within the calculated range of losses is in recognition of the fact that historical charge-off experience, without adjustment, may not be representative of current impairment of the current portfolio of loans because of changed circumstances. Such changes may relate to changes in the age of loans in the portfolio, changes in the creditor's underwriting standards, changes in economic conditions affecting borrowers in a geographic region, or changes in the business climate in a particular industry.  Management regularly evaluates our allowance for loan losses based upon our periodic review of the collectability of the loans, historical experience, nature and volume of our loan portfolio, adverse situations that may affect the borrower's ability to repay, value of the collateral and prevailing economic conditions. Since an evaluation of this nature is inherently subjective, we may have to adjust our allowance for loan losses as conditions change and new information becomes available.                                          54 --------------------------------------------------------------------------------

Recent Accounting Pronouncements

  In May 2011, the Financial Accounting Standard Board ("FASB") issued an amendment to achieve common fair value measurement and disclosure requirements between U.S. and international accounting principles. Overall, the guidance is consistent with existing U.S. accounting principles; however, there are some amendments that change a particular principle or requirement for measuring fair values or for disclosing information about fair value measurements. The amendments in this guidance are effective for interim and annual periods beginning on or after December 15, 2011. Adoption of this guidance did not have any impact on the financial statements.  In June 2011, the FASB amended existing guidance and eliminated the option to present components of other comprehensive income as part of the statement of changes in members' equity. The update requires that comprehensive income be presented in either a single continuous statement or in a two separate consecutive statement approach. The adoption oof this amendment will change the presentation of the components of comprehensive income as part of the consolidated statement of stockholders' equity. The amendment is effective for fiscal and interim periods beginning after December 15, 2011. Adoption of this guidance did not have an impact on the consolidated financial statements.  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 Company does not expect this guidance to have a material impact on its consolidated financial statements.  

Consolidated Results of Operations

Our Balance Sheet for the Years Ended December 31, 2012 and 2011

                                               (Dollars in Thousands)         

Comparison

 Assets:                                            2012           2011      $ Difference      % Difference Cash                                       $     10,068      $  11,167     $      ( 1,099 )             (10 %) Loans receivable, net of allowance for loan losses of $4,005 and $4,127 as of December 31, 2012 and 2011, respectively        152,428        165,355            (12,927 )              (8 %) Accrued interest receivable                         672            725                (53 )              (7 %) Property and equipment, net                         216            303                (87 )             (29 %) Debt issuance costs                                  95            104                 (9 )              (9 %) Foreclosed assets                                 2,914          1,374              1,540               112 % Other assets                                        252            253                 (1 )               0 % Total assets                               $    166,645      $ 179,281     $     ( 12,636 )              (7 %)                                             55

--------------------------------------------------------------------------------    Liabilities and members' equity Liabilities: Borrowings from financial institutions   $  103,833     $  110,280     $  ( 6,447 )      (6 %) Notes payable                                52,564         59,030         (6,466 )     (11 %) Accrued interest payable                          7             15             (8 )     (53 %) Other liabilities                               693            478            215        45 % Total liabilities                           157,097        169,803        (12,706 )      (7 %) Members' Equity: Series A preferred units                     11,715         11,715             --        -- Class A common units1,509                     1,509          1,509             --        -- Accumulated deficit                          (3,676 )       (3,746 )           70         2 % Total members' equity                         9,548          9,478         

70 1 % Total liabilities and members' equity $ 166,645$ 179,281 $ ( 12,636 ) (7 %)

    General. The $12.6 million decrease in total assets from December 31, 2012 as compared to December 31, 2011 is due primarily to the payoff of loans that matured or were refinanced with another lender, a decline in investor debt securities, sale of loans and challenges we faced identifying, underwriting, originating or acquiring mortgage loans that meet our loan criteria given our capital funding sources. Proceeds from these payoffs and the sale of loans were used to pay down the Company's NCUA borrowings as well as to redeem investor notes when their notes matured, especially during the period from May to October when we temporarily suspended our Class A Notes sales.  During the year ended December 31, 2012, gross loans receivable decreased by $13.5 million, or 8%, to $157.4 million from $170.9 million at December 31, 2011. While we purchased or originated a total of $22.2 million in net loans receivable, we also experienced regular principal paydowns on our loan portfolio throughout the year and 20 mortgage loans totaling $24.5 million were refinanced with another lender or paid off. These payoffs represented both early payoffs of existing loans and non-renewals of maturing loans. In many cases, non-renewals occur because a loan has fallen outside our lending policies and cannot be refinanced by us. In addition, we sold two of our impaired loans, which represented $2.4 million in loans receivable, and transferred $1.7 million in loans to foreclosed assets. We did not sell any loan participations during the year ended December 31, 2012. None of the mortgage loans currently held in our portfolio are being offered for sale.                                          56 --------------------------------------------------------------------------------  Our mortgage loan portfolio consists entirely of loans made to evangelical churches and ministries. All but one of these loans are secured by real estate, while one loan that represents less than 0.1% of our portfolio is unsecured. Our portfolio carried a weighted average interest rate of 6.36% at December 31, 2012, as compared to 6.43% at December 31, 2011.  Non-performing Assets. Non-performing assets consist of non-accrual loans, restructured loans, and four foreclosed assets, which include real estate properties we now own. Non-accrual loans include any loan that becomes 90 days or more past due, loans where terms have been modified in a favorable manner to the borrower due to financial difficulty ("troubled debt restructurings"), and any other loan where management assesses full collectability of principal and interest to be in question. Once a loan is put on non-accrual status, the balance of any accrued interest is immediately reversed. Loans past due 90 days or more will not return to accrual status until they become current. Troubled debt restructurings will not return to accrual status until they perform according their modified payment terms without exception for at least six months. Non-performing assets also include one troubled debt restructuring that has performed for six months but has not yet returned to its original terms.  Some of our non-accrual loans are considered collateral-dependent. A loan is construed to be collateral-dependent when the repayment of principal and interest is expected to come solely from the sale or operation of the underlying collateral. For impaired collateral-dependent loans, any payment of interest we receive from a borrower is recorded against principal. As a result, interest income is not recognized until the loan is no longer considered impaired. For non-accrual loans that are not considered to be collateral-dependent, we do not accrue interest income, but we recognize income on a cash basis. We had eleven non-accrual loans with a recorded balance of $18.3 million as of December 31, 2012, down from fifteen non-accrual loans with a recorded balance of $22.9 million at December 31, 2011. In addition to completing foreclosure proceedings on a loan participation interest in 2011, we completed foreclosure proceedings on two properties securing one of our loan participation interests in February 2012 and entered into a Deed in Lieu of Foreclosure Agreement with one of our borrowers. These two transactions resulted in the transfer of $1.7 million of mortgage loan interests to real estate owned assets during the year ended December 31, 2012.  On March 15, 2013, we acquired a worship facility pursuant to a Deed in Lieu of Foreclosure Agreement.  We held first and second trust deed mortgage liens totaling $2.6 million on the property and restructured the loans in January 2012.  The two loans had a carrying value, net of discounts and specific reserves, of $1.5 million.  All reserves were charged off immediately prior to acquiring the property in the deed in lieu of foreclosure transaction.  The property is now included in our financial statements with a value of $1.5 million.                                                57

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The following table presents our non-performing assets:

                                   Non-Performing Assets                                     ($ in thousands)                                   December 31, 2012                December 31, 2011  Non-Performing Loans:1  Collateral-Dependent:  Delinquencies over 90-Days                       $                  2,611         $                  6,586 Troubled Debt Restructurings2                                  8,469                            8,873  Total Collateral-Dependent Loans                                           11,080                           15,459  Non-Collateral-Dependent:  Delinquencies over 90-Days                                             -- Troubled Debt Restructurings                                   7,479                            7,483  Total Non-Collateral-Dependent Loans                                            7,479                            7,483  Loans 90 Days past due and still accruing                                  --                               --  Total Non-Performing Loans                                           18,559                           22,942 Foreclosed Assets                                2,914                            1,374  Total Non-performing Assets                        $                 21,473         $                 24,316 

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

2 Includes $814 thousand and $6.2 million of restructured loans that were over 90 days delinquent as of December 31, 2012 and December 31, 2011, respectively.

    At December 31, 2012, we had eleven restructured loans that were on non-accrual status. One of these loans was over 90 days delinquent. We had one non-restructured loan that was over 90 days past due. As of December 31, 2012, we held four foreclosed real properties in the net amount of $2.9 million, which includes a $136 thousand valuation allowance against two of the properties.  At December 31, 2011, we had eleven restructured loans that were on non-accrual status. Five of these loans were over 90 days delinquent. We had four non-restructured loans that were over 90 days past due. One of these restructured loans was acquired in the transaction we entered into with ECCU in which ECCU repurchased two impaired loans from us in exchange for a cash purchase price of $4.5 million. As a result, this loan was carried on our financial statements at a net investment of zero at December 31, 2011. This loan was charged-off in 2012. As of December 31, 2011, we held one foreclosed asset in the amount of $1.4 million.                                          58 --------------------------------------------------------------------------------  Allowance for Loan Losses. We maintain an allowance for loan losses that we consider adequate to cover both the inherent risk of loss associated with the loan portfolio as well as the risk associated with specific loans that we have identified as having a significant chance of resulting in loss. Allowances taken to address the inherent risk of loss in the loan portfolio are considered general reserves. We include various qualitative factors in our analysis which are weighted based on the level of risk represented and for the potential impact on our portfolio. These factors include:  

- Changes in lending policies and procedures, including changes in underwriting

    standards and collection;   

- Changes in national, regional and local economic and business conditions and

    developments that affect the collectability of the portfolio;   

- Changes in the volume and severity of past due loans, the volume of nonaccrual

    loans, and the volume and severity of adversely classified loans;      - Changes in the value of underlying collateral for collateral-dependent loans;     and                           - The effect of credit concentrations.     While we have not added any new qualitative factors in the analysis of our loan portfolio since 2009, in March 2012 we refined our analysis by segregating our loans into pools based on the position of the underlying collateral and the risk rating of the loan. We modify the weight of the factors above depending on the risk associated with the pool. Risk ratings are determined by grading a borrower on certain metrics, which include financial performance, strength of management, credit history, and condition of the local economy. These ratings are updated on an annual basis, or more frequently as necessary. By segregating the portfolio in this manner, our senior management team is better able to assess the potential impact of various risk factors depending on the quality of the loans in a particular pool. The potential impact of factors such as the risk of charge-offs, impairment, delinquency, restructuring, decreases in borrower financial condition, and continued low commercial real estate values throughout the country fluctuates depending on the quality of the loan. 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. We evaluate the factors used in our general reserve analysis on a quarterly basis to ensure that we have adequately addressed the inherent risks present in our portfolio.  We also examine our entire loan portfolio monthly to identify individual loans which we believe have a greater risk of loss than is addressed by the general reserves.  These are identified by examining delinquency reports, both current and historic, monitoring collateral value, and performing a periodic review of borrower financial statements. For loans that are collateral-dependent, management first determines the value at risk on the investment, defined as the unpaid principal balance less the collateral value net of estimated costs associated with selling a foreclosed property. This entire value at risk is reserved. For impaired loans that are not collateral-dependent, management will record an impairment based on the present value of expected future cash flows. Loans that carry a specific reserve are formally reviewed quarterly, although reserves will be adjusted more frequently if additional information regarding the loan's status or its underlying collateral is received.                                          59 --------------------------------------------------------------------------------  Finally, our allowance for loan losses includes reserves related to troubled debt restructurings. These reserves are calculated as the difference in the net present value of payment streams between a troubled debt restructuring at its modified terms as compared to its original terms, discounted at the original interest rate on the loan. These reserves are recorded at the time of the restructuring. The change in the present value of cash flows attributable to the passage of time is reported as interest income.  In May 2012, we entered into a Loan Purchase Agreement involving two mortgage loan interests which were the subject of foreclosure proceedings. In exchange for transferring all rights, title and interest in these two mortgage loan interests, we received $2.4 million in cash and were relieved of any further obligations regarding the mortgage loan interests sold. Both loans were considered impaired. The recorded investment in these loans was $2.5 million after discounts. The loans also carried a total of $300 thousand in specific reserves that had been recorded in prior periods and set aside as an allowance for loan losses. $35 thousand of these specific reserves were charged off against our allowance for loan losses. We reversed the remaining $265 thousand of specific reserves related to these two loans, reducing our provision and allowance for loan losses for the year ended December 31, 2012.  The process of providing adequate allowance for loan losses involves discretion on the part of management, and as such, losses may differ from current estimates. We have attempted to maintain the allowance at a level which compensates for losses that may arise from unknown conditions. At December 31, 2012 and December 31, 2011, the allowance for loan losses was $4.0 million and $4.1 million, respectively. This represented 2.5% and 2.4% of our gross loans receivable at those respective dates.                                                   Allowance for Loan Losses                                                     as of and for the                                                        Year Ended                                                       December 31,                                                    2012             2011           Balances:                                 ($ in thousands)           Average total loans           outstanding during period             $     163,042      $ 181,855           Total loans outstanding           at end of the period                  $     157,396      $ 170,920           Allowance for loan losses:           Balance at the beginning of period    $       4,127      $   3,997           Provision charged to expense1                    (9 )        1,487           Charge-offs           Wholly-Owned First                               35             --           Wholly-Owned Junior                              --             --           Participation First                              12          1,279           Participation Junior                             --             --           Total                                            47          1,279                                             60

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         Recoveries       Wholly-Owned First                                         --           --       Wholly-Owned Junior                                        --           --       Participation First                                        --           --       Participation Junior                                       --           --       Total                                                      --           --       Net loan charge-offs                                                                  47        1,279

      Accretion of allowance related to       restructured loans                                         66           78        Balance                                             $   4,005      $ 4,127   

Ratios:

      Net loan charge-offs to average total loans              0.03 %      

0.70 %

Provision for loan losses to average total

          loans                                                 0.00 %       

0.82 %

Allowance for loan losses to total loans at

           the end of the period                                2.54 %       

2.41 %

Allowance for loan losses to non-

      performing loans                                        21.58 %     

18.00 %

Net loan charge-offs to allowance for

         loan losses at the end of the period                   1.17 %      

30.99 %

Net loan charge-offs to provision for loan losses (522.22 )% 86.01 %

    1 We reversed $265 thousand of reserves against provision for loan losses during the year ended December 31, 2012 as a result of the sale of two impaired loans, which resulted in a net credit to provision expense.  Borrowings from Financial Institutions. The decrease in borrowings from financial institutions is the result of regular monthly payments we made on our NCUA credit facilities as well as $3.2 million in additional principal payments made in order to remain in compliance with the minimum collateralization ratio requirements of our NUCA credit facilities. The remaining balance on these facilities totals $103.8 million and bears interest at a rate of 2.525% pursuant to agreements entered into with the NCUA in November 2011. The maturity date for both facilities is October 31, 2018. For further discussion concerning our borrowings and credit facilities see Item 7, "Credit Facility Borrowings".  Notes Payable. Our notes payable consist of debt securities sold under registered national offerings as well as notes sold to accredited investors. The principal balance owed on these notes decreased by $6.5 million during 2012 primarily due to the temporary suspension of the sale of Class A Notes sales from May 15, 2012 until our new Class A Notes Registration Statement was declared effective by the SEC on October 11, 2012. Sales of our Class A Notes are now being conducted by our wholly-owned subsidiary, MP Securities, which is a broker-dealer subject to regulation by FINRA.  Members' Equity. Total members' equity increased in 2012 due mainly to our net income of $417 thousand for 2012, offset by $347 thousand of dividend payments and net income distributions related to our Series A Preferred Units. We did not repurchase any ownership units during the year ended December 31, 2012.                                          61 --------------------------------------------------------------------------------   Results of Operations for the Years Ended December 31, 2012 and December 31, 2011                                                                                      Comparison                                                2012          2011         $ Difference        % Difference Interest income: Interest on loans                          $   9,913     $  10,989     $       ( 1,076 )               (10 %) Interest on interest-bearing accounts            137            88                  49                  56 % Total interest income                         10,050        11,077              (1,027 )                (9 %) Interest expense: Borrowings from financial institutions         2,715         4,560              (1,845 )               (40 %) Notes payable                                  2,420         2,597                (177 )                (7 %) Total interest expense                         5,135         7,157              (2,022 )               (28 %) Net interest income                            4,915         3,920                 995                  25 % Provision (credit) for loan losses                (9 )       1,487              (1,496 )              (101 %) Net interest income after provision for loan losses                                    4,924         2,433               2,491                 102 % Non-interest income                               56           162                (106 )               (65 %) Non-interest expenses: Salaries and benefits                          2,029         1,555                 474                  30 % Marketing and promotion                          158           119                  39                  33 % Office occupancy                                 132           115                  17                  15 % Office operations and other expenses           1,357         1,153                 204                  18 % Foreclosed assets, net                           160           (20 )               180                 900 % Legal and accounting                             711           701                  10                   1 % Total non-interest expenses                    4,547         3,623                 924                  26 % Income (loss) before provision for income taxes                                     433        (1,028 )             1,461                 142 % Provision for income taxes                        16            16                   0                   0 % Net income (loss)                          $     417     $  (1,044 )   $         1,461                 140 %                                              62

--------------------------------------------------------------------------------  In 2012, we recognized net income of $417 thousand due in large part to reductions in our cost of borrowings from financial institutions and a $1.5 million decline in our provision for loan losses as compared to 2011. As further described below, the most significant factors influencing our consolidated results of operations for the year ended December 31, 2012, as compared to 2011 were:  

· a credit for loan losses of $9 thousand for 2012 as compared to provisions of

$1.5 million for 2011, primarily resulting from the sale of two impaired loans

at a price greater than our net investment in those loans and the

stabilization of our loan portfolio, leading to no new impaired loans that

    require significant reserves;   

· total interest income on our mortgage loan investments declined by $1.1

million in 2012, a 10% decline, primarily resulting from a $13.5 million

    decrease in our mortgage loan investments;      · net interest income increased by 25% in 2012, primarily resulting from

completing a refinancing transaction in 2011 which reduced our borrowing rates

from a weighted average rate of 4.0% to 2.5% on approximately $110 million

    that we owed on our credit facilities;   

· our borrowing costs on our investor debt securities declined by 7% due to the

$6.5 million decrease in the total of our outstanding investor debt     securities;   

· we were unable to sell any loan participations in 2012, thereby resulting in a

$106 thousand decrease in non-interest income that we earned in 2011;   

· we incurred a 30% increase in salary and benefits expenses as we hired staff

for our broker-dealer subsidiary and transitioned from selling investor debt

securities through Company employees to a more robust platform that relies on

MP Securities</org> to sell investor debt securities, mutual funds and investment

    products; and   

· we incurred a 26% increase in non-interest expenses primarily due to costs

incurred in managing our real estate owned assets, legal fees and expenses

    incurred to protect our investments made in several impaired loans and     regulatory related costs associated with obtaining approval from FINRA to     permit MP Securities to sell our Class A Notes.    Interest income on our mortgage loan investments decreased by 10% from 2011. This corresponds to the 10% decrease in the average balance of our interest-earning loans of $168.5 million for the year ended December 31, 2011, as compared to $151.8 million for the year ended December 31, 2012. While the outstanding balance due on our non-accrual loans declined by $4.6 million for 2012 as compared to 2011, we recorded $379 thousand of interest payments we received against the principal balance of these collateral-dependent impaired loans instead of reporting the payments as interest income in 2012. In 2011, we recorded $275 thousand in interest payments against the principal balances of our collateral-dependent impaired loans. Interest income recognized on interest-bearing accounts with other financial institutions increased as our average cash balance rose from $7.5 million in 2011 to $13.2 million in 2012.                                          63 --------------------------------------------------------------------------------  Interest expense on our borrowings decreased substantially during the year due to the refinancing transaction we completed with the NCUA in November, 2011. The weighted average interest rate paid on the NCUA credit facilities decreased from 4.0% for the year ended December 31, 2011 to 2.5% for the year ended December 31, 2012. While the weighted average interest rates of our investor notes stayed fairly constant, the average balance of our notes decreased from $60.9 million for 2011 to $57.0 million in 2012, causing the interest expense on investor notes to decrease by $177 thousand. Even though interest income decreased by 10%, net interest income increased by $995 thousand in 2012 as compared to 2011, primarily due to lower borrowing costs in 2012.  We had a credit for loan losses of $9 thousand for the year ended December 31, 2012 as compared to a provision of $1.5 million for the year ended December 31. In 2011, we recorded $1.6 in additional reserves on four collateral-dependent impaired loans after management concluded that there had been a material decrease in the value of the real estate that secured these loans. For 2012, we did not incur a material decrease in the value of the real estate properties that secured our collateral-dependent impaired loans. As a result, we recorded no additional reserved for loan losses on these loans. While we increased reserves on several of our troubled debt restructurings based on new estimates of future cash flows, these provisions were offset by a $265 thousand credit that was taken when we sold two impaired loans in May 2012 at a price greater than our carrying value of the loan. As a result of reduced interest expense and $1.4 million reduction in our provision for loan losses, net interest income after provision for loan losses increased by 97% for the year ended December 31, 2012 over the year ended December 31, 2011.  We received other income of $56 thousand in the year ended December 31, 2012 which is a decrease of $106 thousand from the year ended December 31, 2011. We recognized $21 thousand in additional servicing fee income as we serviced the loan participations we sold in 2011 for an entire year. However, we sold no loan participations during 2012 as we did in 2011, and our gains on loan sales decreased by $132 thousand.  Our non-interest expenses for the year ended December 31, 2012 increased by 26% from the year ended December 31, 2011. Salaries and benefits expenses increased by $474 thousand as we experienced a full year from the four additional employees we hired in 2011 to help manage and grow our loan portfolio. In 2012, we hired two new employees to work for our wholly-owned broker-dealer as well as another staff member to assist in loan servicing. With the Board of Managers approval, management also approved $116 thousand in bonuses for the year ended December 31, 2012, while no bonuses were approved for 2011. Marketing expenses increased by $39 thousand as we engaged in new marketing efforts through our broker-dealer to sell our debt securities and through our lending department to originate new loans. Office operation expenses increased by $204 thousand primarily due to $33 thousand in additional human resources costs related to our new staff members, $31 thousand in additional insurance costs due to rising premiums, and $52 thousand in additional expenses related to managing our delinquent loans.  Net expenses related to foreclosed assets increased by $180 thousand during 2012. We acquired three new real estate assets during 2012, and while this caused rental income from foreclosed assets to increase by $30 thousand, the costs of managing foreclosed assets increased by $74 thousand. We also recorded a $136 thousand valuation allowance on one of the properties. Finally, legal and consulting related costs increased by $10 thousand in 2012. While we incurred $150 thousand less in consulting services related to the refinancing of our bank borrowings in 2011, we had $122 thousand in additional legal expenses and filing fees in 2012 resulting from efforts to launch MP Securities and obtain approval for it to sell our Class A Notes. We also experienced $22 thousand in additional audit fees due to the increased regulatory and reporting obligations of our operations primarily related to the broker-dealer. While we incurred significant additional legal fees and expenses in 2012 resulting from the launch of MP Securities and obtaining approval for it to sell our Class A Notes, we believe most of these costs are non-recurring in nature.                                          64 --------------------------------------------------------------------------------

Results of Operations for the Years Ended December 31, 2011 and December 31, 2010

  We experienced many of the same challenges in 2011 as we did in 2010. Although we recorded significant provisions for loan losses on several loans in 2011, we were able to relieve $914 thousand in our allowance for loan losses when we sold two impaired loans at par in December 2011 that carried significant specific reserves for losses. Despite the decrease in provision for loan losses as compared to 2010, we incurred a loss of $1.044 million in 2011. As further described below, the most significant factors influencing our consolidated results of operations for the year ended December 31, 2011, as compared to 2010 were:  

• a decrease in provision for loan losses of $890 thousand, from $2.4 million in

2010 to $1.5 million in 2011, due mainly to the sale of two impaired loans at

    par that carried total specific reserves of $914 thousand;   

• a decrease in interest income received as a result of decrease in our loan

    portfolio from $191.8 million at December 31, 2010 to $170.9 million at     December 31, 2011;   

• a decrease in interest expense related to the decrease in notes payable from

$62.3 million to $59.0 million;   

• a decrease in interest expense related to the repricing of interest rates on

three tranches of our Members United credit facility totaling $75.4 million

    from 4.39% to 3.96%;   

• a decrease in interest expense related to the refinancing of our primary

credit facilities in November, which lowered our interest rate on $110.8

    million of debt from 3.94% to 2.53%;   

• an increase in salary and benefits costs of $192 thousand as we hired staff in

order to facilitate future note sales, loan originations, and in-house loan

    servicing;   

• an increase in marketing and promotions expense of $75 thousand as we began

    campaigns to increase note sales;                                               65

--------------------------------------------------------------------------------

• an increase in office operation expense of $195 thousand as we experienced an

entire year of monthly maintenance charges and depreciation expense related to

    the new core system implemented in 2010; and   

• an increase in legal and professional fees of $104 thousand we incurred in the

process of opening our broker-dealer and preparing to commence its operations.

    Interest income on loans decreased from $11.9 million to $11.0 million for the year ended December 31, 2011, a decrease of 8%. This corresponds to the 7% decrease in the average balance of our loan portfolio from $196.1 million for the year ended December 31, 2010 to $181.9 million for the year ended December 31, 2011. While the number and amount of non-accrual loans stayed relatively stable throughout the year, we recorded $275 thousand of interest payments against the principal balance of several impaired loans, which also decreased interest income. Thus, if these loans were performing loans we would have realized an additional $275 thousand in interest income.  Interest expense on our borrowings decreased from $5.4 million in 2010 to $4.6 million in 2011 due to the partial pay-down of our primary credit facilities, as well as repricing of the interest rates on three tranches of our Members United credit facility in March, and then again when we refinanced both of our primary credit facilities in November. Interest expense to our note investors decreased from $2.8 million to $2.6 million for the year ended December 31, 2011, mainly due to a decrease in the average amount of notes outstanding during 2011 as compared to 2010. Net interest income increased to $3.9 million in 2011 from $3.8 million in 2010, mainly as a result of the decrease in our interest expense paid on our credit facilities.  Our provision for loan losses decreased to $1.5 million for the year ended December 31, 2011 as compared to $2.4 million for the year ended December 31, 2010. During both 2010 and 2011, we provided significant reserves on impaired collateral-dependent loans as a result of decreases in value of the collateral securing such loans. In December 2011, we sold two of our impaired loans to ECCU at par. In doing so, we relieved $914 thousand in our provision for loan losses related to these two loans, which accounts for the decrease in provision expense. Net interest income after provision for loan losses increased to $2.4 million for the year ended December 31, 2011, an increase of $981 thousand, or 67%, from $1.5 million for the year ended December 31, 2010. This increase is primarily attributable to the decrease in provision for loan losses as well as the decrease in interest rates paid on our credit facility borrowings.  We also received other income of $199 thousand in the year ended December 31, 2011 which is an increase of $137 thousand from $62 thousand for the year ended December 31, 2010. This increase is primarily related to $132 thousand of gain related to the sale of participations in two loans to financial institutions during 2011.                                          66

--------------------------------------------------------------------------------  Our non-interest operating expenses for the year ended December 31, 2011 increased to $3.7 million from $3.1 million for the same period in 2010, which represents an increase of 16%. Salaries and benefits expenses increased by $192 thousand as we hired five new employees to facilitate the expansion of our loan servicing capabilities, and better equip us to manage and grow our loan portfolio. Marketing expenses increased by $75 thousand as we engaged in new marketing efforts to sell our debt securities. Office operation expenses increased by $195 thousand primarily due to $182 thousand of additional costs related to the implementation of our new enterprise resources planning system. Finally, legal and consulting related costs increased by $104 thousand due to additional legal and consulting services related to the refinancing of our bank borrowings and the launch of MP Securities. While we have incurred additional consulting and legal fees related to refinancing and restructuring of our balance sheet, we believe that these expenses are non-recurring in nature.  

Net Interest Income and Net Interest Margin

  Our earnings depend largely upon the difference between the income we receive from interest-earning assets, which are principally mortgage loan investments and interest-earning accounts with other financial institutions, and the interest paid on notes payable and lines of credit. This difference is net interest income. Net interest margin is net interest income expressed as a percentage of average total interest-earning assets.  The following tables provide information, for the periods indicated, on the average amounts outstanding for the major categories of interest-earning assets and interest-bearing liabilities, the amount of interest earned or paid, the yields and rates on major categories of interest-earning assets and interest-bearing liabilities, and the net interest margin:                                                          Average Balances and Rates/Yields                                                          For the year ended December 31,                                                              (Dollars in Thousands)                                                2012                                               2011                                                                                               Interest                          Average        Interest Income/      Average         Average         Income/          Average                          Balance            Expense         Yield/ Rate       Balance         Expense        Yield/ Rate Assets: Interest-earning accounts with   other financial institutions            $   13,218     $           137              1.04 %   $    7,545     $         88             1.17 %  Interest-earning loans [1]                  151,804               9,913              6.53 %      168,539           10,989             6.52 %  Total interest-earning assets                     165,022              10,050              6.09 %      176,084           11,077             6.29 %  

Non-interest-earning

assets                       9,485                  --                --         10,791               --               -- Total Assets               174,507              10,050              5.76 %      186,875           11,077             5.93 %  Liabilities: Public offering notes - Class A                   44,620               1,820              4.08 %       46,186            1,891             4.09 % Public offering notes - Alpha  Class                       3,670                 204              5.56 %        4,991              287             5.75 % Special offering notes                        8,454                 387              4.58 %        9,088              379             4.17 % International notes            220                   9              4.09 %          171                8             4.68 % Subordinated notes               6                   *              5.73 %          506               32             6.32 % Secured notes                   31                   1              2.53 %           --               --               -- Borrowings from financial institutions               107,210               2,714              2.53 %      114,799            4,560             3.97 %  Total interest-bearing liabilities             $  164,211               5,135              3.13 %   $  175,741            7,157             4.07 %  Net interest income                    $         4,915                                      $      3,920 Net interest margin [2]                                                                 2.83 %                                           2.10 %  

[1] Loans are net of deferred fees and loan discounts [2] Net interest margin is equal to net interest income as a percentage of average total assets. * Represents amounts less than $0.5 thousand.

                                             67

--------------------------------------------------------------------------------  Average interest-earning assets decreased to $165.0 million during the year ended December 31, 2012, from $176.1 million, a decrease of $11.1 million or 6%. The average yield on these assets decreased to 6.09% for the year ended December 31, 2012 from 6.29% for the year ended December 31, 2011. This decrease is related entirely to the composition of our interest-earning assets. In 2011, interest-earning accounts with other financial institutions, which earned average yields of 1.17%, only comprised 4% of our interest-earning assets. In 2012, as we sought to increase our liquidity, the average balance of our interest-earning accounts with other financial institutions increased to $13.2 million, which comprised 8% of our total interest-earning assets. This shift in the balance of assets caused the decrease in the average yield of both our interest-earning assets and total assets.  Average interest-bearing liabilities, consisting primarily of investor and credit facility notes payable, decreased to $164.2 million during the year ended December 31, 2012, from $175.7 million during 2011. The average rate paid on these notes decreased to 3.13% for the year ended December 31, 2012, from 4.07% for 2011. The decrease in the rate paid on interest-bearing liabilities was the result of refinancing our Members United and WesCorp credit facilities in November 2011 which reduced our average borrowing rate of 3.97% to an average rate of 2.53%. The average rate paid on our investor notes remained stable in total, as the average rates on our Class A Notes, which comprise a significant portion of our total notes, only decreased by one basis point.  Net interest income for the year ended December 31, 2012 was $4.9 million, which was an increase of $995 thousand, or 25% from the prior year. The net interest margin increased 72 basis points to 2.82% for the year ended December 31, 2012, as compared to 2.10% for 2011. This increase was mainly related to the decrease in interest rates paid on borrowings on our credit facilities.                                                      68

--------------------------------------------------------------------------------                                              Distribution, Rate and Yield 

Analysis of Net Interest Income

                                                               (Dollars in thousands)                                                          For the Years Ended December 31,                                                2011                                               2010                                             Interest                                           Interest                           Average           Income/            Average         Average         Income/          Average                           Balance           Expense          Yield/ Rate       Balance         Expense        Yield/ Rate Assets: Interest-earning accounts   with other financial institutions            $     7,545       $         88               1.17 %   $    9,631     $        118             1.23 %  Total loans [1]            168,539             10,989               6.52 %      195,967           11,918             6.08 %   Total interest-earning assets                      176,084             11,077               6.29 %      205,598           12,036             5.85 %  Liabilities: Public offering notes - Alpha Class                 4,991                287               5.75 %   $    8,036     $        443             5.44 % Public offering notes -Class A                     46,186              1,891               4.09 %       47,180            1,858             3.94 % Special offering notes                         9,088                379               4.17 %        8,206              329             4.01 % International notes             171                  8               4.68 %          319               14             4.39 % Subordinated notes              506                 32               6.32 %        2,755              192             6.97 % Financial institutions borrowings                  114,799              4,560               3.97 %      124,793            5,370             4.30 %    Total interest-bearing liabilities             $   175,741              7,157               4.07 %   $  191,289     $      8,206             4.29 %  Net interest income                       $      3,920                                       $      3,830 Net interest margin [2]                                                                  2.10 %                                           1.86 % 

[1] Loans are net of deferred loan fees but gross of the allowance for loan losses. [2] Net interest margin is equal to net interest income as a percentage of average interest-earning assets.

    Average interest-earning assets decreased to $176.1 million during the year ended December 31, 2011, from $196.4 million, a decrease of $20.3 million or 10.3%. The average yield on these assets increased to 6.29% for the year ended December 31, 2011 from 6.13% for the year ended December 31, 2010. This increase is mainly due to the sale of two impaired loans at the end of 2011. Because these loans had been characterized as non-accrual loans, when they were purchased, we were able to recognize $158 thousand of interest income that had been recorded as an offset to principal as well as $65 thousand of interest income related to accrued interest on these loans. The remainder of the increase is related to taking on servicing of 25 more loans during the year, which increased our net yield on those loans.  Average interest-bearing liabilities, consisting primarily of investor and credit facility notes payable, decreased to $175.7 million during the year ended December 31, 2011, from $191.3 million during 2010. The average rate paid on these notes decreased to 4.07% for the year ended December 31, 2011, from 4.29% for 2010. The decrease in the rate paid on interest-bearing liabilities was the result of the repricing of three tranches of our Members United credit facility in March 2011 to a lower interest rate, as well as the refinancing of our Members United and WesCorp credit facilities in November 2011 to a rate of 2.53%.  Net interest income for the year ended December 31, 2011 was $3.9 million, which was an increase of $90 thousand, or 2.3% from the prior year. The net interest margin increased 23 basis points to 2.10% for the year ended December 31, 2011, as compared to 1.87% for 2010. This increase was mainly related to the decrease in interest rates paid on our borrowings from financial institutions.                                          69 --------------------------------------------------------------------------------  The following table sets forth, for the periods indicated, the dollar amount of changes in interest earned and paid for interest-earning assets and interest-bearing liabilities, the amount of change attributable to changes in average daily balances (volume), changes in interest rates (rate), and changes attributable to both the volume and rate (rate/volume):                              Rate/Volume Analysis of Net Interest Income                                        (dollars in thousands)                                                            Year Ended 

December 31, 2012 vs. 2011

                                                           Increase (Decrease) Due to Change in Increase in Interest Income:                            Volume              Rate             Total Interest-earning account with other financial institutions                                         $         60       $        (11 )     $      49 Total loans                                                (1,109 )               33          (1,076 )                                                      $     (1,049 )     $         22       $  (1,027 )   Increase (Decrease) in Interest Expense: Public offering notes - Class A                               (64 )               (7 )           (71 ) Public offering notes - Alpha Class                           (74 )               (9 )           (83 ) Special offering notes                                        (27 )               35               8 International notes                                             2                 (1 )             1 Subordinated notes                                            (29 )               (3 )           (32 ) Secured notes                                                   1                 --               1 Lines of credit and other borrowings                         (284 )         

(1,562 ) (1,846 )

                                                      $       (475 )     $     (1,547 )     $  (2,022 ) Change in net interest income                        $       (574 )     $      1,569       $     995                                   Rate/Volume Analysis of Net Interest Income                                         (dollars in thousands)                                                             Year Ended

December 31, 2011 vs. 2010

                                                             Increase (Decrease) Due to Change in Increase in Interest Income:                           Volume             Rate               Total Interest-earning account with other financial institutions                                         $       (25 )     $        (5 )     $          (30 ) Total loans                                                 (841 )             (88 )               (929 )                                                      $      (866 )     $       (93 )     $         (959 )   Increase (Decrease) in Interest Expense: Public offering notes - Class A                              (40 )              73                   33 Public offering notes - Alpha Class                         (174 )              18                 (156 ) Special offering notes                                        36                14                   50 International notes                                           (6 )              --                   (6 ) Subordinated notes                                          (144 )             (16 )               (160 ) Lines of credit and other borrowings                        (413 )            (397 )               (810 )                                                      $      (741 )     $      (308 )     $       (1,049 ) Change in net interest income                        $      (125 )     $       215       $           90                                              70

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Credit Quality and Allowance for Loan Losses

  We maintain an allowance for loan losses, through charges to earnings, at a level reflecting estimated credit losses on our loan portfolio. In evaluating the level of the allowance for loan losses, we consider the type of loan, amount of loans in our portfolio, adverse situations that may affect our borrowers' ability to pay and estimated value of underlying collateral and credit quality trends (including trends in non-performing loans expected to result from existing conditions).  Several factors led to the sharp decline in provision for loan loss expense and the decrease in the balance of our allowance for loan losses for the year ended December 31, 2012. During 2012, the delinquency rate on our mortgage loan investments decreased from 7.5% to 2.2%. We also sold two impaired loans that carried approximately $300 thousand in reserves, and we did not experience significant declines in the value of the real properties that served as collateral on any of our collateral-dependent loans. Despite the decrease in the total principal balance of our loan portfolio, we slightly increased our general reserves as a result of the analysis of our stratified portfolio we began doing in March 2012. In performing this analysis, we increased the risk factors substantially for loans rated as "Watch," particularly those factors that address the risk of potential charge-offs, impairment, delinquency, modification and losses due to the decline in commercial real estate values. We also recorded several specific reserves on our non-collateral-dependent loans in 2012 based on new estimates of the present value of future cash flows. For 2012, we recorded a credit for loan losses of $9 thousand.  

The activity in the allowance for loan losses for the years ended December 31, 2012 and 2011 was as follows:

                                                   (dollars in thousands)                                                    2012             2011             Balance, beginning of year           $     4,127       $   3,997            Provision (credit) for loan losses            (9 )         1,487            Accretion of allowance related to            restructured loans                           (66 )           (78 )            Charge-offs                                  (47 )        (1,279 )             Balance, end of year                 $     4,005       $   4,127   

Impaired Loans

  As of December 31, 2012 and 2011, the principal balances of impaired loans were as follows:                                                         (dollars in thousands)                                                          2012             2011        Impaired loans with an allowance for       loan losses                                    $     11,128       $

18,168

Impaired loans for which there is no related

      allowance for loan losses                             7,431         

4,774        Total impaired loans                           $     18,559       $ 22,942 

Allowance for loan losses related to

      impaired loans                                 $      2,987       $ 

3,064

      Total non-accrual loans                        $     18,338       $

22,942

      Total loans past due 90 days or more       and still accruing                             $         --       $     --                                            71

--------------------------------------------------------------------------------  Information about impaired loans for the years ended December 31, 2012 and 2011, is as follows:                                                         (dollars in thousands)                                                           2012             2011      Average investment in impaired loans              $     18,245       $ 

22,085

     Interest income recognized on impaired     loans                                             $        482       $    498     Interest income recognized on impaired loans       attributable to their change in present value             66             78     Total interest income recognized on impaired        loans                                          $        548       $    576    

No additional funds were committed to be advanced in connection with impaired loans as of December 31, 2012.

Cash and Cash Equivalents

  We experienced a decrease in our cash during the twelve months ended December 31, 2012 in the amount of $1.1 million, as compared to a net increase of $4.1 million for the twelve months ended December 31, 2011. This decrease is related primarily to the increase in loan purchases and originations in 2012 as compared to the previous year. In addition, several ministries made withdrawals from their investor notes in order to fund real estate purchases and improvement of their worship facilities during the fourth quarter of 2012.  Net cash provided by operating activities totaled $896 thousand for the twelve months ended December 31, 2012, an increase of $829 thousand from $67 thousand provided by operating activities during the twelve months ended December 31, 2011. This is related primarily to an increase in net income for the year as well as an increase in other liabilities related to accrued bonuses and one large accrued payable recorded at the end of 2012.                                          72 --------------------------------------------------------------------------------  Net cash provided by investing activities totaled $11.4 million during the twelve months ended December 31, 2012, compared to $19.2 million provided during the twelve months ended December 31, 2011, a decrease of $7.8 million. This difference is attributable to a lack of loan sales during 2012 as well as an increase in loan purchases from $2.0 million in 2011 to $12.4 million in 2012 and an increase in loan originations from $4.3 million in 2011 to $9.8 million in 2012 as our lending team worked to replace loans that were paid off or sold.  Net cash used in financing activities totaled $13.4 million for the twelve-month period in 2012, an increase of $1.7 million from $15.1 million used in financing activities during the twelve months ended December 31, 2011. While we experienced $3.4 million more in notes payable paydowns in 2012, we paid down $5.1 million fewer in borrowings from financial institutions due to the principal payments we were required to make on our MU Credit Facility in 2011.  

Liquidity and Capital Resources

  We rely on cash generated from our operations, cash reserves and proceeds from the sale of investor notes to meet our obligations as they arise. From time to time, we also generate funds from the sale of mortgage loans and loan participations and raise additional capital through the sale of debt and equity securities. In addition, we have begun to raise funds through the generation of non-interest income, chiefly commissions on securities sales, by our wholly-owned broker-dealer, MP Securities. We require cash to originate and acquire new mortgage loans, repay indebtedness, make interest payments to our note investors and pay expenses related to our general business operations. We intend to continue our current liquidity plan which relies primarily on cash generated by operations, cash reserves and proceeds from the sale of debt securities. However, we intend to supplement this liquidity plan by expanding our loan participation sales as well as through the generation of additional sources of non-interest income.  Our management regularly prepares liquidity forecasts which we rely upon to ensure that we have adequate liquidity to conduct our business. While we believe that these expected cash inflows and outflows are reasonable, we cannot assure you that our forecasts or assumptions will prove to be accurate, particularly in this volatile credit and financial environment. While our liquidity sources that include cash, reserves and net cash from operations are generally available on an immediate basis, our ability to sell mortgage loan assets and raise additional debt or equity capital is less certain and less immediate.  We are also susceptible to withdrawal requests made by large note investors that can adversely affect our liquidity. We believe that our available cash, cash flow from operations, net interest and other fee income will be sufficient to fund our liquidity requirements for the next 12 months. Should our liquidity needs exceed our available sources of liquidity, we believe we could sell assets to raise additional cash. We may not be able to obtain desired financing on terms and conditions acceptable to us. If we are unable to obtain additional capital funding, our ability to grow our business and meet our strategic objectives will be constrained.                                          73 --------------------------------------------------------------------------------  Historically, we have experienced high rates of repeat investments or renewals by our debt security investors when their debt securities mature. During 2009 and 2008, for example, 79% and 76%, respectively, of our note investors renewed their investment. In 2010, the rate dropped to 57% of our note holders who purchased new debt securities. For the year 2011, 73% of note holders purchased new investments. However, in 2012, this renewal rate fell to 45% as we temporarily suspended the sale of our Class A Notes while we awaited an order of effectiveness for our registration statement from the SEC and a "no objections" letter from FINRA that would allow the notes to be sold by our wholly-owned subsidiary, MP Securities. We received the "no objections" letter on September 24, 2012 and the order of effectiveness from the SEC on October 11, 2012. While we are now able to distribute Class A Notes through MP Securities, these note sales are subject to certain suitability requirements that restrict the ability of some of our current investors to renew or make investments in our Class A Notes. In response, we have begun to develop other investment products, including private offerings of debt securities, and, through MP Securities, the sale of off-balance sheet investment products that generate commission income.  Should sources of capital from the sale of our debt securities prove insufficient to fund our operations and obligations, we also own a portfolio of performing mortgage loans and believe that we can generate additional liquidity through the sale of participation interests and mortgage loan assets to make payments on our credit facilities, pay interest to our note investors and pay operating expenses.  We base this belief on the size and quality of our mortgage loan portfolio and on our management's experience in finding purchasers for those loans on a timely basis. However, any sales transactions are dependent on and subject to market and economic conditions and our ability to consummate an acceptable purchase commitment. In addition, sales transactions could only be consummated if our loan balance after the transaction would continue to meet the minimum collateralization requirements of our credit facilities held with the NCUA. In order to enhance our ability to meet these requirements, we are currently discussing with a small number of financial institutions the possibility of obtaining an additional credit facility that would provide short-term financing for the funding of new loans which we would then offer for sale in the participation market. We are seeking to increase the sale of secured and unsecured debt securities and partner with other credit unions that may have an interest in originating or investing in new business loans that are made to churches and ministries that meet our underwriting guidelines. By developing new financing resources such as loan participations and institutional financing arrangements, we believe that we can attract new capital while generating profitable returns.  

Credit Facilities Developments

As of December 31, 2012, our credit facilities' commitments, amounts available and principal amounts outstanding were as follows:

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Members United Facilities

  On October 12, 2007, we entered into two note and security agreements with Members United, a federally chartered credit union located in Warrenville, Illinois for a secured $10 million revolving line of credit and for a secured $50 million revolving line of credit, which was later amended on May 8, 2008 to allow us to borrow up to $100 million through the revolving line of credit. Both credit facilities were secured by certain mortgage loans as a recourse obligation.  On August 27, 2008, we borrowed the entire $10 million available on the $10 million. As a result of this financing, the $10 million facility was converted to a term loan with a maturity date of August 26, 2011 and we paid off this facility in 2011. We also have used our $100 million Members United credit facility to assist us in financing our business. For 2011, the weighted average interest rate we paid on the Members United facility was 3.98%.  On September 24, 2010, the NCUA Board of Directors placed Members United into conservatorship. When the NCUA initiates a conservatorship action, the board of directors and management of the credit union is replaced. To implement the Members United conservatorship, certain legacy assets and contributed capital accounts, including our Members United credit facilities, were placed into an Asset Management Estate established by the NCUA to administer the Members United conservatorship.  On November 4, 2011, we and the National Credit Union Administration Board As Liquidating Agent of Members United Corporate Federal Credit Union entered into an $87.3 million credit facility refinancing transaction which amended and restated the original $100 million credit line we entered into with Members United on May 7, 2008. Unless the principal amount of the indebtedness due is accelerated under the terms of the MU Credit Facility loan documents, the principal balance and any interest due on the MU Credit Facility will mature on October 31, 2018. Accrued interest is due and payable monthly in arrears on the MU Credit Facility commencing on December 1, 2011 and on the first day of each succeeding month thereafter at the lesser of the maximum interest rate permitted by applicable law under the loan documents or 2.525%. The term loan may be repaid or retired without penalty, but any amounts repaid or prepaid under the MU Credit Facility may not be re-borrowed.  The MU Credit Facility includes a number of borrower covenants, including affirmative covenants to maintain the collateral free of liens, to timely pay the amounts due on the facility, to provide the lender with interim or annual financial statements and annual and periodic reports filed with the SEC and maintain a minimum collateralization ratio of at least 128%. If at any time we fail to maintain our required minimum collateralization ratio, we will be required to deliver cash or qualifying mortgage loans in an amount sufficient to enable us to meet our obligation to maintain a minimum collateralization ratio. As of December 31, 2012, the collateral securing the MU Credit Facility had an aggregate principal balance of $104.2 million, which satisfies the minimum collateralization ratio for this facility. As of December 31, 2012, the outstanding principal balance due on the MU Credit Facility was $81.3 million.  The MU Credit Facility also includes covenants which prevent us from renewing or extending a loan pledged as collateral under this facility unless certain conditions have been met and requiring the borrower to deliver current financial statements to us. Under the terms of the MU Credit Facility, we have established a lockbox maintained for the benefit of the NCUA that will receive all payments made by collateral obligors. Our obligation to repay the outstanding balance on this facility may be accelerated upon the occurrence of an "Event of Default" as defined in the MU Credit Facility. Such events of default include, among others, failure to make timely payments due under the MU Credit Facility, or our breach of any of our covenants.                                          75

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WesCorp Facility

  On November 30, 2009, we entered into a $28 million credit facility with WesCorp, a federally chartered credit union located in San Dimas, California. We used $24.6 million of the proceeds from the WesCorp credit facility to pay-off the BMO Facility. The WesCorp credit facility had a fixed interest rate of 3.95% and was initially secured by approximately $59.2 million of mortgage loans we previously pledged to secure the BMO Facility. Thus, the loan was initially secured by excess collateral of approximately $30.8 million.  On March 20, 2009, the NCUA assumed control of WesCorp under a conservatorship proceeding initiated by the NCUA under regulations adopted under the Federal Credit Union Act. Effective as of October 1, 2010, WesCorp was placed into liquidation by the NCUA. Pursuant to a letter dated October 25, 2010, we were advised that our WesCorp credit facility had been transferred to the Asset Management Assistance Center (AMAC), a facility established by the NCUA.  On November 4, 2011, we and the National Credit Union Administration Board As Liquidating Agent of Western Corporate Federal Credit Union entered into a $23.5 million credit facility which amended and restated the WesCorp credit facility. Unless the principal amount due on the WesCorp Credit Facility Extension is accelerated under the terms of the loan documents evidencing such credit facility, the principal balance and any interest due on the facility will be payable in full on October 31, 2018. Accrued interest on the WesCorp Credit Facility Extension is due monthly in arrears commencing on December 1, 2011 and on the first day of each succeeding month thereafter at the lesser of the maximum rate permitted by applicable law under the loan documents or 2.525%. As a result of this refinancing transaction, our interest rate was reduced from 3.95% to 2.525%. The term loan may be repaid or retired without penalty, but any amounts repaid or prepaid under the WesCorp Credit Facility Extension may not be re-borrowed.  The WesCorp Credit Facility Extension includes a number of borrower covenants, including affirmative covenants to maintain the collateral free of liens, to timely pay the amounts due on the facility, to provide the NCUA with interim or annual financial statements and annual and periodic reports filed with the SEC and maintain a minimum collateralization ratio of at least 150%. If at any time we fail to maintain our required minimum collateralization ratio, we will be required to deliver cash or qualifying mortgage loans in an amount sufficient to enable us to meet our obligation to maintain a minimum collateralization ratio. As of December 31, 2012, the collateral securing the WesCorp Credit Facility Extension had an aggregate principal balance of $34.2 million, which satisfies the minimum collateralization ratio for this facility. As of December 31, 2012, $22.5 million was outstanding on the WesCorp Credit Facility Extension.                                          76 --------------------------------------------------------------------------------

For further information on our credit facilities, see Note 7, Borrowings from Financial Institutions, in our accompanying audited consolidated financial statements for the year ended December 31, 2012.

Investor Notes

  We also rely on our investor notes to provide the funding for origination and purchase of mortgage loan assets and fund our general operations. As of December 31, 2012, a total of $52.6 million of our investor debt securities were issued and outstanding. For further information on our investor notes, see Note 9, Notes Payable in our accompanying audited consolidated financial statements for the year ended December 31, 2012. Historically, we have offered investor notes under offerings registered with the SEC and in private placements exempt under the provisions of the Securities Act of 1933, as amended. Our Alpha Class Notes were initially registered with the SEC in July 2001 and an additional $75.0 million of new Alpha Notes were registered with the SEC in May 2007. We discontinued the sale of our Alpha Class Notes in April 2008. As of December 31, 2012, $2.8 million of these notes remained outstanding. In addition to our Alpha Class Notes, in April 2008, we registered with the SEC an offering of $80.0 million of new Class A Notes that consists of three series of notes, including a fixed series, flex series and variable series. We registered an additional $100.0 million in Class A Notes with the SEC in June, 2010. On June 24, 2011, we filed a registration statement with the SEC seeking to register an additional $75 million of our Class A Notes.  Effective as of May 15, 2012, we temporarily discontinued the sale of the Class A Notes and deregistered the securities remaining unsold under our registration statement on Form S-1, initially filed with the SEC on December 23, 2009 and declared effective on June 3, 2010. We subsequently filed a registration statement seeking to register $75 million of our Class A Notes with the SEC. This registration statement was declared effective as of October 11, 2012 and we have resumed the sale of our Class A Notes. All of our Class A Notes are unsecured. The interest rates we pay on the fixed series notes and the flex series notes are determined by reference to the "swap index", an index that is based upon a weekly average swap rate reported by the Federal Reserve Board, and is in effect on the date they are issued, or in the case of the flex series notes, on the date the interest rate is reset. These notes bear interest at the swap index plus a rate spread of 1.70% to 2.50% and are issued in maturities ranging from 12 to 84 months. The interest rates we pay on the variable series notes are determined by reference to the variable index in effect on the date the interest rate is set and bear interest at a rate of the swap index plus a rate spread of 1.50% to 1.80%. Effective as of January 5, 2009, the variable index is defined under the Class A Notes as the three month LIBOR rate.  The Class A Notes are issued under a Trust Indenture we entered into with U.S. Bank National Association. Pursuant to the US Bank Indenture, we may issue up to a maximum of $200 million of our Class A Notes. The Trust Indenture covering the Class A Notes contains covenants pertaining to a minimum fixed charge coverage ratio, maintenance of tangible net worth, limitation on issuance of additional notes and incurrence of indebtedness. We were in compliance with these covenants at December 31, 2012. At December 31, 2012, $40.5 million of these Class A Notes were outstanding.                                          77

--------------------------------------------------------------------------------  Of the $52.6 million in investor notes that are outstanding at December 31, 2012, $8.5 million are available to be withdrawn at any time without penalty while an additional $14.7 million will mature in 2013. Historically, we have experienced a high rate of renewal or reinvestment by our note holders upon maturity of their notes. In 2011 and 2010, 73% and 57%, respectively, of our note investors renewed their investments by purchasing new notes. For the year ended December 31, 2012, largely due to the temporary suspension of our Class A Notes sales for six months, only 45% of our note investors renewed their investments. While no assurances can be given that we will be able to restore investments made by repeat investors to pre-2012 rates, we believe the historical record of repeat purchasers by our debt security investors supports our confidence in the future viability of our investor note program.  

Debt Covenants

  Our investor notes require that we comply with certain financial covenants including, without limitation, minimum net worth, interest coverage, restrictions on the distribution of earnings to our equity investors and incurring other indebtedness that is not permitted under the provisions of our loan and trust indenture. If an event of default occurs under our investor notes, the trustee may declare the principal and accrued interest on all notes to be due and payable and may exercise other available remedies to collect payment on such notes. We are in compliance with our debt covenants under the investor notes.  The MU Credit Facility and WesCorp Credit Facility Extension agreements contain a number of standard borrowing covenants, including affirmative covenants to maintain good and indefeasible title to the pledged collateral free and clear of all liens, to maintain a lockbox for the benefit of the lender to collect payments from borrowers on the collateral notes and comply with customary covenants for a transaction of this nature. In addition, unless otherwise waived by the NCUA, we may not renew or extend an underlying mortgage loan unless a recent appraisal is completed for such mortgaged property, the loan continues to be amortized over the same period as the prior note and requires the borrower to submit quarterly financial statements in the event the borrower has negative annual net income or a debt service coverage ratio of less than 1.0 to 1.0. We are in compliance with these covenants as of December 31, 2012. 

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