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MINISTRY PARTNERS INVESTMENT COMPANY, LLC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

May 15, 2014

SAFE HARBOR CAUTIONARY STATEMENT

This Form 10-Q contains forward-looking statements regarding Ministry Partners Investment Company, LLC and our wholly-owned subsidiaries, Ministry Partners Funding, LLC, MP Realty, and MP Securities, LLC, including, without limitation, statements regarding our expectations with respect to revenue, credit losses, levels of non-performing assets, expenses, earnings and other measures of financial performance. Statements that are not statements of historical facts may be deemed to be forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. The words "anticipate," "believe," "estimate," "expect," "plan," "intend," "should," "seek," "will," and similar expressions are intended to identify these forward-looking statements, but are not the exclusive means of identifying them. These forward-looking statements reflect the current views of our management. These forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties that are subject to change based upon various factors (many of which are beyond our control). Such risks, uncertainties and other factors that could cause our financial performance to differ materially from the expectations expressed in such forward-looking statements include, but are not limited to, the risks set forth in our Annual Report on Form 10-K for the year ended December 31, 2013, as well as the following:



· We are a highly leveraged company and our indebtedness could adversely affect

our financial condition and business;



· we depend on the sale of our debt securities to finance our business and have

relied on the renewals or reinvestments made by our holders of debt securities

when their debt securities mature to fund our business;



· due to additional suitability and overconcentration limits imposed on investors

in our Class A Notes under FINRA guidelines and our Class A Notes Prospectus,

the Company needs to expand our investor base and scope of investment products

offered by our wholly-owned affiliate, MP Securities;



· our ability to maintain liquidity or access to other sources of funding;

· we need to enhance and increase the sale of loan participations for loans we

originate in order to improve liquidity and generate servicing fees;



· changes in the cost and availability of funding facilities;

· the allowance for loan losses that we have set aside prove to be insufficient

to cover actual losses on our loan portfolio;



· because we rely on credit facilities to finance our investments in church

mortgage loans, disruptions in the credit markets, financial markets and

economic conditions that adversely impact the value of church mortgage loans

can negatively affect our financial condition and performance; and



· we are required to comply with certain covenants and restrictions in our

primary credit facilities that, if not met, could trigger repayment obligations

of the outstanding principal balance on short notice.



As used in this quarterly report, the terms "we", "us", "our" or the "Company" means Ministry Partners Investment Company, LLC and our wholly-owned subsidiaries, Ministry Partners Funding, LLC, MP Realty, and MP Securities, LLC.

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OVERVIEW We were incorporated in 1991 as a credit union service organization and we invest in and originate mortgage loans made to evangelical churches, ministries, schools and colleges. Our loan investments are generally secured by a first mortgage lien on properties owned and occupied by evangelical churches, schools, colleges and ministries. We converted to a limited liability company form of organization on December 31, 2008. The following discussion and analysis compares the results of operations for the three month periods ended March 31, 2014 and March 31, 2013 and should be read in conjunction with the accompanying financial statements and Notes thereto. Results of Operations



Three Months Ended March 31, 2014 vs. Three Months Ended March 31, 2013

Three months ended Comparison March 31, 2014 2013 $ Difference % Difference Interest income: Interest on loans $ 2,295$ 2,369 $ (74) (3%) Interest on interest-bearing 13 24 (11) (46%) accounts Total interest income 2,308 2,393 (85) (4%) Interest expense: Borrowings from financial 620 645 (25) (4%) institutions Notes payable 464 532 (68) (13%) Total interest expense 1,084 1,177 (93) (8%) Net interest income 1,224 1,216 8 1% Provision (credit) for loan losses 4 8 (4) (50%) Net interest income after provision 1,220 1,208 12 1% for loan losses Non-interest income 46 20 26 130% Non-interest expenses: Salaries and benefits 548 571 (23) (4%) Marketing and promotion 21 21 -- 0% Office operations 315 308 7 2% Foreclosed assets, net 34 (4) 38 (950%) Legal and accounting 191 185 6 3% Total non-interest expenses 1,109 1,081 28 3% Income before provision for income 157 147 10 7% taxes Provision for income taxes 4 4 -- 0% Net income $ 153$ 143 $ 10 7% 4

-------------------------------------------------------------------------------- During the three months ended March 31, 2014, we reported net income of $153 thousand, which was an increase of $10 thousand over the first quarter 2013. Our increased profitability in the first quarter of 2014 is primarily attributable to a slight improvement in our net interest margin and an increase in non-interest income. As compared to the first quarter of 2013, net interest income increased primarily as a result of the maturity and withdrawal of a net $5.4 million of our notes payable. Non-interest expenses increased due to maintenance costs on several of our foreclosed assets. The decrease in our total interest income as compared to the prior year is due primarily to the decrease in the mortgage loan assets held in our loan portfolio. Our average interest-earning loans decreased by $7.6 million from the three months ended March 31, 2013 to the three months ended March 31, 2014. We have not been able to renew or replace all of the maturing loans due to lending policy restrictions and liquidity concerns. However, the weighted average interest rate in our portfolio has increased from 6.58% at March 31, 2013 to 6.72% as of March 31, 2014 as we have earned $18.8 thousand of additional interest income from the amortization of deferred loan fees. Interest income has also decreased due to a lower average cash balance held in interest bearing accounts relative to the first quarter of 2013 as cash balances have decreased due to paydowns on our Class A Notes and institutional borrowings. Total interest expense decreased by $93 thousand as compared to the first quarter of 2013 primarily due to the decrease in the average balance of notes payable from $51.2 million for the three months ended March 31, 2013 to $46.3 million for the three months ended March 31, 2014. Our Class A Notes have declined as suitability restrictions have constrained our ability to renew some of the Class A Notes owned by our investors when their notes mature. Our institutional borrowings have also decreased as we have made regular monthly principal payments over the last twelve months. The $5.4 million decline in the total amount of our investor notes outstanding at March 31, 2014, as compared to March 31, 2013, was primarily due to restrictions on our Class A Notes sales. Because certain suitability and concentration limits imposed by FINRA rules and our Class A Notes Prospectus restrict the ability of some of our current investors to renew or make investments in our Class A Notes, some of our notes that matured since we filed our new Class A Note Prospectus in October 2012 could not be renewed when they matured. However, we have facilitated the transition of the marketing and sale of our investor notes to our wholly-owned subsidiary, MP Securities, and we expect note sales to increase as we expand our sales force, offer new products and broaden our market. For the three month period ended March 31, 2014, net interest income increased by $8 thousand, or 1%, from the three month period ended March 31, 2013. Net interest income after provision for loan losses increased by $12 thousand for the quarter ended March 31, 2014 over the three months ended March 31, 2013. For the quarter ended March 31, 2014, we recorded a provision for loan losses of $4 thousand, as compared to adding $8 thousand to the provision for loan losses for the the three months ended March 31, 2013. We have not changed the methodology for calculating our allowance for loan losses, and we have not experienced decline in the estimated value on any of the properties securing our collateral-dependent loans. As a result, our provisions for loan losses were minimal in the first quarter of both 2013 and 2014. We had other income of $46 thousand in the first quarter of 2014 primarily due to $24 thousand in servicing fee income. This income has increased by $12 thousand over the same period in the prior year as we sold four loan participation interests during the last half of 2013. We also earned $8 thousand in advisory fees and $9 thousand in commission income from the sale of mutual funds and fixed annuities by our wholly-owned broker dealer, MP Securities. MP Securities revenue increased by $12 thousand for the first quarter of 2014 relative to the first quarter of 2013. These factors led to a total increase in other income of $26 thousand from the prior year. Non-interest operating expenses for the three months ended March 31, 2014 increased by $28 thousand over the same period ended March 31, 2013, an increase of 3%. This increase is due almost entirely to an increase in net foreclosed asset expenses of $38 thousand. While we earned $14 thousand in additional rental income from our properties, we incurred $52 thousand in additional expenses due to repairs and maintenance on these properties over the winter. Offsetting the increase in foreclosed assets expense was a $23 thousand decrease in salaries and benefits expense that was primarily due to staffing reductions made by the Company in the fourth quarter of 2013. 5 -------------------------------------------------------------------------------- Marketing expenses, office operations expense, and professional expenses stayed relatively stable from the prior year. We did experience a decrease of $17 thousand in depreciation expenses as our data processing system became fully depreciated in October 2013, but this was offset by an increase in insurance expenses and clearing firm fees related to increased activity by MP Securities.



Net Interest Income and Net Interest Margin

Our earnings depend largely upon the difference between the income we receive from interest-earning assets, which consist principally of mortgage loan investments and interest-earning accounts with other financial institutions, and the interest paid on our debt securities and credit facility borrowings. This difference is net interest income. Net interest margin is net interest income expressed as a percentage of average total assets. The following table provides 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 Three Months Ended March 31, (Dollars in Thousands) 2014 2013 Interest Interest Income/ Average Income/ Average Average Balance Expense Yield/ Rate Average Balance Expense Yield/ Rate Assets: Interest-earning accounts with other financial institutions $ 6,840$ 13 0.78 % $ 10,458$ 24 0.94 % Interest-earning loans [1] 138,451 2,295 6.72 % 146,055 2,369 6.58 % Total interest-earning assets 145,291 2,308 6.44 % 156,513 2,393 6.20 %



Non-interest-earning

assets 11,431 -- -- % 8,462 -- -- % Total Assets 156,722 2,308 5.97 % 164,975 2,393 5.88 % Liabilities: Public offering notes - Class A 35,916 347 3.92 % 39,450 407 4.18 % Public offering notes - Alpha Class 118 * 0.66 % 2,036 24 4.78 % Special offering notes 5,016 58 4.66 % 9,314 99 4.29 % International notes 410 3 3.42 % 327 3 3.61 % Subordinated notes 4,554 54 4.77 % 13 * 4.28 % 6

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Secured notes 301 2 2.87 % 56 * 2.49 % Borrowings from financial institutions 99,597 620 2.53 % 103,496 644 2.53 %



Total

interest-bearing

liabilities $ 145,912 1,084 3.01 % 154,692

1,177 3.09 % Net interest income 1,224 1,216 Net interest margin [2] 3.17 % 2.99 %



[1] Loans are net of deferred fees and before the allowance for loan losses

[2] Net interest margin is equal to net interest income as a percentage of average total assets.

* Represents amounts less than $0.5 thousand.

Average interest-earning assets decreased to $145.3 million during the three months ended March 31, 2014, from $156.5 million during the same period in 2013, a decrease of $11.2 million or 7%. The average yield on these assets increased to 6.44% for the three months ended March 31, 2014 from 6.20% for the three months ended March 31, 2013. The average yield increase is due mainly to additional deferred fee amortization, as our loan portfolio is comprised less of loans purchased from and serviced by ECCU and more of loans that we have originated. The increase in yield is also related to the lower average balance in interest-earning accounts with other financial institutions. These assets earn less than 1% and they comprise a smaller portion of interest-earning assets compared to the prior year. The average balance of interest-earning accounts held with other financial institutions decreased to $6.8 million at March 31, 2014 as compared to $10.5 million at March 31, 2013, a decrease of 35%.



The yield on interest-earning loans for the three months ended March 31, 2014 increased to 6.72% from 6.58%. This is mainly the result of the additional deferred fee income the Company recognized from loans we originated.

Non-interest earning assets increased from $8.5 million for the three months ended March 31, 2013 to $11.4 million at March 31, 2014. This increase is due primarily to the increase in foreclosed assets. Yield on average assets increased from 5.88% for the three months ended March 31, 2013 to 5.97% for the three months ended March 31, 2014. Average interest-bearing liabilities, consisting of notes payable and borrowings from financial institutions, decreased to $145.9 million during the three months ended March 31, 2014, from $154.7 million during the same period in 2013. The average rate paid on these liabilities decreased to 3.01% for the three months ended March 31, 2014, from 3.09% for the same period in 2013. This decrease is due primarily to a decrease in the rates paid on our Class A Notes, as the underlying rates for these notes have decreased significantly over the prior year. Net interest income for the three months ended March 31, 2014, was $1.2 million, which was an increase of $8 thousand, or 1%, for the same period in 2013. Net interest margin increased 18 basis points to 3.17% for the quarter ended March 31, 2014, compared to 2.99% for the quarter ended March 31, 2013. 7 -------------------------------------------------------------------------------- The following table sets forth, for the periods indicated, the dollar amount of changes in interest earned and paid for our interest-earning assets and interest-bearing liabilities, the amount of change attributable to changes in average daily balances (volume), and changes in interest rates (rate). Rate/Volume Analysis of Net Interest Income Three months Ended March 31, 2014 vs. 2013 Increase (Decrease) Due to Change in Volume Rate Total (Dollars in Thousands) Increase (Decrease) in Interest Income: Interest-earning account with other $ (7) $ (4) $ (11) financial institutions Total loans (71) (3) (74) (78) (7) (85) Increase (Decrease) in Interest Expense: Public offering notes - Class A (36) (24) (60) Public offering notes - Alpha Class (13) (11) (24) Special offering notes (49) 8 (41) International notes -- -- -- Subordinated notes 54 -- 54 Secured notes 2 -- 2 Other (24) -- (24) (66) (27) (93) Change in net interest income $ (12) $ 20 $ 8 8

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Financial Condition



Comparison of Financial Condition at March 31, 2014 and December 31, 2013

Comparison 2014 2013 $ Difference % Difference (Unaudited) (Audited) Assets: Cash $ 3,683$ 7,483$ (3,800) (51%) Loans receivable, net of allowance for loan losses of $2,721 and $2,856 as of March 31, 2014 and December 31, 2013, respectively 145,295 146,519 (1,224) (1%) Accrued interest receivable 604 607 (3) (0%) Property and equipment, net 110 120 (10) (8%) Debt issuance costs, net 10 31 (21) (68%) Foreclosed assets, net 4,478 3,308 1,170 35% Other assets 534 347 187 54% Total assets $ 154,714$ 158,415$ (3,701) (2%) Liabilities and members' equity Liabilities: Borrowings from financial $ 99,015$ 99,904$ (889) (1%) institutions Notes payable 45,088 47,667 (2,579) (5%) Accrued interest payable 27 14 13 93% Other liabilities 526 887 (361) (41%) Total liabilities 144,656 148,472 (3,816) (3%) Members' Equity: Series A preferred units 11,715 11,715 -- --% Class A common units 1,509 1,509 -- --% Accumulated deficit (3,166) (3,281) 115 (4%) Total members' equity 10,058 9,943 115 1%



Total liabilities and members' $ 154,714$ 158,415$ (3,701) (2%) equity

General. Total assets decreased by $3.7 million, or 2%, between December 31, 2013 and March 31, 2014. This decrease was due to a decrease in cash related to the paydown of our liabilities. During the three month period ended March 31, 2014, gross loans receivable decreased by $1.2 millon, or 1%. This decrease is due to the transfer of $1.2 million in loans to foreclosed assets. We sold $541 thousand in loans, and experienced $2.8 million in principal paydowns and loan payoffs, however, these loan receivable balances were replaced by $3.2 million of loan originations. Our portfolio consists entirely of loans made to evangelical churches and ministries. Approximately 99.9% of these loans are secured by real estate, while three loans that represent less than 0.1% of our portfolio are unsecured. The loans in our portfolio carried a weighted average interest rate of 6.33% at March 31, 2014 and December 31, 2013. 9

-------------------------------------------------------------------------------- Non-performing Assets. Non-performing assets consist of non-accrual loans, troubled debt restructurings, and four foreclosed assets, which are real estate properties. Non-accrual loans include any loan that becomes 90 days or more past due 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 to their modified payment terms without exception for at least three months. Some non-accrual loans are considered collateral dependent. These are defined as loans where there is a significant possibility that repayment of principal will involve the sale or operation of collateral securing the loan. For collateral dependent loans, any payment of interest we receive 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 collateral dependent, we do not accrue interest income, but we recognize income on a cash basis. We had ten and eleven nonaccrual loans as of March 31, 2014 and December 31, 2013, respectively. In June 2011, the Company completed foreclosure proceedings on a loan participation interest it acquired from ECCU. Prior to this foreclosure sale, we had never foreclosed on or taken a charge-off one of our mortgage loan investments. Since that time, we acquired two properties in February 2012 in partial satisfaction of one of our mortgage loan investments, and we acquired one property in September 2012 and another in March 2013 pursuant to Deed in Lieu of Foreclosure Agreements we entered into with two of our borrowers. We also acquired four properties in August 2013 in partial satisfaction of a loan participation interest we held as a mortgage loan investment. Finally, we acquired one property in January of 2014 pursuant to a Deed in Lieu of Foreclosure agreement. We have sold several of these properties. We have experienced $2.5 million in total charge-offs since June 2011.



The following table presents our non-performing assets:

Non-performing Assets ($ in thousands) March 31, 2014 December 31, 2013 Non-Performing Loans:1 Collateral Dependent: Delinquencies over 90-Days $ 751 $ 2,000 Troubled Debt Restructurings2 6,333 5,261 Other Impaired Loans -- 555 Total Collateral Dependent Loans 7,084 7,816



Non-Collateral Dependent:

Delinquencies over 90-Days -- 2,555 Troubled Debt Restructurings2 9,850 8,546 Total Non-Collateral Dependent Loans 9,850 11,101 10

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Loans 90 Days past due and still accruing -- --

Total Non-Performing Loans 16,934 18,917 Foreclosed Assets 4,478 2,914 Total Non-performing Assets $ 21,412$ 21,831



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

2 Includes $2.6 million of restructured loans that were over 90 days delinquent as of March 31, 2014 and December 31, 2013.

At March 31, 2014, we had nine restructured loans that were on non-accrual status. One of these loans was over 90 days delinquent. In addition, we had one non-restructured loan that was over 90 days past due. We also had two restructured loans that have been performing in accordance with their loan documents for a period of six months and have been put on accrual status; however, they are still considered non-performing. As of March 31, 2014, we had seven foreclosed properties valued at $4.5 million, net of a $13 thousand valuation allowance against one of the properties. At December 31, 2013, 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, 2013, we held six foreclosed real properties in the amount of $3.3 million, net of a $13 thousand valuation allowance against one of the properties. 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 factors in our analysis. These 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;

· The effect of credit concentrations; and



· The rate of defaults on loans modified as troubled debt restructurings within

the previous twelve months.

In addition, we include additional general reserves for our loans that are collateralized by a junior lien or that are unsecured. In order to more accurately determine the potential impact these factors have on our portfolio, we segregate our loans into pools based on risk rating when we perform our analysis. Risk factors are weighted differently depending upon the quality of the loans in the pool. In general, risk factors are given a higher weighting for lower quality loans, which results in greater general reserves related to these loans. We evaluate these factors on a quarterly basis to ensure that we have adequately addressed the risk inherent in our loan portfolio. We also examine our entire loan portfolio regularly 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. 11 -------------------------------------------------------------------------------- For loans that are collateral dependent, management first determines the value at risk on the investment, defined as the unpaid principal balance, net of discounts, less the collateral value net of estimated costs associated with selling a foreclosed property. This entire value at risk is reserved. For impaired loans that are not collateral dependent, management will record an impairment based on the present value of expected future cash flows. Loans that carry a specific reserve are formally reviewed quarterly, although reserves will be adjusted more frequently if additional information regarding the loan's status or its underlying collateral is received. Finally, our allowance for loan losses includes reserves related to troubled debt restructurings. These reserves are calculated as the difference in the net present value of payment streams between a troubled debt restructuring at its modified terms as compared to its original terms, discounted at the original interest rate on the loan. These reserves are recorded at the time of the restructuring. The change in the present value of cash flows attributable to the passage of time is reported as interest income. 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 March 31, 2014 and December 31, 2013, the allowance for loan losses was $2.7 million and $2.9 million, respectively. This represented 1.8% of our gross loans receivable at March 31, 2014 and 1.9% of our gross loans receivable at December 31, 2013. Allowance for Loan Losses as of and for the Three months ended Year Ended March 31, December 31, 2014 2013 2013 Balances: ($ in thousands) Average total loans outstanding during period $ 148,974$ 155,510 $



150,828

Total loans outstanding at end of the period $ 149,329$ 152,051 $



150,688

Allowance for loan losses: Balance at the beginning of period $ 2,856$ 4,005$ 4,005 Provision charged to expense 4 8 9 Charge-offs Wholly-Owned First 53 978 1,076 Wholly-Owned Junior -- -- -- Participation First 66 -- -- Participation Junior -- -- -- Total 119 978 1,076 Recoveries Wholly-Owned First -- -- -- Wholly-Owned Junior -- -- -- Participation First -- -- -- Participation Junior -- -- -- Total -- -- -- Net loan charge-offs (recoveries) 119 978 1,076 Accretion of allowance related to restructured loans 20 23 82 Balance $ 2,721$ 3,012$ 2,856 12

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Ratios:

Net loan charge-offs to average total loans 0.08 % 0.63 % 0.71 % Provision for loan losses to average total loans1 0.00 % 0.01 % 0.01 % Allowance for loan losses to total loans at the end of the period 1.82 % 1.98 % 1.90 % Allowance for loan losses to non-performing loans 16.07 % 17.77 % 15.10 % Net loan charge-offs to allowance for loan losses at the end of the period 4.37 % 32.47 % 37.68 % Net loan charge-offs to Provision for loan losses1 2,975 % 12,225 % 11,956 % Borrowings from Financial Institutions. At March 31, 2014, we had $99.0 million in borrowings from financial institutions. This is a decrease of $889 thousand from December 31, 2013. This decrease is the result of regular monthly payments made on both the MU Credit Facility and the Wescorp Credit Facility Extension. Notes Payable. Our investor notes payable consist of debt securities sold under several registered national offerings as well as notes sold in private placements. These investor notes had a balance of $45.1 million at March 31, 2014, which was a decrease of $2.6 million from December 31, 2013. While we sell our Class A Notes through our wholly-owned affiliate, MP Securities, these note sales are subject to certain suitability requirements imposed by FINRA rules and our Class A Notes Prospectus that restrict the ability of some of our current investors to renew or make investments in the notes. Our Class A Notes, Alpha Class Notes, and special investor notes have decreased by $3.8 million since December 31, 2013 as a result of implementing the suitability standards imposed by FINRA and our Class A Notes Prospectus, as well as several withdrawals made by ministries that needed funds for expansion, loan paydowns or ministry related purposes. In order to maintain our investor note sales, we have increased sales efforts for our special note offerings, secured investment certificates, and Series 1 Subordinated Capital Notes. The balance of our subordinated notes has increased by $1.3 million since December 31, 2013. Members' Equity. Total members' equity was $10.1 million at March 31, 2014, which represents an increase of $115 thousand from $9.9 million at December 31, 2013. Our $153 thousand in net income during the first three months of the year is offset partially by $38 thousand of dividends related to our Series A Preferred Units, which require quarterly dividend payments and a payment of 10% of our annual net income after dividends, for which we accrue quarterly. We did not repurchase or sell any ownership units during the three months ended March 31, 2014.



Liquidity and Capital Resources

March 31, 2014 vs. March 31, 2013

Maintenance of adequate liquidity requires that sufficient resources be available at all times to meet cash flow requirements of the Company. Desired liquidity may be achieved from both assets and liabilities. Cash, investments in interest-bearing time deposits in other financial institutions, maturing loans, payments of principal and interest on loans and potential loan sales are sources of asset liquidity. Sales of investor notes and access to credit lines also serve as sources of additional liquidity. The Company reviews its liquidity position on a regular basis based upon its current position and expected trends of loans and investor notes. Management believes that the Company maintains adequate sources of liquidity to meet its liquidity needs. Nevertheless, if we are unable to continue our offering of Class A Notes for any reason, we incur sudden withdrawals by multiple investors in our investor notes, a substantial portion of our notes that mature during the next twelve months are not renewed and we are unable to obtain capital from sales of our mortgage loan assets or other sources, we expect that our business would be materially and adversely affected. Historically, we have relied on the sale of our debt securities to finance our mortgage loan investments. We have increased our marketing efforts related to the sale of privately placed special offering notes and we believe that the sale of these notes will enable the Company to meet its liquidity needs for the near future. The Company filed a new Registration Statement with the SEC to register $75 million of its Class A Notes that was deemed effective as of October 11, 2012. We have also entered into a Loan and Standby Agent Agreement pursuant to a Rule 506 offering 13



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to sell $40.0 million of Series 1 Subordinated Capital Notes. By offering the Class A Notes and privately placed investor notes, the Company expects to increase its investment in mortgage loans and thereby generate increased interest income. We also plan on selling participations in a portion of those mortgage loan investments. The cash gained from these sales will be used to originate additional loan investments or to fund operating activities. We have been successful in generating reinvestments by our debt security holders when the notes that they hold mature. During the three months ended March 31, 2014, our investors renewed their debt securities investments at a 38% rate, which represented no change from the 38% renewal rate over the three months ended March 31, 2013. This rate was 80% during the first quarter of 2012. The renewal rate dropped during the initial three month period after the SEC and FINRA approved our Class A Notes offering as we began to implement the suitability requirements and overconcentration limits imposed on investors by FINRA rules and the terms of the Company's Class A Notes Prospectus. We have initiated efforts to address the challenges imposed by FINRA's suitability rule by offering other securities products to our investors, locating new investors for our Class A Notes and expanding the products and services that MP Securities will offer to our investors. The net decrease in cash during the three months ended March 31, 2014 was $3.8 million, as compared to a net decrease of $286 thousand for the three months ended March 31, 2013, a change of $3.5 million. Net cash used in operating activities totaled $414 thousand for the three months ended March 31, 2014, as compared to net cash used in operating activities of $50 thousand for the same period in 2013. This increase in net cash used in operating activities is attributable primarily to the paydown of other liabilities as we paid accrued bonuses and dividends on our preferred units. Net cash provided by investing activities totaled $126 thousand during the three months ended March 31, 2014, as compared to $3.1 million provided during the three months ended March 31, 2013, a decrease in cash of $3.0 million. This decrease is related to a decrease in loan paydowns. While we used cash to originate or purchase a similar amount of loans from 2013, we received $3.3 less in cash related to loan sales and loan principal collections. Net cash used by financing activities totaled $3.5 million for the three month period ended March 31, 2014, an increase in cash used of $193 thousand from $3.3 million used in financing activities during the three months ended March 31, 2013. This difference is primarily attributable to an increase in withdrawals of our notes payable. Cash used in paying down our borrowings from financial institutions decreased as we did not make any additional principal payments during the three months ended March 31, 2014. During the first quarter of 2013, we made $310 thousand in additional principal payments. At March 31, 2014, our cash, which includes cash reserves and cash available for investment in mortgage loans, was $3.7 million, a decrease of $3.8 million from $7.5 million, at December 31, 2013.


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