MINISTRY PARTNERS INVESTMENT COMPANY, LLC – 10-K – MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion on our financial statements should be read in
conjunction with the consolidated financial statements and notes thereto in
this Report beginning at page F-1.
OVERVIEW
We generate our revenue primarily through our church lending portfolio and secondarily through fees generated from our investment and insurance products and services. While we generate most of our revenue through interest income, our strategic aim is to diversify our revenue sources so that non-interest income becomes a larger percentage of total income. Producing revenue from multiple sources may reduce the risk to the Company if we experience a decrease in interest income. We also strive to improve operating efficiency by increasing the revenue generated for each dollar of expense incurred to run the business, which helps us improve our capital position. Increased capital helps mitigate risk in economic down cycles. In addition, we reduce risk to our lending revenue by improving the quality of our loan portfolio, assessing the financial strength of our borrowers, and collaborating with borrowers to restructure, refinance, and/or liquidate these investments when necessary.
To continue to achieve our goals, protect the investment made by our note
holders, and maximize the value of our equity holders' investment, we will
continue to focus on:
?growing our non-interest income from our broker-dealer services and loan
servicing and products;
?investing in technology to enhance our customer experience while creating
operating efficiencies;
?growing our client base;
?expanding our broker-dealer sales staff;
?serving the needs of credit union and CUSO clients through revenue producing
strategic partnerships;
?finding new strategic partnership opportunities with like-minded organizations
that can help grow our client base and generate revenue;
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?expanding revenue through the sale of loan participation interests;
?managing the size and cost structure of our business to match our operating
environment and capital funding efforts;
?strengthening our capital through growth in earnings;
?optimizing our balance sheet size as we seek to improve the quality of our loan
investments;
?originating profitable new loans;
?strengthening our loan portfolio through aggressive and proactive efforts to
resolve problems in our non-performing assets;
?expanding the sale of our investor debt securities to diversify our funding
sources; and
?maintaining adequate liquidity levels.
COVID-19 Impact on the Company's Business
Although COVID-19 has personally affected the Company's staff and board managers, management does not believe the pandemic has caused any material adverse impact on the Company's financial position or ability to conduct any aspect of its business. The shutdown orders that began inMarch 2020 have been lifted and many churches are holding worship services in their facilities. In addition, vaccines are available that medical professionals expect will reduce the spread of COVID-19. However, COVID-19 variants may reduce vaccine efficacy, which may trigger governmental authorities to reinstate restrictions on church meetings and causing more economic disruption. While this was not the case with the most recent Omicron variant, the long-term impact of the pandemic and its related variants on our borrowers' revenues and their ability to make their loan payments is still unknown. The Company will continue to observe the impact of COVID-19 on the borrowers it serves, considering regional differences in the adverse effects and impact of the pandemic throughout theU.S.
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Financial Performance Summary for the Two-Year Period ended
(dollars in thousands)
2021
2020
Broker-dealer commissions and fees$ 878 $
762
Gain on debt extinguishment 2,398
2,400
Total income 10,641
11,788
Provision (credit) for loan losses 122 188 Total non-interest expenses 4,921 5,009 Net income 1,850 2,116 Cash, cash equivalents, and restricted cash 28,149
21,973
Loans receivable, net of allowance for loan losses of$1,638 and$1,516 as ofDecember 31, 2021 and 2020, respectively 97,243 116,121 Total assets 127,965 143,093 Lines of credit 2,000 - Term-debt 32,749 51,516 Notes payable, net of debt issuance costs 76,732 76,194 Total equity 14,511 12,908
Summary of Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with Generally Accepted
Accounting Principles ("GAAP") requires management to make estimates and
assumptions that influence amounts reported in the financial statements. These
estimates and assumptions affect the reported amounts of assets and liabilities
at the date of the financial statements and the reported amounts of revenues and
expenses generated during the reporting period. Various elements of our
accounting policies are inherently subject to estimation techniques, valuation
assumptions, and other subjective assessments.
Management has identified certain accounting policies that rely on judgments,
estimates, and assumptions and are critical to an understanding of our financial
statements. These policies govern such areas as the allowance for credit losses
and the fair value of financial instruments and foreclosed assets. Management
believes the judgments, estimates, and assumptions used in the accounting
policies governing these areas are appropriate based on the factual
circumstances at the time they were made. However, given the sensitivity of the
financial statements to these critical accounting policies, changes in
management's judgments, estimates, and assumptions could result in material
differences in our results of operations or financial condition. Further,
subsequent changes in economic or market conditions could have a significant
impact on these estimates as well as on our financial condition and operating
results in future periods.
The determination of the allowance for loan losses involves critical estimates
made in accordance with GAAP. Further on in Management's Discussion and
Analysis, we provide additional details regarding the factors involved in
determining the allowance, the
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nature of the uncertainty involved in the calculation, and the impact of the
allowance on the Company's financial position and results of operations.
Summary of Financial Performance
For the year endedDecember 31, 2021 , we earned net income of$1.9 million . While net income was down$266 thousand over the prior year, owners' equity increased by$1.6 million , resulting in the highest total amount of members' equity in the Company's history. The calendar years ended 2021, 2020, and 2019 are the Company's three most profitable years since starting operations. The main driver of the net income in 2021, as well as in 2020, was a$2.4 million gain on debt extinguishment realized by using cash to pay down a portion of our term debt at a discount. Non-interest income increased by$155 thousand to$3.6 million for the year endedDecember 31, 2021 . The increase was mostly due to a$116 thousand increase in broker-dealer commissions and fees. The increase was due to expanding our client base as well as the overall stock market and economic recovery. Non-interest expense decreased by$88 thousand mostly due to a reduction in salaries and benefits due to staffing changes. Conversely, net interest income after provision for loan loss decreased by$509 thousand due to a reduction in the average loan portfolio. The Company derived this substantial income by strategically shrinking the loan portfolio to generate the cash to extinguish the debt. While the smaller loan portfolio will produce less net interest income going forward, management determined the gains received on debt extinguishment outweighed any lost future income. Management will continue to evaluate opportunities to pay down our term debt if it is in the best interests of the Company and its strategic goals. For 2022, the Company plans to invest in infrastructure to effectively grow its loan portfolio with profitable loans.
Progress on Strategic Objectives
In 2021, we continued making progress towards our strategic objectives of
diversifying our revenue streams, improving the quality of our loan portfolio,
maintaining our balance sheet size, and improving operating efficiency. The
following discussion focuses on each of these strategic objectives.
Diversified revenue streams
The Company's management team believes that it will be able to use its
capabilities in lending, servicing, and providing investment advisory services
to supplement its net interest income with fee income. Our primary sources of
recurring non-interest income are:
?Revenue from our broker-dealer operations: As described above, revenue from
this source increased in 2021. The Company continues to develop new networking
agreements and build infrastructure it believes will help grow this business. We
also will look to increase this revenue source by expanding our sales force in
2022.
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?Loan participation sales: We sold$14.1 million in loan participation interests during the year endedDecember 31, 2021 while we sold$17.1 million in loan participation interests throughout the year endedDecember 31, 2020 . For 2022, we intend to continue our strategic efforts to increase the amount of loans originated and sold as loan participation interests.
?Loan servicing fee income: As of
servicing rights retained. This was, an increase of
portfolio generated
Loan portfolio quality
Historically, when the Company has reported a net loss for the year, the primary reason for the loss has been due to losses on our loan investments or from reserves taken on our allowance for loan losses. In subsequent years, the Company has benefited from recoveries when the loans paid off, the Company disposed of the collateral properties, or when the Company sold the promissory notes or loans. Therefore, the resolution of non-performing loans may contribute either positively or negatively to the Company's financial results. During the year endedDecember 31, 2020 , the Company sold an impaired loan to recoup its recorded investment in the loan. During the year endedDecember 31, 2021 , the Company sold a REO property which resulted in a gain on sale of$44 thousand . We continue to carefully watch our loan portfolio and work with borrowers to minimize losses on our mortgage loan investments. The Company can often find a solution for borrowers who are in distress, but who are willing and able to work out a compatible solution. These efforts became more important in 2021 as we saw our classified loans increase by$3.5 million to$9.7 million thousand atDecember 31, 2021 as compared toDecember 31, 2020 . This increase was as a result of three loans becoming impaired because of the borrowers experiencing financial distress. As part of our strategic decision to reposition our loan portfolio, we have continued to focus on originating lower balance loans made to ministries where we can achieve yields that are more favorable. This allows us to avoid deteriorating our margins while reducing overall risk exposure to any one borrower. However, we also have originated larger loans when we are able to find participants to buy a participation interest in the loan. Servicing loan participations sold generates servicing fee income while allowing us to reduce our risk exposure on the loan. We believe we have found a good mix in loan size that allows us to take advantage of quality lending opportunities. Our average net loan balance (recorded balance) was$783 thousand onDecember 31, 2021 . We believe the relationships we have formed with credit unions throughoutthe United States will enable us to increase the amount of loan participation interests we sell and service for others.
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Maintaining balance sheet size
Our strategy in 2019 and entering 2020 was to keep our balance sheet size flat rather than grow it as we direct more resources into improving the quality of our existing loan portfolio. However, during the year endedDecember 31, 2020 , we took advantage of an opportunity to pay off a term-debt credit facility with a$15.0 million outstanding principal balance. While paying off the loan reduced our balance sheet size, this opportunity helped the Company by increasing capital from a$2.4 million gain on debt extinguishment, improving net interest margin, and reducing the ongoing cash flow requirements to service the debt. OnMarch 5, 2021 , we made a prepayment of$14.3 million on our remaining term-debt credit facility. We will continue to evaluate the benefits of taking advantage of gains on debt extinguishment if we decide it is in the Company's best interest. Going forward, we intend to grow our loan portfolio while still taking advantage of debt extinguishment opportunities. To that end, onJanuary 6, 2022 , we made another prepayment of$15 million on the term-debt credit facility.
Improved operating efficiency
In the last several years, we have improved our operating efficiency. In 2021, we had non-interest expense of$4.9 million , a decrease of$88 thousand from$5.01 million in 2020. The decrease for the year endedDecember 31, 2021 , is attributable to reduced employee expense due to staffing changes. In 2022, management expects to increase our investment in personnel, technology, and infrastructure to continue to expand its products and services and well as improve our customer's digital experience. While we expect our operating expense to increase in the next few years, we believe that the added capital investments will allow us to deliver better products and services in a more efficient manner in the future. Financial Condition The following discussion and analysis compares the results of operations for the twelve months endedDecember 31, 2021 and 2020 and should be read in conjunction with the accompanying consolidated financial statements and notes thereto.
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Comparison of Financial Condition at December 31,:
Comparison
2021 2020 $ Difference % Difference
(dollars in thousands)
Assets:
Cash $ 28,080 $ 21,922 $ 6,158 28%
Restricted cash 69 51 18 35%
Certificates of deposit - 1,761 (1,761) -%
Loans receivable, net of allowance for
loan losses of $1,638 and $1,516 as of
December 31, 2021 and 2020,
respectively 97,243 116,121 (18,878) (16%)
Accrued interest receivable 507 798 (291) (36%)
Investments in joint venture 882 884 (2) -%
Property and equipment, net 172 219 (47) (21%)
Foreclosed assets, net 301 301 - -%
Servicing assets 170 147 23 16%
Other assets 541 889 (348) (39%)
Total assets $ 127,965 $ 143,093 $ (15,128) (11%)
Liabilities and members' equity
Liabilities:
Lines of credit $ 2,000 $ - $ 2,000 -%
Term-debt 32,749 51,516 (18,767) (36%)
Other secured borrowings 17 - 17 -%
Notes payable, net of debt issuance
costs of $88 and $33 as of December
31, 2021 and 2020, respectively 76,732 76,194 538 1%
Accrued interest payable 252 312 (60) (19%)
Other liabilities 1,704 2,163 (459) (21%)
Total liabilities 113,454 130,185 (16,731) (13%)
Members' Equity:
Series A preferred units 11,715 11,715 - -%
Class A common units 1,509 1,509 - -%
Accumulated earnings (deficit) 1,287 (316) 1,603 (507%)
Total members' equity 14,511 12,908 1,603 12%
Total liabilities and members'
equity $ 127,965 $ 143,093 $ (15,128) (11%)
General
Total assets decreased 11% due to the paydown of $14.3 million in term-debt
described earlier. Loans receivable decreased 16% due to management's focus on
selling loan participation interests of $14.1 million as well as receiving
$20.1 million in principal collections on loans receivable. Despite the economic
uncertainty caused by the COVID-19 pandemic, our net notes payable increased by
$538 thousand . Even with the term-debt paydown made by the Company in 2021, we
were able to increase cash by $6.2 million , and have positioned the Company to
benefit from future gains on debt extinguishment.
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Loan Portfolio
Our loan portfolio provides the majority of our revenue; however, it also presents the most risk to future earnings through both interest rate risk and credit risk. Additional information regarding risk to our loans is included in " Part I, Item 1A, Risk Factors ". Our portfolio consists entirely of loans made to evangelical churches and ministries with approximately 99.0% real estate secured loans. The loans in our portfolio carried a weighted average interest rate of 6.21% atDecember 31, 2021 and 6.55% atDecember 31, 2020 . Loan Types Year Ended December 31, (dollars in thousands) 2021 2020 Loans to evangelical churches and related organizations Amount % of Portfolio Amount % of Portfolio Real estate secured$ 97,708 98.3 %$ 113,930 96.3 % Construction 1,150 1.2 % 4,273 3.6 % Other secured 425 0.4 % -- -- % Unsecured 122 0.1 % 144 0.1 % Total$ 99,405 100.0 %$ 118,347 100.0 %
Maturities and Sensitivities of Loans to Changes in Interest Rates
Dollar Amount of Loans Receivable Maturing (in thousands)
Due 1yr to 5 Due After 5
As of Due 1 Yr or Less Yrs Yrs Total
December 31, 2021 $ 18,525 61,203 19,677 $ 99,405
Included in the table above are 75 adjustable rate loans totaling $58.1 million
in gross loans receivable, or 58% of the total balance. Adjustable rate loans
reduce the interest rate risk compared to fixed rate loans with similar cash
flow characteristics.
Non-performing Assets
Non-performing assets include:
?non-accrual loans;
?loans 90 days or more past due and still accruing;
?restructured loans, except for loans changed in a troubled debt restructuring
that were subsequently classified as performing due to the borrowers
demonstrated ability to perform on the restructured terms (typically a minimum
of six months); and
?foreclosed assets.
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Non-accrual loans are loans on which we have stopped accruing interest. Restructured loans are loans in which we have granted the borrower a concession on the interest rate or the original repayment terms due to financial distress. Foreclosed assets are real properties for which we have taken title and possession upon the completion of foreclosure proceedings. We closely watch these non-performing assets on an ongoing basis. Management evaluates the potential risk of loss on these loans and foreclosed assets by comparing the book balance to the fair value of any underlying collateral or the present value of projected future cash flows, as applicable. From time to time, we determine that certain non-accrual loans are collateral-dependent. We consider a loan to be collateral-dependent, when we believe the repayment of principal will involve the sale or operation of the loan collateral. For these loans, we record any interest payment we receive in one of two methods. If the Company believes that the recorded investment of the loan is fully collectable, we will recognize income on the interest payment received on a cash basis. If we believe that the recorded investment is not fully collectable, we will record any interest payment we receive towards reduction of the principal balance of the loan. For non-collateral-dependent loans that are on non-accrual status, we generally recognize income on a cash basis, although may record interest payments against principal in certain situations. We have four performing restructured loans on accrual status as ofDecember 31, 2021 . During 2021, the Company had one loan become non-accrual due to deteriorating financial performance. The Company restructured this loan. The Company also agreed on a restructure with another borrower facing financial distress. In addition, one loan that was a performing troubled debt restructure, and therefore not included in the table below for the year endedDecember 31, 2020 , became impaired during the year endedDecember 31, 2021 due to insufficient cash flow. As detailed in the table below, these activities increase the balance of our non-performing loans atDecember 31, 2021 , as compared toDecember 31, 2020 .
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The following table presents our non-performing assets:
Non-performing Assets
($ in thousands)
December 31, December 31,
2021 2020
Non-Performing Loans:1
Collateral-Dependent:
Delinquencies over 90-Days2 $ 503 $ 4,185
Troubled Debt Restructurings 8,295 1,996
Other Impaired Loans 890 -
Total Collateral-Dependent Loans 9,688 6,181
Non-Collateral-Dependent:
Delinquencies over 90-Days - - Other Impaired loans - - Troubled Debt Restructurings - - Total Non-Collateral-Dependent Loans - - Loans 90 Days past due and still accruing - - Total Non-Performing Loans 9,688 6,181 Foreclosed Assets3 301 301 Total Non-performing Assets$ 9,989 $ 6,482
1 These loans are presented at the balance of unpaid principal less interest
payments recorded against principal.
2 Includes
as of
3 Foreclosed assets are presented net of valuation allowance.
Allowance for Loan Losses
We keep 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.
General reserves are allowances taken to address the inherent risk of loss in
the loan portfolio. We analyze several factors to figure out the amount of
general reserve. We weigh these factors based on the level of risk and loss
potential. These factors include, among others:
?changes in lending policies and procedures, including changes in underwriting
standards and collection;
?changes in national, regional, and local economic and industry conditions,
including pandemics, that affect the collectability of the portfolio;
?changes in the volume and severity of past due loans, the volume of non-accrual
loans, and the volume and severity of adversely classified loans;
?changes in the value of the collateral;
?the effect of credit concentrations; and
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?the rate of defaults on loans modified as troubled debt restructurings within
the previous twelve months.
In addition, we include added general reserves if the loan is a junior lien or
unsecured loan. We segregate our loans into pools based on risk rating to
increase the accuracy when deciding the factors potential impact on our
portfolio. We weigh the risk factors based upon the quality of the loans in the
class. In general, we give risk factors a higher weight for lower quality loans,
which increases the general reserves on these loans. We evaluate these factors
on a quarterly basis to ensure that we have addressed the inherent risks of our
loans.
We also examine our entire loan portfolio regularly to find individual loans
that we believe have a greater risk of loss than decided by the general
reserves. These are found by examining current and historic delinquency reports,
checking collateral value, and performing a periodic review of borrower
financial statements. For loans that are collateral-dependent, management first
figures out the amount of the loan investment at risk. We figure out the loan
investment at risk by calculating the difference between the unpaid principal
balance less any discounts and the collateral value less any estimated selling
costs. We then reserve for the total amount of the loan investment at risk. For
impaired loans that are not collateral-dependent, we will record an impairment
based on the present value of expected future cash flows. At a minimum, we
review loans that carry a specific reserve quarterly. However, we will adjust
our reserves more often if we receive additional information regarding the
loan's status or its underlying collateral.
Finally, for non-collateral-dependent trouble debt restructurings we use a net
present value method for the allowance calculation. We figure out these reserves
by calculating the net present value of payment streams we expect to receive
from a restructured loan compared to what we would have received from the loan
according to its original terms. We then discount these expected cash flows at
the original interest rate on the loan. Management records these reserves at the
time of the restructuring. We report the change in the present value of cash
flows attributable to the passage of time as interest income.
The process of establishing an adequate allowance for loan losses involves
judgement on the part of management. Our aim is to keep the allowance at a level
that compensates for losses that may arise from unknown conditions. However, the
allowance is a critical accounting estimate that is based on several of
management's assumptions and as a result, realized losses may differ from
current estimates made by management.
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The following chart details our allowance for loan losses:
Allowance for Loan Losses
as of and for the
Twelve months ended
December 31,
2021 2020
Balances: ($ in thousands)
Average total loans outstanding during period
Total loans outstanding at end of the period
$ 99,405 $ 118,347 Allowance for loan losses: Balance at the beginning of period$ 1,516 $ 1,393 Provision (credit) charged to expense 122 188 Charge-offs Wholly-Owned First - (65) Wholly-Owned Junior - - Participation First - - Participation Junior - - Total - (65) Recoveries Wholly-Owned First - - Wholly-Owned Junior - - Participation First - - Participation Junior - - Total - - Net loan charge-offs - (65) Accretion of allowance related to restructured loans - - Balance$ 1,638 $ 1,516 Ratios: Net loan charge-offs to average total loans 0.00 % (0.05) % Provision (credit) for loan losses to average total 0.12 % 0.16 % loans Allowance for loan losses to total loans at the end 1.65 % 1.28 % of the period Allowance for loan losses to non-performing loans 16.91 % 24.53 % Net loan charge-offs to allowance for loan losses at 0.00 % (4.29) % the end of the period Net loan charge-offs to provision (credit) for loan 0.00 % (34.57) % losses ? 50
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The following table shows the Company's allocation of allowance for loan losses
by loan categories as of
Percent of loans
in each category
Loan Categories Amount to total loans
Church loans:
Wholly-Owned First $ 1,610 96%
Wholly-Owned Junior 25 4%
Participation First 3 0%
Participation Junior - -
Total $ 1,638 $ 100%
Investor Notes Payable
Our investor notes payable ("investor notes") are debt securities sold under
both publicly registered and private placement security offerings. Over the last
several years, we have expanded the number of investors in our debt securities,
and we have broadened the type of investors we serve by building relationships
with other faith-based organizations which has permitted us to offer our
investor notes to these organizations and their clients. Concurrently, MP
Securities and its staff of financial advisors have increased our customer base
through marketing efforts made to individual investors. These strategies helped
the Company grow its investor notes despite working in an economic environment
stressed by the COVID-19 pandemic. Our investor notes increased by $538 thousand
during the year ended December 31, 2021 . The balance sheet presents our investor
notes net of debt issuance costs. Debt issuance costs increased from
$33 thousand at December 31, 2020 to $88 thousand at December 31, 2021 . The
increase in the issuance costs was due to costs related to the issuance of our
2021 Class A Notes prospectus.
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The balances of our outstanding investor notes are as follows (dollars in
thousands):
As of As of
December 31, 2021 December 31, 2020
Weighted Weighted
?Average ?Average
?Interest ?Interest
SEC Registered Public Offerings Offering Type Amount ?Rate Amount ?Rate
Class 1 Offering Unsecured $ 3,654 4.45 % $ 9,010 3.94 %
Class 1A Offering Unsecured 27,116 4.11 % 48,982 3.16 %
2021 Class A Offering Unsecured 34,524 3.20 % - - %
Public Offering Total $ 65,294 3.65 % $ 57,992 3.28 %
Private Offerings
Subordinated Notes Unsecured $ 11,526 4.47 % $ 11,655 4.49 %
Secured Notes Secured - - % 6,580 3.99 %
Private Offering Total $ 11,526 4.47 % $ 18,235 4.31 %
Total Notes Payable $ 76,820 3.77 % $ 76,227 3.53 %
Notes Payable Totals by Security
Unsecured Total Unsecured $ 76,820 3.77 % $ 69,647 3.48 %
Secured Total Secured $ - - % $ 6,580 3.99 %
Members' Equity
During the year ended December 31, 2021 , total members' equity increased by
$1.60 million attributable to net income of $1.85 million earned by the Company
and offset by dividend distributions of $247 thousand . We did not repurchase or
sell any membership equity units during the year ended December 31, 2021 .
Liquidity and Capital Resources
Holding adequate liquidity requires that sufficient resources be always available to meet our cash flow needs. We use cash to obtain new mortgage loans, repay term-debt, make interest payments to our note investors, and pay general operating expenses. Our primary sources of liquidity are: ?cash; ?sales of investor notes. ?net income from operations; ?maturing loans;
?payments of principal and interest on loans; and
?loan sales.
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Our management team regularly prepares cash flow forecasts that we rely upon to ensure that we have sufficient liquidity to conduct our business. While we believe that these expected cash inflows and outflows are reasonable, we can give no assurances that our forecasts or assumptions will prove to be correct. Management believes that we hold adequate sources of liquidity to meet our liquidity needs and have the means to generate more liquidity if necessary. 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. Material liquidity events that would adversely affect our business include, but are not limited to, the following:
?we become unable to continue offering our investor notes in public and private
offerings for any reason;
?we incur sudden withdrawals by multiple investors in our investor notes;
?a substantial portion of our investor notes that mature during the next twelve
months is not renewed; or
?we are unable to obtain capital from sales of our mortgage loan assets or other
sources.
Withdrawal requests made by holders of high dollar notes can also adversely affect our liquidity. We believe that our available cash, cash flow from operations, net interest income, and other fee income will be sufficient to meet our cash needs. Should our liquidity needs exceed our available sources of liquidity, we believe we could sell a part of our mortgage loan investments at par as well as sell investor notes to raise more cash. However, we also must keep adequate collateral, consisting of loans receivable and cash, to secure our term-debt and secured notes. We have reduced this risk in the last two years due to the term-debt paydowns described in this Report. The Company now has more loans available to sell that are not encumbered by being pledged as collateral on the borrowing facilities. Despite the term-debt paydown described in this discussion, the Company is still working with cash levels above its Board-approved policy. OurBoard of Managers approves our liquidity policy. The policy sets a minimum liquidity ratio and has a contingency protocol if our liquidity falls below the minimum. Our liquidity ratio was 33% atDecember 31, 2021 , which is above the minimum set by our policy. This was an increase from 26% atDecember 31, 2020 , primarily due to participation loan sales and cash received from loan payoffs and paydowns.
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Growing Liquidity Sources
At the beginning of the COVID-19 pandemic, management began to generate liquidity by selling participation interests in its loans receivable. During the year endedDecember 31, 2021 , the Company continued using this strategy and generated$14.1 million in cash from the sale of loan participation interests. This strategy allows us to fund loans using less cash while still allowing the Company to fulfill a key missional goal; to deliver financing options to Christian churches and ministries. We plan to continue to raise more cash through the sale of loan participation interests, if necessary, to keep sufficient levels of cash available to meet our debt obligations to investors as well as obligations under our term-debt credit facilities. In 2020, we added another liquidity source, which we use in conjunction with our loan participation sales; a$7.0 million warehouse line of credit with KCT. We entered into the KCT LOC for the specific purpose of funding loan originations and offering participation interests in these loans through a short-term credit facility. This facility allows us to warehouse loan originations until we sell participations in these loans. As ofDecember 31, 2021 , we had no outstanding balance on the KCT LOC. We added another liquidity source when onSeptember 23, 2021 , the Company entered into a Loan and Security Agreement with ACCU. The ACCU LOC is a revolving$5.0 million short-term demand credit facility with a one-year maturity date ofSeptember 23, 2022 . The Company does not have any restrictions on how it can use the funds borrowed on this facility. As ofDecember 31, 2021 , we had an outstanding balance of$2.0 million on this facility. Due to management's desire to keep staff employed, supply liquidity, and increase safety for our investors amid the general uncertainty during the start of the pandemic,MP Securities applied for and received a Paycheck Protection Program Loan ("PPP loan") for$111 thousand . OnMarch 5, 2021 , the SBA forgave this loan under the provisions of the CARES Act. The Company no longer bears any liability for principal or interest due on the loan. Cash, restricted cash, and certificates of deposit totaled$28.1 million as ofDecember 31, 2021 and our liquidity ratio was 33%. These liquidity levels are significantly higher than the cash amounts the Company has historically carried.
The sale of our debt securities contributes significantly to funding our
mortgage loan investments. Through sales of our publicly offered notes and
privately placed investor notes, we expect to fund new loans, which we can
either hold to receive interest income or sell to participants to generate
servicing income and gains on loan sales. We also use the cash we receive from
investor note sales to fund general operating activities.
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At
following twelve-month periods ending
2022$ 30,442 2023 10,033 2024 14,238 2025 12,126 2026 9,981 76,820 Debt Issuance Costs 88
Notes payable, net of debt issuance costs
Historically, we have been successful in generating reinvestments by our debt security holders when the notes they hold mature. Our note renewal rate has been stable over the last several years.
The table below shows the renewal rates of our maturing notes over the last
three years.
2021 55% 2020 60% 2019 75% During the year endedDecember 31, 2021 , we worked with our investors to reduce larger investor notes that were maturing to reduce the concentration risk of any one investor not renewing a note. We were able to replace these notes with funds representing a larger investor base. This intentional concentration risk reduction is the reason why our 2021 renewal rate is lower than in previous years.
Short-term Credit Facilities
Warehouse Line of Credit Short-Term Funding:
OnSeptember 30, 2020 , we opened a$7.0 million warehouse line of credit with KCT, which enabled the Company to fund loans and warehouse them until sold without using long-term borrowing facilities or investor notes. The KCT LOC is a short-term demand credit facility with a one-year maturity date ofSeptember 30, 2022 . The KCT LOC will automatically renew for another one-year term unless either party gives a written termination notice at least thirty (30) days prior to the maturity date. We may draw funds on the KCT LOC at any time until the line is fully drawn. Repayment of each advance is due one hundred and twenty (120) days after the advance is made or earlier in the event that a collateral loan becomes more than sixty (60) days delinquent and the Company fails to cure such deficiency. We have agreed to grant a priority first lien and security interest in certain of our mortgage loan investments and keep a minimum collateralization ratio measured by taking outstanding balance of mortgage notes pledged under the facility as compared to the total amount of principal owed on the KCT LOC. The minimum ratio must equal at least 120%. The KCT LOC has typical affirmative covenants for a credit
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facility of this nature. The Company was in compliance with these covenants atDecember 31, 2021 . As ofDecember 31, 2021 , the KCT warehouse line of credit had no outstanding balance. Operating Line of Credit OnSeptember 23, 2021 , the Company entered into a Loan and Security Agreement withAmerica's Christian Credit Union ("ACCU"), one of our owners. The ACCU line of credit ("ACCU LOC") is a$5.0 million short-term demand facility with a maturity date ofSeptember 23, 2022 . The ACCU LOC is a general operating line of credit and as such has no restrictions on the use of funds. We have agreed to grant a priority first lien and security interest in certain of our mortgage loan investments and keep a minimum collateralization ratio measured by taking outstanding balance of mortgage notes pledged under the facility as compared to the total amount of principal owed on the ACCU LOC. The minimum ratio must equal at least 130%. The ACCU LOC has typical affirmative covenants for a credit facility of this nature. The Company was in compliance with these covenants atDecember 31 , 2021.As ofDecember 31, 2021 , there were$2.0 million in borrowings outstanding on the ACCU LOC. Term-debt Credit Facilities We have funded a part of our balance sheet through our term-debt. Because the term-debt has a fixed rate until the facility matures in 2026, it supplies a stable cost of funds. The table below is a summary of the Company's credit facilities (dollars in thousands): Interest Loan Nature of Rate Amount Collateral Borrowing Interest Rate Type Outstanding Monthly Payment
Maturity Date Pledged Cash Pledged Term Loan* 2.525% Fixed$ 32,749 $ 450 11/1/2026$ 39,680 $ -
*We cannot borrow more funds on this facility; therefore, we will need to find a
new funding source when the facility matures
Due to the debt extinguishment payments in 2020, 2021, and onJanuary 6, 2022 , we have mitigated the risk resulting from needing to replace this funding facility. After we made the$15.0 million January 6, 2022 , payment, the loan no longer has a balloon payment as the scheduled monthly payments will pay off the loan in entirety before the maturity date of the facility. Our sources of funds available to pay down the remaining term-debt credit facility include our earnings, the debt securities we sell, net cash flow from our loans receivable portfolio, and our ACCU LOC.
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The following table shows the maturity schedule on our credit facilities for the
next five years and thereafter as of
2022$ 3,737 2023 3,978 2024 4,188 2025 4,417 2026 16,429$ 32,749 Debt Covenants Under our credit facility agreements, line of credit agreements, and our investor note documents, we are bound to follow certain affirmative and negative covenants, including maintaining a minimum collateralization ratio of at least 120% for the term-loan credit facility. Failure to follow our covenants could require all interest and principal to become due. As ofDecember 31, 2021 , we are in compliance with the covenants on our notes payable and term debt.
?For more information regarding our investor notes payable, refer to "Note 11.
Investor Notes Payable of Part II, Item 8. of this Report.
?For more information on our credit facilities, refer to "Note 10. Credit
Facilities", to Part II, Item 8. of this Report.
Results of Operations:
For the year ended
Net Interest Income and Net Interest Margin
Historically, our earnings have primarily depended upon our net interest income.
Net interest income is the difference between the interest income we receive
from our loans and cash on deposit ("interest-earning assets") and the interest
paid on our debt securities and term debt.
Net interest margin is net interest income expressed as a percentage of average
total interest-earning assets.
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The following table provides information, for average outstanding balances for
each major category of interest earnings assets and interest-bearing
liabilities, the interest income or interest expense, and the average yield or
rate for the periods indicated:
Average Balances and Rates/Yields
For the Twelve Months Ended December 31,
(Dollars in Thousands)
2021 2020
Interest Average Interest Average
Average ?Income/ ?Yield/ Average ?Income/ ?Yield/
?Balance ?Expense ?Rate ?Balance ?Expense ?Rate
Assets:
Interest-earning accounts with
other financial institutions $ 19,795 $ 43 0.22 % $ 26,929 $ 161 0.60 %
Interest-earning loans [1][2] 101,476 6,998 6.90 % 118,124 8,182 6.91 %
Total interest-earning assets 121,271 7,041 5.81 % 145,053 8,343 5.74 %
Non-interest-earning assets 8,231 - - % 7,995 - - %
Total Assets 129,502 7,041 5.44 % 153,048 8,343 5.44 %
Liabilities:
Notes payable gross of debt
issuance costs 73,897 2,657 3.60 % 74,443 2,717 3.64 %
Other debt 39,149 1,007 2.57 % 64,906 1,639 2.52 %
Total interest-bearing
liabilities $ 113,046 3,664 3.24 % $ 139,349 4,356 3.12 %
Debt issuance cost 64 99
Total interest-bearing
liabilities net of debt
issuance cost $ 113,046 3,728 3.30 % $ 139,349 4,455 3.19 %
Net interest income $ 3,313 $ 3,888
Net interest margin 2.73 % 2.67 %
[1] Loans are net of deferred fees and before the allowance for loan losses.
Non-accrual loans are considered non-interest earning assets for this analysis.
[2] Interest income on loans includes deferred fee amortization of$231 thousand and$257 thousand for the years endedDecember 31, 2021 and 2020, respectively. Rate/Volume Analysis of Net Interest Income Twelve Months Ended December 31, 2021 vs. 2020 Increase (Decrease) Due to Change in: Volume Rate Total (Dollars in Thousands) Increase (Decrease) in Interest Income: Interest-earning accounts with other financial institutions $ (35)$ (83) $ (118) Interest-earning loans (1,172) (12) (1,184) Total interest-earning assets (1,207) (95) (1,302) Increase (Decrease) in Interest Expense: Notes payable gross of debt issuance costs (77) 17 (60) Other debt (664) 32 (632) Debt issuance cost - (35) (35) Total interest-bearing liabilities (741) 14 (727) Change in net interest income $ (466) $
(109)
Net interest income decreased 15% during the year endedDecember 31, 2021 . This decrease in net interest income was due primarily due to lower average balance on interest-earning loans. Lower interest expense on notes payable and term-debt partially offset the decreased earnings as explained below.
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Of the$1.3 million decrease in interest income,$1.2 million was due to a volume variance on interest-earning loans. The volume variance was due to the lower average loan balances as the Company sold loan participation interests and also received loan principal payments as described previously in this Report. The weighted average rate on the loan portfolio decreased 34 basis points from 6.55% to 6.21% during the year endedDecember 31, 2021 . The portfolio rate decreased as new lower rate loans replaced higher rate loans that paid off.
Total interest expense offset the decrease in interest income by
average balance on term-debt as described previously in this Report.
The Company's net interest margin increased despite the decrease in overall
net interest income because the Company's balance sheet had a higher percentage
of its interest-earning assets invested in higher yielding interest-earning
loans.
Provision and non-interest income and expense
Twelve months ended
December 31, Comparison
(dollars in thousands)
2021 2020 $ Change % Change
Net interest income $ 3,313 $ 3,888 $ (575) (15%)
Provision for loan losses 122 188 (66) (35%)
Net interest income after provision for loan
losses 3,191 3,700 (509) (14%)
Non-interest income
Broker-dealer commissions and fees 878 762 116 15%
Other lending income 324 283 41 14%
Gain on debt extinguishment 2,398 2,400 (2) -%
Total non-interest income 3,600 3,445 155 4%
Total non-interest expenses 4,921 5,009 (88) (2%)
Income before provision for income taxes 1,870 2,136 (266) (12%)
Provision for income taxes and state LLC
fees 20 20 - -%
Net income $ 1,850 $ 2,116 $ (266) (13%)
Provision
Net interest income after provision for loan losses decreased by $509 thousand
for the year ended December 31, 2021 . The provision expense decreased by
$66 thousand for the year ended December 31, 2021 , as compared to December 31,
2020 . The decrease in the provision is due to the lower general reserve needed
on the smaller average loan balance in 2021 compared to 2020.
Non-interest income
The increase in non-interest income shown above was primarily due to higher
income on broker-dealer commissions and fees in 2021 compared to 2020. By
expanding
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relationships with other credit unions and strategic partners that share an interest in providing investment, retirement, insurance and wealth planning options that align with Christian stewardship principles, we were able to expand the number of clients that we serve and increase the income generated from assets under management and non-interest income bearing sources. This higher income was due to stock market valuation growth as well as expanding our client base and increasing the volume of our revenue producing transactions. Other lending income increased by$41 thousand during the year endedDecember 31, 2021 due to the growing our total participation interests sold and serviced by$8.1 million during the year.
Non-interest expenses
The decrease in non-interest expenses of$88 thousand was due primarily to a decrease in staff for the year endedDecember 31, 2021 , compared toDecember 31, 2020 . ? 60
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For the year ended
Net Interest Income and Net Interest Margin:
The following table provides information, for average outstanding balances for
each major category of interest earnings assets and interest bearing
liabilities, the interest income or interest expense, and the average yield or
rate for the periods indicated:
Average Balances and Rates/Yields
For the Twelve Months Ended December 31,
(Dollars in Thousands)
2020 2019
Interest Average Interest Average
Average ?Income/ ?Yield/ Average ?Income/ ?Yield/
?Balance ?Expense ?Rate ?Balance ?Expense ?Rate
Assets:
Interest-earning accounts with
other financial institutions $ 26,929 $ 161 0.60 % $ 20,200 $ 343 1.70 %
Interest-earning loans [1] 118,124 8,182 6.91 % 135,202 9,812 7.28 %
Total interest-earning assets 145,053 8,343 5.74 % 155,402 10,155 6.55 %
Non-interest-earning assets 7,995 - - % 7,149 - - %
Total Assets 153,048 8,343 5.44 % 162,551 10,155 6.26 %
Liabilities:
Notes payable gross of debt
issuance costs 74,443 2,717 3.64 % 75,485 3,110 4.13 %
Term-debt 64,906 1,639 2.52 % 74,131 1,867 2.52 %
Total interest-bearing
liabilities $ 139,349 4,356 3.12 % $ 149,616 4,977 3.34 %
Debt issuance cost 99 86
Total interest-bearing
liabilities net of debt
issuance cost $ 139,349 4,455 3.19 % $ 149,616 5,063 3.39 %
Net interest income $ 3,888 $ 5,092
Net interest margin 2.67 % 3.29 %
[1] Loans are net of deferred fees and before the allowance for loan losses.
Non-accrual loans are considered non-interest earning assets for this analysis.
Rate/Volume Analysis of Net Interest Income
Twelve Months Ended
December 31, 2020 vs. 2019
Increase (Decrease) Due to Change in:
Volume Rate Total
(Dollars in Thousands)
Increase (Decrease) in Interest Income:
Interest-earning accounts with other
financial institutions $ 89 $ (271) $ (182)
Interest-earning loans (1,148) (482) (1,630)
Total interest-earning assets (1,059) (753) (1,812)
Increase (Decrease) in Interest Expense:
Notes payable gross of debt issuance costs (310) (83) (393)
Term-debt (228) - (228)
Debt issuance cost - 13 13
Total interest-bearing liabilities (538) (70) (608)
Change in net interest income $ (521) $
(683)
Net interest income decreased 24% during the year ended
interest margin decreased 62 basis points to 2.67% for the year ended
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decrease was due to reduced interest income on both of our primary sources of interest income: interest-earning accounts with other financial institutions and interest-earning loans. Reduced interest-expense on notes payable and term-debt offset the decreased earnings somewhat as explained below. The decrease in yield on interest-earning loans was due to both volume and rate variance. The volume variance was due to the lower average loan balances as the Company sold participation loan interests to increase cash balances due to the uncertainty of the economy caused by COVID-19. The rate variance on the interest-earning loans was due to the Company collecting and recognizing interest when two non-accrual loans paid off during 2019. On payoff, the Company was able to collect$511 thousand of interest income previously allocated to principal when the loans were on non-accrual basis. The weighted average rate on the loan portfolio decreased slightly from 6.59% to 6.55% during the year endedDecember 31, 2020 . The rate variance decrease on interest-earning accounts with other financial was due to the decrease in average yield on these accounts of 110 basis points. The decrease was due to overall market interest rates declining over the last twelve months caused by theFederal Reserve's monetary response to the COVID-19 pandemic. The volume variance was due to the Company holding higher cash balances as described previously. Offsetting the decrease in interest income, total interest expense decreased by$608 thousand for the year endedDecember 31, 2020 . This was mostly due to both a decrease in average balance on investor notes payable and a decrease in average balance on term-debt. The decrease in average balance on term-debt was due to the$15 million payoff of a portion of term debt inSeptember 2020 , as well as contractual monthly principal payments made on the term-debt.
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Provision and non-interest income and expense
Twelve months ended
December 31, Comparison
(dollars in thousands)
2020 2019 $ Change % Change
Net interest income $ 3,888 $ 5,092 $ (1,204) (24%)
Provision (credit) for loan losses 188 (544) 732 100%
Net interest income after provision
(credit) for loan losses 3,700 5,636 (1,936) (34%)
Non-interest income
Broker-dealer commissions and fees 762 1,415 (653) (46%)
Other lending income 283 154 129 84%
Gain on debt extinguishment 2,400 - 2,400 -%
Total non-interest income 3,445 1,415 2,030 143%
Non-interest expenses:
Salaries and benefits 2,868 2,810 58 2%
Marketing and promotion 238 275 (37) (13%)
Office occupancy 179 177 2 1%
Office operations and other expenses 1,353 1,483 (130) (9%)
Foreclosed assets, net 11 97 (86) (89%)
Legal and accounting 360 343 17 5%
Total non-interest expenses 5,009 5,185 (176) (3%)
Income before provision for income taxes 2,136 2,020 116 6%
Provision for income taxes and state LLC
fees 20 19 1 5%
Net income $ 2,116 $ 2,001 $ 115 6%
Provision
Net interest income after provision for loan losses decreased by
for the year ended
credit for loan losses recorded during 2019 but not in the year ended
Non-interest income
The increase in non-interest income shown above was the result of the gain on debt extinguishment of$2.4 million as described above. Revenue from broker-dealer commissions and fees decreased by$653 thousand during the year endedDecember 31, 2020 compared to the year endedDecember 31, 2019 . This decrease was the result of reduced investment activity due to the COVID-19 pandemic during the year endedDecember 31, 2020 compared to the year endedDecember 31, 2019 . Other lending income increased by$129 thousand during the year endedDecember 31, 2020 . This was due to the Company selling$17.1 million in loan participations in 2020 as compared to no loan sales during 2019.
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Non-interest expenses
The decrease in non-interest expenses of
decreased business activity, such as reduced travel, because of the COVID-19
pandemic.
?
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