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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. While seeking to grow our non-interest income, we also strive to grow our loan portfolio to increase total income for the Company. While we expect to generate most of our future growth through church lending, we intend to diversify our lending to mitigate concentration risk. Producing revenue from multiple sources as well as growing total income may reduce the risk to the Company if we experience adverse economic or market conditions. 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 focus
on:
? maintaining adequate liquidity levels;
? expanding the sale of our investor debt securities;
? growing our balance sheet by originating profitable new loans;
? 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;
? outsource certain operations to allow for scalable growth and provide an
enhanced customer experience;
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? 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;
? 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; and
? strengthening our loan portfolio through aggressive and proactive efforts to
resolve problems in our non-performing assets;
COVID-19 and inflation's impact on the Company's Business
In 2022, the effects of the worldwide pandemic continued to lessen in severity and indicators of economic activity have continued to strengthen as jobs, consumer spending, manufacturing, and other indicators rebound from their weakest levels. However, rising prices have become a concern and as a result, theFederal Reserve Board ("FRB") raised the fed funds target rate up from 0.00% - 0.25% at the beginning of the year to 4.25% - 4.50% as ofDecember 31, 2022 . Additionally, the FRB's median projection of the fed funds rate at the end of 2023 is 5.1%, indicating the committee expects to continue to increase rates as they attempt to curtail inflation. Due to these factors, we believe that economic uncertainty remains high and could negatively impact our borrowers and financial results.
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
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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 nature of the uncertainty involved in the
calculation, and the impact of the allowance on the Company's financial position
and results of operations.
Financial Performance Summary for the Two-Year Period ended December 31, 2022 :
(dollars in thousands)
2022 2021
Broker-dealer commissions and fees$ 838 $
878
Gain on debt extinguishment 2,537
2,398
Total income 9,427
10,641
Provision (credit) for loan losses (296)
122 Total non-interest expenses 5,707 4,921 Net income 627 1,850
Cash, cash equivalents, and restricted cash 9,564
28,149
Certificates of deposit 1,250
-
Loans receivable, net of allowance for loan losses of$1,551 and$1,638 as ofDecember 31, 2022 and 2021, respectively 85,076 97,243 Total assets 99,363 127,965 Lines of credit 3,000 2,000 Term-debt - 32,749
Notes payable, net of debt issuance costs 79,100
76,732 Total equity 14,626 14,511
Summary of Financial Performance
For the year endedDecember 31, 2022 , we earned net income of$627 thousand . While net income decreased by$1.2 million over the prior year, owners' equity increased by$115 thousand , resulting in the highest total amount of members' equity in the Company's history. The main driver of the net income in 2022, as well as in 2021, was a$2.5 million gain on debt extinguishment realized by using cash to pay down our remaining term debt at a discount. With the term-debt fully paid off we do not expect to receive revenue from debt extinguishment in the future. Non-interest expense increased by$786 thousand as salaries and benefits increased by$726 thousand due to a one-time Supplemental Executive Retirement Plan ("SERP") expense of$600 thousand . For more information on the SERP, please see Note 15, 37 Table of Contents Retirement Plans in the Notes to the Consolidated Financial Statements. Conversely, net interest income after provision for loan loss decreased by$429 thousand due to a reduction in the size of our loan portfolio. Management evaluated the opportunity to retire our term debt facility at a discount and determined that the gains resulting from the payoff would be more beneficial than holding the cash used to make the pay down. By making those payments on our own term debt facility, the Company recognized$7.3 million in gains from debt extinguishment over the three-year period endedDecember 31, 2022 . Cash used to make those payments was derived primarily from reducing our loan portfolio through loan participations sold as well as proceeds received from the early payoff of some of our loans when borrowers refinanced a loan with another lender. By making those payments on our term debt facility using cash investments, the Company has a smaller loan portfolio that will produce less net interest income going forward. With this strategy completed, in 2023 and going forward, the Company plans to increase our loan portfolio.
Progress on Strategic Objectives
In 2022, we continued making progress towards our strategic objectives of
diversifying our revenue streams, improving the quality of our loan portfolio,
strengthening capital, and improving customer experience. 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, investment advisory, and insurance product
? sales: While revenue from this source decreased slightly by
2022, the Company continues to develop new networking agreements and is building infrastructure it believes will help grow this business. Loan participation sales: We sold$3.7 million in 2022 as compared to$14.1 million in loan participation interests during the year ended
? Company not needing to generate liquidity due to the high liquidity levels
during the year. For 2023, we do not expect to sell participation loans other
than for risk mitigation purposes, as our focus is on increasing our on-book
loan portfolio.
Loan servicing fee income: Our loan portfolio generated
? servicing income in 2022 as compared to
loan servicing income to be a material revenue source for the Company in the
future due to the focus on growing our on-book portfolio.
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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 or assets may
contribute either positively or negatively to the Company's financial results.
During the year ended December 31, 2021 , the Company sold a REO property which
resulted in a gain on sale of $44 thousand . During the year ended December 31,
2022 , the Company did not have any gains or losses related to nonperforming
assets or loans sold.
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. During the year ended 2022 our classified loans
decreased by $3.8 million during the year to $5.9 million at December 31, 2022 .
This decrease is primarily due to a $3.7 million loan that we restructured in
2021 and was returned to performing status during the year ended December 31,
2022 .
As part of our strategic decision to reposition our loan portfolio, we have
continued to focus on originating lower principal balance loans made to
borrowers 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 $719 thousand on December 31, 2022 . We
believe the relationships we have formed with credit unions throughout the
United States will enable us to sell loan participation interests as necessary
to mitigate risk by selling larger loans.
Strengthening Capital
For 2022, our strategy shifted from maintaining our balance sheet size to strengthening capital through the gains on the discounted term debt payoff. With debt retirement completed in 2022, our strategy going forward will be to grow our balance sheet and our loan portfolio to increase our total revenue. We intend to rely on the sale of our investor notes to fund the growth of our
on-book loan portfolio.
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Improving Customer Experience
In 2022, the Company planned to increase our investment in personnel, technology, and infrastructure to continue to expand our products and services and well as improve our customer's digital experience. During the year we made some progress on those objectives by investing in new technology and personnel. In 2023, we expect to make additional investments in those areas, as well as improve our operating efficiency by outsourcing a component of our loan servicing while growing our balance sheet. We believe these activities will give us a more efficient operation going forward while. More importantly, we believe this will create a better customer experience.
Financial Condition
The following discussion compares the results of operations for the twelve
months ended
the accompanying consolidated financial statements and notes thereto.
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Comparison of Financial Condition as of December 31,:
Comparison
2022 2021 $ Difference % Difference
(dollars in thousands)
Assets:
Cash $ 9,504 $ 28,080 $ (18,576) (66%)
Restricted cash 60 69 (9) (13%)
Certificates of deposit 1,250 - 1,250 -% Loans receivable, net of allowance for loan losses of$1,551 and$1,638 as of December 31, 2022 and 2021, respectively 85,076 97,243
(12,167) (13%) Accrued interest receivable 477 507 (30) (6%) Investments in joint venture 870 882 (12) -% Other investments 1,018 - 1,018 100% Property and equipment, net 140 172 (32) (19%) Foreclosed assets, net 301 301 - -% Servicing assets 123 170 (47) (28%) Other assets 544 541 3 1% Total assets$ 99,363 $ 127,965 $ (28,602) (22%) Liabilities and members' equity Liabilities: Lines of credit$ 3,000 $ 2,000 $ 1,000 -% Term-debt - 32,749 (32,749) (100%) Other secured borrowings 7 17 (10) -% Notes payable, net of debt issuance costs of$58 and$88 as ofDecember 31, 2022 and 2021, respectively 79,100 76,732 2,368 3% Accrued interest payable 281 252 29 12% Other liabilities 2,349 1,704 645 38% Total liabilities 84,737 113,454 (28,717) (25%) Members' Equity: Series A preferred units 11,715 11,715 - -% Class A common units 1,509 1,509 - -% Accumulated earnings 1,402 1,287 115 9% Total members' equity 14,626 14,511 115 1%
Total liabilities and members' equity
$ (28,602) (22%) General
Total assets decreased by 22% due to the paydown of the term-debt described
earlier. Loans receivable decreased 13% due to receiving
principal collections on loans receivable. We used the funds received from the
loans receivable as well as our cash to payoff our term-debt.
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".
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Our portfolio consists mostly of loans made to evangelical churches and
ministries with approximately 99.4% real estate secured loans. The loans in our
portfolio carried a weighted average interest rate of 6.46% as of December 31,
2022 and 6.21% as of December 31, 2021 .
Loan Types
Year Ended December 31, (dollars in thousands)
2022 2021
% of % of
Amount Portfolio Amount Portfolio
Loans to evangelical churches and related
organizations:
Real estate secured $ 84,718 97.3 % $ 97,708 98.3 %
Construction 160 0.2 % 1,150 1.2 %
Other secured 225 0.3 % 425 0.4 %
Unsecured 99 0.1 % 122 0.1 %
Total loans to evangelical churches and
related organizations $ 85,202 97.9 % $ 99,405 100.0 %
Loans for other commercial purposes:
Real estate secured $ 1,035 1.2 % - - %
Construction 805 0.9 % - - %
Total loans for other commercial purposes $ 1,840 2.1
% $ - - % Total loans$ 87,042 100.0 %$ 99,405 100.0 %
Maturities and Sensitivities of Loans to Changes in Interest Rates
Dollar Amount of Loans Receivable Maturing (in
thousands)
As of Due 1 Yr or Less Due 1yr to 5 Yrs Due After 5 Yrs Total December 31, 2022 $ 6,162 61,203 19,677$ 87,042 Included in the table above are 63 adjustable-rate loans totaling$45.2 million in gross loans receivable, or 52% 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.
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
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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 seven performing restructured loans on accrual status as of December 31,
2022 . The Company restructured four loans during the year ended December 31,
2022 , but all made payments according to the terms of the restructure and were
deemed performing as of the end of the year. All of the loans that were
considered non-performing as of December 31, 2022 had already been classified as
non-performing at December 31, 2021 . There were no new loans that the Company
classified as non-performing during the year ended December 31, 2022 .
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The following table presents our non-performing assets:
Non-performing Assets
($ in thousands)
December 31, December 31,
2022 2021
Non-Performing Loans:1
Collateral-Dependent:
Delinquencies over 90-Days2 $ 1,378 $ 503
Troubled Debt Restructurings 4,555 8,295
Other Impaired Loans - 890
Total Collateral-Dependent Loans 5,933 9,688
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 5,933 9,688 Foreclosed Assets3 301 301 Total Non-performing Assets$ 6,234 $ 9,989
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,
2022 2021
($ in thousands)
Balances:
Average total loans outstanding during period$ 90,477 $ 100,032 Total loans outstanding at end of the period$ 87,042 $ 99,405 Allowance for loan losses: Balance at the beginning of period$ 1,638 $ 1,516 Provision (credit) charged to expense (296)
122 Charge-offs Wholly-Owned First - - Wholly-Owned Junior - - Participation First - - Participation Junior - - Total - - Recoveries Wholly-Owned First 209 - Wholly-Owned Junior - - Participation First - - Participation Junior - - Total 209 - Net loan charge-offs 209 -
Accretion of allowance related to restructured loans -
- Balance$ 1,551 $ 1,638 Ratios:
Net loan recoveries to average total loans (0.23) % - % Provision (credit) for loan losses to average total loans (0.33) % 0.12 % Allowance for loan losses to total loans at the end of the period 1.78 % 1.65 % Allowance for loan losses to non-performing loans 26.14 % 16.91 %
Net loan recoveries to credit for allowance for loan
losses at the end of the period
0.71 % - Net loan recoveries to credit for loan losses 70.61 % - %
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
Commercial loans:
Wholly-Owned First $ 1,377 95%
Wholly-Owned Junior 163 4%
Participation First 13 1%
Participation Junior - -
Total $ 1,553 $ 100%
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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 allowed 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. Our net investor notes payable
increased by $2.4 million during the year ended December 31, 2022 . The balance
sheet presents our investor notes net of debt issuance costs. Debt issuance
costs as of December 31, 2022 totaled $58 thousand .
The balances of our outstanding investor notes are as follows (dollars in
thousands):
As of As of
December 31, 2022 December 31, 2021
Weighted Weighted
Average Average
Interest Interest
SEC Registered Public Offerings Offering Type Amount Rate Amount Rate Class 1 Offering Unsecured $ - - %$ 3,654 4.45 % Class 1A Offering Unsecured 20,698 4.27 % 27,116 4.11 % 2021 Class A Offering Unsecured 45,935 4.04 % 34,524 3.20 % Public Offering Total$ 66,633 4.11 %$ 65,294 3.65 % Private Offerings Subordinated Notes Unsecured$ 12,525 4.56 %$ 11,526 4.47 % Secured Notes Secured - - % - - % Private Offering Total$ 12,525 4.56 %$ 11,526 4.47 % Total Notes Payable$ 79,158 4.19 %$ 76,820 3.77 % Notes Payable Totals by Security Unsecured Total Unsecured$ 79,158 4.19 %$ 76,820 3.77 % Secured Total Secured $ - - % $ - - % Members' Equity
During the year endedDecember 31, 2022 , total members' equity increased by$115 thousand attributable to net income of$627 thousand earned by the Company and offset by dividend distributions of$512 thousand . We did not repurchase or sell any membership equity units during the year endedDecember 31, 2022 .
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,
make interest payments to
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our note investors, make payments on our credit facilities, and pay general
operating expenses. Our primary sources of liquidity are:
? cash; ? lines of credit; ? sales of investor notes;
? payments of principal and interest on loans;
? net income from operations; and
? loan sales.
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, lines of credit, 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, operating lines of
credit, 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
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raise more cash. However, we also must keep adequate collateral, consisting of loans receivable and cash, to secure our lines of credit and any secured notes. We have reduced this risk in the last three 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. 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 11% atDecember 31, 2022 , which is above the minimum set by our policy. Growing Liquidity Sources
In response to the economic uncertainty created from the COVID-19 pandemic, management began to generate liquidity by selling participation interests in its loans receivable during 2020 and throughout 2021. In 2022, the Company moderated this strategy based on its current and expected near term liquidity needs. During the period endedDecember 31, 2022 , we generated$3.7 million in cash from the sale of loan participation interests. When we sell a loan participation interest, this strategy will allow the Company to fund loans that are larger than the amount management prefers to keep on our balance sheet. We limit the size of loans we hold on the balance sheet to limit the risk in event the loan becomes non-performing. An additional liquidity tool we use in conjunction with our loan participation sales is a$5.0 million warehouse line of credit ("KCT LOC") withKane County Teachers Credit Union ("KCT"). We must repay each advance within one hundred twenty (120) days after receiving the funds. As ofDecember 31, 2022 , we had no outstanding balance on the KCT LOC. The Company also has two other revolving lines of credit. The Company has a revolving$5.0 million short-term demand credit facility ("ACCU LOC") withAmerica's Christian Credit Union . The ACCU LOC has a one-year term with a maturity date ofSeptember 23, 2023 . As ofDecember 31, 2022 , we had an outstanding balance of$3.0 million on this facility. The Company does not have any restrictions on how the funds may be used for this facility. We also have a$5.0 million short-term demand credit facility with KCT. The Company can use this operating line as needed and it has a one-year term with a maturity date ofJune 6, 2023 . As ofDecember 31, 2022 , we had no outstanding balance on this operating line of credit.Debt Securities The sale of our debt securities contributes significantly to funding our mortgage loan investments. Through sales of our publicly offered debt securities and privately placed investor notes, we expect to fund new loans. We also use the cash we receive from our debt securities sales to fund general operating activities. 49 Table of Contents As ofDecember 31, 2022 , our investor debt securities had future maturities during the following twelve-month periods endingDecember 31 , (dollars in thousands): 2023$ 23,682 2024 17,574 2025 15,211 2026 13,990 2027 8,701 79,158 Debt Issuance Costs 58
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. The table below shows the
renewal rates of our maturing notes over the last three years.
2022 63 % 2021 55 % 2020 60 %
During the years endedDecember 31, 2021 , andDecember 31, 2022 , 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 from a larger number of investors. This intentional reduction of concentration risk reduced the renewal rates in 2021 and 2022. However, as discussed, our investor debt securities increased by$2.4 million during the year endedDecember 31, 2022 .
Credit Facilities and Other Borrowings
The table below is a summary of the Company's
payable as of
Nature of Interest Interest Rate Amount Monthly Maturity Loan Collateral Cash
Borrowing Rate Type Outstanding Payment Date Pledged Pledged
KCT Warehouse LOC 5.250% Variable $ - $ - 6/6/2023 $ 6,160 $ -
KCT Operating LOC 5.250% Variable - - 6/6/2023 4,835 -
ACCU LOC 4.000% Variable 3,000 - 9/23/2023 6,823 -
ACCU Secured Various Fixed 7 - Various - 7
OnNovember 4, 2022 , the Company used a portion of its liquidity sources to make a final payment of$5.4 million to payoff our term loan credit facility. The ACCU secured borrowing is a loan participation sold with recourse that is classified as a secured borrowing.
Debt Covenants
Under our line of credit agreements and our investor note documents, we are
bound to follow certain affirmative and negative covenants. Failure to follow
our covenants could
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require all interest and principal to become due. As of
are in compliance with the covenants on our notes payable and lines of credit.
? 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.
51
Table of Contents
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.
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)
2022 2021
Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
Assets:
Interest-earning accounts with other
financial institutions $ 15,312 $ 129 0.84 % $ 19,795 $ 43 0.22 %
Interest-earning loans[1][2] 83,524 5,706 6.83 % 101,476 6,998 6.90 %
Total interest-earning assets 98,836 5,835 5.90 % 121,271 7,041 5.81 %
Non-interest-earning assets 7,817 - - %
8,231 - - % Total Assets$ 106,653 $ 5,835 5.47 %$ 129,502 $ 7,041 5.44 % Liabilities: Notes payable gross of debt issuance costs$ 76,111 $ 2,882 3.79 %$ 73,897 $ 2,657 3.60 % Other debt 13,655 387 2.83 % 39,149 1,007 2.52 % Total interest-bearing liabilities$ 89,766 $ 3,269 3.64 %$ 113,046 $ 3,664 3.24 % Debt issuance cost 100 64 Total interest-bearing liabilities net of debt issuance cost$ 89,766 3,369 3.75 %$ 113,046 3,728 3.30 % Net interest income$ 2,466 $ 3,313 Net interest margin 2.50 % 2.73 %
[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$127 thousand and$231 thousand for the years ended years endedDecember 31, 2022 and 2021, respectively. 52 Table of Contents Rate/Volume Analysis of Net Interest Income Twelve Months Ended December 31, 2022 vs. 2021 Increase (Decrease) Due to Change in: Volume Rate Total (Dollars in Thousands) Increase (Decrease) in Interest Income: Interest-earning accounts with other financial institutions $ (11)$ 97 $ 86 Interest-earning loans (1,222) (70) (1,292) Total interest-earning assets (1,233) 27 (1,206) Increase (Decrease) in Interest Expense: Notes payable gross of debt issuance costs 180
45 225 Other debt (729) 109 (620) Debt issuance cost - 36 36
Total interest-bearing liabilities (549) 190 (359) Change in net interest income $ (684)
Net interest income decreased 26% during the year endedDecember 31, 2022 . This decrease in net interest income was primarily due to the lower average balance on interest-earning loans. Lower interest expense on debt partially offset the decrease in earnings on total interest-earning assets. The decrease in interest income was due to a volume variance on interest-earning loans. The volume variance was due to the lower average loan balances as the Company received loan principal payments as described previously in this Report. The weighted average yield on the loan portfolio decreased 7 basis points from 6.90% to 6.83% during the year endedDecember 31, 2022 . Total interest expense offset the decrease in interest income by$359 thousand .$729 thousand of this decrease in interest expense was due to a decrease in average balance on term-debt as described previously in this Report. This was offset by an increase of$190 thousand due to a rate variance. The rate variance was due to higher offering rates on new note sales asUS Treasury rates increased during the year. The Company's net interest margin decreased due to the changes described above. The Company intends to grow its loan portfolio in 2023 and beyond in order
to
increase net interest income.
53
Table of Contents
Provision and non-interest income and expense
Twelve months ended
December 31, Comparison
(dollars in thousands)
2022 2021 $ Change % Change
Net interest income $ 2,466 $ 3,313 $ (847) (26%)
Provision (credit) for loan losses (296) 122 (418) (343%)
Net interest income after provision (credit)
for loan losses 2,762 3,191 (429) (13%)
Total non-interest income 3,592 3,600 (8) (0%)
Total non-interest expenses 5,707 4,921 786 16%
Income before provision for income taxes 647 1,870 (1,223) (65%)
Provision for income taxes and state LLC fees 20
20 - -% Net income$ 627 $ 1,850 $ (1,223) (66%) Provision
In 2022, the Company recorded a credit to provision for loan losses due to lower
average loan balances and recovery on a non-performing loan.
Non-interest income
Non-interest income was mostly unchanged in 2022 compared to 2021. The Company recorded a$2.5 million and a$2.4 million gain on debt extinguishment for the years endedDecember 31, 2022 , and 2021, respectively. With our term-loan fully paid off we do not expect to receive revenue from this source going forward. Therefore, we intend to grow our loan portfolio to increase our net interest income in 2023. Non-interest expenses
The increase in non-interest expenses was due primarily to a one-time SERP
expense of
Retirement Plans in the Notes to the Consolidated Financial Statements.
54
Table of Contents
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)
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$257 thousand for the years endedDecember 31, 2021 and 2020, respectively. Twelve Months Ended December 31, 2021 vs. 2020 Increase (Decrease) Due to Change in: Volume Rate Total (Dollars in Thousands) Increase (Decrease) in Interest Income: Interest-earning accounts with other financial institutions$ (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) Term-debt (664) 32 (632) Debt issuance cost - (35) (35) Total interest-bearing liabilities (741) 14 (727) Change in net interest income$ (466) $ (109) $ (575) 55 Table of Contents
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. 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 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 % Non-interest expenses: -
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 endedDecember 31, 2021 . The provision expense decreased by$66 thousand for the year endedDecember 31, 2021 , as compared to December
31,
2020. The decrease in the
56
Table of Contents
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 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 . 57 Table of Contents
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