EDGAR 10-K Filing

Company CIK: 944130
Filing Year: 2023
Filename: 944130_10-K_2023_0000944130-23-000025.json

---

ITEM 1. BUSINESS
Item 1.
Business

---

ITEM 1A. RISK FACTORS
ITEM 1A.RISK FACTORS
Any of the following identified risks, along with other unidentified risks, or risks we believe are immaterial or unlikely, could harm the Company. The risks and uncertainties described below are not the only risks that may have a material, adverse effect on us. Additional risks and uncertainties also could adversely affect our business, financial condition, and results of operations. The risks discussed below include forward-looking statements, and our actual results may differ substantially from those discussed in these forward-looking statements. Investors should carefully consider the risks described below in conjunction with the other information in this Form 10-K.
Risks Related to the Company
We may be unable to obtain sufficient capital to meet the financing requirements of our business.
Our ability to finance our operations and repay maturing obligations to our investors primarily depends on our ability to raise funds from the sale of our debt securities. Factors that affect our ability to sell our debt securities include, but are not limited to:
● quality of the mortgage loan and business loan investments we make;
● the profitability of our operations; and
● limitations imposed under our credit facility arrangements and trust indenture agreements that have restrictive and negative covenants that may limit our ability to borrow additional sums or sell our publicly and privately offered debt securities.
Our growth is dependent on leverage, which may create other risks.
We use responsible leverage, which means borrowing to invest in mortgage assets. This mechanism creates net interest income for the Company. Our Board of Managers has overall responsibility for our financing strategy. Our success is dependent, in part, upon our ability to manage our leverage effectively. Leverage creates an opportunity for
increased net income, but at the same time creates risks. For example, leveraging magnifies changes in our net worth. We will incur leverage only when we expect that it will enhance our investment returns. To generate a quick sell on an asset, the asset often sells at a discount. There can be no assurance that we will be able to meet our debt service obligations; and, if we must quickly sell assets to meet our debt service obligations, we risk incurring a loss on some or all those assets. Our management has been working on reducing the Company’s reliance on leverage by increasing revenue from non-balance sheet sources that do not require leverage, such as our broker-dealer commissions and loan servicing income.
A portion of our mortgage loans collateralizes our credit facilities; therefore, these pledged assets will be unavailable to meet our unsecured debt obligations.
Our lines of credit requires that we secure them with mortgage loans, keeping a minimum collateralization ratio on each credit facility. Loans pledged as collateral to the lines of credit will be unavailable for other cash flow purposes, including meeting our unsecured debt obligations. A default on one of our credit facilities could reduce the availability of other assets on our balance sheet, and adversely affect our liquidity and ability to repay our investor notes.
The following table shows the recorded balance of loans pledged and not pledged as collateral as of December 31, 2022 (dollars in thousands):
Recorded Loan Balance
Collateral pledged to line of credit
$
17,819
Loans not pledged
69,223
Total loans
$
87,042
Our financing arrangements have covenants that restrict our operations and any default under these arrangements would inhibit our ability to grow our business, increase revenue, and make distributions to our equity investors.
Our financing arrangements have restrictions, covenants, and events of default. Failure to meet or satisfy any of these covenants could result in an event of default under these agreements. Our default under any of our financing arrangements could have a material, adverse effect on our business, financial condition, liquidity, results of operations, and our ability to make distributions to our equity investors. These restrictions also may interfere with our ability to obtain financing or engage in other business activities.
We may be unable to successfully implement our strategy to grow our mortgage loan and non-interest generating segments of our business.
Over the past decade, we have gradually decreased the total amount of mortgage loans on our balance sheet as part of an effort to reduce risk in the portfolio and pay off our long-
term debt. Having completed those objectives the Company intends to enter a growth phase and increase our loan portfolio. We have also implemented a strategic objective of transitioning to a more diversified financial services. We also intend to continue our strategy of offering additional financial products and services to our equity owners, strategic partners, and clients. Continuing to grow our business will depend, in part, on our ability to address the needs of our clients, borrowers, investors and strategic partners by effectively using technology to provide products and services that will enable us to create additional efficiencies in our business and expand the scope of and volume of financial transactions we are able to complete. If we cannot effectively grow our business our operations and financial condition may be adversely impacted.
Loss of our management team or the ability to attract and keep key employees could harm our business.
We are dependent on the industry knowledge, professional skillsets, institutional contacts, and overall financial services experience of our senior management team. We rely on our management team to develop relationships with current and potential clients and strategic business partners. We also rely on our management team to develop new products and services for our clientele, as well as the continued expansion of complimentary lines of business to diversify the Company’s value proposition further. We can give no assurances that we will be able to recruit and keep qualified senior managers that will enable us to achieve our core strategic aims and continue to grow our business profitably.
Our broker-dealer and investment advisory business depends on fees generated from the distribution of financial products and advisory fees.
One of our strategic goals is to increase non-interest revenues from fees generated from the distribution of financial products, such as managed accounts, mutual funds, and annuity products. Changes in the structure or amount of fees paid by sponsors of these products could directly affect our non-interest revenue. In addition, if these products experience losses or increased investor redemptions, the revenue we earn on these products may decline.
The ability to attract and keep qualified financial advisors and associates is critical to MP Securities’ continued success.
As we continue to expand our non-interest revenue sources, we will need to expand our team of qualified investment and financial advisors that complement the services we provide to our clients. If we are unable to recruit and keep qualified professionals, we could jeopardize our strategic goal of increasing non-interest income, thereby adversely affecting our net earnings and financial condition.
Our systems may experience an interruption or breach in security, which could subject us to increased operating costs as well as litigation and other liabilities.
We rely heavily on communications and information systems to conduct our business, process, send, and store electronic financial information. Any failure, interruption, or breach in security of these systems could result in failures or disruptions in our critical business systems. The secure transmission of confidential information over the Internet and other electronic transmission and communication systems is essential to keeping customer confidence in our services. Security breaches, computer viruses, acts of vandalism, and developments in computer capabilities could result in a breach or breakdown of the technology we use to protect customer and investor information and transaction data.
While we have policies and procedures designed to prevent or limit the effect of the possible failure, interruption, or security breach of our information systems, there can be no assurance that any such failure, interruption or security breach will not occur or, if they do occur, that they will be adequately addressed. We rely on third parties in processing our transactions. Any breakdown or failures of their systems or capacity constraints could adversely affect our operations. The occurrence of any failure, interruption, or security breach of our information systems could damage our reputation, result in a loss of a borrower, investor, or customer’s business, or expose us to civil litigation and possible financial liability.
Our critical business systems may fail due to events out of our control, such as:
● unforeseen catastrophic events;
● cyber-attacks;
● human error;
● change in operational practices of our system vendors; or
● unforeseen problems met while implementing major new computer systems or upgrades to existing systems.
These events could potentially result in data loss and adversely affect our ability to conduct our business. As of the date of this Report, to our knowledge, we have not experienced any material impacts relating to cyber-attacks or information system security breaches.
From time to time, we have engaged in transactions with related parties and our policies and procedures on these transactions may be insufficient to address any conflicts of interest that may arise.
Under our code of business conduct, we have set up procedures regarding the review, approval, and ratification of transactions that may give rise to a conflict of interest between
us and a related party. A related party is any employee, officer, board member, equity owner, trustee, their immediate family members, other businesses under their control, and other related persons. In the ordinary course of our business operations, we have ongoing relationships and engage in transactions with several related entities. This includes transactions with our equity owners. Conflicts of interest are inherent in any transactions involving credit facilities, funds on deposit with, mortgage loans bought, sold, participated, or serviced in our dealings with our equity owners. While the Company believes that it has taken reasonable measures to mitigate any risks, these procedures may not be sufficient to address conflicts of interest that may arise.
Risks Related to the Financial Services Industry and Financial Markets
The failure of a financial institution in which we deposit our funds could have an adverse impact on our ability to access our short-term source of funds.
In response to recent bank closures by the Federal Deposit Insurance Corporation (“FDIC”), the Company is monitoring its cash investments with various financial institutions and adjusting its short-term liquidity policies to respond to changes in the financial markets. The Company has no funds invested with the banks that the FDIC has closed. The National Credit Union Share Insurance Fund (“NCUSIF”) insures a portion of the Company’s cash held at credit unions and the FDIC insures a portion of cash held by the Company at other financial institutions. Currently, the NCUSIF and FDIC generally insures amounts up to $250,000 per depositor per insured credit union or bank. As of the date of this report, depositors of the banks that have been closed by the FDIC in 2023, have not taken a loss on deposits over the insured limit. To the extent the Company has deposited funds with a credit union or banking institution, then if any of such financial institutions ultimately fail, the Company could lose the amount of deposits over the then current insurance limit. The loss of such funds could reduce the amount cash needed for short term liquidity purposes. See, Note 1 in the Notes to the Consolidated Financial Statements on page of this Report.
Deterioration of market conditions could negatively affect our business, results of operations, financial condition, and liquidity.
A number of factors that we cannot control affect the market in which we operate. These factors can have a potentially significant, negative impact on our business. These factors include, among other things:
● interest rates and credit spreads;
● inflationary or deflationary economic cycles;
● the availability of credit, including the price, terms, and conditions under which it can be obtained;
● loan balances relative to the value of the underlying real estate assets;
● default rates on special purpose mortgage loans for churches and ministries, and the amount of the related losses;
● the actual and perceived state of the real estate markets for church properties and special use facilities;
● deterioration of local, global, and national economic conditions including epidemics or pandemics that may affect the local or global economy; or
● unemployment rates.
Significant declines in the value of real estate related assets, impairment of our borrowers’ ability to repay their obligations, and illiquidity in the markets for real estate related assets can adversely affect our mortgage loan investments, financial condition, and income.
The long-term impact of various external factors such as the COVID-19 pandemic, Russia’s invasion of Ukraine, increasing inflation, and continuing disruption of the global supply chains, and the impact of such factors on our church and ministry loans, cannot be known at this time.
The COVID-19 pandemic caused major disruptions in the U.S. economy and has caused churches, private schools, and ministries to make significant changes in the conduct of their operations, programs and in-person meeting schedules. In addition, Russia’s invasion of Ukraine, increasing inflation, and the disruption of global supply chains are putting strain on the U.S economy and the U.S. consumer. Our business relies, to a significant degree, on the ability of our ministry borrowers to make loan payments on a timely basis. At this time, we cannot know what the long-term impact of these economic stressors on our borrowers and their donors will be. A significant disruption in giving trends resulting from these factors could have a material impact on the timing of loan payments made by our borrowers, our liquidity, loan loss reserves, and our financial condition.
Declining real estate values could harm our operations.
We believe the risks associated with our business are more severe during periods in which an economic slowdown or recession is accompanied by declining real estate values. Declining real estate values often reduce the level of new mortgage loan originations, since borrowers often use increases in the value of their existing properties to support the purchase of, investment in, or renovation of their worship facilities. Borrowers may also have difficulty paying principal and interest on our loans if the real estate economy weakens. Further, declining real estate values significantly increase the likelihood that we
will incur losses on our foreclosed assets and on our loans in case of default because the value of our collateral may be insufficient to cover our investment in such assets.
Any sustained period of increased payment delinquencies, foreclosures, or losses could adversely affect both our net interest income from loans as well as our ability to originate, sell, and securitize loans. These events would significantly harm our revenues, results of operations, financial condition, liquidity, and business prospects.
The Company is subject to interest rate risk.
Interest rate fluctuations and shifts in the yield curve may cause losses. Our primary interest rate exposures relate to our mortgage loan investments and floating rate debt obligations. Typically, our loan investments have a fixed interest rate with a five-year interest rate adjustment or maturity date. A portion of our borrowing arrangements with our note investors, however, provides for variable rates of interest that are indexed to short-term borrowing rates or fixed rates on short-term maturities.
Changes in interest rates, including changes in expected interest rates or “yield curves,” affect our business in multiple ways. Changes in the general level of interest rates can affect our net interest income. Net interest income is the difference between the interest income we earn on our interest-earning assets and the interest expense we incur on our interest-bearing liabilities. Changes in the level of interest rates also can affect, among other things, our ability to originate and acquire mortgages, and the market value of our mortgage investments. In the case of a significant rising interest rate environment, default by our mortgage loan obligors could increase our losses and negatively affect our liquidity and operating results.
Our ability to expand the size of our loan portfolio is dependent on our ability to obtain debt financing at rates that supply a positive net spread. We have used borrowing facilities obtained from institutional lenders and relied upon offerings of debt securities in SEC registered offerings and private placement offerings to fund our mortgage loan investments. Our ability to fund future investments will be severely restricted if spreads on debt financing widen or if availability of credit facilities ceases to exist. In addition, an increase in our borrowing costs could decrease the spread we receive on our mortgage loan investments, which could adversely affect our ability to pay interest and redeem the outstanding debt securities as they mature. To mitigate our interest rate risks, we have previously and may in the future enter into interest rate hedging transactions that include, but are not limited to, interest rate caps and interest rate swaps. We cannot guarantee the results of using these types of instruments to mitigate interest rate risks, and as a result, the volatility of interest rates could result in reduced earnings or losses for us.
In addition, increases in interest rates during the term of a loan may adversely affect a borrower’s ability to repay a loan at maturity or to prepay a loan. Our mortgage loans
typically have large balloon payments due at maturity. When the loan matures and the balloon payment is due, the borrower must either pay the loan balance or refinance the loan with us or another lender. If interest rates are higher when the loan matures, the borrower’s payment on new financing may be higher. The borrower may not be able to afford the higher debt service hindering their ability to refinance our loan. In addition, the borrower may not be able to refinance the loan because the value of the property has decreased. If a borrower is unable to repay our loan at maturity, we could suffer a loss and we would not be able to reinvest proceeds in assets with higher interest rates, which could adversely affect our business and profitability.
Regulatory compliance failures could adversely affect our reputation, operating business, and core strategic goals.
We rely on publicly offered debt securities to fund a substantial part of our operations. As a result, we are subject to U.S. securities laws, rules, and regulations publicized by the SEC and applicable state securities statutes. Our subsidiary, MP Securities, is subject to oversight from the SEC, FINRA, the Department of Insurance, California’s Department of Financial Protection and Innovation, and securities regulators in the states where MP Securities conducts business. To the extent MP Securities engages in securities and insurance-related activities in a particular state, state securities and insurance administrators will have authority over the activities of our broker-dealer affiliated entity. As a registered broker-dealer and FINRA member, MP Securities must maintain registrations under the securities laws in those states in which it conducts business. The failure to follow obligations imposed by any regulatory authority binding on our subsidiaries or us or to keep any of the required licenses or permits could result in investigations, sanctions, and reputation damage.
Risks Related to Our Mortgage Loan Investments
Our Church mortgage loans are not as liquid as other financial instruments and therefore we may not be able to generate adequate liquidity, or we may have to take a material loss on sale if we needed to liquidate a portion or all of our loan portfolio.
The market for church mortgage loans is specialized and therefore not as liquid as for a residential or commercial loan portfolio. As a result, in the event we need additional liquidity we may have difficulty in disposing of our mortgage loan portfolio quickly or at all. The amount we would realize is dependent on several factors, including the quality and yield of similar mortgage loans and the prevailing financial market and economic conditions. It is possible that we could realize substantially less than the face amount of our mortgage loans, should we be required to sell the loans or pledge them as collateral for debt. Thus, the amount we could realize for the liquidation of our mortgage loan investments is uncertain and unpredictable.
We are subject to risks related to prepayment of mortgage loans held in our portfolio, which may negatively affect our business.
Our borrowers may prepay the principal amount of their mortgage loans at any time. There is intense competition from financial institutions that are looking to make commercial loans at competitive rates to qualified borrowers. If a significant number of borrowers refinance their loans with other lenders, our profitability could be adversely affected.
We are subject to the risks associated with loan participations, such as less than full control rights.
We have sold participation interests in loans we have originated and service. We may need the consent of the parties to which we have sold the participation interest to exercise our rights under such loans, including rights with respect to amendment of loan documentation, enforcement proceedings in case of default, and the institution of, and control over, foreclosure proceedings. Similarly, a majority of the participants may be able to take actions to which we object but must comply with if our participation interest represents a minority interest. The lack of full control on participation interests sold may adversely affect our business.
Church revenues fluctuate and may substantially decrease during times of economic hardship and global pandemics, which could adversely affect our operations and financial condition.
To pay their loans, churches depend on revenues from church member contributions. Donations typically fluctuate over time for multiple reasons, including, but not limited to:
● changes in church leadership and church membership;
● local unemployment rates, credit conditions and real estate markets; and
● other local economic conditions, including epidemics or pandemics that may affect the local economy.
When a mortgage loan is made to a church, the senior pastor usually plays a critical role in determining whether the loan will be repaid.
The senior pastor of a church ministry usually performs a critical role in the leadership, management, effectiveness of the church’s governance and conflict of interest practices, and continued viability of the church. A leadership crisis faced by a church that loses its senior pastor due to death, disability, resignation, or retirement can negatively affect the church’s ability to meet its debt service obligations on a mortgage loan we make.
If we do not consistently apply sound underwriting standards the quality of our mortgage loans could degrade, which could adversely affect our operations and financial condition.
The quality of the mortgage loans in which we invest depends on the adequacy and implementation of sound underwriting standards as described in our Board adopted loan policy. To achieve our desired loan risk levels we must properly observe and implement our underwriting standards, which may change depending on the state of the economy. There is no assurance that our credit underwriting and loan approval procedures are or will be adequate to address the inherent risks associated with lending. Any failure to manage such risks may materially adversely affect our financial condition and results of operations.
We may suffer losses on loans due to not having all the material information relating to a potential borrower at the time that we make a credit decision with respect to that potential borrower or at the time we advance funds to the borrower.
There is typically no publicly available information about the churches and ministries to which we lend. Therefore, we must rely on our borrowers and the due diligence efforts of our staff to obtain the information that we consider when making our credit decisions. Our staff partially depends and relies upon the pastoral staff to supply full and correct disclosure of material information concerning their operations and financial condition. We may not have access to all the material information about a particular borrower’s operations, financial condition, and prospects. In addition, a borrower’s accounting records may become poorly kept or organized. The financial condition and prospects of a church may also change rapidly in the current economic environment. In such instances, we may not make a fully informed credit decision, which may lead to a failure or inability to recover our loan in its entirety.
Our loan portfolio is concentrated in specialized purpose mortgage loans and may be more adversely impacted by external market forces than a portfolio that was more diversified.
We are among a limited number of non-bank financial institutions specialized in supplying loans to evangelical churches and church organizations. Church and ministry mortgage loans secured by real properties generally secure our loans and the secondary market for these loans is regional and limited. Our mortgage loan agreements require that the borrower insure the property. This requirement secures the loan against liability and casualty loss. However, certain types of losses, those of a catastrophic nature such as earthquakes, floods or storms, health emergencies such as the COVID-19 pandemic, and losses due to civil disobedience, are either uninsurable or are not economically insurable. If an uninsured loss destroys a property, we could suffer loss of all or a substantial part of our mortgage loan investment.
Our loan portfolio is concentrated geographically and may be negatively impacted by downturns in markets that we operate.
As of December 31, 2022, the Company has 12% and 27% of the balance of its loan portfolio located in the states of Illinois and Maryland, respectively. Economic conditions in each of these states could differ in a significant manner from the loan investments we have made in other states and the real estate values which serve as collateral in those two states will depend, to a substantial degree, on the real estate markets in those markets.
We may be unable to recognize or act upon an operational or financial problem with a church in a timely fashion to prevent a loss of our loan to that church.
Our borrowers may experience operational or financial problems that, if not timely addressed by us, could result in a substantial impairment or loss of the value of our loan to the borrower. We may fail to identify problems because our borrowers did not report them in a timely manner or, even if the borrower did report the problem, we may fail to address it quickly enough, or at all. We try to minimize our credit risk through prudent loan approval and monitoring practices in all categories of our lending. However, we cannot assure you that such monitoring and approval procedures will reduce these lending risks. We also cannot assure you that our credit administration personnel, policies, and procedures will properly adapt to changes in economic or any other conditions affecting our borrowers and the quality of our loan portfolio. As a result, we could suffer loan losses that could have a material adverse effect on our revenues, net income, and results of operations.
Our accounting estimates and impairment assumptions may require the Company to record loan impairments that may adversely impact our operations and financial condition.
We make various assumptions and judgments about the collectability of our loan portfolio, including the creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for the repayment of our loans. If we decide that it is probable that we will not be able to collect all amounts due to us under the terms of a particular loan agreement, we may have to recognize an impairment charge or a loss on the loan unless the value of the collateral securing the loan exceeds the carrying value of the loan.
If our assumptions regarding, among other things, the present value of expected future cash flows or the value of the collateral securing our loans are incorrect or general economic and financial conditions cause one or more borrowers to become unable to make payments under their loans, we may have to recognize impairment charges. These charges could result in a material reduction in earnings in the period in which the loans are determined to be impaired. The impairment may adversely affect, perhaps materially, our financial condition, liquidity, and ability to make debt service payments.
Our reserves for loan losses may prove inadequate, which could have a material, adverse effect on us.
Although we regularly evaluate our financial reserves to protect against future losses based on the probability and severity of the losses, there is no guarantee that our assessment of this risk will be adequate to cover any future potential losses. As of December 31, 2022, our allowance for loan loss totaled $1.6 million, or 1.78%, of our total loans.
Unanticipated adverse events may result in reserves that will be inadequate over time to protect against potential future losses. Examples of these adverse events are:
● significant negative changes in the economy;
● events affecting specific assets;
● events affecting specific borrowers;
● mismanaged construction;
● loss of a senior pastor;
● rising interest rates;
● failure to sell properties or assets;
● epidemics or pandemics that may affect the local or global economy; or
● events affecting the geographical regions in which our borrowers or their properties are located.
Maintaining the adequacy of our allowance for loan losses may require that we make significant and unanticipated increases in our provisions for loan losses, which would materially affect our results of operations and capital levels. See the section captioned “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Report for further discussion related to our process for determining the appropriate level for the allowance for loan losses.
Some of our mortgage loan investments currently are, and in the future may be, non-performing loans or may be restructured, which subject us to increased risks compared to performing loans.
Some of the loans in our mortgage loan portfolio currently are, or in the future may become a non-performing loan. Such loans may become non-performing if the church falls upon financial distress, the community or congregation the church serves suffers financial hardship, or there is adverse change in leadership of the church. These circumstances could result in the borrower being unable to meet its debt service obligations to us. Non-performing loans may require our management team to devote a substantial amount of their resources to workout negotiations and restructuring efforts. These restructuring
efforts may involve modifications to the interest rate, extension, or deferral of payments to be made under the loan or other concessions. For restructured loans, a risk still exists that the borrower may not be able or willing to continue the restructured payments or refinance the restructured mortgage at maturity. Our troubled assets could increase significantly if borrowers become delinquent and we are unsuccessful in managing our non-performing assets. This in turn could have a material, unfavorable effect on our results of operations and financial condition. As of December 31, 2022, $6.23 million, or 6.3%, of our total assets, were deemed to be non-performing, as compared to $10.0 million, or 7.8%, of our total assets at December 31, 2021
In the event a borrower defaults on one of our mortgage loan investments, we may need to recover our investment through the sale of the property securing the loan, which may result in credit losses.
In that event, the value of the real property security may prove insufficient to recover the amount of our investment. Even though we may obtain an appraisal of the property at the time we originate the loan, the property’s value could decline because of subsequent events, including:
● uninsured casualty loss (such as an earthquake or flood);
● a decline in the local real estate market;
● undiscovered defects on the property;
● waste or neglect of the property;
● a downturn in demographic and residential trends;
● epidemics or pandemics that may affect the local or global economy;
● environmental hazards;
● a decline in growth in the area in which the property is located; and
● churches and church-related properties are typically not as marketable as more common commercial, retail, or residential properties.
The occurrence of any of these events could severely impair the market value of the security for our mortgage loan investments. In case of a default under a mortgage loan held directly by us, we will bear the risk of loss of principal to the extent of any deficiency between the value of the collateral and the principal and accrued interest of the mortgage loan. Foreclosure of a church mortgage can be an expensive and lengthy process, which could have a significant effect on our expected return on the foreclosed mortgage loan. Such delays can cause the value of the mortgaged property to deteriorate further. The properties also incur operating expenses pending their sale, including property insurance,
management fees, security, repairs, and maintenance. Any added expenses incurred could adversely affect our ability to recover the full value of our collateral.
From time to time, we have recorded additional provisions for losses related to real estate assets acquired after we carry out loan foreclosure proceedings. If we take ownership of a property as part of a foreclosure action, we could be required to write down the value of the property if the value of the property declines after we take title to the property. Further deterioration could lead to an increase in non-performing assets and reduced earnings.
Risks of cost overruns and non-completion of the construction or renovation of the mortgage properties securing construction loans we invest in may have a material and adverse effect on our investment.
The renovations, refurbishment, or expansion by a borrower of a mortgage property involves risks of cost overruns and non-completion. Costs of construction or improvements to bring a mortgage property up to standards established for the market position intended for that property might exceed original estimates, possibly making a project uneconomical. Such delays and cost overruns are often the result of events outside both our and the borrower’s control such as material shortages, labor shortages, labor strikes, pandemics, and unexpected delays caused by weather and other acts of nature. In addition, environmental risks and construction defects may cause cost overruns, and completion delays. If the borrower does not complete such construction or renovation in a timely manner, or if it costs more than expected, the borrower may experience a prolonged impairment of the borrower’s revenues impacting their ability to make their payments on our loan.
We are exposed to environmental liabilities with respect to properties to which we take title, which could have an adverse impact on our operations and financial condition.
In the course of our business, we may take title to real estate through foreclosure on one of our mortgage loan investments or otherwise. If we do take title to a property, we could be subject to environmental liabilities with respect to these properties. In such a circumstance, we may be held liable to a governmental entity or to third parties for property damage, personal injury, and investigation and clean-up costs incurred by these parties in connection with environmental contamination. In addition, we may be required to investigate or clean up hazardous or toxic substances, or chemical releases, at a property. The costs associated with investigation or remediation activities could be substantial. If we ever become subject to significant environmental liabilities, our business, financial condition, liquidity, and results of operations could be materially and adversely affected.
Risks Relating to Our Investor Notes
Unexpected large withdrawals by investors that hold our debt securities can reduce our overall liquidity.
We continue to expand our methods of raising funds, including selling participations in our mortgage loan investments, expanding the sales of our debt securities, and maintaining lines of credit at financial institutions. If this strategy becomes less effective, we will need to find alternative sources of borrowing to finance our operations. Alternative solutions may be selling assets, deleveraging our balance sheet, and reducing operational expenses.
We may face potential claims from certain holders of our 2021 Class A Notes requesting a rescission of their investment made in our Notes.
Under Section 10(a)(3) of the Securities Act of 1933, as amended (the “Securities Act”), when a prospectus is used more than nine months after the effective date of the registration statement, audited financial statements included in the prospectus must be as of a date not more than sixteen months prior to such use. When the Company filed its Registration Statement on Form S-1, which was declared effective on January 8, 2021, and subsequently filed Supplements to its Prospectus with the SEC, it included language in its Prospectus which was intended to serve as an election made to incorporate future filings of its audited and unaudited financial statements filed on Form 10-K and Form 10-Q as part of its Prospectus.
If the Company failed to make a proper election and include necessary language permitting it to use forward incorporation by reference of subsequently filed Exchange Act reports, certain investors that purchased our 2021 Class A Notes during the period commencing on October 9, 2021 and ending on the date the Company filed a post-effective amendment to its Registration Statement may have a claim for rescission of their investment under Section 5 of the Securities Act based upon a claim that the Prospectus failed to include updated financial statements.
The Company believes that the potential liability for such recission claims is $26.9 million. To the extent that rescission claims arising in connection with the sale of our 2021 Class A Notes during the period commencing October 9, 2021, and ending on the date the Company filed a post-effective amendment to its Registration Statement are initiated and judgments entered, the Company’s liquidity, balance sheet, and statement of cash flows could be materially impacted. In that event, the Company would be required to use its available cash, borrowing capacities, or raise funds from the sale of participation interests and its mortgage loan assets to satisfy these claims.
We depend on repeat purchases by a significant number of investors in our debt securities to finance our business.
A significant percentage of the investors who buy our debt securities roll their matured debt security into a new one. Historically, we have been able to sustain a high rate of renewal investments. If the rate of repeat investments declines, our ability to maintain or grow our asset base could be impaired.
The table below shows the renewal rates of our maturing debt securities over the prior three years:
%
%
%
Some of our investors may be unable to purchase our public offered debt securities due to FINRA’s investor suitability rule.
When handling sales of our investor debt securities, we must comply with FINRA’s “know your customer” and “suitability” rule. Some investors may not qualify under suitability criteria we have established for investors. These suitability eligibility standards help ensure that investors make appropriate investments given the age, investment experience, net worth, need for liquidity; and the mix of the investor’s portfolio.
If MP Securities is unable to offer a potential investor a Class A Certificate that will enable such investor to meet the applicable suitability standards, we will need to find other qualified investors to implement our strategic objectives.

---

ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 1B.UNRESOLVED STAFF COMMENTS
Not applicable.

---

ITEM 2. PROPERTIES
ITEM 2.
PROPERTIES
Corporate Offices
As of December 31, 2022, the Company conducts most of its operations from its main corporate office at 915 West Imperial Highway, Suite 120, Brea, California. In addition, the Company has one primary branch office located in Fresno, California. The Brea corporate office and Fresno branch locations have operating leases. Ministry Partners Securities, LLC also keeps networking agreement office locations in Glendora, California, Elgin, Illinois, and Nampa, Idaho.

---

ITEM 3. LEGAL PROCEEDINGS
ITEM 3.
LEGAL PROCEEDINGS
Given the nature of our investments made in mortgage loans, we may from time to time have an interest in, or be involved in, litigation arising out of our loan portfolio. We consider litigation related to our loan portfolio to be routine to the conduct of our business. As of December 31, 2022, we are not involved in any litigation matters that could have a material adverse effect on our financial position, results of operations, or cash flows.

---

ITEM 4. MINE SAFETY DISCLOSURE
ITEM 4.
MINE SAFETY DISCLOSURES
Not applicable.
PART II

---

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
ITEM 5.MARKET FOR OUR COMMON EQUITY, RELATED MEMBER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Price Range of Common Units
There is no public market for our Class A Units and Series A Preferred Units. As of December 31, 2022, a total of 146,522 Class A Units were issued, with 11 holders of record, and a total of 117,100 Series A Preferred Units were issued, with 11 holders of record.
Sale of Equity Securities by Issuer
None.
Purchases of Equity Securities by Issuer
None.
Dividends and Distributions
The Series A Preferred Unit holders are entitled to receive two types of dividend distributions. First, they are entitled to receive a quarterly cash dividend at the rate of one-year LIBOR plus 25 basis points (the “Series A Dividend”). Payment of the Series A Dividend will have priority over all other distributions to equity owners. In addition, the Company must pay any accrued and undistributed Series A Dividend before we can distribute other dividends.
Our Series A Preferred Unit holders are also entitled to receive 10% of our net profits after subtracting the amount of quarterly Series A Dividends paid earned for any fiscal year. This payment will be made to holders of the Series A Preferred Units on a pro rata basis. We accrued $13 thousand and $178 thousand in net profits to distribute to our Series A Preferred Units holders for the years ended December 31, 2022 and 2021, respectively. This increased the amount of distributions declared on our Series A Preferred Units for the fourth quarters of 2022 and 2021 by $0.018 per unit and $1.521 per unit, respectively.
The remaining balance of any profits will be allocated to all holders of our Class A Units based on their ownership percentage. For 2022, we made no distributions to the holders of our Class A Units.
During December 31, 2022 and 2021, we declared distributions on our Series A Preferred Units as follows:
SERIES A UNITS
Distributions Declared per Unit
Quarter
First
$
0.580
$
0.131
Second
0.965
0.124
Third
1.268
0.123
Fourth
1.463
1.731
Total distributions per unit
$
4.276
$
2.109
In the event of a loss, our operating agreement provides that losses will be allocated first to the holders of common units and then to the Series A Preferred Units holders until their respective capital accounts have been reduced to zero. If the capital accounts of the members cannot offset the entire loss, the balance will be allocated, pro rata, to the holders of common units in proportion to their respective ownership interest in our common equity units.
Equity Compensation Plans
None.

---

ITEM 6. SELECTED FINANCIAL DATA
ITEM 6.
SELECTED FINANCIAL DATA
We are a “smaller reporting company” as defined by Regulation S-K issued by the SEC. As a result, we are not supplying the information contained in this item per Regulation S-K.

---

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
ITEM 7.
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.
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;
● 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, the Federal 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 of December 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
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)
Broker-dealer commissions and fees
$
$
Gain on debt extinguishment
2,537
2,398
Total income
9,427
10,641
Provision (credit) for loan losses
(296)
Total non-interest expenses
5,707
4,921
Net income
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 of December 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 ended December 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,
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 ended December 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 $40 thousand in 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 December 31, 2021. The decrease in loan participation sales was due to the 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 $153 thousand in servicing income in 2022 as compared to $189 thousand in 2021. We do not expect 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.
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.
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 December 31, 2022, and 2021 and should be read in conjunction with the accompanying consolidated financial statements and notes thereto.
Comparison of Financial Condition as of December 31,:
Comparison
$ Difference
% Difference
(dollars in thousands)
Assets:
Cash
$
9,504
$
28,080
$
(18,576)
(66%)
Restricted cash
(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
(30)
(6%)
Investments in joint venture
(12)
-%
Other investments
1,018
-
1,018
100%
Property and equipment, net
(32)
(19%)
Foreclosed assets, net
-
-%
Servicing assets
(47)
(28%)
Other assets
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
(10)
-%
Notes payable, net of debt issuance costs of $58 and $88 as of December 31, 2022 and 2021, respectively
79,100
76,732
2,368
3%
Accrued interest payable
12%
Other liabilities
2,349
1,704
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
9%
Total members' equity
14,626
14,511
1%
Total liabilities and members' equity
$
99,363
$
127,965
$
(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 $15.9 million in 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”.
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)
Amount
% of
Portfolio
Amount
% of
Portfolio
Loans to evangelical churches and related organizations:
Real estate secured
$
84,718
97.3
%
$
97,708
98.3
%
Construction
0.2
%
1,150
1.2
%
Other secured
0.3
%
0.4
%
Unsecured
0.1
%
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
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
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.
The following table presents our non-performing assets:
Non-performing Assets
($ in thousands)
December 31,
December 31,
Non-Performing Loans:1
Collateral-Dependent:
Delinquencies over 90-Days2
$
1,378
$
Troubled Debt Restructurings
4,555
8,295
Other Impaired Loans
-
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
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 $503 thousand of restructured loans that were over 90 days delinquent as of December 31, 2022 and December 31, 2021.
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
● 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.
The following chart details our allowance for loan losses:
Allowance for Loan Losses
as of and for the
Twelve months ended
December 31,
($ 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)
Charge-offs
Wholly-Owned First
-
-
Wholly-Owned Junior
-
-
Participation First
-
-
Participation Junior
-
-
Total
-
-
Recoveries
Wholly-Owned First
-
Wholly-Owned Junior
-
-
Participation First
-
-
Participation Junior
-
-
Total
-
Net loan charge-offs
-
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 December 31, 2022.
Percent of loans
in each category
Loan Categories
Amount
to total loans
Commercial loans:
Wholly-Owned First
$
1,377
95%
Wholly-Owned Junior
4%
Participation First
1%
Participation Junior
-
-
Total
$
1,553
$
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 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
SEC Registered Public Offerings
Offering Type
Amount
Weighted
Average
Interest
Rate
Amount
Weighted
Average
Interest
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 ended December 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 ended December 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
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
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.
Our Board 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% at December 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 ended December 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”) with Kane County Teachers Credit Union (“KCT”). We must repay each advance within one hundred twenty (120) days after receiving the funds. As of December 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”) with America’s Christian Credit Union. The ACCU LOC has a one-year term with a maturity date of September 23, 2023. As of December 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 of June 6, 2023. As of December 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.
As of December 31, 2022, our investor debt securities had future maturities during the following twelve-month periods ending December 31, (dollars in thousands):
$
23,682
17,574
15,211
13,990
8,701
79,158
Debt Issuance Costs
Notes payable, net of debt issuance costs
$
79,100
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.
%
%
%
During the years ended December 31, 2021, and December 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 ended December 31, 2022.
Credit Facilities and Other Borrowings
The table below is a summary of the Company’s $3 million in outstanding debt payable as of December 31, 2022 (dollars in thousands):
Nature of
Borrowing
Interest
Rate
Interest Rate
Type
Amount
Outstanding
Monthly
Payment
Maturity
Date
Loan Collateral
Pledged
Cash
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
-
Various
-
On November 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
require all interest and principal to become due. As of December 31, 2022, we 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.
Results of Operations:
For the year ended December 31, 2022
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)
Average
Balance
Interest
Income/
Expense
Average
Yield/
Rate
Average
Balance
Interest
Income/
Expense
Average
Yield/
Rate
Assets:
Interest-earning accounts with other financial institutions
$
15,312
$
0.84
%
$
19,795
$
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
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
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 ended December 31, 2022 and 2021, respectively.
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)
$
$
Interest-earning loans
(1,222)
(70)
(1,292)
Total interest-earning assets
(1,233)
(1,206)
Increase (Decrease) in Interest Expense:
Notes payable gross of debt issuance costs
Other debt
(729)
(620)
Debt issuance cost
-
Total interest-bearing liabilities
(549)
(359)
Change in net interest income
$
(684)
$
(163)
$
(847)
Net interest income decreased 26% during the year ended December 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 ended December 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 as US 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.
Provision and non-interest income and expense
Twelve months ended
December 31,
Comparison
(dollars in thousands)
$ Change
% Change
Net interest income
$
2,466
$
3,313
$
(847)
(26%)
Provision (credit) for loan losses
(296)
(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
16%
Income before provision for income taxes
1,870
(1,223)
(65%)
Provision for income taxes and state LLC fees
-
-%
Net income
$
$
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 ended December 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 $600 thousand for the year ended December 31, 2022, compared to December 31, 2021. For more information on the SERP, please see Note 15, Retirement Plans in the Notes to the Consolidated Financial Statements.
For the year ended December 31, 2021:
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)
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
$
0.22
%
$
26,929
$
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
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 ended December 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)
(60)
Term-debt
(664)
(632)
Debt issuance cost
-
(35)
(35)
Total interest-bearing liabilities
(741)
(727)
Change in net interest income
$
(466)
$
(109)
$
(575)
Net interest income decreased 15% during the year ended December 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 ended December 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 $727 thousand. $664 thousand of this decrease in interest expense was due to a decrease in 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)
$Change
% Change
Net interest income
$
3,313
$
3,888
$
(575)
(15)
%
Provision for loan losses
(66)
(35)
%
Net interest income after provision for loan losses
3,191
3,700
(509)
(14)
%
Non-interest income
-
Broker-dealer commissions and fees
%
Other lending income
%
Gain on debt extinguishment
2,398
2,400
(2)
-
%
Total non-interest income
3,600
3,445
%
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
-
-
%
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 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 ended December 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 ended December 31, 2021, compared to December 31, 2020.

---

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are a “smaller reporting company” as defined by Regulation S-K and as such, are not providing the information contained in this item pursuant to Regulation S-K

---

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Included herewith are the following financial statements:
Page
Report of Independent Registered Public Accounting Firm (PCAOB ID: 261)
Financial Statements
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
-
Report of Independent Registered Public Accounting Firm
To the Members
Ministry Partners Investment Company, LLC
Brea, California
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Ministry Partners Investment Company, LLC and its subsidiaries (the Company) as of December 31, 2022 and 2021, the related consolidated statements of income, members’ equity, and cash flows for the years then ended, and the related notes to the consolidated financial statements (collectively, the financial statements). In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Allowance for Loan Losses
As more fully described in Notes 1 and 4 to the Company’s consolidated financial statements, the allowance for loan losses represents losses that are estimated to have occurred. The allowance for loan losses is based on collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, and prevailing economic conditions. The allowance consists of allocated and general components. The allocated component relates to specific allowances on loans that are classified as impaired. The general component relates to loans that are not classified as impaired and is based on historical charge-off experience and the qualitative factors for each class of loans with similar risk characteristics. Qualitative factors include general conditions in economy; loan portfolio composition; delinquencies; changes in underwriting policies; credit administration practices; and experience, ability and depth of lending management, among other factors. Management discloses that this evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available.
We identified the valuation of the allowance for loan losses as a critical audit matter. Auditing the allowance for loan losses involves a high degree of subjectivity in evaluating management’s estimates, such as evaluating management’s assessment of economic conditions and other qualitative or environmental factors, evaluating the adequacy of specific allowances associated with impaired loans, and assessing the appropriateness of loan grades.
The primary procedures we performed to address this critical audit matter included:
● Testing of completeness and accuracy of the information utilized in the calculation of the allowance for loan losses;
● Evaluating the qualitative adjustments to historical loss rates, including assessing the basis for the adjustments and the reasonableness of the significant assumptions;
● Testing the allowance model for computational accuracy;
● Assessing the reasonableness of specific allowances on certain impaired loans;
● Evaluating the overall reasonableness of significant assumptions used by management;
● Testing the assignment of loan risk ratings;
● Evaluating the accuracy and completeness of disclosures in the consolidated financial statements.
/s/ Hutchinson and Bloodgood LLP
We have served as the Company’s auditor since 2005.
Glendale, California
March 24, 2023
Ministry Partners Investment Company, LLC and Subsidiaries
Consolidated Balance Sheets
As of December 31, 2022 and 2021
(dollars in thousands except unit data)
Assets:
Cash and cash equivalents
$
9,504
$
28,080
Restricted cash
Certificates of deposit
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
Accrued interest receivable
Investments in joint venture
Other investments
1,018
-
Property and equipment, net
Foreclosed assets, net
Servicing assets
Other assets
Total assets
$
99,363
$
127,965
Liabilities and members’ equity
Liabilities:
Lines of credit
$
3,000
$
2,000
Term-debt
-
32,749
Other secured borrowings
Notes payable, net of debt issuance costs of $58 and $88 as of December 31, 2022 and 2021, respectively
79,100
76,732
Accrued interest payable
Other liabilities
2,349
1,704
Total liabilities
84,737
113,454
Members' Equity:
Series A preferred units, 1,000,000 units authorized, 117,100 units issued and outstanding at December 31, 2022 and 2021 (liquidation preference of $100 per unit); See Note 14
11,715
11,715
Class A common units, 1,000,000 units authorized, 146,522 units issued and outstanding at December 31, 2022 and 2021; See Note 14
1,509
1,509
Accumulated earnings
1,402
1,287
Total members' equity
14,626
14,511
Total liabilities and members' equity
$
99,363
$
127,965
The accompanying notes are an integral part of these consolidated financial statements.
Ministry Partners Investment Company, LLC and Subsidiaries
Consolidated Statements of Income
For the years ended December 31, 2022 and 2021
(dollars in thousands)
Interest income:
Interest on loans
$
5,706
$
6,998
Interest on interest-bearing accounts
Total interest income
5,835
7,041
Interest expense:
Other debt
1,007
Notes payable
2,982
2,721
Total interest expense
3,369
3,728
Net interest income
2,466
3,313
Provision (credit) for loan losses
(296)
Net interest income after provision (credit) for loan losses
2,762
3,191
Non-interest income:
Broker-dealer commissions and fees
Other income
Gain on debt extinguishment
2,537
2,398
Total non-interest income
3,592
3,600
Non-interest expenses:
Salaries and benefits
3,504
2,778
Marketing and promotion
Office occupancy
Office operations and other expenses
1,491
1,315
Foreclosed assets, net
Legal and accounting
Total non-interest expenses
5,707
4,921
Income before provision for income taxes and state LLC fees
1,870
Provision for income taxes and state LLC fees
Net income
$
$
1,850
The accompanying notes are an integral part of these consolidated financial statements.
Ministry Partners Investment Company, LLC and Subsidiaries
Consolidated Statements of Equity
For the years ended December 31, 2022 and 2021
(dollars in thousands)
Series A Preferred Units
Class A Common Units
Number of
Units
Amount
Number of
Units
Amount
Accumulated
Deficit
Total
Balance, December 31, 2020
117,100
$
11,715
146,522
$
1,509
$
(316)
$
12,908
Net income
-
-
-
-
1,850
1,850
Dividends on preferred units
-
-
-
-
(247)
(247)
Balance, December 31, 2021
117,100
$
11,715
146,522
$
1,509
$
1,287
$
14,511
Net income
-
-
-
-
Dividends on preferred units
-
-
-
-
(512)
(512)
Balance, December 31, 2022
117,100
$
11,715
146,522
$
1,509
$
1,402
$
14,626
The accompanying notes are an integral part of these consolidated financial statements.
Ministry Partners Investment Company, LLC and Subsidiaries
Consolidated Statements of Cash Flows
For the years ended December 31, 2022 and 2021
(dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income
$
$
1,850
Adjustments to reconcile net income to net cash used by operating activities:
Depreciation
Amortization of deferred loan fees, net
(127)
(231)
Amortization of debt issuance costs
Provision (credit) for loan losses
(296)
Accretion of loan discount
(20)
(26)
Gain on sale of loans
(13)
(64)
Gain on sale of foreclosed assets
-
(44)
Gain on debt extinguishment
(2,537)
(2,398)
Gain on other investments
(18)
-
Changes in:
Accrued interest receivable
Other assets
Accrued interest payable
(60)
Other liabilities
(461)
Net cash used by operating activities
(1,440)
(501)
CASH FLOWS FROM INVESTING ACTIVITIES:
Loan purchases
(2,760)
(842)
Loan originations
(4,267)
(14,319)
Loan sales
3,716
14,053
Loan principal collections
15,915
20,104
Purchase of other investments
(1,000)
-
Redemption (purchase) of certificates of deposit
(1,250)
1,761
Sale of foreclosed assets
-
Purchase of property and equipment
(12)
(1)
Net cash provided by investing activities
10,342
20,800
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on term debt
(30,212)
(16,369)
Borrowings, net of repayments on lines of credit
1,000
2,000
Net change in secured borrowings
(10)
Net change in investor notes payable
2,338
Debt issuance costs
(70)
(119)
Dividends paid on preferred units
(533)
(245)
Net cash used by financing activities
(27,487)
(14,123)
Net increase (decrease) in cash and restricted cash
(18,585)
6,176
Cash, cash equivalents, and restricted cash at beginning of period
28,149
21,973
Cash, cash equivalents, and restricted cash at end of period
$
9,564
$
28,149
Supplemental disclosures of cash flow information
Interest paid
$
3,341
$
3,788
Income taxes paid
Leased assets obtained in exchange of new operating lease liabilities
-
Lease liabilities recorded
-
Dividends declared to preferred unit holders
The accompanying notes are an integral part of these consolidated financial statements.
MINISTRY PARTNERS INVESTMENT COMPANY, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Nature of Business and Summary of Significant Accounting Policies
Nature of Business
Throughout these notes to consolidated financial statements, we refer to Ministry Partners Investment Company, LLC and its subsidiaries as “the Company.” The Company was formed in California in 1991. The Company’s primary operations are financing commercial real property secured loans and providing investment services for the benefit of evangelical churches, ministries, and individuals. The Company funds its operations primarily through the sale of debt securities.
The Company’s wholly-owned subsidiaries are:
● Ministry Partners Funding, LLC, a Delaware limited liability company (“MPF”);
● MP Realty Services, Inc., a California corporation (“MP Realty”);
● Ministry Partners Securities, LLC, a Delaware limited liability company (“MP Securities”); and
● Ministry Partners for Christ, Inc., a not-for-profit Delaware corporation (“MPC”).
The Company formed MPF in 2007 and then deactivated the subsidiary on November 30, 2009. In December 2014, the Company reactivated MPF to enable it to serve as collateral agent for loans held as collateral for its Secured Investment Certificates.
The Company formed MP Realty in November 2009, and obtained a license to operate as a corporate real estate broker through the California Department of Real Estate on February 23, 2010. MP Realty has conducted limited operations to date.
The Company formed MP Securities on April 26, 2010 to provide investment and financial planning solutions for individuals, churches, charitable institutions, and faith-based organizations. MP Securities acts as the selling agent for the Company’s public and private placement notes.
The Company formed MPC on December 28, 2018 to be used exclusively for religious and charitable purposes within the meaning of Section 501(c)(3) of the U.S. Internal Revenue Code of 1986 (“IRC”). MPC is a not-for-profit corporation formed and organized under Delaware law. MPC makes charitable grants to Christian educational organizations, and provides accounting, consulting,
and financial expertise to aid evangelical Christian ministries. On August 23, 2019, the Internal Revenue Service granted MPC tax-exempt status as a private foundation under Section 501(c)(3) of the IRC. The MPC Board of Directors approved its first charitable grants during the year ended December 31, 2020.
Principles of Consolidation
The consolidated financial statements include the accounts of Ministry Partners Investment Company, LLC and its wholly-owned subsidiaries. Management eliminates all significant inter-company balances and transactions in consolidation.
Conversion to LLC
Effective December 31, 2008, the Company converted from a corporation organized under California law to a California limited liability company. After this conversation, the separate existence of Ministry Partners Investment Corporation ceased and the entity continued by operation of law under the name Ministry Partners Investment Company, LLC. As an LLC, a group of managers provides oversight of the Company’s affairs. The managers have full, exclusive, and complete discretion, power, and authority to oversee the management of Company affairs. An Operating Agreement governs the Company’s management structure and governance procedures.
Risks and Uncertainties
COVID 19, a global pandemic, adversely impacted the broad economy, affecting most industries, including businesses, schools, hospitality-, and travel-based employers, and disrupted the supply and distribution networks that deliver products to the consuming public. The process of recovery from the pandemic by U.S. churches, ministries, and faith-based organizations that the Company serves could have a material financial impact on the Company. If declining in-person attendance at churches and faith-based organizations continues as churches and ministries adjust to the long-term effects of the pandemic, charitable gifts and contributions made to ministries and churches could be adversely affected.
In accordance with Financial Accounting Standards Board (FASB) and interagency regulatory guidance issued in March 2020, loans that were modified under the terms of our COVID 19 Deferral Assistance Program were not considered troubled debt restructurings to the extent that they met the terms of such guidance under Section 4013 of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). The CARES Act guidance applies to modifications made between March 1, 2020, and the earlier of January 2, 2022, or sixty (60) days after the end of the COVID 19 national emergency, as stipulated by the Consolidated Appropriations Act signed into law on December 31, 2020. The Company has not restructured a loan under the COVID 19 Deferral Assistance Program since the year ended December 31, 2021 and does not expect to use the program in the future.
In addition, Russia’s invasion of Ukraine, increasing inflation, and the disruption of global supply chains are putting strain on the U.S economy and the U.S. consumer. While it is not possible to know the full extent of the long-term impact of COVID 19 or these other current events, the Company is disclosing potentially material factors that could impact our business of which it is aware.
Cash and Cash Equivalents
Cash equivalents include time deposits and all highly liquid debt instruments with original maturities of three months or less. The Company had demand deposits and money market deposit accounts as of December 31, 2022 and December 31, 2021.
The National Credit Union Share Insurance Fund insures a portion of the Company’s cash held at credit unions and the Federal Deposit Insurance Corporation insures a portion of cash held by the Company at other financial institutions. The Company holds cash deposits that may exceed insured limits. Management does not expect to incur losses in these cash accounts.
The Company maintains cash accounts with Royal Bank of Canada Dain Rauscher (“RBC Dain”) as part of its clearing agreement for its securities-related activities, and with the Central Registration Depository (“CRD”) for regulatory purposes in connections with its investment advisory and securities-related business. The Company also maintains cash in an account with America’s Christian Credit Union (“ACCU”) as collateral for its secured borrowings. The Company classifies these accounts as restricted cash on its balance sheet.
Certificates of Deposit
Certificates of deposit include investments in certificates of deposit held at financial institutions that carry original maturities of greater than three months. The Company had $1.3 million in certificates with terms greater than three months as of December 31, 2022. The Company had no certificates of deposit with original maturities of greater than three months at December 31, 2021.
Use of Estimates
The Company’s creation of consolidated financial statements that conform to United States Generally Accepted Accounting Principles ("GAAP") requires management to make estimates and assumptions. 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 during the reporting period. These estimates govern areas such as the allowance for credit losses and the fair value of financial instruments and foreclosed assets. Actual results could differ from these estimates.
Investments in Joint Venture
In 2016, the Company entered into a joint venture agreement to develop and sell property we acquired as part of a Deed in Lieu of Foreclosure agreement reached with one of our borrowers. The joint venture owns a property located in Santa Clarita, California.
The Company accounts for its investment in the joint venture using the equity method of accounting. Under this method, the Company records its proportionate share of the joint venture’s net income or loss in the statement of operations.
On a periodic basis, or whenever events or circumstances arise that would necessitate analysis, management analyzes the Company’s investment in the joint venture for impairment. In this analysis, management compares the carrying value of the investment to the estimated value of the underlying real property. The Company records any impairment charges as a valuation allowance against the value of the asset. Management records these valuation changes as realized gains or losses on investment on the Company’s consolidated statements of operations. The Company determined that the investment in the joint venture was not impaired as of December 31, 2022.
Other Investments
In June 2022, MP Securities purchased two ten-year fixed annuities from insurance companies. These annuities each carry unique features, including guaranteed fixed income components, variable income components, premium bonuses, and potential withdrawal charges. The Company carries these investments at cost and adjusts for guaranteed income when such income is realized. The principal balances of these annuities are guaranteed but are not insured; however, management determined that the annuities were not impaired at December 31, 2022 and does not anticipate losses.
Loans Receivable
The Company reports loans that management has the intent and ability to hold for the foreseeable future at their outstanding unpaid principal balance adjusted for an allowance for loan losses, deferred loan fees and costs, and loan discounts.
Interest Accrual on Loans Receivable
The Company accrues loan interest income daily. Management defers loan origination fees and costs generated in making a loan. The Company amortizes these fees and costs as an adjustment to the related loan yield using the interest method.
Loan discounts can arise from interest accrued and unpaid which the Company adds to loan principal balances when it restructures the loan. The Company does not accrete discounts to income
on impaired loans. However, when management determines that a previously impaired loan is no longer impaired, the Company begins accreting loan discounts to interest income over the term of the restructured loan. For loans purchased from third parties, loan discounts include differences between the purchase price and the recorded principal balance of the loan. The Company accretes these discounts to interest income over the term of the loan using the interest method.
Management considers a loan impaired if it concludes that the collection of principal or interest according to the terms of the loan agreement is doubtful. The Company stops the accrual of interest when management determines the loan is impaired.
For loans that the Company places on non-accrual status, management reverses all uncollected accrued interest against interest income. Management accounts for the interest on these loans on the cash basis or cost-recovery method until the loan qualifies for return to accrual status. It is not until all the principal and interest amounts contractually due are brought current and future payments are reasonably assured that the Company returns a loan to accrual status.
Allowance for Loan Losses
The Company sets aside an allowance for loan losses by charging the provision for loan losses account on the Company’s consolidated statements of income. This charge decreases the Company’s earnings. Management charges off the part of loan balances it believes it will not collect against the allowance. The Company credits subsequent recoveries, if any, to the allowance.
Loan Portfolio Segments and Classes
Management separates the loan portfolio into portfolio segments for purposes of evaluating the allowance for loan losses. A portfolio segment is defined as the level at which the Company develops and documents a systematic method for determining its allowance for loan losses. The Company segments the loan portfolio based on loan types and the underlying risk factors present in each loan type. Management periodically reviews and revises such risk factors, as it considers appropriate.
The Company’s loan portfolio consists of one segment - commercial loans. Management has segregated the loan portfolio into the following portfolio classes:
Loan Class
Class Description
Wholly-Owned First Collateral Position
Wholly-owned loans and the retained portion of loans originated by the Company and sold for which the Company possesses a senior lien on the collateral underlying the loan.
Wholly-Owned Junior Collateral Position
Wholly-owned loans and the retained portion of loans originated by the Company and sold for which the Company possesses a lien on the underlying collateral that is superseded by another lien on the same collateral. This class also contains any loans that are not secured. These loans present higher credit risk than loans for which the Company possesses a senior lien due to the increased risk of loss should the loan default.
Participations First Collateral Position
Participated loans purchased from another financial entity for which the Company possesses a senior lien on the collateral underlying the loan. Loan participations purchased may present higher credit risk than wholly owned loans because disposition and direction of actions regarding the management and collection of the loans must be coordinated and negotiated with the other participants, whose best interests regarding the loan may not align with those of the Company.
Participations Junior Collateral Position
Participated loans purchased from another financial entity for which the Company possesses a lien on the underlying collateral that is superseded by another lien on the same collateral. Loan participations in the junior collateral position loans have higher credit risk than wholly owned loans and participated loans purchased where the Company possesses a senior lien on the collateral. The increased risk is the result of the factors presented above relating to both junior lien positions and participations.
Allowance for Loan Loss Evaluation
Management evaluates the allowance for loan losses on a regular basis. The Company establishes the allowance for loan losses based upon its periodic review of several factors management believes influences the collectability of the loans, including:
● the Company’s loss history;
● the characteristics and volume of the loan portfolio;
● adverse conditions that may affect the borrower’s ability to repay;
● the estimated value of any secured collateral; and
● the current economic conditions.
This evaluation is subjective, as it requires estimates that are subject to significant revision as more information becomes available.
The allowance consists of general and specific components. The general component covers non-classified loans. Management bases the general reserve on the Company’s loss history adjusted for qualitative factors. These qualitative factors are significant factors management considers likely to cause estimated credit losses associated with the Company’s existing portfolio to differ from its historical loss experience. Management adjusts these factors on an on-going basis, some of which include:
● changes in lending policies and procedures, including changes in underwriting standards and collection;
● changes in national, regional, and local economic and industry conditions that affect the collectability of the portfolio, including the effects of the pandemic;
● 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 for collateral-dependent loans; and
● the effect of credit concentrations.
Loans that management has classified as impaired receive a specific reserve. For such loans, an allowance is established when the carrying value of that loan is higher than the amount management expects to collect. Management uses multiple approaches to determine the amount the Company expects to collect. These include the discounted cash flow method, using the loan’s underlying collateral value reduced by expected selling costs, or using the observable market price of the impaired loan.
Impairment Analysis
Impaired loans include non-accrual loans, loans 90 days or more past due and still accruing, and restructured loans. Non-accrual loans are loans on which management has discontinued interest accruals. Restructured loans are loans in which the Company has granted the borrower a concession due to financial distress. Concessions are usually a reduction of the interest rate or a change in the original repayment terms.
The Company monitors impaired loans on an ongoing basis as part of management’s loan review and work out process. All loans in the loan portfolio are subject to impairment analysis. The Company reviews its loan portfolio monthly by examining several data points. These include
reviewing delinquency reports, any new information related to the financial condition of its borrowers, and any new appraisal or other collateral valuation. Through this process, the Company identifies potential impaired loans. Management generally deems a loan is impaired when current facts and circumstances indicate that it is probable a borrower will be unable to make payments according to the loan agreement. If management has not already deemed a loan impaired, it will classify the loan as non-accrual when it becomes 90 days or more past due.
Management considers several factors when determining impairment status. These factors include the loan’s payment status, the value of any secured collateral, and the probability of collecting scheduled payments when due. Management generally does not classify loans that experience minor payment delays or shortfalls as impaired. Management determines the significance of payment delays or shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower. These circumstances include the length and reasons for the delay, the borrower’s payment history, and the amount of the shortfall in relation to the principal and interest owed.
Management measures impairment on a loan-by-loan basis using one of three methods:
● the present value of expected future cash flows discounted at the loan’s effective interest rate;
● the obtainable market price; or
● the fair value of the collateral if the loan is collateral-dependent.
Troubled Debt Restructurings
A troubled debt restructuring is a loan for which the Company, for reasons related to a borrower’s financial difficulties, grants a concession to a borrower that the Company would not otherwise consider. A restructuring of a loan usually involves an interest rate modification, extension of the maturity date, payment reduction, or reduction of accrued interest owed on the loan on a contingent or absolute basis.
Management considers loans that it renews at below-market terms to be troubled debt restructurings if the below-market terms represent a concession due to the borrower’s troubled financial condition. The Company classifies troubled debt restructurings as impaired loans. For the loans that are not considered to be collateral-dependent, management measures troubled debt restructurings at the present value of estimated future cash flows using the loan’s effective rate at start of the loan. The Company reports the change in the present value of cash flows related to the passage of time as interest income. If the loan is considered to be collateral-dependent, impairment is measured based on the fair value of the collateral.
In accordance with industry standards, the Company classifies a loan as impaired if management has modified it as part of a troubled debt restructuring. However, troubled debt restructures, upon meeting certain performance conditions, are eligible to receive non-classified loan ratings (pass or watch) and to be moved out of non-accrual status. These loans continue to be included in total impaired loans but not necessarily in non-accrual or collateral-dependent loans.
The “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus” was issued by banking regulators on March 22, 2020. This guidance encourages financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations due to the effects of COVID-19.
Additionally, Section 4013 of the CARES Act further provided that loans modified due to the impact of COVID-19 that would otherwise be classified as TDRs under GAAP are not required to be so classified. Modifications within the scope of this relief were in effect from the period beginning March 1, 2020 until January 1, 2022.
In accordance with this guidance, we offered modifications to borrowers who were both impacted by COVID-19 and current on all principal and interest payments. As of December 31, 2022, the Company had no loans classified as non-TDR loan modifications due to COVID-19.
Loan Charge-offs
Management charges off loans or portions thereof when it determines the loans or portions of the loans are uncollectible. The Company evaluates collectability periodically on all loans classified as “Loans of Lesser Quality.” Key factors management uses in assessing a loan’s collectability are the financial condition of the borrower, the value of any secured collateral, and the terms of any workout agreement between the Company and the borrower. In workout situations, the Company charges off the amount deemed uncollectible due to the terms of the workout, the inability of the borrower to make agreed upon payments, and the value of the collateral securing the loan.
Credit Quality Indicators
The Company has established a loan grading system to assist its management in analyzing and monitoring the loan portfolio. The Company classifies loans it considers lesser quality (“classified loans”) as watch, special mention, substandard, doubtful, or loss assets. The loan grading system is as follows:
Pass:
The borrower has sufficient cash to fund debt services. The borrower may be able to obtain similar financing from other lenders with comparable terms. The risk of default is considered low.
Watch:
These loans exhibit potential or developing weaknesses that deserve extra attention from credit management personnel. If the developing weakness is not corrected or mitigated, there may be deterioration in the ability of the borrower to repay the debt in the future. Loans graded Watch must be reported to executive management and the Board of Managers. Potential for loss under adverse circumstances is elevated, but not foreseeable. Watch loans are considered pass loans.
Special mention:
These credit facilities exhibit potential or actual weaknesses that present a higher potential for loss under adverse circumstances, and deserve management’s close attention. If uncorrected, these weaknesses may result in deterioration of the repayment prospects for the loan at some future date.
Substandard:
Loans and other credit extensions bearing this grade are considered to be inadequately protected by the current sound worth and debt service capacity of the borrower or of any pledged collateral. These obligations, even if apparently protected by collateral value, have well-defined weaknesses related to adverse financial, managerial, economic, ministry, or environmental conditions which have clearly jeopardized repayment of principal and interest as originally intended. Furthermore, there is the possibility that some future loss will be sustained if such weaknesses are not corrected.
Doubtful:
This classification consists of loans that display the properties of substandard loans with the added characteristic that the severity of the weaknesses makes collection or liquidation in full highly questionable or improbable based upon currently existing facts, conditions, and values. The probability of some loss is very high, but because of certain important and reasonably specific factors, the amount of loss cannot be exactly determined. Such pending factors could include merger or liquidation, additional capital injection, refinancing plans, or perfection of liens on additional collateral.
Loss:
Loans in this classification are considered uncollectible and cannot be justified as a viable asset. This classification does not mean the loan has absolutely no recovery value, but that it is neither practical nor desirable to defer writing off this loan even though partial recovery may be obtained in the future.
Revenue Recognition
The Company recognizes two primary types of revenue: interest income and non-interest income.
Interest Income
The Company’s principal source of revenue is interest income from loans, which is not within the scope of ASU 2014-09, Revenue from Contracts with Customers and all subsequent amendments to the ASU (collectively, "ASC 606"). Refer to the discussion in “Loans Receivable” above to understand the Company’s recognition of interest income.
Non-interest Income
Non-interest income includes revenue from various types of transactions and services provided to customers. Contracts with customers can include multiple services, which are accounted for as separate “performance obligations” if they are determined to be distinct. Our performance obligations to our customers are generally satisfied when we transfer the promised good or service to our customer, either at a point in time or over time. Revenue from a performance obligation transferred at a point in time is recognized at the time that the customer obtains control over the promised good or service. Revenue from our performance obligations satisfied over time are recognized in a manner that depicts our performance in transferring control of the good or service, which is generally measured based on time elapsed, as our customers simultaneously receive and consume the benefit of our services as they are provided.
Payment for the majority of our services is considered to be variable consideration, as the amount of revenues we expect to receive is subject to factors outside of our control, including market conditions. Variable consideration is only included in revenue when amounts are not subject to significant reversal, which is generally when uncertainty around the amount of revenue to be received is resolved.
Wealth advisory fees
Generally, management recognizes wealth advisory fees over time as the Company renders services to its clients. The Company receives these fees either based on a percentage of the market value of the assets under management, or as a fixed fee based on the services the Company provides to the client. The Company’s delivery of these services represents its related performance obligations. The Company typically collects the wealth advisory fees at the beginning of each quarter from the client’s account. Management recognizes these fees ratably over the related billing period as the Company fulfills its performance obligation. In addition, management recognizes any commissions or referral fees paid related to this revenue ratably over the related billing period as the Company fulfills its performance obligation.
Investment brokerage fees
Investment brokerage fees arise from the selling, distribution, and trade execution services. The Company’s execution of these services fulfills its related performance obligations.
The Company also offers sales and distribution services, and earns commissions through the sale of annuity and mutual fund products. The Company acts as an agent in these transactions and recognizes revenue at a point in time when the customer executes a contract with a product carrier. The Company may also receive trailing commissions and 12b-1 fees related to mutual fund and annuity products. Management recognizes this revenue in the period when it is earned, estimating the revenue if necessary based on the balance of the investment and the commission rate on the product.
The Company earns and recognizes trade execution commissions on the trade date, which is when the Company fulfills its performance obligation. Payment for the trade execution is due on the settlement date.
Lending fees
Lending fees represent charges earned for services we provide as part of the lending process, such as late charges, servicing fees, and documentation fees. The Company recognizes late charges as earned when they are paid. The Company recognizes revenue on other lending fees in the period in which the Company has performed the service.
Gains on sales of loans receivable
From time to time, the Company sells participation interests in loans receivable that it services. Upon completion of the loan sale, the Company recognizes a gain based on certain factors including the maturity date of the loan, the percentage of the loan sold and retained, and the servicing rate charged to the participant on the sold portion.
Gains on debt extinguishment
Gains on debt extinguishment arise from agreements reached with the Company’s lenders to reduce the principal amount on outstanding debt. The amount of the gain is determined by the difference between the cash paid and the amount of principal and interest that is relieved as stipulated by the agreement.
Gains/losses on sales of foreclosed assets
The Company records a gain or loss from the sale of foreclosed assets when control of the property transfers to the buyer, which generally occurs at the time of an executed deed. When the Company
finances the sale of a foreclosed asset to the buyer, the Company assesses whether the buyer is committed to perform their obligation under the contract and whether collectability of the transaction price is probable, among other factors. Once these criteria are met, the foreclosed asset is derecognized and the gain or loss on sale is recorded upon the transfer of control of the property to the buyer. In determining the gain or loss on the sale, the Company adjusts the transaction price and related gain (loss) on sale if a significant financing component is present.
Other non-interest income
Other non-interest income includes fees earned based on service contracts the Company has entered into with credit unions. The Company recognizes the revenue monthly based on the terms of the contracts, which require monthly payments for services the Company performs. Other non-interest income also includes realized income and gains on other investments.
Foreclosed Assets
Management records assets acquired through foreclosure or other proceedings at fair market value less estimated costs of disposal. Management determines the fair value at the date of foreclosure, which establishes a new cost for the asset. After foreclosure, the Company carries the asset at the lower of cost or fair value, less estimated costs of disposal. Management evaluates these real estate assets regularly to ensure that the recorded amount is supported by the current fair value and, if necessary, ensuring that valuation allowances reduce the carrying amount to fair value less estimated costs of disposal. Revenue and expense from the operation of the Company’s foreclosed assets and changes in the valuation allowance are included in net expenses from foreclosed assets. When the Company sells the foreclosed property, it recognizes a gain or loss on the sale equal to the difference between the net sales proceeds received and the carrying amount of the property.
Transfers of Financial Assets
Management accounts for transfers of financial assets as sales when the Company has surrendered control over the asset. Management deems the Company has surrendered control over transferred assets when:
● the assets have been isolated from the Company;
● the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred asset; and
● the Company does not maintain effective control over the transferred asset through an agreement to repurchase it before its maturity.
The Company, from time to time, sells participation interests in mortgage loans it has originated or acquired. In order to recognize the transfer of a portion of a financial asset as a sale, the transferred portion, and any portion that continues to be held by the transferor must represent a participating interest, and the transfer of the participating interest must meet the conditions for surrender of control. To qualify as a participating interest:
● each portion of a financial asset must represent a proportionate ownership interest in an entire financial asset;
● from the date of transfer, all cash flows received from the entire financial asset must be divided proportionately among the participating interest holders in an amount equal to their respective share of ownership;
● the transfer must be made on a non-recourse basis (other than standard representations and warranties made under the loan participation sale agreement);
● the transfer may not be subordinate to any other participating interest holder; and
● no party has the right to pledge or exchange the entire financial asset.
If the transaction does not meet either the participating interest or surrender of control criteria, management accounts for it as a secured borrowing arrangement.
Under some circumstances, when the Company sells a participation in a wholly-owned loan receivable that it services, it retains loan-servicing rights, and records a servicing asset that is initially measured at fair value. As quoted market prices are generally not available for these assets, the Company estimates fair value based on the present value of future expected cash flows associated with the loan receivable. The Company amortizes servicing assets over the life of the associated receivable using the interest method. Any gain or loss recognized on the sale of a loan receivable depends in part on both the previous carrying amount of the financial asset involved in the sale, allocated between the asset sold and the interest that continues to be held by the Company based on its relative fair value at the date of transfer, and the proceeds received.
Property and Equipment
The Company states its furniture, fixtures, equipment, and leasehold improvements at cost, less accumulated depreciation and amortization. Management computes depreciation on a straight-line basis over the estimated useful lives of the assets. The useful lives of the Company’s assets range from three to seven years.
Debt Issuance Costs
The Company’s debt consists of borrowings from financial institutions and obligations to investors incurred through the sale of investor notes. Management presents debt net of debt issuance costs, and amortizes debt issuance costs into interest expense over the contractual terms of the debt using the straight-line method.
Employee Benefit Plans
The Company records contributions to the qualified employee retirement plan as compensation cost in the period incurred. The Company has also entered into a Supplemental Executive Retirement Plan (the “SERP”) with its President and Chief Executive Officer, Joseph W. Turner, Jr. The Company records expenses related to the SERP based on the likelihood of the benefits vesting.
Leases
We recognize right-of-use (“ROU”) assets and lease liabilities on the balance sheet for leases with lease terms longer than 12 months. The recognition, measurement and presentation of lease expenses and cash flows depend on the classification by the lessee as a finance or operating lease.
The Company has operating leases for real estate. Its leases have remaining lease terms of 3 months to 2 years. Its lease agreements may include renewal or termination options for varying periods that are generally at our discretion. In lease term, the Company only includes those periods related to renewal options we are reasonably certain to exercise. However, the Company generally does not include these renewal options as it is not reasonably certain to renew at the lease commencement date. This determination is based on management’s consideration of certain economic, strategic, and other factors that are evaluated at lease commencement date and reevaluate throughout the lease term. Some leases also include options to terminate the leases and the Company only includes those periods beyond the termination date if management is reasonably certain not to exercise the termination option.
Some leasing arrangements require variable payments that are dependent on usage or may vary for other reasons, such as payments for insurance and tax payments. The variable part of lease payments is not included in our ROU assets or lease liabilities. Rather, variable payments, other than those dependent upon an index or rate, are expensed when the obligation for those payments is incurred and are included in lease expenses recorded in selling and administrative expenses on the Consolidated Statements of Operations.
If any of the lease agreements have both lease and non-lease components, the Company treats those as a single lease component for all underlying asset classes. Accordingly, all expenses associated with a lease contract are accounted for as lease expenses.
Leases with a term of 12 months or less are not recognized on the balance sheet, but rather expensed on a straight-line basis over the lease term.
Income Taxes
The Company has elected to be treated as a partnership for income tax purposes. Therefore, the Company passes through its income and expenses to its members for tax reporting purposes.
Tesoro Hills, LLC, is a joint venture in which the Company has an investment. Tesoro Hills, according to its operating agreement, has elected to be treated as a partnership for income tax purposes.
The Company and MP Securities are subject to a California LLC fee.
The Company uses a recognition threshold and a measurement attribute for the consolidated financial statement recognition and measurement of a tax position taken in a tax return. The Company recognizes benefits from tax positions in the consolidated financial statements only when it is more likely than not that the tax position will be sustained upon examination by the appropriate taxing authority that would have full knowledge of all relevant information. A tax position that meets the more-likely-than-not recognition threshold is measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. Tax positions that previously failed to meet the more-likely-than-not recognition threshold are recognized in the first subsequent financial reporting period in which that threshold is met. Management derecognizes previously recognized tax positions that no longer meet the more-likely-than-not recognition threshold in the first subsequent financial reporting period in which that threshold is no longer met.
New accounting guidance
Accounting Standards Pending Adoption
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” ASU 2016-13 introduces an approach based on expected losses to estimate credit losses on certain types of financial instruments. ASU 2016-13 also modifies the impairment model for available-for-sale debt securities and provides for a simplified accounting model for purchased financial assets with credit deterioration since their origination. The guidance requires companies to apply the requirements in the year of adoption through cumulative adjustment with some aspects of the update requiring a prospective transition approach.
In October 2019, the FASB adopted a two-bucket approach to stagger the effective date for the credit losses standard for the fiscal years beginning after December 31, 2022 for certain entities,
including certain Securities and Exchange Commission filers, public business entities, and private companies. As a smaller reporting company, the Company is eligible for delayed implementation of the standard. The Company’s preliminary evaluation indicates the provisions of ASU No. 2016-13 are expected to affect the level of the allowance for loan losses on the Company’s consolidated financial statements. Management has gathered all necessary data and reviewed potential methods to calculate the expected credit losses. The Company will use a third-party software solution to assist with the adoption of the standard.
The ASU allows for several different methods of calculating the Allowance for Credit Losses (“ACL”) and based on its analysis of observable data, the Company determined the probability of default method to be the most appropriate for all its loans.
The Company expects to record a one-time cumulative effect adjustment to the allowance for credit losses in retained earnings on the consolidated balance sheet as of the beginning of 2023, as is required in the guidance. The Company believes there will be an adjustment to the allowance of up to $300 thousand. In addition, the Company expects the allowance for unfunded commitments to be immaterial.
The qualitative impact of the new accounting standard will still be directed by many of the same factors that impacted the previous methodology for calculating the allowance, including but not limited to, quality and experience of staff, changes in the value of collateral, concentrations of credit in loan types and changes to lending policies. In addition, the Company will also use reasonable and supportable forecasts.
The actual impact from adopting this guidance may be subject to change based upon refinement and finalization of the model and associated assumptions, the implementation and testing of certain internal controls ensuring model effectiveness and management’s judgment.
In March 2022, the FASB issued ASU 2022-02, Financial Instruments-Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. This ASU eliminates the accounting guidance for troubled debt restructurings (TDRs) by creditors in Subtopic 310-40, Receivables - Troubled Debt Restructurings by Creditors, while adding disclosures for certain loan restructurings by creditors when a borrower is experiencing financial difficulty. This guidance requires an entity to determine whether the modification results in a new loan or a continuation of an existing loan. Additionally, the ASU requires disclosure of current period gross write-offs by year of origination for financing receivables. This ASU is effective for the Company for fiscal years beginning after December 15, 2022. The Company adopted this guidance on January 1, 2023 and it did not have a material impact on the condensed consolidated financial statements.
Note 2. Pledged Cash and Restricted Cash
Under the terms of its debt agreements, the Company has the ability to pledge cash as collateral for its borrowings. At December 31, 2022 and December 31, 2021, the Company did not pledge cash for its term-debt or lines of credit. At December 31, 2022 and December 31, 2021, the Company had $7 thousand and $17 thousand, respectively, in cash pledged as collateral for its secured borrowings. See Note 3: Related Party Transactions for additional details. This amount is included in restricted cash in the table below.
The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the statement of financial position to the amounts reported in the statements of cash flows (dollars in thousands):
December 31,
Cash and cash equivalents
$
9,504
$
28,080
Restricted cash
Total cash, cash equivalents, and restricted cash shown in the statements of cash flows
$
9,564
$
28,149
Other amounts included in restricted cash represent those required to be set aside with the Central Registration Depository (“CRD”) account with FINRA, as well as funds the Company has deposited with RBC Dain as clearing deposits. The Company may only use the CRD funds for certain fees charged by FINRA. These fees are paid to maintain the membership status of the Company or are related to the licensing of registered and associated persons of the Company.
Note 3. Related Party Transactions
Transactions with Equity Owners
Transactions with AdelFi Credit Union (“AdelFi”)
The tables below summarize transactions the Company conducts with AdelFi (formerly Evangelical Christian Credit Union), the Company’s largest equity owner.
Related party balances pertaining to the assets of the Company (dollars in thousands):
December 31,
December 31,
Total funds held on deposit at AdelFi
$
$
3,797
Loan participations purchased from and serviced by AdelFi
Related party transactions of the Company (dollars in thousands):
Years ended
December 31,
Interest earned on funds held with AdelFi
$
$
Interest income earned on loans purchased from AdelFi
Fees paid to AdelFi from MP Securities Networking Agreement
Income from Successor Servicing Agreement with AdelFi
-
Rent expense on lease agreement with AdelFi
Loan participation interests purchased:
In the past, the Company purchased loan participation interests from AdelFi. Management negotiated the pass-through interest rates on these loans on a loan-by-loan basis. Management believes these negotiated terms were equivalent to those that would prevail in an arm’s length transaction. The Company did not purchase any loans from AdelFi during the years ended December 31, 2022 and 2021.
Loans sold:
From time to time, the Company may sell loans to AdelFi. The Company sold no loans to AdelFi during the years ended December 31, 2022 and 2021.
Lease and Services Agreement:
The Company leases its corporate offices and purchases other facility-related services from AdelFi pursuant to a written lease and services agreement. Management believes these terms are equivalent to those that prevail in arm’s length transactions.
MP Securities Networking Agreement with AdelFi:
MP Securities, the Company’s wholly-owned subsidiary, has entered into a Networking Agreement with AdelFi pursuant to which MP Securities agreed to offer investment and insurance products and services to AdelFi’s members that:
(1) AdelFi or its Board of Directors has approved;
(2) comply with applicable investor suitability standards required by federal and state securities laws and regulations;
(3) are offered in accordance with National Credit Union Administration (“NCUA”) rules and regulations; and
(4) comply with its membership agreement with Financial Industry Regulation Authority (“FINRA”).
The agreement entitles MP Securities to pay AdelFi a percentage of total revenue received by MP Securities from transactions conducted for or on behalf of AdelFi members. Either AdelFi or MP Securities may terminate the Networking Agreement without cause upon thirty days prior written notice.
Successor Servicing Agreement with AdelFi:
On October 5, 2016, the Company entered into a Successor Servicing Agreement with AdelFi. This agreement obligates the Company to serve as the successor loan servicing agent for certain mortgage loans designated by AdelFi. The Company will service these loans in the event AdelFi requests that the Company assume its obligation to act as the servicing agent for those loans. The original Agreement terminated in October 2019 and has converted to a month-to-month agreement. The agreement was terminated at the request of AdelFi in January 2022.
Transactions with America’s Christian Credit Union (“ACCU”)
The Company has several related party agreements with ACCU, one of the Company’s equity owners. The following describes the nature and dollar amounts of the material related party transactions with ACCU.
Related party balances pertaining to the assets of the Company (dollars in thousands):
December 31,
December 31,
Total funds held on deposit at ACCU
$
$
4,083
Dollar amount of outstanding loan participations sold to ACCU and serviced by the Company
1,830
Amount owed on ACCU secured borrowings
Amount owed on ACCU line of credit
3,000
2,000
Loans pledged on ACCU line of credit
6,823
6,768
Related party transactions of the Company (dollars in thousands):
Years ended
December 31,
Interest earned on funds held with ACCU
$
$
Loans sold to ACCU
-
1,000
Dollar amount of secured borrowings made from ACCU
Dollar amount of draws on ACCU line of credit
3,000
2,000
Interest expense on ACCU borrowings
Income from broker services provided to ACCU by MPS
Fees paid based on MP Securities Networking Agreement with ACCU
Loan participation interests purchased:
The Company negotiates pass-through interest rates on loan participation interests purchased from ACCU on a loan-by-loan basis. Management believes these terms are equivalent to those that prevail in arm’s length transactions. The Company did not purchase any loans from ACCU during the years ended December 31, 2022 and 2021.
Loan participation interests sold:
From time to time, the Company sells loan participation interests in loans it originates and services to ACCU. The Company negotiates pass-through interest rates on loan participation interests sold to ACCU on a loan-by-loan basis. Management believes these terms are equivalent to those that prevail in arm’s length transactions.
Effective August 9, 2021, the Company entered into a Master Loan Participation Purchase and Sale Agreement (“the Master LP Agreement”) with ACCU. The Master LP Agreement is intended to facilitate the sale to ACCU of small participation interests in the Company’s originated loans. As a part of any transaction conducted under the Master LP Agreement, the borrower of the loan being sold would become a member of ACCU, thereby meeting the requirements of NCUA regulations that govern loan participation purchases by credit unions. This allows the Company to sell additional participations in the loan to other credit unions.
Sales made under the Master LP Agreement are done on a recourse basis, requiring the Company to repurchase the participation interest in the event of default by the borrower. Under a separate Deposit Control Agreement reached in conjunction with the Master LP Agreement, the Company deposits cash on a one-to-one basis as collateral to secure the participation interest sold to ACCU. This cash is considered restricted cash. The Company retains the ability to sell loan participation interests to ACCU outside of the Master LP Agreement.
As of December 31, 2022 and December 31, 2021, respectively, $7 thousand and $17 thousand had been sold and was outstanding under this agreement. This has been classified on the balance sheet as secured borrowings. The Company has deposited equal amounts of cash in an account at ACCU as collateral for these borrowings. These funds are considered restricted cash.
MP Securities networking agreement with ACCU:
MP Securities has entered into a Networking Agreement with ACCU pursuant to which MP Securities has agreed to offer investment and insurance products and services to ACCU’s members that:
(1) ACCU or its Board of Directors has approved;
(2) comply with applicable investor suitability standards required by federal and state securities laws and regulations;
(3) are offered in accordance with NCUA rules and regulations; and
(4) comply with its membership agreement with FINRA.
The agreement entitles MP Securities to pay ACCU a percentage of total revenue received by MP Securities from transactions conducted for or on behalf of ACCU members. Either ACCU or MP Securities may terminate the Networking Agreement without cause upon thirty days prior written notice.
Line of Credit:
On September 23, 2021, the Company entered into a Loan and Security Agreement with ACCU. The ACCU line of credit (“ACCU LOC”) is a $5.0 million short-term demand facility with a maturity date of September 23, 2023. See Note 10: Credit Facilities and Other Debt for additional terms and conditions. Management believes these terms are equivalent to those that prevail in arm’s length transactions. As of December 31, 2022 and December 31, 2021, respectively, there were $3.0 million and $2.0 million in borrowings outstanding on the ACCU line of credit.
Transactions with Kane County Teachers Credit Union (“KCT”)
Our Board Chairperson, R. Michael Lee, serves as the Chief Executive Officer and President of KCT. The following describes the nature and dollar amounts of the material related party transactions with KCTCU.
Related party balances pertaining to the assets of the Company (dollars in thousands):
December 31,
December 31,
Total funds held on deposit at KCT
$
1,261
$
1,018
Loans pledged on KCT line of credit
10,962
8,492
Outstanding loan participations sold to KCT and serviced by the Company
3,455
4,598
Related party transactions of the Company (dollars in thousands):
Years ended
December 31,
Interest earned on funds held with KCT
$
$
Loans sold to KCT
2,847
Dollar amount of draws on KCT line of credit
2,000
3,825
Interest expense on KCT line of credit
Fees paid based on MP Securities Networking Agreement with KCT
Funds on deposit with KCT:
On January 13, 2020, the Company purchased $1.0 million of certificates of deposit from KCT. The certificates matured on October 13, 2021, and the funds were transferred to a savings account at KCT. On September 29, 2022, the Company purchased a $1.3 million certificate of deposit from KCT. The certificate matures on June 6, 2023 and carries an interest rate of 3.25%. This certificate is pledged as a compensating balance deposit on one of the lines of credit the Company holds with KCT.
Line of Credit:
On June 6, 2022, the Company terminated the existing $7.0 million Loan and Security Agreement with KCT Credit Union, an Illinois state chartered financial institution. It replaced this agreement with two short-term demand credit facilities, a $5.0 million warehouse line of credit (“KCT Warehouse LOC”) and a $5.0 million operating line of credit (“KCT Operating LOC”). See “Note 10: Credit Facilities and Other Debt” for additional terms and conditions of these credit facilities. Management believes these terms are equivalent to those that prevail in arm’s length transactions. As of and December 31, 2022 and December 31, 2021, there was no outstanding balance on either of the lines of credit with KCT.
MP Securities Networking Agreement:
MP Securities, the Company’s wholly-owned subsidiary, has entered into a Networking Agreement with KCT pursuant to which MP Securities agreed to offer investment and insurance products and services to KCT’s members that:
(1) KCT or its Board of Directors has approved;
(2) comply with applicable investor suitability standards required by federal and state securities laws and regulations;
(3) are offered in accordance with National Credit Union Administration (“NCUA”) rules and regulations; and
(4) comply with its membership agreement with FINRA.
The agreement entitles MP Securities to pay KCT a percentage of total revenue received by MP Securities from transactions conducted for or on behalf of KCT members. Either KCT or MP Securities may terminate the Networking Agreement without cause upon thirty days prior written notice.
Loan Participation Interests Sold:
Occasionally the Company sells loan participation interests to KCT in the normal course of business. The Company retains the right to service these participation loans sold to KCT, and it charges KCT a customary fee for servicing the loan. As of December 31, 2022 and December 31, 2021, respectively, the Company serviced $3.5 million and $4.6 million in loan participations that it has sold to KCT.
Transactions with Other Equity Owners
From time to time the Company will engage in transactions with other owners or related parties. Related party balances pertaining to the assets of the Company are as follows (dollars in thousands):
December 31,
December 31,
Outstanding loan participations sold to UFCU and serviced by the Company
$
-
$
4,275
Outstanding loan participations sold to NFCU and serviced by the Company
4,872
4,991
Outstanding notes payable to officers and managers
2,266
Loan Participations Sold:
The Company had a Loan Participation Agreement with UNIFY Financial Credit Union (“UFCU”), an owner of both the Company’s Class A Common Units and Series A Preferred Units. Under this agreement, the Company sold UFCU a $5.0 million loan participation interest in one of its mortgage loan interests on August 14, 2013. As part of this agreement, the Company retained the right to service the loan, and it charged UFCU a fee for servicing the loan. The loan related to this agreement paid off in 2022.
The Company has also entered into a Loan Participation Agreement with Navy Federal Credit Union (“NFCU”), an owner of both the Company’s Class A Common Units and Series A Preferred Units. Under this agreement, the Company sold NFCU a $5.0 million loan participation interest in one of its construction loans on March 20, 2020. As part of this agreement, the Company retained the right to service the loan, and it charges NFCU a fee for servicing the loan. Management believes the terms of the agreement are equivalent to those that prevail in arm’s length transactions for similar agreements entered into by other credit unions.
From time to time, the Company may purchase a loan participation interest from a related party. The Company and its related party will negotiate in good faith the terms and conditions of such a purchase and in accordance with the Company’s related party procedures and governance practices. Each party must approve such a purchase after full disclosure of the related party transaction and must include terms and conditions that would normally be included in arm’s length transactions conducted by independent parties.
Investor Notes Sold:
From time to time, the Company’s Board and members of its executive management team have purchased investor notes from the Company or have purchased investment products through MP Securities. Investor notes payable owned by related parties totaled $2.3 million and $261 thousand at December 31, 2022 and December 31, 2021.
Transactions with Subsidiaries
The Company has entered into several agreements with its subsidiary, MP Securities. The Company eliminates the income and expense related to these agreements in the consolidated financial statements. MP Securities serves as the managing broker for the Company’s public and private placement note offerings. MP Securities receives compensation related to these broker-dealer services ranging from 0.25% to 5.50% over the life of a note. The amount of the compensation depends on the length of the note and the terms of the offering under which MP Securities sold the note.
The Company also has entered into an Administrative Services Agreement with MP Securities. The Administrative Services Agreement provides services such as the use of office space, use of equipment, including computers and phones, and payroll and personnel services. The agreement stipulates that MP Securities will provide ministerial, compliance, marketing, operational, and investor relations-related services in relation to the Company’s investor note program. As stated above, the Company eliminates all intercompany transactions related to this agreement in its consolidated financial statements.
The Company’s subsidiary, MPF, serves as the collateral agent for the Company’s Secured Notes. The Company’s Prospectus for its Class 1A Notes and the private placement memorandum for the Company’s Secured Notes Offering describe the terms of these agreements.
Related Party Transaction Policy
The Board has adopted a Related Party Transaction Policy to assist in evaluating transactions the Company may enter into with a related party. Under this policy, a majority of the members of the Company’s Board and majority of its independent Board members must approve a material transaction that it enters into with a related party. As a result, all transactions that the Company undertakes with an affiliate or a related party are entered into on terms believed by management to be no less favorable than are available from unaffiliated third parties. In addition, a majority of the Company’s independent Board members must approve these transactions.
Note 4. Loans Receivable and Allowance for Loan Losses
The Company’s loan portfolio is comprised of one segment - commercial loans. See “Note 1 - Loan Portfolio Segments and Classes” to the Financial Statements. The loans fall into four classes:
● wholly-owned loans for which the Company possesses the first collateral position;
● wholly-owned loans that are either unsecured or for which the Company possesses a junior collateral position;
● participated loans purchased for which the Company possesses the first collateral position; and
● participated loans purchased for which the Company possesses a junior collateral position.
The Company primarily makes or purchases participations in loans that are made to evangelical churches and related organizations. The purpose of these loans is to purchase, construct, or improve facilities. Occasionally the company purchases conventional commercial loans to meet the Company’s liquidity and yield goals as well as to diversify the Company’s loan portfolio. Loan maturities extend through 2037. The loan portfolio had a weighted average rate of 6.46% and 6.21% as of December 31, 2022 and December 31, 2021, respectively. Loans receivable at December 31, 2022 and December 31, 2021, respectively include $7 thousand and $17 thousand in loan participations transferred under a recourse agreement.
The table below is a summary of the Company’s mortgage loans owned (dollars in thousands):
December 31,
December 31,
Commercial loans:
Real estate secured
$
86,718
$
98,858
Other secured
Unsecured
Total loans
87,042
99,405
Deferred loan fees, net
(208)
(304)
Loan discount
(207)
(220)
Allowance for loan losses
(1,551)
(1,638)
Loans, net
$
85,076
$
97,243
Allowance for Loan Losses
Management believes it has properly calculated the allowance for loan losses as of December 31, 2022 and December 31, 2021. The following table shows the changes in the allowance for loan losses for the years ended years ended December 31, 2022 and 2021 (dollars in thousands):
December 31,
December 31,
Balance, beginning of period
$
1,638
$
1,516
Provision (credit) for loan loss
(296)
Chargeoffs
-
-
Recoveries
-
Balance, end of period
$
1,551
$
1,638
The table below presents loans by portfolio segment (commercial loans) and the related allowance for loan losses. In addition, the table segregates loans and the allowance for loan losses by impairment methodology (dollars in thousands):
Loans and Allowance for Loan Losses (by segment)
As of
December 31,
December 31,
Loans:
Individually evaluated for impairment
$
5,933
$
9,688
Collectively evaluated for impairment
81,109
89,717
Balance
$
87,042
$
99,405
Allowance for loan losses:
Individually evaluated for impairment
$
$
Collectively evaluated for impairment
1,348
Balance
$
1,551
$
1,638
The Company has established a loan grading system to assist management in their analysis and supervision of the loan portfolio. The following tables summarize the credit quality indicators by loan class (dollars in thousands):
Credit Quality Indicators (by class)
As of December 31, 2022
Wholly-Owned First
Wholly-Owned Junior
Participation First
Participation Junior
Total
Grade:
Pass
$
46,155
$
1,742
$
1,035
$
-
$
48,932
Watch
32,080
-
32,177
Special mention
-
-
-
-
-
Substandard
3,840
1,590
-
-
5,430
Doubtful
-
-
-
Loss
-
-
-
-
-
Total
$
82,578
$
3,361
$
1,103
$
-
$
87,042
Credit Quality Indicators (by class)
As of December 31, 2021
Wholly-Owned First
Wholly-Owned Junior
Participation First
Participation Junior
Total
Grade:
Pass
$
67,580
$
2,007
$
$
-
$
69,759
Watch
19,858
-
19,958
Special mention
-
-
-
-
-
Substandard
7,535
1,650
-
-
9,185
Doubtful
-
-
-
Loss
-
-
-
-
-
Total
$
95,476
$
3,687
$
$
-
$
99,405
The following table sets forth certain information with respect to the Company’s loan portfolio delinquencies by loan class and amount (dollars in thousands):
Age Analysis of Past Due Loans (by class)
As of December 31, 2022
30-59 Days Past Due
60-89 Days Past Due
Greater Than 90 Days
Total Past
Due
Current
Total Loans
Recorded
Investment 90
Days or more
and Accruing
Commercial loans:
Wholly-Owned First
$
6,068
$
-
$
1,378
$
7,446
$
75,132
$
82,578
$
-
Wholly-Owned Junior
-
-
-
-
3,361
3,361
-
Participation First
-
-
-
-
1,103
1,103
-
Participation Junior
-
-
-
-
-
-
-
Total
$
6,068
$
-
$
1,378
$
7,446
$
79,596
$
87,042
$
-
Age Analysis of Past Due Loans (by class)
As of December 31, 2021
30-59
Days
Past Due
60-89
Days Past Due
Greater
Than 90
Days
Total Past
Due
Current
Total Loans
Recorded
Investment 90
Days or more
and Accruing
Commercial loans:
Wholly-Owned First
$
-
$
-
$
$
$
94,973
$
95,476
$
-
Wholly-Owned Junior
-
-
-
-
3,687
3,687
-
Participation First
-
-
-
-
-
Participation Junior
-
-
-
-
-
-
-
Total
$
-
$
-
$
$
$
98,902
$
99,405
$
-
Impaired Loans
The following tables are summaries of impaired loans by loan class as of and for the years ended years ended December 31, 2022 and 2021, respectively. The unpaid principal balance reflects the contractual principal outstanding on the loan. Included in the balance of impaired loans are troubled debt restructurings that have been performing and have been upgraded to pass or watch since the modification date. The recorded balance reflects the unpaid principal balance less any interest payments that have been recorded against principal. The recorded investment reflects the recorded balance, plus accrued interest, less discounts taken. The related allowance reflects specific reserves taken on the impaired loans (dollars in thousands):
Impaired Loans (by class)
For the years ended
December 31,
December 31,
Wholly-Owned First
Average Recorded Investment
$
14,644
$
10,772
Interest Income Recognized
1,026
Wholly-Owned Junior
Average Recorded Investment
1,620
1,668
Interest Income Recognized
-
-
Participation First
Average Recorded Investment
-
-
Interest Income Recognized
-
-
Participation Junior
Average Recorded Investment
-
-
Interest Income Recognized
-
-
Total Impaired Loans
Average Recorded Investment
$
16,264
$
11,310
Interest Income Recognized
1,026
Impaired Loans (by class)
As of
As of
December 31,
December 31,
Wholly-Owned First
Recorded Investment with allowance
$
3,008
$
1,371
Recorded Investment with no Allowance
15,569
9,339
Total Recorded Investment
$
18,577
$
10,710
Related Allowance on Impaired Loans with Allowance
Unpaid Principal Balance
$
18,734
$
10,905
Wholly-Owned Junior
Recorded Investment with allowance
$
1,590
$
-
Recorded Investment with no Allowance
-
1,650
Total Recorded Investment
$
1,590
$
1,650
Related Allowance on Impaired Loans with Allowance
-
Unpaid Principal Balance
$
1,685
$
1,685
Participation First
Recorded Investment with allowance
$
-
$
-
Recorded Investment with no Allowance
-
-
Total Recorded Investment
$
-
$
-
Related Allowance on Impaired Loans with Allowance
-
-
Unpaid Principal Balance
$
-
$
-
Participation Junior
Recorded Investment with allowance
$
-
$
-
Recorded Investment with no Allowance
-
-
Total Recorded Investment
$
-
$
-
Related Allowance on Impaired Loans with Allowance
-
-
Unpaid Principal Balance
$
-
$
-
Total Impaired Loans
Recorded Investment with allowance
$
4,598
$
1,371
Recorded Investment with no Allowance
15,569
10,989
Total Recorded Investment
$
20,167
$
12,360
Related Allowance on Impaired Loans with Allowance
Unpaid Principal Balance
$
20,419
$
12,590
A summary of non-accrual loans by loan class is as follows (dollars in thousands):
Loans on Non-accrual Status (by class)
December 31, 2022
December 31, 2021
Commercial loans:
Wholly-Owned First
$
4,342
$
6,162
Wholly-Owned Junior
1,590
1,650
Participation First
-
-
Participation Junior
-
-
Total
$
5,932
$
7,812
Beginning in April, 2020, the Company has taken measures to assist borrowers adversely affected by COVID-19 by deferring principal and/or interest payments. The concessions granted met the qualifications under Section 4013 of the CARES Act, and, as a result, the Company elected not to account for these modifications as troubled debt restructurings. The Company restructured one loan during the year ended December 31, 2021 that qualified as a CARES Act modification and was not accounted for as a troubled debt restructuring. This loan had an outstanding balance of $1.3 million at the time of the modification. The borrower resumed making contractual payment prior to December 31, 2021. As of December 31, 2021, no loans were under CARES Act deferrals. The Company did not restructure any loans that qualified as CARES Act modifications during the year ended December 31, 2022.
The Company restructured four loans during the year ended December 31, 2022. The Company restructured two loans during the year ended December 31, 2021.
A summary of troubled debt restructures by loan class during the years ended December 31, 2022 and 2021 is as follows (dollars in thousands):
Troubled Debt Restructurings (by class)
For the year ended December 31, 2022
Number of
Loans
Pre-
Modification
Outstanding
Recorded
Investment
Post-
Modification
Outstanding
Recorded
Investment
Recorded
Investment At
Period End
Commercial loans:
Wholly-Owned First
$
8,385
$
8,385
$
8,464
Wholly-Owned Junior
-
-
-
-
Participation First
-
-
-
-
Participation Junior
-
-
-
-
Total
$
8,385
$
8,385
$
8,464
Troubled Debt Restructurings (by class)
For the year ended December 31, 2021
Number of
Loans
Pre-
Modification
Outstanding
Recorded
Investment
Post-
Modification
Outstanding
Recorded
Investment
Recorded
Investment At
Period End
Commercial loans:
Wholly-Owned First
$
5,387
$
5,387
$
5,313
Wholly-Owned Junior
-
-
-
-
Participation First
-
-
-
-
Participation Junior
-
-
-
-
Total
$
5,387
$
5,387
$
5,313
Of the four loans the Company restructured in 2022, two were granted extended maturity dates when the borrower’s financial condition could not support a full renewal. One of these loans was a construction loan that still had amounts remaining to be drawn. Two months after the restructure, the borrower met the appropriate conditions, and the Company funded the remainder of the approved amount of the construction draws. The Company then renewed and converted the loan to an amortizing commercial real estate loan. One restructured loan was granted a period of six months of interest-only payments; the borrower had returned to making principal and interest payments prior to December 31, 2022. Finally, the Company reached a forbearance agreement with a borrower to restructure a loan, granting a reduced interest rate and interest-only payments for one year. None of the loans restructured during the year ended December 31, 2022 subsequently defaulted.
The Company had two previously restructured loans that were past maturity as of December 31, 2022. The Company has entered into forbearance agreements with the borrowers and is evaluating what actions it should undertake to protect its investment on these loans. These forbearance agreements include reduced monthly payment amounts and additional reporting requirements.
For loans modified in a troubled debt restructuring, the Company monitors borrower performance according to the terms of the restructure to determine whether there are any early indicators for future default. Management regularly evaluates loans modified in a troubled debt restructuring for potential further impairment and will make adjustments to the risk ratings and specific reserves associated with troubled debt restructurings as deemed necessary.
As of December 31, 2022, no additional funds were committed to be advanced in connection with loans modified as troubled debt restructurings.
Note 5. Investments
Joint Venture
In December 2015, the Company finalized an agreement with Intertex Property Management, Inc., a California corporation, to enter into a joint venture to form Tesoro Hills, LLC (the “Valencia Hills Project”). Intertex is a managing member of the LLC, with authority to direct operations. The Company is a non-managing member with no authority beyond limited rights granted to the Company by the operating agreement. The Valencia Hills Project is a joint venture that will develop and market property formerly classified by the Company as a foreclosed asset. In January 2016, the Company transferred ownership in the foreclosed asset to the Valencia Hills Project. In addition, the Company reclassified the carrying value of the property from foreclosed assets to an investment in a joint venture. The Company’s initial investment in the joint venture was $900 thousand and represented 100% of the ownership of the joint venture. The Company’s ownership percentage in the joint venture was 74% as of December 31, 2022 and 2021.
The value of the Company’s investment in the joint venture was $870 thousand and $882 thousand, as of December 31, 2022 and 2021, respectively. Management’s impairment analysis of the investment as of December 31, 2022 has determined that the investment is not impaired.
Certificates of Deposit
The Company held an investment in a certificate of deposit with an original maturity greater than three months at December 31, 2022.
Details of certificates with original maturities of greater than three months owned by the Company as of December 31, 2022, are as follows (dollars in thousands):
Certificate
Open Date
Certificate Amount
Interest Rate
Maturity Date
CD 1
9/29/2022
$
1,250
3.25%
6/6/2023
The certificate identified above was purchased from KCT and is pledged as a compensating balance under the terms of the KCT Warehouse LOC. See “Note 10: Credit Facilities and Other Debt” for additional terms and conditions of these credit facilities.
The Company owned no certificates of deposit with an original maturity greater than three months at December 31, 2021.
Other Investments
In June 2022, the Company entered into two indexed annuity insurance contracts whereby an insurance company guarantees a fixed rate of return in exchange for holding a deposit from the Company for the contracted period of ten years. The Company recognized $18 thousand in income on these investments during the year ended December 31, 2022.
Additional information related to these investments is as follows (dollars in thousands):
Income for the year ended
Investment Type
Maturity Date
Original Cost
Net Carrying Amount
December 31, 2022
December 31, 2021
Fixed annuity
June 2032
$
1,000
$
1,018
$
$
-
Note 6. Revenue Recognition
The Company recognizes two primary types of revenue: interest income and non-interest income. The following tables reflect the Company’s non-interest income disaggregated by financial statement line item. Items outside of scope of ASC 606 are noted as such (dollars in thousands):
December 31,
Non-interest income, in scope of ASC 606
Broker-dealer fees and commissions
$
$
Gains on loan sales
Gain on sale of foreclosed assets
-
Other investment income
-
Other non-interest income
-
Non-interest income, out of scope, ASC 606
Lending fees
Gain on debt extinguishment
2,537
2,398
Total non-interest income
$
3,592
$
3,600
In accordance with our accounting policies as governed by ASC 606, Revenue from Contracts with Customers, the following table separates revenue from contracts with customers into categories that are based on the nature, amount, timing, and uncertainty of revenue and cash flows associated with each product and distribution channel. Non-interest revenue earned by the Company’s broker-dealer subsidiary, MP Securities, comprises security commissions, sale of investment company shares, insurance product revenue, and advisory fee income. Security commission revenue represents the sale of over-the-counter stock, unit investment trusts, and variable annuities. The revenue earned from the sale of these products is recognized upon satisfaction of performance obligations, which occurs on the trade date and is considered transactional revenue. The Company also earns revenue from the management of invested assets, which is recognized monthly, as earned, based on the average asset value, and is referred to as Assets Under Management revenue (“AUM”).
For the twelve months ended
(dollars in thousands)
December 31,
December 31,
Broker-dealer revenue
Securities commissions
Transactional
$
$
AUM
Total
Sale of investment company shares
Transactional
AUM
Total
Other insurance product revenue
Transactional
AUM
Total
Advisory fee income
Transactional
AUM
Total
Total broker-dealer revenue
Transactional
AUM
Total broker-dealer revenue
$
$
Note 7. Loan Transfers and Servicing
A summary of loan participation sales and servicing assets are as follows (dollars in thousands):
As of and for the years ended
December 31,
December 31,
Participation loans interests sold by the Company during the year
$
3,716
$
14,053
Total participation interests sold and serviced by the Company
34,946
46,056
Servicing income
Servicing Assets
Balance, beginning of period
$
$
Additions:
Servicing obligations from sale of loan participations
Subtractions:
Amortization
(66)
(58)
Balance, end of period
$
$
ACCU Loan Participation Agreement
As detailed in Note 3: Related Party Transactions, effective August 9, 2021, the Company entered into a Master Loan Participation Purchase and Sale Agreement with ACCU. Sales made under the
Master LP Agreement will be done on a recourse basis, requiring the Company to repurchase the participation interest in the event of default by the borrower.
During the year ended years ended December 31, 2022 and 2021, the Company sold loan participations to ACCU under the provisions of the Master LP Agreement that totaled $7 thousand and $17 thousand, respectively. Due to the recourse provisions of the agreement, the participation sales made under the agreement are classified as secured borrowings and are presented separately on the Company’s balance sheet.
Note 8: Foreclosed Assets
The Company’s investment in foreclosed assets consisted of one property that was valued at $301 thousand at December 31, 2022 and 2021. There was no allowance for losses on foreclosed assets at December 31, 2022 and 2021. The Company did not record any loss provisions on foreclosed assets during the years ended December 31, 2022 and 2021.
During the year ended December 31, 2021, the Company sold a residential property it had acquired in a foreclosure action that had previously been completely written off. The Company realized a gain of $44 thousand on this sale.
Expenses applicable to foreclosed assets include the following (dollars in thousands):
Foreclosed Asset Expenses
for the years ended
December 31,
Operating expenses
Total expenses
$
$
Note 9. Premises and Equipment
The tables below summarize our premises and equipment (dollars in thousands):
As of
December 31,
December 31,
Furniture and office equipment
$
$
Computer system
Leasehold improvements
Total premises and equipment
Less accumulated depreciation and amortization
(651)
(607)
Premises and equipment, net
$
$
Depreciation and amortization expense for the years ended December 31,
$
$
Note 10. Credit Facilities and Other Debt
Details of the Company’s debt facilities as of December 31, 2022 are as follows (dollars in thousands):
Nature of
Borrowing
Interest
Rate
Interest Rate
Type
Amount
Outstanding
Monthly
Payment
Maturity
Date
Loan Collateral
Pledged
Cash
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
-
Various
-
Term-Debt Credit Facility
The Company had a secured term-debt credit facility with OSK VII, LLC, an investment fund (“OSK”). The original obligation on this debt was an $87.3 million credit facility refinancing transaction, which was entered into on November 4, 2011, with the National Credit Union Administration Board As Liquidating Agent of Members United Corporate Federal Credit Union. On June 28, 2019, NCUA assigned all its rights, title, and interest under the credit facility to OSK. The facility was non-revolving and did not include an option to renew or extend additional credit. Additionally, the facility does not contain a prepayment penalty. Under the terms of the credit facility, the Company was required to maintain a minimum collateralization ratio of at least 120%. If at any time the Company had failed to maintain its required minimum collateralization ratio, it
would have been required to deliver cash or qualifying mortgage loans in an amount sufficient to meet its obligation to maintain a minimum collateralization ratio. The facility’s interest rate was 2.525%. The collateral securing the facility at December 31, 2021 satisfied the 120% minimum ratio. In addition, the credit facility included several borrower covenants. The Company was in compliance with these covenants as of December 31, 2021. On March 5, 2021, the Company made a $14.3 million principal prepayment on this facility and realized a $2.3 million gain on the extinguishment of debt because of this payment. On January 6, 2022, the Company made a $16.5 million principal prepayment on this facility and realized a $1.5 million gain on the extinguishment of debt. On June 29, 2022, and September 29, 2022, the Company made $3.3 million principal prepayments on this facility and realized $300 thousand gains on the extinguishment of debt on of each of these payments. The Company was in compliance with its covenants under the facility at the time of these payments.
On November 4, 2022, the Company paid off the remaining $5.4 million in outstanding principal on the term-debt credit facility. The term-debt credit facility is now terminated and satisfied in whole. The Company negotiated to settle the remaining $5.4 million in principal outstanding at a discount resulting in a gain on debt extinguishment of $437 thousand.
Paycheck Protection Program Loan
On April 27, 2020, MP Securities applied for and received a Paycheck Protection Program loan (“PPP Loan”) granted under the CARES Act in the amount of $111 thousand. According to the terms of the program, as administered by the Small Business Association (“SBA”), payments on the loan were deferred and deferred interest was capitalized into the principal balance of the loan. In addition, qualifying amounts of the principal balance of the loan and deferred interest were eligible to be forgiven if MP Securities retained employees and maintained salary levels for its existing employees. On March 5, 2021, the SBA forgave all principal and accrued interest due on this loan.
KCT Lines of Credit
On September 30, 2020, Ministry Partners Investment Company, LLC, entered into a Loan and Security Agreement with KCT Credit Union, an Illinois state chartered financial institution. On June 6, 2022, the Company and KCT mutually agreed to terminate this facility and entered into two new facilities. The first facility, the KCT Warehouse LOC, is a $5.0 million short-term demand credit facility with a one-year maturity date ending on June 6, 2023. The KCT Warehouse LOC will automatically renew for another one-year term unless either party furnishes written notice at least 30 days prior to the termination date that it does not intend to renew the agreement. The Company has secured the KCT Warehouse LOC with certain of its mortgage loan investments.
The Company may draw funds on the KCT Warehouse LOC at any time until the line is fully drawn. Repayment of each advance is due 120 days after the advance is made or earlier if a collateral loan becomes more than 60 days delinquent, and the Company fails to cure such deficiency. The interest rate on the KCT Warehouse LOC is equal to the prime rate at the time of the draw plus 0.50%. At December 31, 2022, the interest rate on the KCT Warehouse LOC was 5.25%. To secure its obligations under the KCT Warehouse LOC, the Company has agreed to grant a priority first lien and security interest in certain of its mortgage loan investments and maintain 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 Warehouse LOC. The minimum ratio must equal at least 120%. The KCT Warehouse LOC also requires the Company to maintain a deposit of 25% of the total line limit to borrow on the facility. In September 2022, the Company purchased a $1.25 million certificate of deposit from KCT that satisfies this requirement. A total of $6.2 million in loans were pledged on this facility as of December 31, 2022. At December 31, 2022, there were no outstanding borrowings on the KCT Warehouse LOC.
In addition, on June 6, 2022, the Company entered into an Operating Line of Credit Loan and Security Agreement with the KCT, the KCT Operating LOC. The KCT Operating LOC is a $5.0 million short-term demand credit facility with a one-year maturity date ending on June 6, 2023. The KCT Operating LOC will automatically renew for another one-year term unless either party furnishes written notice at least 30 days prior to the termination date that it does not intend to renew the agreement. The Company must secure a minimum of 25% of the line with cash while the remaining portion of the KCT Operating LOC may be secured by certain of its mortgage loan investments.
The Company may draw funds on the KCT Operating LOC at any time until the line is fully drawn. Repayment by the termination date or earlier if a collateral loan becomes more than 60 days delinquent, and the Company fails to cure such deficiency. The interest rate on the KCT Warehouse LOC is equal to the prime rate at the time of the draw plus 0.50%. At December 31, 2022, the interest rate on the KCT Warehouse LOC was 5.25%. To secure its obligations under the KCT Operating LOC, the Company has agreed to grant a priority first lien and security interest in certain of its mortgage loan investments and maintain a minimum collateralization ratio measured by taking the outstanding balance of mortgage notes pledged under the facility as compared to the total amount of principal owed less the secured cash on the KCT Operating LOC. The minimum ratio must equal at least 120%. A total of $4.8 million in loans were pledged on this facility as of December 31, 2022. At December 31, 2022, there were no outstanding borrowings on the KCT Operating LOC.
The KCT Operating LOC and the KCT Warehouse LOC both contain typical affirmative covenants for a credit facility of this nature, including requiring that the Company maintain the pledged
collateral free of liens and encumbrances, timely pay the amounts due under the facility and provide KCT with current financial statements and monthly reports. The Company will also be required to comply with certain financial covenants including maintaining a net worth of at least $5.0 million dollars, ensuring that its net worth is equal to at least 5% of its total liabilities and that it will maintain minimum liquidity that equals or exceeds 120% of the outstanding amount owed under the KCT Operating LOC and the KCT Warehouse LOC at the end of each calendar month.
ACCU Line of Credit
On September 23, 2021, Ministry Partners Investment Company, LLC, entered into a Loan and Security Agreement with ACCU (“ACCU LOC”). The ACCU LOC is a revolving $5.0 million short-term demand credit facility with a one-year maturity date of September 23, 2023. The facility carried an outstanding balance of $3.0 million and $2.0 million at December 31, 2022 and December 31, 2021, respectively. The interest rate on the facility is equal to the Prime Rate as published in the Wall Street Journal plus 0.75%. This rate will be adjusted on January 10th each year to account for the current Prime Rate but cannot be adjusted below 4.00%. The interest rate on the ACCU LOC was 4.00% on December 31, 2022. The ACCU LOC will automatically renew for one additional one-year term unless either party furnishes written notice at least thirty (30) days prior to the termination date that it does not intend to renew the agreement.
The Company may draw funds on the ACCU LOC at any time until the line is fully drawn. All outstanding principal and interest amounts are due on the maturity date. To secure its obligations under the ACCU LOC, the Company has agreed to grant a priority first lien and security interest in certain of its mortgage loan investments and maintain 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 120%. The Company must also maintain minimum liquidity that equals or exceeds $10.0 million at all times during the term of the loan. The ACCU LOC contains typical affirmative covenants for a credit facility of this nature. The Company was in compliance with these covenants at years ended December 31, 2022 and 2021. A total of $6.8 million in loans were pledged on this facility as of December 31, 2022 and December 31, 2021.
ACCU Secured Borrowings
As detailed in Note 3: Related Party Transactions, on August 9, 2021, the Company entered into a Master Loan Participation Purchase and Sale Agreement with ACCU. The participations sold under the Master LP Agreement are considered secured borrowings and are presented as such on the Company’s balance sheet. $7 thousand and $17 thousand in secured borrowings were outstanding under the Master LP Agreement as of December 31, 2022 and December 31, 2021, respectively.
Note 11. Investor Notes Payable
The table below provides information on the Company’s investor notes payable (dollars in thousands):
As of
As of
December 31, 2022
December 31, 2021
SEC Registered Public Offerings
Offering Type
Amount
Weighted
Average
Interest
Rate
Amount
Weighted
Average
Interest
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
$
-
-
%
$
-
-
%
Future maturities for the Company’s investor notes during the twelve-month periods ending December 31, are as follows (dollars in thousands):
$
23,682
17,574
15,211
13,990
8,701
79,158
Debt issuance costs
Notes payable, net of debt issuance costs
$
79,100
Debt issuance costs related to the Company’s notes payable were $58 thousand and $88 thousand at December 31, 2022 and December 31, 2021, respectively.
The notes are payable to investors who have purchased the securities. Notes pay interest at stated spreads over an index rate. The investor may reinvest the interest or have the interest paid to them at their option. The Company may repurchase all or a portion of notes at any time at its sole discretion. In addition, the Company may allow investors to redeem their notes prior to maturity at its sole discretion.
SEC Registered Public Offerings
Class 1 Offering
In January 2015, the Company registered its Class 1 Notes with the SEC. The Company discontinued the sale of its Class 1 Note Offering when it expired on December 31, 2017. The offering included two categories of notes, including a fixed interest note and a variable interest note. The Class 1 Notes contain restrictive covenants pertaining to paying dividends, making redemptions, acquiring, purchasing, or making certain payments, requiring the maintenance of minimum tangible net worth, limitations on the issuance of additional notes, and incurring of indebtedness. The Company was in compliance with these covenants as of December 31, 2021. The Company issued the Class 1 Notes under a Trust Indenture between the Company and U.S. Bank. There were no outstanding Class 1 Notes as of December 31, 2022.
Class 1A Offering
In February 2018, the Company launched its Class 1A Notes Offering. Pursuant to a Registration Statement declared effective on February 27, 2018, the Company registered $90 million of its Class 1A Notes in two series - fixed and variable notes. The Class 1A Notes are unsecured. The interest rate paid on the Fixed Series Notes is determined in reference to a Constant Maturity Treasury Index published by the U.S. Department of Treasury (“CMT Index”) in effect on the date that the note is issued plus a rate spread as described in the Company’s Class 1A Prospectus. The variable index in effect on the date the interest rate is set determines the interest rate paid on a Variable Series Note. The CMT Index refers to the Constant Maturity Treasury rates published by the U.S. Department of Treasury for actively traded Treasury securities. The variable index is equal to the 3-month LIBOR rate. The Company issued the Class 1A Notes under a Trust Indenture entered into between the Company and U.S. Bank.
2021 Class A Offering
In January 2021, the Company launched its 2021 Class A Notes Offering. Pursuant to a Registration Statement declared effective on January 8, 2021, the Company registered $125 million of its 2021 Class A Notes in two series - fixed and variable notes. The 2021 Class A Notes are unsecured. Like the Class 1A Notes Offering, the interest rate paid on the Fixed Series Notes is determined in reference to a CMT Index published by the U.S. Department of Treasury in effect on the date that the note is issued plus a rate spread as described in the Company’s 2021 Class A Prospectus. The variable index in effect on the date the interest rate is set determines the interest rate paid on a Variable Series Note. The CMT Index refers to the Constant Maturity Treasury rates published by the U.S. Department of Treasury for actively traded Treasury securities. The variable index is equal to the 3-month LIBOR rate. The Company issued the 2021 Class A Notes under a Trust Indenture entered into by and between the Company and U.S. Bank.
Private Offerings
Series 1 Subordinated Capital Notes (“Subordinated Notes”)
In June 2018, the Company renewed the offer and sale of its Subordinated Notes initially launched in February 2013. The Company offers the notes pursuant to a limited private offering to qualified investors that meet the requirements of Rule 506 of Regulation D. The Company offers the Subordinated Notes with maturity terms from 12 to 60 months at an interest rate fixed on the date of issuance, as determined by the then current seven-day average rate reported by the U.S. Federal Reserve Board for interest rate swaps.
Under the Subordinated Notes offering, the Company is subject to certain covenants, including limitations on restricted payments, limitations on the amount of notes that it can sell, restrictions on mergers and acquisitions, and proper maintenance of books and records. The Company was in compliance with these covenants at December 31, 2022 and December 31, 2021.
Note 12. Commitments and Contingencies
Unfunded Commitments
The Company is a party to credit-related financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include undisbursed loans, un-advanced lines of credit, and standby letters of credit. Such commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet.
The contractual amount of these commitments represents the Company’s exposure to credit loss. The Company uses the same credit policies in making commitments as it does for on-balance-sheet instruments.
The table below shows the outstanding financial instruments whose contract amounts represent credit risk (dollars in thousands):
Contract Amount at:
December 31, 2022
December 31, 2021
Undisbursed loans
$
$
Undisbursed loans are commitments for possible future extensions of credit to existing customers. These loans are sometimes unsecured and the borrower may not necessarily draw upon the line the total amount of the commitment. Commitments to extend credit are generally at variable rates.
Operating Leases
The Company has lease agreements for its offices in Brea and Fresno, California. The Brea office lease expires in December 2023. The lease does not contain any additional options to renew. The Fresno office lease expires in April 2025. There are no options to renew in the lease agreement. The Company also has a lease agreement for a vehicle used by management. The lease for the vehicle terminates in December 2024. The Company has determined that these leases are operating leases.
The table below presents information regarding our existing operating leases (dollars in thousands):
For the Year Ended
Lease cost
Operating lease cost
$
$
Other information
Cash paid for operating leases
$
$
Right-of-use assets obtained in exchange for operating lease liabilities
$
$
-
Lease liabilities recorded
$
$
-
Weighted average remaining lease term (in years)
1.46
1.96
Weighted-average discount rate
4.33
%
4.71
%
Future minimum lease payments and lease costs for the twelve months ending December 31 are as follows (dollars in thousands):
Lease Payments
Lease Costs
$
$
Total
$
$
Note 13. Office Operations and Other Expenses
Office operations and other expenses comprise the following (dollars in thousands):
December 31, 2022
December 31, 2021
Technology and communication expenses
$
$
Insurance
Lease and occupancy expense
Outsourced operations
Staff and travel expense
Loan expenses
Clearing firm fees
Other
Total
$
1,491
$
1,315
Note 14. Preferred and Common Units Under LLC Structure
Holders of the Series A Preferred Units are entitled to receive a quarterly cash dividend that is 25 basis points higher than the one-year LIBOR rate in effect on the last day of the calendar month for which the preferred return is approved. The Company has also agreed to set aside an annual amount equal to 10% of its net profits earned for any year, after subtracting from profits the quarterly Series A Preferred Unit dividends paid, for distribution to its Series A Preferred Unit holders.
The Series A Preferred Units have a liquidation preference of $100 per unit and have no voting rights. They are also subject to redemption in whole or in part at the Company’s election on December 31 of any year for an amount equal to the liquidation preference of each unit, plus any accrued and declared but unpaid quarterly dividends and preferred distributions on such units. The Series A Preferred Units have priority as to earnings and distributions over the Common Units. The resale of the Company’s Series A Preferred Units and Common Units are subject to the Company’s first right of refusal to purchase units proposed to be transferred. Upon the Company’s failure to pay quarterly dividends for four consecutive quarters, the holders of the Series A Preferred Units have the right to appoint two managers to its Board of Managers.
The Class A Common Units have voting rights, but have no liquidation preference or rights to dividends, unless declared.
Note 15. Retirement Plans
401(k)
All of the Company’s employees are eligible to participate in the Automated Data Processing, Inc. (“ADP”) 401(k) plan effective as of the date their employment commences. No minimum service is required and the minimum age is 21. Each employee may elect voluntary contributions not to exceed 86% of salary, subject to certain limits based on U.S. tax law. The plan has a matching program, which qualifies as a Safe Harbor 401(k) plan. As a Safe Harbor Section 401(k) plan, the Company matches each eligible employee’s contribution, dollar for dollar, up to 3% of the employee’s compensation, and 50% of the employee’s contribution that exceeds 3% of their compensation, up to a maximum contribution of 5% of the employee’s compensation. Company matching contributions for the years ended December 31, 2022 and 2021 were $80 thousand and $67 thousand, respectively.
Profit Sharing
The profit sharing plan is for all employees who, at the end of the calendar year, are at least 21 years old, still employed, and have at least 900 hours of service during the plan year. The Company’s Board of Managers determines the amount annually contributed on behalf of each qualified employee. The Company determines the amount by calculating it as a percentage of the eligible employee’s annual earnings. Plan forfeitures are used to reduce the Company’s annual contribution. The Company did not make or approve a profit sharing contribution to the plan during the years ended December 31, 2022 and 2021.
Supplemental Executive Retirement Plan
On March 30, 2022, the Company entered into a Supplemental Executive Retirement Plan (the “SERP”) with its President and Chief Executive Officer, Joseph W. Turner, Jr. The SERP is an unfunded non-qualified plan that is intended to provide Mr. Turner with a fixed benefit over a ten-year period after Mr. Turner incurs a separation from service with the Company. The SERP has been established as a supplemental retirement and death benefits arrangement that conforms with the provisions of Section 409(A) of the Internal Revenue Code. If Mr. Turner retires on or after his expected retirement date, he will be entitled to receive $60,000 per year over a ten-year period, payable in equal monthly installments commencing the first day of the month following his separation from service.
For purposes of the SERP, Mr. Turner’s accrued benefit is subject to a maximum sum of $600,000, with payments made annually in equal monthly installments over a ten-year period. The Company is liable for the entire amount of this benefit unless Mr. Turner incurs a separation of service prior to the vesting date in August 2024. The Company’s management has determined that such a separation is unlikely to occur prior to the vesting date and has accrued the entire benefit as of December 31, 2022.
Note 16. Fair Value Measurements
Fair Value Measurements Using Fair Value Hierarchy
The Company classifies measurements of fair value within a hierarchy based upon inputs that give the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The Company did not change its methodology in measuring fair value during the year ended December 31, 2022. The fair value hierarchy is as follows:
● Level 1 inputs are quoted prices (unadjusted) for identical assets or liabilities in active markets.
● Level 2 inputs include:
o quoted prices for similar assets and liabilities in active markets,
o quoted prices for identical assets and liabilities in inactive markets,
o inputs that are observable for the asset or liability (such as interest rates, prepayment speeds, credit risks, etc.); or
o inputs that are derived principally from or corroborated by observable market data by correlation or by other means.
● Level 3 inputs are unobservable and reflect an entity’s own assumptions about the assumptions that market participants would use in pricing the assets or liabilities.
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.
Fair Value of Financial Instruments
The following tables show the carrying amounts and estimated fair values of the Company’s financial instruments (dollars in thousands):
Fair Value Measurements at December 31, 2022 using
Carrying
Value
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Fair Value
FINANCIAL ASSETS:
Cash and restricted cash
$
9,564
$
9,564
$
-
$
-
$
9,564
Certificates of deposit
1,250
-
1,243
-
1,243
Loans, net
85,076
-
-
83,525
83,525
Investments in joint venture
-
-
Other investments
1,018
-
-
1,018
1,018
Accrued interest receivable
-
-
FINANCIAL LIABILITIES:
Lines of credit
$
3,000
$
-
$
-
$
3,026
$
3,026
Other secured borrowings
-
-
Notes payable
79,100
-
-
78,330
78,330
Other financial liabilities
-
-
Fair Value Measurements at December 31, 2021 using
Carrying
Value
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Fair Value
FINANCIAL ASSETS:
Cash and restricted cash
$
28,149
$
28,149
$
-
$
-
$
28,149
Loans, net
97,243
-
-
97,913
97,913
Investments in joint venture
-
-
Accrued interest receivable
-
-
FINANCIAL LIABILITIES:
Lines of credit
$
2,000
$
-
$
-
$
2,000
$
2,000
Term-debt
32,749
-
-
31,489
31,489
Other secured borrowings
-
-
Notes payable
76,732
-
-
76,871
76,871
Other financial liabilities
-
-
Management uses judgment in estimating the fair value of the Company’s financial instruments; however, there are inherent weaknesses in any estimation technique. Therefore, for substantially all financial instruments, the fair value estimates presented herein are not necessarily indicative of the amounts the Company could have realized in a sales transaction at December 31, 2022 and December 31, 2021.
The Company used the following methods and assumptions to estimate the fair value of financial instruments:
● Cash - The carrying amounts reported in the balance sheets approximate fair value for cash.
● Certificates of deposit - Management estimates fair value by using a present value discounted cash flow with a discount rate approximating the current market rate for similar assets. Management classifies certificates of deposits as Level 2 of the fair value hierarchy.
● Loans (other than collateral-dependent impaired loans) - Management estimates fair value by discounting the future cash flows of the loans. The discount rate the Company uses is the current average rates at which it would make loans to borrowers with similar credit ratings and for the same remaining maturities. Also included is $7 thousand of loan participations transferred under a recourse agreement.
● Investments in joint venture - Management estimates fair value by analyzing the operations and marketability of the underlying investment to determine if the investment is other-than-temporarily impaired.
● Other investments - Management estimates fair value by determining the whether there is an indication of potential lack of performance on the part of the insurance companies in which the investments are made, and whether those indications would impair the investments.
● Investor Notes Payable - Management estimates the fair value of fixed maturity notes by discounting the future cash flows of the notes. The discount rate the Company uses is the rate currently offered for investor notes payable of similar remaining maturities. Company management estimates the discount rate by using market rates that reflect the interest rate risk inherent in the notes.
● Lines of Credit, Term-debt, Other Secured Borrowings - Management estimates the fair value of borrowings from financial institutions discounting the future cash flows of the borrowings. The discount rate the Company uses is the current incremental borrowing rate for similar types of borrowing arrangements.
● Off-Balance Sheet Instruments - Management determines the fair value of loan commitments on fees currently charged to enter into similar agreements, taking into account the remaining term of the agreements and the counterparties’ credit standing. The fair value of loan commitments is insignificant at December 31, 2022 and December 31, 2021.
Fair Value Measured on a Nonrecurring Basis
The Company measures certain assets at fair value on a nonrecurring basis. On these assets, the Company only makes fair value adjustments in certain circumstances (for example, when there is evidence of impairment). The following table presents the fair value of assets measured on a nonrecurring basis (dollars in thousands):
Fair Value Measurements Using:
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total
Assets at December 31, 2022:
Collateral-dependent loans (net of allowance and discount)
$
-
$
-
$
5,259
$
5,259
Investments in joint venture
-
-
Other investments
-
-
1,018
1,018
Foreclosed assets (net of allowance)
-
-
Total
$
-
$
-
$
7,448
$
7,448
Assets at December 31, 2021:
Collateral-dependent loans (net of allowance and discount)
$
-
$
-
$
5,815
$
5,815
Investments in joint venture
-
-
Foreclosed assets (net of allowance)
-
-
Total
$
-
$
-
$
7,000
$
7,000
The following table presents activity in Level 3 assets for those assets in which there were purchases or sales, or in which assets were transferred between levels. The only assets to have such activity during the year ended December 31, 2022 were other investments (dollars in thousands):
Other investments
Balance, December 31, 2021
$
--
Purchase of other investments
1,000
Realized income on other investments
Balance, December 31, 2022
$
1,018
Impaired Loans
The fair value of collateral-dependent impaired loans with specific allocations of the allowance for loan losses is generally based on recent real estate appraisals. Such fair values are obtained using independent appraisals, which the Company may discount due to age or other factors, which the Company considers to be Level 3 inputs. The range of these discounts is shown in the table below.
Foreclosed Assets
At the date of foreclosure, the Company initially records real estate acquired through foreclosure or other proceedings (foreclosed assets) at fair value less estimated costs of disposal, which establishes a new cost. After foreclosure, management periodically performs valuations on foreclosed assets. The company carries foreclosed assets held for sale at the lower of cost or fair value, less estimated costs of disposal. The fair values of real properties initially are determined based on appraisals. In some cases, management adjusts the appraised values for various factors including age of the appraisal, age of comparable properties included in the appraisal, and known changes in the market or in the collateral. The Company makes subsequent valuations of the real properties based either on
management estimates or on updated appraisals. If management makes significant adjustments to appraised values based on unobservable inputs, the Company categorizes foreclosed assets under Level 3. Otherwise, if management bases the foreclosed assets’ value on recent appraisals and the only adjustments made are for known contractual selling costs, the Company will categorize the foreclosed assets under Level 2.
Other Investments
Other investments comprise two indexed annuity insurance contracts. The Company measures fair value on its annuity investments on a nonrecurring basis. On these assets, the Company only makes fair value adjustments when there is evidence of impairment. As the principal amounts and recognized income on the annuities is guaranteed, only impairment of the assets would indicate a degradation in their fair value. The Company concluded that no impairment of the annuity investments existed at December 31, 2022. As such, the Company has determined that the carrying value of its other investments equals its fair value at December 31, 2022.
The table below summarizes the valuation methodologies used to measure the fair value adjustments for Level 3 assets recorded at fair value on a nonrecurring basis (dollars in thousands):
December 31, 2022
Assets
Fair Value
(in thousands)
Valuation
Techniques
Unobservable
Input
Range
(Weighted Average)
Impaired loans
$
5,259
Discounted appraised value
Selling cost / Estimated market decrease
21% - 81% (28%)
Investments in joint venture
Internal evaluations
Estimated future market value
0% (0%)
Other investments
1,018
Internal evaluations
Indications of non-performance by insurance companies
0% (0%)
Foreclosed assets
Internal evaluations
Selling cost
6% (6%)
December 31, 2021
Assets
Fair Value
(in thousands)
Valuation
Techniques
Unobservable
Input
Range
(Weighted Average)
Impaired loans
$
5,815
Discounted appraised value
Selling cost / Estimated market decrease
21% - 81% (23%)
Investments in joint venture
Internal evaluations
Estimated future market value
0% (0%)
Foreclosed assets
Internal evaluations
Selling cost
6% (6%)
Note 17. Income Taxes and State LLC Fees
MPIC is subject to a California gross receipts LLC fee of approximately $12,000 per year, and the state minimum franchise tax of $800 per year. MP Securities is subject to a California gross receipts LLC fee of approximately $6,000 and the state minimum franchise tax of $800 per year.
MP Realty incurred a tax loss for the years ended December 31, 2022 and 2021, and recorded a provision of $800 per year for the state minimum franchise tax. For the years ended December 31, 2022 and 2021, MP Realty has federal and state net operating loss carryforwards of approximately $432 thousand and $422 thousand, respectively, which begin to expire in the year 2032. Management assessed the realizability of the deferred tax asset and determined that a 100% valuation against the deferred tax asset was appropriate at years ended December 31, 2022 and 2021.
Tax years ended December 31, 2019 through December 31, 2022 remain subject to examination by the Internal Revenue Service and the tax years ended December 31, 2018 through December 31, 2022 remain subject to examination by the California Franchise Tax Board.
Note 18. Segment Information
The Company’s reportable segments are strategic business units that offer different products and services. The Company manages the segments separately because each business requires different management, personnel proficiencies, and marketing strategies.
The Company has two reportable segments that represent the primary businesses reported in the consolidated financial statements: the finance company (the parent company), and the investment advisor and insurance firm (MP Securities). The finance company segment uses funds from the sale of debt securities, income from operations, and the sale of loan participations to originate or purchase mortgage loans. The finance company also services loans. MP Securities generates fee income by selling debt securities and other investment and insurance products, as well as providing investment advisory and financial planning services.
The accounting policies applied to determine the segment information are the same as those described in the summary of significant accounting policies. Management accounts for intersegment revenues and expenses at amounts that assume the Company entered into the transaction with unrelated third parties at the current market prices at the time of the transaction. Management evaluates the performance of each segment based on net income or loss before provision for income taxes and LLC fees.
Financial information with respect to the reportable segments for the years ended December 31, 2022 and 2021 is as follows (dollars in thousands):
Twelve months ended
December 31,
December 31,
Revenue from external sources
Finance Company
$
8,562
$
9,651
Broker Dealer
Adjustments / Eliminations
-
-
Total
$
9,427
$
10,641
Revenue from internal sources
Finance Company
$
-
$
-
Broker Dealer
1,128
1,244
Other Segments
Adjustments / Eliminations
(1,193)
(1,437)
Total
$
-
$
-
Total non-interest expense and provision for tax
Finance Company
$
4,125
$
3,605
Broker Dealer
1,598
1,334
Other Segments
Adjustments / Eliminations
-
-
Total
$
5,727
$
4,941
Net profit
Finance Company
$
$
1,108
Broker Dealer
Other Segments
Adjustments / Eliminations
(17)
(350)
Total
$
$
1,850
December 31,
December 31,
(Unaudited)
(Audited)
Total assets
Finance Company
$
94,523
$
123,753
Broker Dealer
4,553
3,946
Other Segments
Adjustments / Eliminations
(136)
(293)
Total
$
99,363
$
127,965
Note 19. Condensed Financial Statements of Parent Company
Financial information pertaining only to the parent company, Ministry Partners Investment Company, LLC, is as follows (dollars in thousands):
Ministry Partners Investment Company, LLC Balance Sheet
As of December 31,
Assets:
Cash
$
5,875
$
24,030
Certificates of deposit
1,250
-
Loans receivable, net of allowance for loan losses
85,076
97,243
Investment in subsidiaries
3,084
2,645
Other assets
2,922
3,045
Total assets
$
98,207
$
126,963
Liabilities and members’ equity
Liabilities:
Other borrowings
$
3,007
$
34,766
Notes payable, net of debt issuance costs
78,441
76,025
Other liabilities
2,133
1,661
Total liabilities
83,581
112,452
Equity
14,626
14,511
Total liabilities and members' equity
$
98,207
$
126,963
Ministry Partners Investment Company, LLC Statement of Income
For the years ended
December 31,
Income:
Interest Income
$
5,825
$
7,040
Other income
2,737
2,566
Total income
8,562
9,606
Interest expense:
Other borrowings
1,007
Notes payable
4,158
3,808
Total interest expense
4,545
4,815
Provision (credit) for loan losses
(296)
Other operating expenses
4,112
3,548
Income before provision for income taxes
1,121
Provision for income taxes and state LLC fees
Income before equity in undistributed net income of subsidiaries
1,108
Equity in undistributed net income of subsidiaries
Net income
$
$
1,850
Ministry Partners Investment Company, LLC Statement of Cash Flows
For the years ended
December 31,
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income
$
$
1,850
Adjustments to reconcile net income to net cash used by operating activities:
Equity in undistributed net income of subsidiaries
(439)
(742)
Depreciation
Amortization of deferred loan fees
(127)
(231)
Amortization of debt issuance costs
Provision for loan losses
(296)
Accretion of loan discount
(20)
(27)
Gain on sale of loans
(13)
(64)
Gain on sale of foreclosed assets
-
(44)
Gain on debt extinguishment
(2,537)
(2,287)
Changes in:
Other assets
Other liabilities
(275)
Net cash (used) by operating activities
(1,508)
(346)
CASH FLOWS FROM INVESTING ACTIVITIES:
Loan purchases
(2,760)
(842)
Loan originations
(4,267)
(14,319)
Loan sales
3,716
14,053
Loan principal collections
15,915
20,105
Redemption (purchase) of certificates of deposit
(1,250)
1,761
Foreclosed property sales
-
Purchase of property and equipment
(11)
(1)
Net cash provided by investing activities
11,343
20,801
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in term-debt
(30,212)
(16,370)
Borrowings, net of repayments on lines of credit
1,000
2,000
Net change in secured borrowings
(10)
Net change in notes payable
2,338
Debt issuance costs
(573)
(828)
Dividends paid on preferred units
(533)
(245)
Net cash (used) by financing activities
(27,990)
(14,833)
Net (decrease) increase in cash and restricted cash
(18,155)
5,622
Cash, cash equivalents, and restricted cash at beginning of period
24,030
18,408
Cash, cash equivalents, and restricted cash at end of period
$
5,875
$
24,030
Supplemental disclosures of cash flow information
Interest paid
$
3,341
$
3,788
Income taxes paid
Leased assets obtained in exchange of new operating lease liabilities
-
Lease liabilities recorded
-
Dividends declared to preferred unit holders

---

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.

---

ITEM 9A. CONTROLS AND PROCEDURES
ITEM 9A.CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our Principal Executive Officer and Principal Financial Officer have evaluated the effectiveness of our disclosure controls and procedures as of the fiscal period ending December 31, 2022 covered by this Report on Form 10-K. The officers performed this evaluation as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. From this evaluation, our Principal Executive Officer and Principal Financial Officer have concluded that our disclosure controls and procedures were effective as of and for the year ended December 31, 2022. This conclusion by our Principal Executive Officer and Principal Financial Officer does not relate to reporting periods after December 31, 2022.
Management’s Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over our financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act). Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.
Our internal controls over financial reporting include those policies and procedures that:
● pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;
● provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that our receipts and expenditures are being made only in accordance with authorizations of management and the Board; and
● provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on our financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. In addition, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Management assessed the effectiveness of our internal control over financial reporting as of and for the year ended December 31, 2022. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission Internal Control-Integrated Framework. Based on this assessment, management believes that, as of and for the year ended December 31, 2022, our internal control over financial reporting is effective.
This Report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to rules of the SEC that permit us to provide only management’s report in this Report on Form 10-K.

---

ITEM 9B. OTHER INFORMATION
ITEM 9B.OTHER INFORMATION
None.
PART III

---

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
ITEM 10.MANAGERS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Summary of the business experience of our executive officers and managers
Set forth below are the members of our Board of Managers and executive officers:
Name
Age
Managers/Executive Officers
R. Michael Lee
Chairman of the Board, Chairman of Ministry Partners Securities, Manager
Van C. Elliott
Corporate Secretary, Audit Committee Chairperson, Manager
Joseph W. Turner, Jr.
Chief Executive Officer and President, Manager
Brian S. Barbre
Senior Vice President, Chief Financial Officer and Principal Accounting Officer
Darren Thompson
Executive Vice President, Chief Operating Officer
Juli Anne Lawrence
ALCO Committee Chairperson, Credit Committee Chairperson, Manager
Jerrod Foresman
Manager
Guy A. Messick
Manager
With our conversion from a corporation to a limited liability company on December 31, 2008, we are governed by a Board of Managers that supervises our affairs (hereinafter referred to as the “Board”).
R. MICHAEL LEE
Mr. Lee has served as a member of our Board since January 2009. He was appointed Chairman of the Board in May 2015. Mr. Lee currently serves as Chief Executive Officer and President for KCT Credit Union, in Elgin, Illinois. Previously, Mr. Lee served as Vice President Member Relations for Alloya Corporate Federal Credit Union, President of Midwest Region for Members United Federal Credit Union, Chief Membership Officer for Mid-States Corporate Federal Credit Union, Senior Vice President US Central Federal Credit Union, SVP Corporate Network eCom, SVP Corporate One Federal Credit Union and Vice President of Sales for a national insurance agency. Mr. Lee currently serves on multiple boards of organizations and foundations. Most recently he was nominated through the Office of the Comptroller of Illinois to serve on the commission of Bank On Illinois that is part of a national program that focuses on serving the unbanked/underbanked. From that affiliation, Mr. Lee was asked to be the Chairman of the Illinois Governor’s Financial Empowerment Task Force to produce a report with recommendation on how to bring financial education to both K-12 and higher education. Mr. Lee adds special expertise to our Board with his
years of service as an executive of a number of large financial institutions. Mr. Lee currently serves as Chairman of the Board, Chairman of our Executive/Governance Committee, and serves as the Chairman of the Board for MP Securities.
VAN C. ELLIOTT
Mr. Elliott has served as a member of our Board since 1991. He has served as a director for AdelFi Credit union from April 1988 until April, 2022. (except for the periods from March 1997 to March 1998 and March 2004 to March 2005). For multiple years he served as the Board Chair. Mr. Elliott served as Associate Director of the Conservative Baptist Association of Southern California from 1980 to 1994, where he was responsible for the general administrative oversight of the association’s activities. Since that time, he has been self-employed as a consultant providing organizational, financial, and fund-raising consultation services to church and church-related organizations. He received his Bachelor’s and Master’s degrees in mathematics and communications from Purdue University and spent seven years in the computer industry. Mr. Elliott, an ordained minister, holds a Master of Divinity degree from Denver Seminary and has spent fourteen years in local church ministries serving in the area of Christian education and administration. He has completed post-graduate instruction at the College for Financial Planning. Mr. Elliott is a member of the Financial Planning Association and holds the professional credential of Certified Financial Planner.® Mr. Elliott brings to our Board his extensive experience as a credit union board member and intimate knowledge of church and ministry financial operations. He serves on our Executive Committee and Credit Committee and is our Audit Committee Chair.
JOSEPH W. TURNER, JR.
Mr. Turner has served as Chief Executive Officer and President since December 3, 2015 and a non-compensated member of our Board since November 10, 2022. Mr. Turner has also served as the Chief Executive Officer and President for Ministry Partners Securities LLC, the wholly-owned subsidiary of Ministry Partners Investment Company, since February of 2013. Mr. Turner also held the position as Chief Compliance Officer of Ministry Partners Securities LLC until December 14, 2015. During his tenure with the Company, Mr. Turner has led the Company’s efforts in transitioning its wholly-owned broker-dealer to a more robust and diverse financial services firm, launching its investment advisory and insurance company activities in addition to overseeing the capital raising efforts related to the Company’s proprietary products. Mr. Turner was also instrumental in formalizing strategic partnerships with AdelFi Credit Union (the Company’s largest equity owner), America’s Christian Credit Union (2nd largest equity owner), and Kane County Teachers Credit Union to provide complimentary financial products and services to their collective members. Prior to joining the Company in 2011, Mr. Turner served in various roles; including Regional Vice President, Chief Operating Officer, Chief Executive Officer and President for Strongtower Financial, Inc., a Fresno, California based broker-dealer and advisory firm which
specialized in providing investment banking services, mortgage financing for churches and ministries, and investment and insurance products and services. Prior to joining Strongtower in 2007, Mr. Turner served as Managing Director of Principal Financial Group where he led a financial advisory and insurance group. Mr. Turner began his career with Prudential Preferred as an investment advisor in 1990. Mr. Turner received his Bachelor of Science in Business Administration - Finance degree from California State University, Fresno. Mr. Turner has completed industry leadership training both at Drake University and the Wharton School of Business. Mr. Turner holds the FINRA Series 6, 7, 24, 63, 65, and 51 as well as life, health and disability licenses in over 23 states. Mr. Turner also serves as Chairman of the Board for Christian Care Ministries, Inc., a Melbourne, Florida based public charity (“CCM”), with nearly 800 employees and $1.1 billion in total revenue, a ministry that encourages and enables Christians to connect with, share their lives, faith, talents, and financial resources with one another through its Medi-Share health care sharing ministry. CCM has current investments in the Company’s publicly and privately offered debt securities as well as other products offered by the Company’s wholly-owned subsidiary, MP Securities.
BRIAN S. BARBRE
Mr. Barbre has served as the Company’s Senior Vice President, Chief Financial Officer, and Principal Accounting Officer since September 25, 2017. Since December 28, 2018, Mr. Barbre has served as the Treasurer of Ministry Partners for Christ; a private foundation that makes charitable grants to Christian organizations, and looks to provide accounting, consulting, and financial expertise to aid evangelical Christian ministries. Ministry Partners for Christ is a wholly-owned subsidiary of the Company. Mr. Barbre has previously served as Vice President Finance and Treasurer of AdelFi, the Company’s largest equity owner where he led the finance, credit analytics, and participations groups. At AdelFi, Mr. Barbre developed and managed a bond portfolio with over $100 million in assets under management. In addition, Mr. Barbre oversaw the budgeting, liquidity management, and asset liability management of the credit union when it had over one billion in assets. At AdelFi, Mr. Barbre was a member of the Asset Liability Management Committee, Pricing Committee, and attended monthly meetings of the Board of Directors. Mr. Barbre is a Certified Public Accountant and has served as an Adjunct professor at Biola University where he has taught cost accounting and accounting information systems courses. Mr. Barbre holds a Bachelor of Science in Business Administration, Magna Cum Laude, from Biola University. In addition, Mr. Barbre holds a Master of Business Administration degree with a finance emphasis from California State University Fullerton where the dean awarded him the Award for Academic Excellence upon graduation. Mr. Barbre holds the FINRA Series 28 license.
DARREN THOMPSON
Mr. Thompson began serving as the Company’s Executive Vice President and Chief Operating Officer on February 28, 2022. Mr. Thompson previously served as the Chief Lending Officer at ACCU and had been with the credit union since 2011. In his role as Chief Lending Officer, Darren oversaw all of lending, including origination, servicing, collection, and loan participations for both consumer and business loans. At ACCU, Mr. Thompson was a member of the Chief Officer Group and the Asset-Liability Committee. He also led the Loan Review Committee and attended monthly meetings of the Board of Directors. Prior to his work at ACCU, he served as a Treasury & Funding Trader for Western Corporate Federal Credit Union, assisting in the management of a $32 billion portfolio.
JULI ANNE LAWRENCE
Mrs. Lawrence has served as a member of our Board since 2007. She is currently a Chief Judge Chatham County Board of Elections and an independent Strategy Consultant. Prior to her current engagement, Mrs. Lawrence served as the Chief Strategy Officer of Raoust + Partners, a Hampton, Virginia based strategic planning and marketing firm for credit unions. Mrs. Lawrence previously also served as Senior Vice President of Research and Development for Western Bancorp in San Jose, California. Prior to that engagement, she served as President and Chief Executive Officer of the National Institute of Health Federal Credit Union, a Rockville, Maryland credit union. Prior to that, she was Executive Vice President and Chief Operating Officer of KeyPoint Credit Union, a Silicon Valley California credit union and the President of its subsidiary, KeyPoint Financial Services. Before joining KeyPoint Credit Union, Mrs. Lawrence served as Vice President for Business Development, Marketing and Legislative Affairs from 1988-1995 at Langley Federal Credit Union, a Hampton Roads, Virginia credit union. Prior to joining the credit union industry, Mrs. Lawrence served as the Director of Sales for the US Navy Mid-Atlantic Region, which included the direct responsibility for public relations and sales for all Navy Exchange and Commissary Operations in the Mid-Atlantic States, Europe, Iceland, and Bermuda. Mrs. Lawrence received her Bachelor of Science degree in Community Health and Education from East Carolina University and received a Master’s degree in Organizational Development from the University of San Francisco. Mrs. Lawrence served as the Chairwoman on the Board of Directors for the George Washington Institute of Health and Women in BIO. She also previously served as Chair for the Executive Committee of the Open Solutions Client Association and as a Trustee and Chair of the Finance Committee for the International Mission Board of the Southern Baptist Convention. Mrs. Lawrence provides our Board with the benefit of her extensive experience in financial institution operations and technology and especially, her asset-liability management expertise. Mrs. Lawrence serves on the Company’s Executive Committee, and as the Chair of our Asset-
Liability Committee and our Credit Committee. Mrs. Lawrence also serves as the President of Ministry Partners for Christ, a subsidiary of the company.
JERROD FORESMAN
Mr. Foresman has served as a Company Board Member since May 2012 and MP Securities since November 2018. He is Co-Owner and President of Virtue Financial Advisors, LLC and the Office of Supervisory Jurisdiction (OSJ) Principal for Infinex Investments, Inc., managing bank and credit union investment programs for over 60 branch locations in the mid-west. Formerly serving as President, Chief Compliance Officer and FINOP of Bankers & Investors Company Inc., a Registered Broker/Dealer, Investment Advisor and Insurance Agency in Kansas City, Mr. Foresman ran the compliance and operations for 11 years. Bankers & Investors Co. provided investment services for seven banks and four credit unions in Missouri and Kansas. Mr. Foresman had been serving as a financial advisor since 1990 and has managed and owned financial advisory/marketing firms specializing in working with credit unions and community banks since 1993. Mr. Foresman attended Missouri State University and is currently studying for additional financial designations from the American College in Bryn Mawr, PA. He is a contributing member of the Wealth Management RIA Board of Advisors, Advisor Confidence Index (ACI) from Rydex. Mr. Foresman holds the FINRA Series 7, 24, 27, 63, 65 and 66 licenses as well as life, health, property & casualty insurance licenses. Mr. Foresman serves on the Company’s Audit Committee, and on the Board of MP Securities.
GUY MESSICK
Mr. Messick is retired from the practice of law and the law firm of Messick Lauer & Smith P.C. on January 1, 2021. Mr. Messick provided legal and strategic planning services to credit unions and credit union service organizations nationwide for over 30 years. From 1987 to 2020, he served as General Counsel to the National Association of Credit Union Service Organizations. His duties included being NACUSO’s liaison with the National Credit Union Administration. Mr. Messick is a nationally known speaker on a wide range of credit union topics. He has presented at conferences sponsored by NACUSO, NCUA, NAFCU, NASCUS, CUNA, CUES, ACUMA, AICPA and various State Leagues. Mr. Messick has lectured on CUSOs at the University of Cork in Ireland and at Pepperdine University. Mr. Messick served on the CUNA Task Force on Investment Services which was the credit union industry’s liaison with the Securities and Exchange Commission. He is the author of the Guide for Credit Unions Providing Investment and Insurance Services and Credit Union Collaborations - Lessons Learned. Mr. Messick is recognized as a CUSO Pioneer in America’s Credit Union Museum in Manchester, New Hampshire. Mr. Messick’s legal practice included (a) assisting credit unions to plan and implement collaborative business model solutions that provide financial services and operational services; (b) advocating for clients before regulatory agencies; and (c) facilitating planning sessions. Mr. Messick’s board experience includes the Credit Union Network for Financial Literacy (a CUSO providing financial literacy education to children),
United Solutions Company (a CUSO providing IT related services), AKUVO (a CUSO providing software and data analysis for lending and collection services), Tyler Arboretum, Media Historic Preservation and the Media Presbyterian Church. Mr. Messick is a graduate of Bucknell University and the University of Miami School of Law. He served as a law clerk to U.S. District Court Judge Morell E. Sharp (Seattle, Washington) from 1977 78. Prior to exclusively serving the credit union industry, Mr. Messick represented local municipalities, a chamber of commerce, economic development agencies, and many small businesses. He was also an assistant district attorney in Delaware County in the appellate division. He is admitted to practice law in Pennsylvania. Mr. Messick serves on our Audit Committee, Asset-Liability Committee and on the Board of MP Securities.
Our Board of Managers
The Operating Agreement charges our Board and officers with governing and conducting our business and affairs. The Operating Agreement charges our Board with essentially the same duties, obligations, and responsibilities as a board of directors of a corporation. The Board establishes our policies and periodically reviews them and has authorized designated officers and our President the authority to carry out those policies. As of the date of this Prospectus, our Board consists of seven managers, a majority of which are independent managers.
Board Committees
Our Board may from time to time establish and empower board committees to perform various functions on its behalf. Each committee consists of at least three persons. Currently, the Board has established the following committees:
● Our Executive Committee is charged with responsibility for determining the President’s compensation and undertaking other matters of an executive and strategic oversight nature;
● Our Audit Committee is chartered to oversee the annual audit of our financial reports, oversee the establishment and maintenance of internal controls and oversee compliance with our Ethics Policy;
● Our Board Credit Committee is authorized to oversee compliance with our Loan Policy and to review the performance and management of our loan portfolio and to approve loan originations over a certain dollar amount or loans that have fallen outside of the parameters of the Loan Policy;
● Our Credit Review Committee reviews and implements our Loan Policy and reviews most of the loan applications we receive;
● Our Asset-Liability Committee is chartered to oversee the maintenance of our asset liability strategy and process, as well as our asset liability, liquidity and other policies relating to the mitigation of risks to our earnings and capital; and
● Our Governance Committee is charged with responsibility for the Board Governance Policies, including our Related Parties Transaction Policy, and with the periodic task of nominating persons for election to the Board.
Our Board Chairman
On May 14, 2015, the Board of Managers appointed R. Michael Lee, to serve as Chairman of the Board of Managers. Prior to Mr. Lee’s appointment, Mark Holbrook served as our Board Chairman since the Company’s inception. Mr. Holbrook also served as our Chief Executive Officer from inception of the Company until February 17, 2011.
Code of Ethics
On November 6, 2009, our Board adopted a Code of Ethics for our principal officers and members of the Board. On February 26, 2018, the Company’s President and Chief Executive Officer, Joseph Turner, was appointed to the Board of Directors for CCM. CCM currently maintains a business relationship with MP Securities and the Company, holds investments in the Company’s debt securities and has purchased other investment products made available through MP Securities. Mr. Turner currently serves as Chairman of the CCM Board of Directors.
The Company’s Board of Managers reviewed Mr. Turner’s appointment to the CCM Board of Directors as Chair of the Board and concluded that the appointment was made in compliance with the Company’s Code of Ethics.
Audit Committee
As authorized within the operating agreement for Ministry Partners Investment Company LLC, the Board of Managers established the Audit Committee in 2005 with the adoption of its formal charter. The primary purpose of the Audit Committee, as designated in its formal charter, is to oversee the Company’s accounting policies and practice, financial reporting procedures and audits of the Company’s financial statements. For the year ended December 31, 2022, the Audit Committee comprises three members, including Guy Messick, Van Elliott, and Jerrod Foresman. Mr. Elliott, Certified Financial Planner and church leadership consultant, is Chairman of the Audit Committee and Corporate Secretary of the overall Board of Managers. Mr. Elliott brings extensive experience as a credit union board member and has intimate knowledge of the Company’s financial operations as he has served as the Company’s Interim Chief Executive Officer on several occasions over the last
29 years since the Company’s inception. Mr. Foresman has nearly 29 years of experience in the financial services industry as an Executive, Compliance Officer, and Operations Principal. His knowledge of the financial operations of broker-dealers, advisory firms, and insurance agencies benefits the Audit Committee in its role of overseeing the operations of both the Company and MP Securities, the Company’s wholly-owned subsidiary. Mr. Messick, retired from the practice of law and the law firm of Messick Lauer & Smith P.C., and has provided legal and strategic planning services to credit unions and credit union service organizations nationwide for over 30 years. His extensive experience in helping create and consult with CUSOs benefits the Audit Committee.

---

ITEM 11. EXECUTIVE COMPENSATION
ITEM 11.EXECUTIVE AND BOARD OF MANAGER COMPENSATION
Executive Compensation
The following table sets forth certain information regarding compensation we paid for services rendered to us during the years ended December 31, 2022 and 2021 by our senior executive officers.
Summary Annual Compensation Table
Name
Principal Position
Salary
Bonus
All Other
Compensation (1)
Salary
Bonus
All Other
Compensation (1)
Joseph W. Turner
President and Chief Executive Officer
312,741
140,466
36,862
302,527
133,825
34,892
Brian S. Barbre
Sr. Vice President, Chief Financial Officer and Principal Accounting Officer
195,463
40,000
56,769
199,506
39,500
47,174
Darren M. Thompson
Executive Vice President, Chief Operating Officer
165,385
1,000
26,365
Michael R. Boblit(2)
Vice-President, Corporate Lending
132,563
-
31,256
(1) This includes the aggregate amount we contributed to the Company’s 401(k) retirement plan, for medical benefits, and life and disability insurance for the Company’s officers in each year.
(2) Mr. Boblit resigned from his position effective November 5, 2021.
Board of Managers Compensation
The following table provides a summary of the compensation paid to our Managers for the year ended December 31, 2022:
Summary Annual Compensation Table
Name
Principal Position
Compensation(1)
Michael Lee
Chairman of the Board of Managers
$
22,750
Van Elliott
Secretary and Manager
17,500
Juli Anne Lawrence
Manager
17,500
Jerrod Foresman
Manager
12,750
Mendell Thompson (Retired on June 22, 2022)
Manager
6,750
Guy Messick
Manager
16,250
(1) During each year, we accrue amounts for each Manager’s service on the Board. In February 2014, the Board approved the payment of compensation grants to Managers of the Board for rendering services to the Company. Under the grants approved by the Board, each Manager will receive a cash grant for serving on the Board, and will receive additional amounts for attendance at each Board meeting and for serving as a Chairperson or member of one of our Board Committees. In addition, we reimburse each Manager for expenses incurred in performing duties on our behalf. Compensation awards for our Managers for the years ended December 31, 2022 and 2021, were $94 thousand and $69 thousand, respectively.

---

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED MEMBER MATTERS
The following table sets forth information available to us, as of December 31, 2022, with respect to our Class A Units owned by each of our executive officers and our managers, and by our managers and executive officers as a group, and by each person who is known to us to be the beneficial owner of more than 5.0% of our Class A Units.
Name
Address
Beneficial
Ownership
Percentage
Owned(1)
R. Michael Lee
915 W. Imperial Hwy., Suite 120 Brea, CA 92821
$
-
-
%
Van C. Elliott
915 W. Imperial Hwy., Suite 120 Brea, CA 92821
-
-
%
Juli Anne Lawrence
915 W. Imperial Hwy., Suite 120 Brea, CA 92821
-
-
%
Jerrod L. Foresman
915 W. Imperial Hwy., Suite 120 Brea, CA 92821
-
-
%
Guy A. Messick
915 W. Imperial Hwy., Suite 120 Brea, CA 92821
-
-
%
Joseph W. Turner, Jr.
915 W. Imperial Hwy., Suite 120 Brea, CA 92821
-
-
%
Brian S. Barbre
915 W. Imperial Hwy., Suite 120 Brea, CA 92821
-
-
%
Darren M. Thompson
915 W. Imperial Hwy., Suite 120 Brea, CA 92821
-
-
%
All officers and members of the Board as a group
$
-
-
%
Other 5% or greater beneficial owners (seven):
Beneficial
Percentage
Name
Ownership
Owned(1)
AdelFi Credit Union
62,000
42.31
%
America’s Christian Credit Union
12,000
8.19
%
Navy Federal Credit Union (2) (“NFCU”)
11,905
8.13
%
UNIFY Financial Credit Union (“UFCU”)
11,905
8.13
%
Wescom Credit Union
11,905
8.13
%
Credit Union of Southern California
11,900
8.12
%
Keypoint Credit Union
8,000
5.46
%
(1) Based on 146,522 Class A Units outstanding.
(2) NFCU is a non-voting equity member in the Company, but holds a beneficial interest in 11,905 Class A Common Units. As the holder of an economic interest in the Company, NFCU holds a beneficial interest in the Company.

---

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ITEM 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The following table provides disclosures required by Regulation S-K Item 404 and Item 407(a), “Certain Relationships and Related Transactions.”
Transactions by related parties in the amount that exceeds $120,000 (dollars in thousands)
Amount of
transaction
Related Party Name
Related Interest
Transaction description
Mendell Thompson
Former Manager of the Company
Purchase of the company's notes
$
1,121
$
-
Mike Lee
Chairman of the Board of Managers
Purchase of the company's notes
-
Brian Barbre
Officer of the Company
Purchase of the company's notes
-
AdelFi
43.1% equity owner
Total funds held on deposit at AdelFi
3,797
AdelFi
43.1% equity owner
Rent expense on lease agreement with AdelFi
ACCU
8.19% equity owner
Total funds held on deposit at ACCU
4,083
ACCU
8.19% equity owner
Loan participations sold to ACCU and serviced by the Company
-
1,000
ACCU
8.19% equity owner
Draws on ACCU line of credit
3,000
2,000
KCTCU
The Company's Board Chair serves as the Chief Executive Officer and President of KCTCU
Loan participations sold to KCTCU and serviced by the Company
2,847
KCTCU
The Company's Board Chair serves as the Chief Executive Officer and President of KCTCU
Draws on KCTCU line of credit
2,000
3,825
UFCU
8.13% equity owner
Loan participations sold to UFCU and serviced by the Company
-
4,275
NFCU
8.13% equity owner
Loan participations sold to NFCU and serviced by the Company
4,872
4,991
ACCU Line of Credit
On September 23, 2021, the Company entered into a Loan and Security Agreement with ACCU for a $5.0 million short-term demand credit facility. The line of credit facility has maturity date of September 23, 2023. The interest rate on the facility is equal to the prime rate as published in the Wall Street Journal plus 75 basis points. As of December 31, 2022 the interest rate was 4.00%. The highest amount outstanding was $5.0 million and the current amount outstanding as of and for the year ended December 31, 2022 was $3.0 million. The Company made $2.0 million in principal payments during the year. $99.7 thousand in interest expense was incurred on the ACCU LOC for the year ended December 31, 2022.
KCTCU Line of Credit
On September 30, 2020, the Company entered into a Loan and Security Agreement with KCT. The KCT LOC is a $7.0 million short-term demand facility with a maturity date ending September 30, 2022. The highest outstanding balance during the year ended December 31, 2022 was $2.0 million. The balance had been paid off by June 6, 2022. The Company incurred interest expense of $14.6 thousand on the KCT LOC for the year ended December 31, 2022.
On June 6, 2022, the Company and KCT mutually agreed to terminate this facility and entered into two new facilities. The first facility, the KCT Warehouse LOC, is a $5.0 million short-term demand credit facility with a one-year maturity date of June 6, 2023. The second facility, the KCT Operating LOC, is also a $5.0 million short-term demand credit facility with a one-year maturity date of June 6, 2023. The interest rate on both facilities is equal to the United States Prime Rate plus 0.50% at the time of the draw. The interest rate was 8.00% on December 31, 2022. The Company did not draw on either line between June 6, 2022 and December 31, 2022.
Related Party Transaction Policy
The Board has adopted a Related Party Transaction Policy to assist in evaluating transactions the Company may enter into with a related party. Under this policy, a majority of the members of the Company’s Board and majority of its independent Board members must approve a material transaction that it enters into with a related party. As a result, all transactions that the Company undertakes with an affiliate or a related party are entered into on terms believed by management to be no less favorable than are available from unaffiliated third parties.

---

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
ITEM 14.PRINCIPAL ACCOUNTANT FEES AND SERVICES
Before we engage our principal accountant to render audit or non-audit services, our Audit Committee approves the engagement if SEC rules and regulations require it.
The aggregate fees billed by our accounting firm, Hutchinson and Bloodgood LLP, for the years ended December 31 were as follows:
Audit and audit-related fees
$
122,000
$
122,000
Tax fees
15,050
12,500
All other fees
2,600
-
Total
$
139,650
$
134,500
Our Audit Committee has considered whether the provision of the non-audit services described above is compatible with maintaining our auditors’ independence and determined that such services are appropriate.

---

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
ITEM 15.EXHIBITS
Exhibit No.
Description
3.1
Articles of Organization - Conversion of Ministry Partners Investment Company, LLC, dated as of December 31, 2008
(Incorporated by reference to the Current Report on Form 8-K filed by the Company on December 22, 2008.)
3.2
Operating Agreement of Ministry Partners Investment Company, LLC, dated as of December 31, 2008
(Incorporated by reference to the Current Report on Form 8-K filed by the Company on December 22, 2008.)
3.3
Plan of Conversion of Ministry Partners Investment Corporation, dated September 18, 2008
(Incorporated by reference to the Current Report on Form 8-K filed by the Company on December 22, 2008.)
3.4
Series A Preferred Unit Certificate of Ministry Partners Investment Company, LLC, dated as of December 31, 2008
(Incorporated by reference to the Current Report on Form 8-K filed by the Company on December 22, 2008.)
3.5
First Amendment to the Operating Agreement of Ministry Partners Investment Company, LLC, effective as of February 11, 2010
(Incorporated by reference to the Report on Form 10-K filed by the Company on March 31, 2010.)
3.6
Amended and Restated Certificate of Designation of the Powers, Designations, Preferences and Rights of Series A Preferred Units, effective as of May 22, 2013
(Incorporated by reference to the Current Report on Form 8-K filed by the Company on May 23, 2013.)
10.6
Office Lease, dated November 4, 2008, by and between Ministry Partners Investment Corporation and Evangelical Christian Credit Union
(Incorporated by reference to the Report on Form 10-K filed by the Company on April 14, 2009)
10.9
Form of Individual Manager Indemnification Agreement
(Incorporated by reference to Exhibit 10.20 to the Registration Statement on Form S-1 filed by the Company on June 24, 2011.)
10.19
Employment Agreement by and between Ministry Partners Securities, LLC and Joseph Turner dated May 5, 2016.
(Incorporated by reference to the Current Report on Form 8-K filed by the Company on May 11, 2016.)
10.23
Networking Agreement by and between Ministry Partners Securities, LLC and America’s Christian Credit Union dated July 30, 2014 and Addendum related thereto dated December 1, 2016.
(Incorporated by reference to Exhibit 10.23 on Form S-1 filed by the Company on December 8, 2017.)
10.33
Settlement Agreement and Mutual Release of All Claims by and between Ministry Partners Investment Company, LLC and OSK VII, LLC dated September 24, 2020
(Incorporated by reference to the Current Report on Form 8-K filed by the Company on September 30, 2020.)
10.35
Trust Indenture by and between Ministry Partners Investment Company, LLC and U.S. Bank National Association, as Trustee dated January 6, 2021
(Incorporated by reference to Pre-Effective Amendment No. 1, Exhibit A to Form S-1/A filed by the Company on January 6, 2021.)
10.36
Managing Broker Dealer Agreement by and between Ministry Partners Investment Company, LLC and Ministry Partners Securities, LLC, dated January 8, 2021
(Incorporated by reference to Pre-Effective Amendment No. 1 to Form S-1/A filed by the Company on January 6, 2021.)
10.38
Master Loan Participation Purchase and Sale Agreement by and between Ministry Partners Investment Company, LLC and America’s Christian Credit Union, dated August 9, 2021
(Incorporated by reference to the Current Report on Form 10-Q filed by the Company on August 12. 2021.)
10.39
Loan Agreement by and between Ministry Partners Investment Company, LLC and America’s Christian Credit Union, dated September 23, 2021
(Incorporated by reference to the Current Report on Form 8-K filed by the Company on September 28, 2021.)
10.40
Supplemental Executive Retirement Plan
(Incorporated by reference to the Current Report on Form 8-K filed by the Company on April 6, 2022.)
10.41
Warehouse Line of Credit Loan and Security Agreement by and between Ministry Partners Investment Company, LLC and Kane County Teacher’s Credit Union dated June 6, 2022.
(Incorporated by reference to the Current Report on Form 8-K filed by the Company on June 9, 2022.)
10.42
Operating Line of Credit Loan and Security Agreement by and between Ministry Partners Investment Company, LLC and Kane County Teacher’s Credit Union dated June 6, 2022.
(Incorporated by reference to the Current Report on Form 8-K filed by the Company on June 9, 2022.)
10.44
Amendment No. 1 to 2021 Class A Notes Trust Indenture Dated January 6, 2021
(Incorporated by reference to Exhibit A filed in Post-Effective Amendment No. 1 to Form POS AM filed by the Company on October 28, 2022.)
10.45
Servicing Agreement between the Company and AmeriNational Community Services, LLC effective as of February 14, 2023.
(Incorporated by reference to the Current Report on Form 8-K filed by the Company on February 21, 2023.)
10.46
Administrative Services Agreement by and between Ministry Partners Investment Company, LLC and Ministry Partners Securities, LLC dated February 8, 2023
14.1
Code of Ethics for Ministry Partners Investment Company, LLC, effective as of February 11, 2010
(Incorporated by reference to the Report on Form 10-K filed by the Company on March 31, 2010)
21.1
List of Subsidiaries (*)
23.1
Consent of Hutchinson and Bloodgood LLP (*)
31.1
Certification of Principal Executive Officer pursuant to Rule 13a-14(a) or Rule 15(d)-14(a) (*)
31.2
Certification of Principal Financial and Accounting Officer pursuant to Rule 13a-14(a) or Rule 15(d)-14(a) (*)
32.1
Certification of Principal Executive Officer and Principal Accounting Officer pursuant to 18 U.S.C. §1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (*)
101.ins
XBRL Taxonomy Extension Definition Linkbase Document **
101.sch
XBRL Taxonomy Extension Schema Document **
101.def
XBRL Taxonomy Extension Definition Linkbase Document **
101.cal
XBRL Taxonomy Extension Calculation Linkbase Document **
101.lab
XBRL Taxonomy Extension Label Linkbase Document **
101.pre
XBRL Taxonomy Extension Presentation Linkbase Document **
*
Filed herewith.
**
Furnished, not filed, herewith.