UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



FORM 10-K

(Mark One)

☑ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2020



☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________________ to________________



Commission file number:  333-4028-LA



MINISTRY PARTNERS INVESTMENT COMPANY, LLC

(Exact name of small business issuer in its charter)











Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☑.



Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☑.



Indicate by check mark whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐.



Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit). Yes ☑ No ☐.



Indicate by check mark whether registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.





If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revise accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐



Indicate by check mark whether registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. Yes ☐ No ☑.



Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑.



As of May 4, 2017 (the last date any sale or exchange was made of our Class A Common Units), the aggregate market value of the registrant’s Class A Common Units held by non‑affiliates was estimated to have no value. As of June 29, 2018 (the last date any sale or exchange was made of our Series A Preferred Units), the market value of the Series A Preferred Units was estimated at $67.50 per share or $7,904,250. The registrant has sold no Class A Common Units within the past sixty days and there is no public market value for the registrant’s Class A Common Units. The number of Class A Common Units outstanding, as of December 31, 2020, was 146,522.



DOCUMENTS INCORPORATED BY REFERENCE: None

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MINISTRY PARTNERS INVESTMENT COMPANY, LLC

FORM 10-K

TABLE OF CONTENTS





 

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Explanatory Note for Purposes of the “Safe Harbor Provisions” of Section 21E of the Securities Exchange Act of 1934, as amended

Certain statements in this report, other than purely historical information, including estimates, projections, statements relating to our business plans, objectives and expected operating results, and the assumptions upon which those statements are based, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward‑looking statements are included with respect to, among other things, our current business plan, core strategy and portfolio management. These forward-looking statements generally are identified by the words “believe,” “project,” “expect,” “anticipate,” “estimate,” “intend,” “strategy,” “plan,” “may,” “should,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties, which may cause actual results or outcomes to differ materially from those contained in the forward-looking statements. Important factors that we believe might cause such differences are discussed in the section entitled, “Risk Factors” in Part I, Item 1A of this Form 10-K or otherwise accompany the forward-looking statements contained in this Form 10-K. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events, or otherwise. In assessing all forward-looking statements, readers are urged to read carefully all cautionary statements contained in this Form 10-K.

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OUR COMPANY

Our Identity and History

Contact Information

Throughout this document, we refer to Ministry Partners Investment Company, LLC and its subsidiaries as “the Company,” “we,” “us,” or “our.”

Purpose and Mission

We are a California limited liability company that has been in business since 1991. Our primary missional purpose is to enhance Christian stewardship. We implement our missional purpose by assisting Christian ministries with Biblically based, value driven financial services. We provide financial services, investment products and financing solutions for churches, colleges, schools, ministry organizations, individuals and privately owned businesses. We also originate, invest in, and service loans made to evangelical Christian churches, ministries, and not for profit organizations.

Organization

Since inception, we have conducted our operations as a non-bank credit union service organization, or ("CUSO"). While we were initially formed as a wholly-owned subsidiary of the Evangelical Christian Credit Union (“ECCU”), we currently have 11 equity owners, all of whom are federal or state chartered credit unions.

We also have four wholly-owned subsidiaries through which we conduct various aspects of our business:

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MPF serves as the custodian of assets pledged to investors in our secured investment notes.

We organized MP Realty to provide loan brokerage and other real estate services to churches and ministries, but it has conducted limited operations since its inception.

MP Securities provides investment advisory and financial planning solutions for individuals, business organizations, churches, charitable institutions, and faith-based organizations. MP Securities also serves as the selling agent for the Company’s public and private placement notes.

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. The Internal Revenue Service has granted MPC tax-exempt status as a private foundation under Section 501(c)(3) of the Internal Revenue Code. MPC made its first charitable grant in 2020 and expects to award further grants during the year ending December 31, 2021.

Our Competition

The religious loan market segment has grown since our inception and we believe that the demand for ministry loans originated and serviced by niche lenders to churches and ministries will continue to exceed available lending and financing sources for this sector. We believe that the availability of lenders serving this market has been somewhat unpredictable as larger financial institutions expand, contract, or vacate this niche market during periods of fluctuating demand. We have specialized in assisting these organizations since we commenced operations in 1991 and believe that the lack of predictable financing sources for evangelical Christian churches and organizations enables us to serve ministries that otherwise may not be able to obtain cost-effective mortgage loans.

Although the demand for church financing is both broad and fragmented, no one lender has a dominant competitive position in the market. We compete with church bond financing companies, banks, credit unions, denominational loan funds, REITs, insurance companies, and other financial institutions to service this market. Many of these entities have greater marketing resources, extensive networks of offices, larger staffs, and lower cost of operations due to their size. We believe, however, we have developed an efficient, effective, and economical operation that (i) specializes in identifying and creating a diversified portfolio of church mortgage loans that we or other credit unions originate and (ii) preserves our capital base and generates consistent income for payments on our debt obligations and distribution to our equity investors.

We rely upon the extensive experience of our officers, management, and Managers in working with ministry related financing transactions, loan origination, and investment in churches, schools, ministries, and non-profit organizations.

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With respect to the investment advisory, broker-dealer, and insurance services provided through MP Securities, there are many mainstream financial services organizations that serve the faith-based market segment throughout the United States. Most of the competitors in this institutional market segment are banks, credit unions, denominational investment funds, as well as larger investment and insurance organizations. However, the overall size of the market segment provides ample opportunities for quality firms with specialized knowledge of the governance surrounding churches and ministries to effectively provide and expand the services we offer. In addition, MP Securities also serves the retail marketplace throughout the United States. While the retail market segment has large national competitors that offer alternative options, MP Securities’ holistic approach to providing investment and insurance advice enables us to provide services and products to an expanding market of potential clients.

Our Principal Business and Markets

Overview

We provide our financial services through two business segments. One is our church loan financing group and the other consists of our investment advisory practice, broker-dealer firm, and insurance agency. Within these segments, we offer a wide range of products and services for investors, borrowers, ministries, businesses, and individuals.

When initially founded, the Company relied solely on interest income generated from its mortgage loan investments. Since inception, the Company has expanded its equity ownership and ability to originate, service, and sell participation interests in the loans it originates. We also made substantial investments to broaden our sources of revenue by forming a broker-dealer and investment advisory firm. In management’s view, creating multiple revenue sources enables us to operate a more diversified business that is able to respond more effectively to economic cycles. To that end, the Company has substantially diversified the sources of its revenues by generating investment services revenue through MP Securities and by generating fee income from selling and servicing participations in our loans receivable. We plan to continue to invest in financial services products and services that will provide fee income and diversify the Company’s revenue and expansion opportunities.

We generate our revenue primarily from the following sources:

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While we strive to generate consistent earnings from our loan investments, receipt of servicing income from originating loans, and fees earned from investment advisory services and broker-dealer commissions, from time to time we have been able to generate income from additional sources. These include: the sale of loans, the sale of participation interests in loans that we originate, recoveries realized on distressed assets we hold, and other non-recurring events. For the year ended December 31, 2020, for example, we benefitted from a non-recurring $2.4 million gain recognized on the extinguishment of a portion of our credit facility debt. See “Management Discussion and Analysis of Financial Condition and Results of Operations” in this Annual Report for additional information on that transaction. 

Investment Advisory, Broker-Dealer, Insurance, and Financial Planning Solutions Segment

We provide investment advisory, broker-dealer, insurance, and financial planning solutions for individuals and businesses, as well as faith-based organizations, churches, and educational institutions. We provide these investment products and services through our wholly-owned broker-dealer, MP Securities, which serves as an investment advisory and broker-dealer firm with access to mainstream investment platforms that offer high quality products and services. MP Securities also maintains a clearing firm relationship with Royal Bank of Canada Dain Rauscher (“RBC Dain”), which provides additional investment platform options for our clientele.

MP Securities serves its clientele through a holistic approach based upon identifying the client’s needs and objectives. This financial planning process takes into account all options available to our clients as we act in their best interest to meet our fiduciary duty of care.

MP Securities also offers insurance products and services through our California insurance agency to help protect clients from unexpected life events. As such, MP Securities offers life, disability, long-term care, fixed and variable annuities, and indexed annuities to its retail and institutional clients. With respect to the annuity products available through MP Securities, many of our retail and institutional clients use annuity products that mitigate risk through income guarantees. In all cases, MP Securities and its advisors must act in the best interest of its clients.

MP Securities is a registered broker-dealer firm under Section 15 of the Securities Exchange Act of 1934 and a member of the Financial Industry Regulatory Authority (FINRA) and the Securities Investor Protection Corporation (SIPC). In addition, MP

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Securities holds a resident license from the California Department of Insurance to act as an Insurance Producer under the name Ministry Partners Insurance Agency, LLC.

MP Securities provides securities brokerage services to credit unions, credit union service organizations, and the customers and institutions it serves. It also acts as a selling agent for the Company’s debt securities offered through both public and private note offerings. As a non-carrying broker-dealer,  MP Securities opens brokerage accounts for its customers through its clearing firm agreement with RBC Dain.

The Securities and Exchange Commission (SEC), the Financial Industry Regulatory Authority (FINRA), California’s Department of Financial Protection and Innovation (formerly Department of Business Oversight), and the California Department of Insurance all directly regulate MP Securities due to its broad offering of products and professional services. In addition, state insurance or securities divisions have granted MP Securities a license to do business in every state in which we conduct offer services. As of December 31, 2020,  MP Securities was licensed to serve as an insurance broker in 15 states and offer investments in 24 states.

Church Loan Financing Segment

Overview

We assist evangelical Christian churches and organizations by providing financing for the acquisition, development, and/or renovation of churches or church-related properties, and provide investors the opportunity to participate in funding those projects. We typically secure these loans by real property owned by evangelical churches or church-related organizations such as Christian schools and ministries. As of December 31, 2020,  99.9% of the loans in our portfolio were secured by real estate. Currently, we conduct substantially all of our business operations in California. However, while we have more loan investments in California than in any other state, we own loan interests in 29 different states. 

To fund a substantial portion of our loan investments, we rely on sales of our debt securities to new investors, and the purchase of our debt securities by repeat investors. We market our debt securities primarily to investors who are in or associated with the Christian community, including individuals, ministries, and other organizations and associations. We also have funded substantial portions of our loan investments through term-debt from financial institutions. Additionally, to raise funds, we sell participation interests in our loan investments to other financial institutions. Finally, the Company’s owners have made significant capital investment into the Company that is available to fund the balance sheet along with the Company’s ongoing earnings. Going forward, we plan to continue to use all of these methods to fund our loan investments.

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Lending Activities

Loan Acquisition

We acquire loans either through originating loans internally or purchasing loans or loan participation interests from other financial institutions. When we originate a loan, we rely entirely on our own underwriting capabilities and standards. For loans that we purchase, we apply our internally developed underwriting criteria and loan acquisition policies and review the underwriting procedures carried out by the financial institution that is selling the loan or participation interest. We funded $19.4 million in loans during the year ended December 31, 2020 and $8.0 million for the year ended December 31, 2019.

Funding Our Operations

Overview

We use three primary on-balance sheet sources to fund our church and ministry loan investments. These include (i) our investor notes; (ii) term-debt borrowings from financial institutions; and (iii) capital investments of our equity members. In the past several years, we have reduced our funding reliance on credit facility term-debt, shifting the funding focus on investor notes and members equity. The chart below shows the shift in the strategy we have used to finance our investments and business operations (dollars in thousands):

To accelerate the shift in funding strategy, the Company has capitalized on opportunities to deleverage its term-debt when there is a financial advantage to do so. For the year ended December 31, 2020, we took advantage of an opportunity to make an early payoff of one of our term-debt credit facilities, which paid off $15.0 million in debt and resulted in a $2.4 million gain on debt extinguishment. Aside from the gain the Company realized, there are several benefits of the debt extinguishment to the Company’s cash flow and liquidity going forward. The monthly payment of $129 thousand will no longer be required on this facility, thus reducing the monthly cash flow needed to service this debt. In addition, the loan had a balloon payment due on November 1, 2026 of approximately $7.5 million. Retiring the debt early eliminated the future requirement to make the large balloon payment. Paying off the debt also released approximately $22.0 million of loans pledged as collateral. These loans are now available to secure other credit facilities or may be sold if

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additional liquidity is needed. The Company will continue to evaluate opportunities to further deleverage and re-evaluate its use of term-debt facilities as may be presented in the future. To that end, on March 5, 2021 we made a prepayment of $14.3 million on our remaining term-debt credit facility. 

One of the strategies we have employed in making this shift in funding sources is to sell participation interests in our mortgage loans. This enables the Company to fund loan acquisitions while conserving cash and increasing our non-interest income. This model allows us to acquire loans with little liquidity deployment while still enabling the Company to fulfill one of its key missional objectives of providing financing to Christian churches and ministries. To facilitate the implementation of this model, on September 30, 2020 we entered into a $7.0 million warehouse line of credit with KCT Credit Union, an Elgin, Illinois credit union (“KCT”). The warehouse line of credit will enable the Company to fund loans and warehouse them until sold without using long-term borrowing facilities or investor notes. We believe these developments create a stronger financial model for our investors and equity owners. We executed the loan participation model in 2020 and as a result, the Company sold $19.8 million in loans during 2020 as compared to no loan sales in 2019. 

Capital investments made by our equity members along with the Company’s retained earnings also provide funds for our church and ministry loan investments. Members’ equity provides investors with protection against losses and provides investment capital for the Company. Equity comes in the form of cash invested in the Company by its equity owners and retained earnings of the Company. As detailed in the chart above, the Company has increased its members’ equity from $8.2 million to $12.9 million over the most recent five-year period, providing an additional $4.7 million in equity protection against losses for its investors.

Funding from Our Investor Notes

Our investor debt consists of various series of notes sold under several registered public offerings as well as in private offerings. We sell these debt securities to faith-based ministries, institutions, and individual investors. 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 by providing at least thirty (30) but not more than sixty (60) days prior written notice. In addition, the Company may allow investors to redeem their notes prior to maturity at its sole discretion.

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Funding from Term-Debt

At December 31, 2020, our borrowings from institutional lenders consisted of the following term-debt borrowings (dollars in thousands):

We cannot borrow additional funds on these debt obligations; therefore, we will need to replace any principal paid on these debt obligations through another source.

MU Term-Debt Credit Facility.

This facility replaced the original $100 million credit facility entered into by and between the Company and Members United Corporate Federal Credit Union on May 7, 2008. The $87.3 million facility was entered into on November 4, 2011, by and between the Company and the National Credit Union Administration Board As Liquidating Agent of Members United Corporate Federal Credit Union (“NCUA”). On June 19, 2019, OSK VII, LLC, a Minnesota limited liability company, purchased the loan from the NCUA. No material terms have been changed with the transfer of ownership of the MU Term Debt Credit Facility. The Company cannot borrow additional funds on the facility and there are no prepayment penalties or restrictions.

Paycheck Protection Program Loan.

On April 27, 2020, MP Securities applied for and received a Paycheck Protection Program loan (“PPP Loan”) granted under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”). According to the terms of the program, as administered by the Small Business Association (“SBA”), payments on the loan are deferred for six months, deferred interest is capitalized into the principal balance of the loan, and qualifying amounts of the principal balance of the loan and deferred interest are eligible to be forgiven if the borrower is able to meet the program’s requirement for retention of employees and maintaining salary levels for its employees. Qualifying amounts include amounts equal to eligible payroll costs, certain rent payments, and utility payments as defined by the program. The CARES ACT does not require that the Company pledge collateral for the PPP Loan. 

On March 5, 2021, the Company was notified that its application for forgiveness of the PPP Loan was accepted by the SBA, and all principal and interest due on the loan was forgiven in full.  The Company no longer bears any liability related to the PPP Loan.

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Funding from Short-Term Warehouse Line of Credit:

On September 30, 2020, we opened a $7.0 million warehouse line of credit with Kane County Teachers Credit Union (“KCT”), which will enable the Company to fund loans and warehouse them until sold without using long-term borrowing facilities or investor notes (the “KCT Facility”). The KCT Facility is a short-term demand credit facility with a one-year maturity date of September 30, 2021. We may draw funds on the KCT Facility at any time until the line is fully drawn. Repayment of each advance is due one hundred and twenty (120) days after the advance is made or earlier in the event that a collateral loan becomes more than sixty (60) days delinquent and the Company fails to cure such deficiency.

Off Balance Sheet Funding: Sale of Loan Participation Interests

From time to time, we enter into loan participation purchase and sale agreements and we believe there is a robust demand for church and ministry loans in the credit union industry. When we sell a loan participation interest, we generally enter into a loan participation interest purchase agreement, which includes standard representations and warranties that are typical for a transaction of this nature. With our processing system and loan servicing capabilities, we believe we will be able to continue to expand our portfolio of loans serviced for others.

The table below shows the activity in our participation sold portfolio (dollars in thousands).

Human Capital Resources

The Company relies on the experience of its lending, financial services, underwriting, loan servicing skills, and experience of its management team. A substantial number of its employees have extensive experience in the credit union industry. Through MP Securities, it employs a team located in both its Brea and Fresno, California offices. The COVID-19 pandemic has caused major disruptions in the U.S. economy and the way businesses operate due to state and local government restrictions designed to limit social interaction in

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an attempt to slow the spread of the virus. In order to protect the safety of its employees, the Company has permitted remote work environments and modified work schedules. As of the date of this report, the Company’s operations have not been materially impacted by the pandemic. As the Company expands the range of services, products, and investment services it offers, the Company will seek to identify and recruit qualified personnel that will enable the Company to further diversify the services and products it offers, and increase its revenues and profitability.

Effect of Government Regulations on the Business

General

We are organized as a credit union service organization and, as a result, are subject to the regulations promulgated by the National Credit Union Administration (“NCUA”) that apply to CUSOs. As a CUSO, we primarily serve the interests of our credit union equity investors and members of such credit unions.

We are also subject to various laws and regulations that govern:

As a CUSO, we are limited in the scope of activities we may provide. In addition, our federal credit union equity investors are permitted to invest in or lend to a CUSO only if the CUSO primarily serves credit unions, its membership, or the membership of credit unions contracting with the CUSO. While the NCUA lacks direct supervisory authority over our operations, our federal credit union equity owners are subject to regulations which govern the rules and conditions of an investment or loan they make or sell to a CUSO. In addition, state-chartered credit unions must follow their respective state’s guidelines which govern investments by a state chartered credit union. California’s Department of Financial Protection and Innovation (formerly Department of Business Oversight) (“DFPI”), in particular, regulates several of our equity owners. These credit union owners must comply with DFPI regulations that govern the investment in a loan they make to a CUSO.

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Regulation of Mortgage Lenders

We conduct loan originating activities for churches and related ministry projects. Many states regulate the investment in or origination of mortgage loans. Under the California Finance Lender’s Law, no lender may engage in the business of providing services as a “finance lender” or “broker” without obtaining a license from the DFPI, unless otherwise exempt under the law. We conduct our commercial lending activities under a California finance lender license.

As a finance lender, we are licensed with the DFPI and file reports from time to time with the DFPI. Accordingly, the DFPI has enforcement authority over our operations as a finance lender, which includes, among other things, the ability to assess civil monetary penalties, issue cease and desist orders, and initiate injunctive actions. We also are subject to licensing requirements in other jurisdictions in connection with our mortgage lending activities. Various laws and judicial and administrative decisions may impose requirements and restrictions that govern secured transactions, require specific disclosure to our borrowers and customers, establish collection, foreclosure, and repossession standards, and regulate the use and reporting of certain borrower and customer financial information.

As we offer and originate loans outside of the State of California, we need to comply with laws and regulations of those states. The statutes which govern mortgage lending and origination activities vary from state to state. Because these laws are constantly changing, due in part to the challenge facing the real estate industry and financial institutions from residential lending activities, it is difficult to comprehensively identify, accurately interpret, and effectively train our staff with respect to all of these laws and regulations. We intend to comply with all applicable laws and regulations wherever we do business and will undertake a best efforts program to do so, including the engagement of professional consultants, legal counsel, and other experts as deemed necessary by our management.

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Broker-Dealer Registration

U.S. broker-dealers are subject to rules and regulations imposed by the United States Securities and Exchange Commission (“SEC”), FINRA, other self-regulatory organizations, and state securities administrators covering all aspects of the securities business. MP Securities, commenced operations in 2012. As a registered broker-dealer under Section 15 of the Securities Exchange Act of 1934 (the “Exchange Act”), MP Securities is subject to regulation by the SEC and regulation by state securities administrators in the states in which it conducts its activities. We have registered MP Securities in the following states:

MP Securities is subject to rules and regulations regarding:

MP Securities is also subject to the financial responsibility, net capital, customer protection, record keeping, and notification rule amendments adopted by the SEC on July 30, 2013. Because MP Securities does not carry or hold customer funds or securities and relies upon a clearing firm to conduct these transactions, Rule 17a-5 requires that it file an exemption report as well as review reports prepared by an independent public accountant

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confirming that it meets the exemption provisions. As amended, the net capital rule requires that MP Securities take into account in its computation of regulatory net capital any liabilities the Company assumes as its parent entity.

MP Securities is also subject to routine inspections and examinations by the SEC staff under Rule 17(b) of the Exchange Act and the SEC is authorized to review, if requested, the work papers of the broker-dealer’s independent public accounting firm that conducts the audit. As required by amendments to Rule 17a-5 of the Exchange Act, MP Securities files an annual report with the SEC and FINRA that includes its audited financial statements, supplementary schedules, and its exemption report as a non-carrying broker-dealer. MP Securities is a member of the Securities Investor Protection Corporation (“SIPC”) and files a copy of its annual report with SIPC.

Much of the regulation of broker-dealers in the U.S. has been delegated to self-regulatory organizations, principally FINRA and the securities exchanges. FINRA adopts and amends rules (which are subject to approval by the SEC) for regulating the industry and conducts periodic examinations of member firms. The SEC, FINRA, and state securities administrators may conduct administrative proceedings that can result in censure, fine, suspension, or expulsion of a broker-dealer, its officers, or employees.

Due to our close affiliation with MP Securities, we are subject to related party transaction disclosure issues under federal and state securities laws and rules adopted by FINRA. In particular, related party transactions can raise regulatory concerns:

MP Securities is also subject to FINRA’s review and policies governing disclosure practices when offering proprietary securities products, training its staff to identify and manage conflicts of interest, and reporting on significant conflict issues, including the firm’s adopted measures to identify and manage conflicts, to the MP Securities Board of Managers and its Chief Executive Officer.

As a broker-dealer firm, MP Securities is subject to regulation regarding:

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To the extent MP Securities solicits orders from customers, it will be subject to additional rules and regulations governing sales practices and suitability rules imposed on member firms.

MP Securities acts as a selling agent for the Company’s public and private debt securities. Due to this role, MP Securities is required to comply with FINRA’s filing requirements for these offerings. We believe that MP Securities has fully complied with its filing obligations as required under applicable FINRA, SEC, and state securities laws.

MP Securities is also required to maintain minimum net capital pursuant to rules imposed by FINRA. In general, net capital is the net worth of the entity (assets minus liabilities) less any other imposed deductions or other charges. A member firm that fails to maintain the required net capital must cease conducting business. If it does not do so, it may be subject to suspension or revocation of registration by the SEC and suspension or expulsion by FINRA. Under its Membership Agreement entered into with FINRA, MP Securities is required to maintain minimum net capital of the greater of $5,000 or one fifteenth of its aggregate indebtedness. As required by the 2013 amendments adopted by the SEC, MP Securities is required to include any liabilities assumed by the Company unless the Company is able to demonstrate that it has adequate capital to pay such expenses.

Regulation of Investment Advisers

On July 11, 2013, the State of California granted its approval for MP Securities to provide investment advisory services. As a California registered investment advisory firm, MP Securities is required to develop and maintain compliance procedures, record keeping procedures, comply with custody rules, marketing and disclosure obligations. MP Securities is also subject to the Investment Advisers Act of 1940, as amended, and related regulations. The SEC is authorized to institute proceedings and impose fines and sanctions for violation of the Investment Advisers Act. In addition to ensuring MP Securities’ compliance with federal and state laws governing its activities as a California registered investment advisory firm, the California DFPI requires that representatives hired by MP Securities meet certain qualification requirements, including complying with testing requirements and examinations.

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Our failure to comply with the requirements of the Investment Advisers Act, related SEC rules or regulations, and provisions of the California Corporations Code and Code of Regulations could have a material effect on us. We believe we are in full compliance in all material aspects with SEC requirements and California laws and regulations. As MP Securities hires new registered investment advisers, it will be required to monitor its compliance with SEC and DFPI regulations.

Fiduciary Standards

The Dodd-Frank Act authorized the SEC to consider whether broker-dealer firms should be held to a standard of care similar to the fiduciary standard applied to registered investment advisors. Although the SEC has not adopted the fiduciary rule for broker-dealer firms, the DOL issued final regulations in April 2016 which expanded the definition as to who will be deemed to be an “investment advice fiduciary” under the Employment Retirement Income Security Act of 1974 (“ERISA”). DOL also issued a new prohibited transaction exemption generally known as the best interest contract exemption designed to address conflicts that may arise when a person provides advice to a retail investor that may be vulnerable to conflicts of interest involving the advisory firm.

With the issuance of the DOL fiduciary rule under ERISA, fiduciary status would be extended to investment advisors and investment professionals that have previously not been considered fiduciaries. If deemed a fiduciary, the representative is held to a strict standard requiring the representative to act solely in the interests of plan participants and beneficiaries. With the adoption of the fiduciary standard, the representative is subject to personal liability to the ERISA plan for breaches of its actions under the rule. Implementation of the DOL fiduciary rule, especially in the context of a MP Securities adviser or sales representative rolling over an individual retirement account (“IRA”) into our proprietary debt securities, will require that we:

Regulation Best Interest Standard

The Regulation Best Interest standard was adopted by the U.S. Securities and Exchange Commission on June 5, 2019 and became effective on September 10, 2019 (“Reg BI”). Under Reg BI, a new standard of conduct has been established for broker-dealer firms and their sales personnel when making a recommendation to purchase a security to a retail

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investor. Under Reg BI, a broker-dealer firm must act in the best interest of the retail customer at the time the recommendation is made and comply with the following component obligations:

With the adoption of Reg BI, state securities regulators may impose or require more rigorous investor suitability standards than those, which are set forth above. In addition, there is inadequate administrative or case law which can give guidance as to how Reg BI will be interpreted. Finally, the Company may need to impose more rigorous quantitative suitability standards for investments made in our investor notes in the future if one or more state regulators adopt more stringent suitability regulations or policies pursuant to Reg BI.

Privacy Standards

The Gramm-Leach-Bliley Financial Services Modernization Act of 1999 (“GLBA”) modernized the financial services industry by establishing a comprehensive framework to permit affiliations among commercial banks, insurance companies, securities firms, and other financial service providers. We are subject to regulations implementing the privacy protection provisions of the GLBA. These regulations require us to disclose our privacy policy, including identifying with whom we share “non-public personal information” to our investors and borrowers at the time of establishing the customer relationship and annually thereafter. The State of California’s Financial Information Privacy Act also regulates consumer’s rights under California law to restrict the sharing of financial data. In recent years, there has been a heightened legislative and regulatory focus on data security, including requiring customer notification in the event of a data breach. Congress has held several hearings in the subject and legislation has been introduced which would impose more rigorous requirements for data security and response to data breaches. As MP Securities expands its investment advisory business operations, it will also need to monitor regulatory initiatives promulgated under Dodd-Frank that affect investment advisers.

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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 and the information incorporated by reference 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 and credit facility lenders substantially depends on our ability to raise funds from the sale of our debt securities. Several factors affect our ability to sell our debt securities including:

Unexpected large withdrawals by investors that hold our debt securities can negatively affect our overall liquidity.

We have expanded our methods of raising funds, including selling participations in our mortgage loan investments, and expanding the sales of our debt securities to Christian ministries, institutional, and retail investors, as well as faith-based organizations and ministries. If this strategy is not viable, we will need to find alternative sources of borrowing to finance our operations. If we are unable to raise the funds we need to implement our strategic objectives, we may have to sell assets, deleverage our balance sheet, and reduce operational expenses.

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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 purchase our debt securities roll their matured note into a new note. Historically, we have been able to maintain 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 notes over the prior three years:



Our growth is dependent on leverage, which may create other risks.

We use 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 a non-cash 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 of some or all of those assets.

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, 2020, our allowance for loan loss totaled $1,516 thousand or 1.28% 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:

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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. Given the total amount of our allowance for loan losses, an adverse collection experience in a small number of loans could require an increase in our allowance. 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.

An increase in our non-performing assets will adversely affect our earnings.

Nonperforming assets adversely affect our net income in the following ways:

Our troubled assets could increase significantly if additional borrowers become delinquent and we are unsuccessful in managing our non-performing assets. This in turn could have a material, adverse effect on our results of operations and financial condition. At December 31, 2020, $6,482 thousand, or 4.5%, of our total assets, were deemed to be non-performing, as compared to $13,601 thousand, or 8.8%, at December 31, 2019.

A portion of our mortgage loans collateralizes our credit facilities; therefore, these pledged assets will be unavailable to meet our unsecured debt obligations.

Our term-debt credit facility and our line of credit requires that we secure them with mortgage loans, maintaining a minimum collateralization ratio (“MCR”) of at least 120% on each credit facility. Loans pledged as collateral to the term-debt credit facility or line of

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credit will be unavailable for other cash flow purposes, including meeting our unsecured debt obligations. As of the date of this Report, we are in compliance with our MCR covenants as required by our credit facilities.

The following table shows the recorded balance of loans pledged and not pledged as collateral as of December 31, 2020 (dollars in thousands):

The loans pledged to satisfy collateral requirements for debt facilities and secured investor notes will not be available to meet our unsecured debt obligations. Therefore, a default on this credit facility could reduce the availability of other assets on our balance sheet, and adversely affect our liquidity and ability to repay our investor notes.

We may not be able to refinance our existing credit facility with an institutional lender on attractive terms.

Our term-debt credit facility matures with a balloon payment due on November 1, 2026. As of December 31, 2020, the outstanding balance on our credit facility is $51.4 million. While we expect that we will be able to retire, pay-off or refinance the facility on or before November 1, 2026, no assurances can be given that we will be able to find a replacement credit facility on attractive terms.

Our financing arrangements contain 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 contain 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.

Loss of our management team or the ability to attract and retain 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 institutional and faith-based ministry investors, lenders, financial institutions, broker-dealer and investment advisory firms,

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ministries, and individual investors. 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 retain qualified senior managers that will enable us to achieve our core strategic objectives 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 objectives is to increase non-interest revenues from fees generated from the distribution of financial products, such as 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 retain 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. Turnover in the financial services industry with broker-dealer and advisory firms is high. If we are unable to recruit and retain 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, transmit, 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 maintaining 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

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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:

These events could potentially result in data loss and adversely affect our ability to conduct our business. As of the date of this annual 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 regarding these transactions may be insufficient to address any conflicts of interest that may arise.

Under our code of business conduct, we have established procedures regarding the review, approval, and ratification of transactions that may give rise to a conflict of interest between us and 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 purchased, 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

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:

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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 the Covid-19 pandemic on our church and ministry loans cannot be determined at this time.

The Covid-19 pandemic has caused major disruptions in the U.S. economy and has caused churches, Christian schools, and ministries to make significant changes in the conduct of their operations, programs and in-person meeting schedules. Our business relies, to a significant degree, on the ability of our ministry borrowers to make loan payments on a timely basis. The long-term impact of the pandemic on our borrowers cannot be determined at this time. A significant disruption in giving trends resulting from ongoing pandemic related causes could have a material impact on the timing of loan payments made by our borrowers, our liquidity, loan loss reserves and our financial condition.

We have granted limited payment relief to certain borrowers adversely impacted by COVID-19.

For the year ended December 31, 2020, we offered loan payment relief to borrowers that have been materially impacted by the economic effects of the pandemic. For borrowers that we have granted payment relief to, we did not extend the maturity dates of the loans and we added any deferred payments to the principal balances due at maturity. Of the 145 loans held at December 31, 2020, we have granted short-term deferrals to 35 borrowers. As of December 31, 2020, only three loans remain on either a full or partial payment deferment while the remaining borrowers to which the Company granted payment relief have resumed making contractual payments on their loans. 

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.

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Declining real estate values generally 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 the event 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 provide for a fixed interest rate with a five-year interest rate adjustment or maturity date. Our term-debt borrowings are also at a fixed interest rate, providing a stable cost of funds at 2.52%. A significant 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 a number of 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 event 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 provide 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 loans 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.

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Regulatory compliance failures could adversely affect our reputation, operating business, and core strategic objectives.

We rely on publicly offered debt securities to fund a substantial portion 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 (formerly Department of Business Oversight), 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 jurisdiction over the activities of our broker-dealer affiliated entity. As a registered broker-dealer and FINRA member, MP Securities is required to maintain registrations under the securities laws in those states in which it conducts business. The failure to comply with obligations imposed by any regulatory authority binding on our subsidiaries or us or to maintain any of the required licenses or permits could result in investigations, sanctions, and reputation damage.

Risks Related to Our Mortgage Loan Investments

We are subject to risks related to prepayment of mortgage loans held in our portfolio, which may negatively affect our business.

Generally, 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 the event 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.

Generally, to pay their loans, churches depend largely on revenues from church member contributions. Donations typically fluctuate over time for a number of reasons, including, but not limited to:

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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 impact the church’s ability to meet its debt service obligations on a mortgage loan we make.

The quality of our mortgage loans depends on consistent application of sound underwriting standards.

The quality of the mortgage loans in which we invest depends largely on the adequacy and implementation of sound underwriting standards as described in our Board adopted loan policy. In order 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.

Because we invest in specialized purpose mortgage loans, our loan portfolio is generally riskier than if it were diversified.  

We are among a limited number of non-bank financial institutions specialized in providing loans to evangelical churches and church organizations. Specialized properties secure our loans and the secondary market for these loans remains regional and limited. Our mortgage loan agreements require that the borrower adequately insure the property. This requirement secures the loan against liability and casualty loss. However, certain types of losses, generally 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 focused on loans to churches and religious organizations.

The Company has 14% and 23% of the balance of its loan portfolio located in the states of California 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.

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We may suffer losses on loans due to not having all of 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 generally 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. To some extent, our staff depends and relies upon the pastoral staff to provide full and accurate disclosure of material information concerning their operations and financial condition. We may not have access to all of the material information about a particular borrower’s operations, financial condition, and prospects. In addition, a borrower’s accounting records may become poorly maintained 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, ultimately, to a failure or inability to recover our loan in its entirety.

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 attempt 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 adequately 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.

We make assumptions about the collectability of our loan portfolio.

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 many of our loans. If we determine 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 could be required 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 could be required to recognize impairment

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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.

Some of our mortgage loan investments currently are, and in the future may be, non-performing loans or may be restructured, which are subject to increased risks relative to performing loans.

Some of the loans in our mortgage loan portfolio currently are, or in the future may be, 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 significant 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 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 maintain the restructured payments or refinance the restructured mortgage at maturity.

In the event a borrower defaults on one of our mortgage loan investments, we will generally need to recover our investment through the sale of the property securing the loan.

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 a number of subsequent events, including:

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The occurrence of any of these events could severely impair the market value of the security for our mortgage loan investments. In the event 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 anticipated 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 additional expenses incurred could adversely affect our ability to recover the full value of our collateral.

There is risk we may incur losses when we acquire properties through the foreclosure of one of our mortgage loan investments.

When we acquire a property through foreclosure, we value the property and its related assets and liabilities. For these foreclosed properties, we base the initial real estate owned value on the estimated collateral value, obtained through an appraisal, net of estimated selling costs. We may recognize a loss if the fair value of the property internally determined upon acquisition is less than the previous carrying amount of the foreclosed loan.

In addition, if we foreclose on a mortgage loan and take legal title to the real property, we could become responsible for real estate taxes levied and assessed against the foreclosed property as well as other costs such as property maintenance and insurance costs. These costs would be our financial responsibility and could reduce our recovery on our investment.

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 and 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.

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None.

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Corporate Offices

As of December 31, 2020, 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 maintains networking agreement office locations in Glendora, California and Elgin, Illinois.

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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. In October 2020, the Company settled a civil action filed against it for wrongful termination of employment and other claims by a former employee, and the suit was dismissed. The settlement amount had no material impact on the Company’s financial position or results of operations. As of December 31, 2020, 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.

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Not applicable.

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PART II

 

Price Range of Common Units

There is no public market for our Class A Units and Series A Preferred Units. As of December 31, 2020, 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 entitle 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 $183 thousand and $171 thousand in net profits to distribute to our Series A Preferred Units holders for the years ended December 31, 2020 and 2019, respectively. This increased the amount of distributions declared on our Series A Preferred Units for the fourth quarters of 2020 and 2019 by $1.565 per unit and $1.461 per unit, respectively.

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The remaining balance of any profits will be allocated to all holders of our Class A Units based on their ownership percentage. For 2020, we made no distributions to the holders of our Class A Units.

During December 31, 2020 and 2019, we declared distributions on our Series A Preferred Units as follows:

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.

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We are a “smaller reporting company” as defined by Regulation S-K promulgated by the SEC. As a result, we are not providing the information contained in this item pursuant to Regulation S-K.

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

OVERVIEW

We generate our revenue primarily through our church lending portfolio and secondarily through fees generated from our investment and insurance products and services. While we generate the majority of our revenue through interest income, our strategy is to increase the diversification of our revenue sources. A diversified revenue stream may reduce the risk to the Company if economic factors, such as changes in interest rates, decrease our interest income. We also focus on improving our operating efficiency and capital position by increasing the revenue generated for each dollar of expense incurred to run the business. Increased capital helps mitigate risk in economic down cycles. In addition, we are focusing on reducing risk to our lending revenue by improving the quality of our loan portfolio, assessing the financial strength of our borrowers, and working with borrowers to restructure, refinance, and/or liquidate these investments when necessary.

In order to continue to achieve our objectives, protect the investment made by our note holders, and maximize the value of our equity holders’ investment, we will continue to focus on:

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COVID-19 Impact on the Company’s Business

Our borrowers are primarily churches, Christian schools, educational institutions, and faith-based ministries. To support our borrowers during COVID-19 pandemic we granted various payment relief options to the borrowers impacted by the pandemic. Interest continued to accrue under loans to which the Company granted payment relief. During the year ended December 31, 2020, the Company granted deferral requests of various terms to 35 borrowers. The vast majority of these borrowers have resumed their contractual payment with three borrowers still under a COVID-19 related payment concession as of December 31, 2020.  

In management’s view, the payment deferrals we made during the year ended December 31, 2020 did not have a material impact on the Company’s cash position or its revenue. For payment deferral requests the Company granted, the maturity date of the mortgage note was not extended. While deferred payments increased the principal amount due at maturity on these loans, the Company’s net income and liquidity have not been adversely affected.

Many of the initial shutdown orders that began in March 2020 have been gradually lifted and some churches have begun holding worship services in their facilities. In addition, several vaccines have begun to be distributed that are expected to reduce to spread of COVID-19. However, if the vaccines are not effective in preventing the spread of COVID-19, some state governments may reinstate restrictions on church meetings. As of the date of this Report, the impact these new restrictions may have on our borrowers’ revenue and their ability to make their loan payments remains unknown.

The Company will continue to monitor the impact of COVID-19 on the borrowers it serves, taking into account regional differences in the adverse effects and impact of the pandemic throughout the U.S. As a result, the Company may need to work with churches that have been substantially impacted by the economic effects of the pandemic and may need to grant additional deferrals during 2021. At this time, there is no legislative relief that would permit the Company to classify COVID-19 related deferrals granted after December 31, 2020, as a non-troubled debt restructure.

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Financial Performance Summary for the Two-Year Period ended December 31:  

(dollars in thousands)





Summary of Financial Performance

For the year ended December 31, 2020, we recognized net income of $2,116 thousand and increased owners’ equity by $1,837 thousand. 2020 replaced 2019 as the Company’s most profitable year since inception due to a recognition of gain on debt extinguishment of $2,400 thousand during 2020. This gain helped the Company overcome a $653 thousand decrease in broker-dealer commissions and fees during the year ended December 31, 2020 as compared to the year ended December 31, 2019. This decrease was mainly due to reduced client investment activity related to the uncertainty caused by the COVID-19 pandemic. The gain on debt extinguishment also helped offset a reduction in net interest income of $(1,204) thousand which was caused by the Company holding higher than normal cash positions. Interest income also decreased in 2020 compared to 2019 because during 2019 the Company recovered interest income when non-accrual loans paid off. Management made a decision to maintain substantial cash positions rather than invest in additional loans due to the economic uncertainty during 2020. We generated cash through loan participation sales and sales of our notes payable.

Progress on Strategic Objectives

In 2020, we made continued progress towards our strategic objectives of diversifying our revenue streams, improving the quality of our loan portfolio, maintaining our balance sheet size, and improving operating efficiency. The following discussion focuses on each of these strategic objectives.

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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:

Loan portfolio quality

Historically, when the Company has reported a net loss for the year, the primary reason for the loss has been due to losses on our loan investments or from reserves taken on our allowance for loan losses. In subsequent years, the Company has benefited from recoveries when the loans paid off, the Company disposed of the collateral properties, or when the Company sold the promissory notes or loans. Therefore, the resolution of non-performing loans may contribute either positively or negatively to the Company’s performance. In 2019, two non-accrual loans paid off, resulting in a collection of interest income of $511 thousand. During the year ended December 31, 2020, the Company sold an impaired loan in order to recoup its recorded investment in the loan.

We continue to monitor our loan portfolio very closely and work with borrowers to minimize losses on 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. Through these efforts, we saw our classified loans decrease by $2,662 thousand to $6,181 thousand at December 31, 2020 as compared to December 31, 2019.

As part of our strategic decision to reposition our loan portfolio, we have continued to focus on originating lower balance loans made to ministries where we can achieve yields that are more favorable. This allows us to avoid deteriorating our margins while reducing

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overall risk exposure to any one borrower. However, we also have originated larger loans when we are able to find participants to purchase a participation interest in the loan. Servicing loan participations sold generates servicing fee income while allowing us to minimize 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 $816 thousand at December 31, 2020. We believe the relationships we have established with credit unions throughout the United States will enable us to increase the amount of loan participation interests we sell and service for others.

Maintaining balance sheet size

Our strategy in 2019 and entering 2020 was to maintain our balance sheet size rather than increase it as we direct more resources into improving the quality of our existing loan portfolio. However, during the year ended December 31, 2020, we took advantage of an opportunity to pay off a term-debt credit facility with a $15.0 million outstanding principal balance. While paying off the loan reduced our balance sheet size, this opportunity benefited the Company by increasing capital from a $2.4 million gain on debt extinguishment, improving net interest margin, and eliminating the ongoing cash flow requirements to service the debt. While we intend to continue our general strategy of maintaining our balance sheet size, we are willing to take advantage of available opportunities to improve our overall financial position. To that end, on March 5, 2021 we made a prepayment of $14.3 million on our remaining term-debt credit facility. This facility had an outstanding balace of $51.4 million as of December 31, 2020.

Improved operating efficiency

In the last several years, we have worked on improving our operating efficiency. In 2020, we had non-interest expense of $5,009 thousand, a decrease of $(176) thousand from $5,185 thousand in 2019. The decrease for the year ended December 31, 2020 is attributable to reduced employee activity, such as limited travel due to the COVID-19 pandemic.

Financial Condition

The following discussion and analysis compares the results of operations for the twelve months ended December 31, 2020 and 2019 and should be read in conjunction with the accompanying consolidated financial statements and notes thereto.

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Comparison of Financial Condition at December 31:



General

Total assets decreased 9% due to the paydown of term-debt described earlier. Loans receivable decreased 10% due to management’s focus on selling participation interests as well as $12,413 thousand in principal collections on loans receivable. Despite the difficult economic environment caused by COVID-19 pandemic, our net notes payable increased by $3,148 thousand. Therefore, despite the term-debt payoff, cash only decreased $4,071 thousand.

Loan Portfolio

Our loan portfolio provides the majority of our revenue, however, it also presents the most risk to future earnings through both interest rate risk and credit risk. Additional information regarding risk to our loans is included in “Part I, Item 1A, Risk Factors”.

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Our portfolio consists entirely of loans made to evangelical churches and ministries with approximately 99.9% of these loans secured by real estate. The loans in our portfolio carried a weighted average interest rate of 6.55% at December 31, 2020 and 6.59% at December 31, 2019.  

Loan Types

Maturities and Sensitivities of Loans to Changes in Interest Rates



Included in the table above are 93 adjustable rate loans totaling $82.6 million in gross loans receivable, or 70% 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 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 monitor these non-performing assets on an ongoing basis. Management evaluates the potential risk of loss on these loans and foreclosed assets by comparing the

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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. When a loan is deemed to be collateral-dependent, the repayment of principal will involve the sale or operation of collateral securing the loan. For these loans, we record any interest payment we receive in one of two methods. If the Company deems that the recorded investment of the loan is fully collectable, we will recognize income on the interest payment received on the cash basis. If we deem that the recorded investment is not fully collectable, we will record any interest payment we receive towards reduction of principal balance. For non-collateral-dependent loans that are on non-accrual status, we recognize income on a cash basis.

We had four non-accrual loans as of December 31, 2020 and six as of December 31, 2019.  During 2020, the Company sold one of the non-accrual loans at approximately its recorded value. The other non-accrual loan is now a performing loan. As detailed in the table below, these activities decreased the balance of our non-performing loans at December 31, 2020 as compared to December 31, 2019.

At December 31, 2020 and December 31, 2019, we had three restructured loans that were on non-accrual status, and two of these loans were over 90 days delinquent at December 31, 2020. In addition, we have five performing restructured loans on accrual status as of December 31, 2020.

The following table presents our non-performing assets:



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

2 Includes $504 thousand of restructured loans that were over 90 days delinquent as of December 31, 2020.

3 Foreclosed assets are presented net of any valuation allowances taken against the assets.

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Allowance for Loan Losses

We maintain an allowance for loan losses that we consider adequate to cover both the inherent risk of loss associated with the loan portfolio as well as the risk associated with specific loans.

General reserves are allowances taken to address the inherent risk of loss in the loan portfolio. We include several factors in our analysis. We weigh these factors for the level of risk represented and for the potential loss in our portfolio. These factors include:

In addition, we include additional general reserves for our loans if the collateral for the loan is a junior lien or if a loan is unsecured. We segregate our loans into pools based on risk rating when we perform our analysis in order to increase the accuracy when determining the potential impact these factors have 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 results in greater general reserves related to these loans. We evaluate these factors on a quarterly basis to ensure that we have adequately addressed the risks inherent in our loan portfolio.

We also examine our entire loan portfolio regularly to identify individual loans that we believe have a greater risk of loss than is addressed by the general reserves. These are identified by examining delinquency reports, both current and historic, monitoring collateral value, and performing a periodic review of borrower financial statements. For loans that are collateral-dependent, management first determines the amount of the loan investment at risk, defined as the unpaid principal balance, net of discounts, less the collateral value net of estimated costs associated with selling a foreclosed property. The total amount of the loan investment at risk is reserved. For impaired loans that are not collateral-dependent, management will record an impairment based on the present value of expected future cash flows. At a minimum, we review loans that carry a specific reserve

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quarterly. However, we will adjust our reserves more frequently 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. Reserves for these loans are determined 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 providing an adequate allowance for loan losses involves judgement on the part of management. We strive to maintain the allowance at a level that compensates for losses that may arise from unknown conditions. As a result, losses may differ from current estimates made by management.

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The following chart details our allowance for loan losses:





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The following table shows the Company’s allocation of loan loss by loan categories as of December 31, 2020.





Investor Notes Payable

Our investor notes payable consist of debt securities sold under publicly registered security offerings as well as notes sold in private placement offerings. Over the last several years, we have expanded our investor note sale program by building relationships with other faith-based organizations whereby we can offer our various investor note products to these organization and the ministries they serve. Concurrently, MP Securities and its staff of financial advisors have increased our customer base through marketing efforts made to individual investors. These efforts helped the Company grow its notes payable despite operating in the uncertain economy caused by the COVID-19 pandemic. Our investor notes payable increased by $3,148 thousand during the year ended December 31, 2020. The balance sheet presents our investor notes payable net of debt issuance costs, which have decreased from $55 thousand at December 31, 2019 to $33 thousand at December 31, 2020.

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At December 31, 2020, the balances of our outstanding investor debt securities were as follows (dollars in thousands):



Members’ Equity

During the year ended December 31, 2020, total members’ equity increased by $1,837 thousand attributable to net income of $2,116 thousand earned by the Company and offset by dividend distributions of $279 thousand. We did not repurchase or sell any membership equity units during the year ended December 31, 2020.

Liquidity and Capital Resources

Maintenance of adequate liquidity requires that sufficient resources are always available to meet our cash flow needs. We need cash to obtain new mortgage loans, repay term-debt, make interest payments to our note investors, and pay general operating expenses. Our primary sources of liquidity are:

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Our management team regularly prepares cash flow forecasts that we rely upon to ensure that we have adequate liquidity to conduct our business. While we believe that these expected cash inflows and outflows are reasonable, we can give no assurances that our forecasts or assumptions will prove to be accurate. While our liquidity sources that include cash, reserves, and net cash from operations are generally available on an immediate basis, our ability to sell mortgage loan assets and raise additional debt or equity capital is less certain and less immediate.

Withdrawal requests made by holders of high value notes can also adversely affect our liquidity. We believe that our available cash, cash flow from operations, net interest income, and other fee income will be sufficient to meet our cash needs. Should our liquidity needs exceed our available sources of liquidity, we believe we could sell a portion of our mortgage loan investments at par to raise additional cash; however, we also must maintain adequate collateral, consisting of loans receivable and cash, to secure our term-debt and secured notes.

Our Board of Managers approves our liquidity policy. The policy sets a minimum liquidity ratio and contains contingency protocol if our liquidity falls below the minimum. Our liquidity ratio was 26% at December 31, 2020, which is above the minimum set by our policy. This was  a decrease from 32% at December 31, 2019 primarily due to the paydown of the term loan.  

We review our liquidity position on a regular basis to analyze our current position and expected trends of loan closings and sales of investor notes. Management believes that we maintain adequate sources of liquidity to meet our liquidity needs. Some of the material liquidity events that would adversely affect our business are listed below:

COVID-19 Impact on the Company’s Liquidity

In response to the uncertainty created from the COVID-19 pandemic, management began to generate liquidity from its loans receivable portfolio by selling participation interests in its loans receivable. During the year ended December 31, 2020, the Company generated cash from loan sales of $19,827 thousand, including $17,106 thousand related to the sale of

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loan participation interests. We plan to continue to raise additional cash through loan and investor note sales, if necessary, to keep sufficient levels of cash available to meet our debt obligations to investors as well as obligations under our term-debt credit facilities.

Cash, restricted cash, and certificates of deposit were $23,734 thousand ($23.7 million) as of December 31, 2020 and our liquidity ratio was 26%. These liquidity levels are significantly higher than the cash amounts the Company has historically carried.

Due to management’s desire to provide liquidity and safety for our investors amid the general uncertainty during the initial stage of the pandemic, MP Securities applied for and received a Paycheck Protection Program Loan (“PPP loan”) for $111 thousand. The maturity date of the loan is April 27, 2022. As of March 5, 2021, this loan was forgiven by the SBA under the provisions of the CARES Act.  The Company no longer bears any liability for principal or interest due on the loan.

Debt Securities

The sale of our debt securities is a significant component in financing our mortgage loan investments. Through sales of our publically offered notes and privately placed investor notes, we expect to fund new loans, which we can hold either to receive interest income or to sell to participants to generate servicing income and gains on loan sales. We also use the cash we receive from investor note sales to fund general operating activities.

At December 31, 2020, our investor notes had future maturities during the following twelve-month periods ending December 30 (dollars in thousands):



Historically, we have been successful in generating reinvestments by our debt security holders when the notes they hold mature. Our note renewal rate has been stable over the last several years.

The table below shows the renewal rates of our maturing notes over the last three years.



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Short-term Credit Facilities

Warehouse Line of Credit Short-Term Funding: KCT CU Warehouse line of credit

On September 30, 2020, we opened a $7.0 million warehouse line of credit with KCT, which will enable the Company to fund loans and warehouse them until sold without using long-term borrowing facilities or investor notes (the “KCT Facility”). The KCT Facility is a short-term demand credit facility with a one-year maturity date of September 30, 2021. The KCT Facility will automatically renew for another 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. We may draw funds on the KCT Facility at any time until the line is fully drawn. Repayment of each advance is due one hundred and twenty (120) days after the advance is made or earlier in the event that a collateral loan becomes more than sixty (60) days delinquent and the Company fails to cure such deficiency. To secure our obligations under the KCT Facility, we have agreed to grant a priority first lien and security interest in certain of our 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 Facility. The minimum ratio must equal at least 120%. The KCT Facility contains typical affirmative covenants for a credit facility of this nature. The Company was in compliance with these covenants at December 31, 2020. As of December 31, 2020 the KCT warehouse line of credit had no outstanding balance.

Term-debt Credit Facilities

We have funded a significant portion of our balance sheet through our term-debt. Because the term-debt has a fixed rate until the facilities mature in 2026, it provides a stable cost of funds.

The table below is a summary of the Company’s credit facilities (dollars in thousands):







We cannot borrow additional funds on these facilities; therefore, we will need to find a new funding source when the facility matures. If we cannot find an alternative source of funding, we will have to shrink our balance sheet, which may reduce our net interest income. However, management reduced this risk on September 25, 2020 by paying off the remaining balance of $15 million on one of the term-debt credit facilities. In addition, on

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March 5, 2021, the Company paid down another $14.3 million on the remaining term-debt credit facility, further reducing the need to replace this term-debt in the future.

As of the date of this Report, our only source of funds to pay down our term-debt credit facilities are our earnings, the debt securities we sell, and net cash flow from our loans receivable portfolio. Our warehouse line of credit from KCT cannot be used to pay down our term-debt, as it is only available to warehouse new loan originations. 

The following table shows the maturity schedule on our credit facilities for the next five years and thereafter as of December 31, 2020 (dollars in thousands):





Debt Covenants

Under our credit facility agreements and our investor note documents, we are obligated to comply with certain affirmative and negative covenants, including maintaining a minimum collateralization ratio of at least 120% for the Term-Loan Credit Facility. Failure to comply with our covenants could require all interest and principal to become due. As of December 31, 2020, we are in compliance with our covenants on our notes payable and term debt.

Results of Operations:

For the year ended December 31, 2020

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.

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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:





[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.





Net interest income decreased 24% during the year ended December 31, 2020. Net interest margin decreased 62 basis points to 2.67% for the year ended December 31, 2020. This decrease was due to reduced interest income on both of our primary sources of interest

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income: interest-earning accounts with other financial institutions and interest-earning loans. Reduced interest-expense on notes payable and term-debt offset the decreased earnings somewhat as explained below.  

The decrease in yield on interest-earning loans was due to both volume and rate variance. The volume variance was due to the lower average loan balances as the Company sold participation loan interests to increase cash balances due to the uncertainty of the economy caused by COVID-19. The rate variance on the interest-earning loans was due to the Company collecting and recognizing interest when two non-accrual loans paid off during 2019. On payoff, the Company was able to collect $511 thousand of interest income previously allocated to principal when the loans were on non-accrual basis. The weighted average rate on the loan portfolio decreased slightly from 6.59% to 6.55% during the year ended December 31, 2020. The rate variance decrease on interest-earning accounts with other financial was due to the decrease in average yield on these accounts of 110 basis points. The decrease was due to overall market interest rates declining over the last twelve months caused by the Federal Reserve’s monetary response to the COVID-19 pandemic. The volume variance was due to the Company holding higher cash balances as described previously.

Offsetting the decrease in interest income, total interest expense decreased by $608 thousand for the year ended December 31, 2020. This was mostly due to both a decrease in average balance on investor notes payable and a decrease in average balance on term-debt. The decrease in average balance on term-debt was due to the $15 million payoff of a portion of term debt in September 2020, as well as contractual monthly principal payments made on the term-debt.

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Provision and non-interest income and expense









Provision

Net interest income after provision for loan losses decreased by $1,936 thousand for the year ended December 31, 2020. This decrease was primarily due to a credit for loan losses recorded during 2019 but not in the year ended December 31, 2020.

Non-interest income

The increase in non-interest income shown above was the result of the gain on debt extinguishment of $2.4 million as described above. Revenue from broker-dealer commissions and fees decreased by $653 thousand during the year ended December 31, 2020 compared to the year ended December 31, 2019. This decrease was the result of reduced investment activity due to the COVID-19 pandemic during the year ended December 31, 2020 compared to the year ended December 31, 2019. Other lending income increased by $129 thousand during the year ended December 31, 2020. This was due to the Company selling  $17,106 thousand in loan participations in 2020 as compared to no loan sales during 2019. 

Non-interest expenses

The decrease in non-interest expenses of $176 thousand was due primarily to decreased business activity, such as reduced travel, because of the COVID-19 pandemic.

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Results of Operations:

For the year ended December 31, 2019

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:





[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.





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Net interest income increased 16% during the year ended December 31, 2019. Net interest margin increased 37 basis points to 3.29% for the year ended December 31, 2019. These improvements were mainly due to an increase in income on interest-earning assets.

The increase on total interest-earning assets was due to mainly to an increase in yield on interest-earning loans. The majority of this increase was due to the payoff of two previously non-performing loans. On payoff, the Company was able to collect $511 thousand of interest income previously allocated to principal when the loans were on non-accrual basis. The weighted average rate on the loan portfolio increased from 6.43% to 6.59% during the year ended December 31, 2019. The rate variance increase on interest-earning accounts with other financial institutions was due to an increase in average yield on these accounts of 96 basis points. The increase was due to two factors. First, overall market interest rates have increased over the last twelve months. Second, we have allocated a higher percentage of our funds to higher interest-earning accounts.

Offsetting the increase in interest income somewhat, total interest expense increased by $227 thousand for the year ended December 31, 2019. This was mostly due to an increase in average balance on investor notes payable offset slightly by a decrease in average balance on term-debt. The average balance of our investor notes payable increased by $6,606 thousand due to the expanded efforts to market our investor notes to faith-based organizations, institutions, and ministries. The decrease in average balance on term-debt was due to contractual monthly principal payments made on the term-debt.

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Provision and non-interest income and expense









Provision

Net interest income after provision for loan losses increased by $1,929 thousand for the year ended December 31, 2019. This increase was primarily due to a credit in provision expense related to loan loss recoveries on loan payoffs.

Non-interest income

The increase in non-interest income shown above was the result of a robust increase in broker-dealer commissions and fees offset by a decrease in other lending income. Revenue from broker-dealer commissions and fees increase by $892 thousand during the year ended December 31, 2019 compared to the year ended December 31, 2018. This increase was the result of an increase in institutional business during the year ended December 31, 2019 compared to the year ended December 31, 2018. Offsetting the increase in broker-dealer commissions and fees, other lending income decreased by $767 thousand during the year ended December 31, 2019. This was mostly due to recording a gain on loan sale during the year ended December 31, 2018 while we did not record any gains on loan sales during 2019.

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Non-interest expenses

The increase in non-interest expenses of $532 thousand was due primarily to an increase in variable expenses directly related to the increase in non-interest income described above. Additionally, office operations expenses increased as we outsourced some credit management functions to outside contractors.





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

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Included herewith are the following financial statements: