Mvb Financial Corp 8-K/A, filed Dec 15, 2022
Mvb Financial Corp (MVBF)
About this 8-K/A
Mvb Financial Corp filed this 8-K/A on December 15, 2022, reporting on events of October 1, 2022.
Items reported
- Item 9.01: Financial statements and exhibits
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Amendment No. 1)
CURRENT REPORT
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EXPLANATORY NOTE
Effective as of October 1, 2022 (the “Closing Date”), MVB Bank, Inc. (the “Bank”) the wholly-owned subsidiary of MVB Financial Corp. (“MVB”), completed the purchase of 3,748,392.93 Class B Common Units (the “MVB Investment”) of Warp Speed Holdings LLC, (“Warp Speed”), pursuant to the terms of the Equity Purchase Agreement between the Bank and Warp Speed dated March 13, 2022, as thereby assigned by the Bank to MVB effective as of April 28, 2022 (as assigned, the “Purchase Agreement”). Immediately prior to the closing of the MVB Investment, the pre-closing members of Warp Speed contributed to Warp Speed all of their equity interests in certain entities under common control of the sellers specified in the Purchase Agreement, in exchange for equity interests in Warp Speed (the “Put-Together Transaction”). As of the Closing Date, Warp Speed serves as a holding company for the entities contributed in the Put-Together Transaction.
On October 3, 2022, MVB filed a Current Report on Form 8-K to report the closing of the MVB Investment. In that filing MVB reported that it would amend the Form 8-K at a later date to provide certain financial information required by Item 9.01 of Form 8-K. This amendment is being filed to provide the financial information required by Item 9.01.
| Item 9.01. | Financial Statements and Exhibits. |
(a) Financial Statements of Businesses Acquired
The audited financial statements of CalCon Mutual Mortgage LLC (“CalCon”) for the year ended December 31, 2021 are filed herewith as Exhibit 99.1 and incorporated herein by reference.
The unaudited financial statements of CalCon for the nine months ended September 30, 2022 are filed herewith as Exhibit 99.2 and incorporated herein by reference.
The audited consolidated financial statements of OneTrust International LLC (“OneTrust”) for the year ended December 31, 2021 are filed herewith as Exhibit 99.3 and incorporated herein by reference.
The unaudited financial statements of OneTrust for the nine months ended September 30, 2022 are filed herewith as Exhibit 99.4 and incorporated herein by reference.
(b) Pro Forma Financial Information
The unaudited pro forma consolidated financial statements of MVB as of and for the nine months ended September 30, 2022 and the unaudited pro forma consolidated financial statements for the year ended December 31, 2021, after giving effect to the MVB Investment, are filed herewith as Exhibit 99.5 and incorporated herein by reference.
(d) Exhibits
| 99.3 | Audited financial statements of OneTrust for the year ended December 31, 2021. | |
| 99.4 | Unaudited financial statements of OneTrust for the nine months ended September 30, 2022. | |
| 99.5 | Unaudited pro forma consolidated financial statements of MVB as of and for the nine months ended September 30, 2022 and the unaudited pro forma consolidated financial statements for the year ended December 31, 2021. | |
| 104 | Cover Page Interactive Data File (embedded within the Inline XBRL document). | |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Current Report to be signed on its behalf by the undersigned thereunto duly authorized.
| MVB FINANCIAL CORP. | ||||||
| Date: December 15, 2022 | By: | /s/ Donald T. Robinson | ||||
| Donald T. Robinson | ||||||
| President and Chief Financial Officer | ||||||
Exhibit 23.1
Consent of Independent Registered Public Accounting Firm
MVB Financial Corp.
301 Virginia Avenue
Fairmont, West Virginia
We hereby consent to the incorporation by reference in the Registration Statements on Forms S-8 (333-186910, 333-189512, 333-225392, 333-260228 and 333-266266) and on Forms S-3 (333-261539, 333-180317) of MVB Financial Corp. and its subsidiaries of our report dated March 29, 2022, relating to the consolidated financial statements of CalCon Mutual Mortgage LLC, which are included in this Current Report on Form 8-K/A dated December 15, 2022.
| /s/ Spiegel Accountancy Corp. |
| Pleasant Hill, California |
| December 15, 2022 |
Exhibit 23.2
CONSENT OF INDEPENDENT AUDITOR
We consent to the incorporation by reference in the Registration Statements on Forms S-8 (333-186910, 333-189512, 333-225392, 333-260228 and 333-266266) and on Form S-3 (333-261539, 333-180317) of MVB Financial Corp. and its subsidiaries of our report dated April 1, 2022, relating to the financial statements of OneTrust International LLC appearing in this Current Report on Form 8-K/A dated December 15, 2022.
| /s/ Marcelo Gutiérrez Suárez, CPA |
| San Juan, Puerto Rico |
| December 15, 2022 |
Exhibit 99.1
CalCon Mutual Mortgage LLC
December 31, 2021 and 2020
Audited Consolidated Financial Statements
|
SPIEGEL ACCOUNTANCY CORP |
2300 Contra Costa Blvd., Suite 425 • Pleasant Hill, CA 94523 • Phone (925) 977-4000 • Fax (925) 363-3370
CalCon Mutual Mortgage LLC
Table of Contents
Years Ended December 31, 2021 and 2020
| Independent Auditor’s Report |
1 - 3 | |||
| Consolidated Balance Sheets |
4 | |||
| Consolidated Statements of Income and Expense |
5 | |||
| Consolidated Statements of Changes in Members’ Equity |
6 | |||
| Consolidated Statements of Cash Flows |
7 | |||
| Notes to Financial Statements |
8 - 37 | |||
| Supplementary Schedule I - Operating Expenses |
39 | |||
| Supplementary Schedule II: |
||||
| Computation of HUD Adjusted Net Worth Requirement. |
40 | |||
| Computation of HUD Liquidity Requirement |
41 | |||
| Supplementary Schedule III: |
||||
| Computation of GNMA Adjusted Net Worth Requirement |
42 | |||
| Computation of GNMA Capital Requirement |
43 | |||
| Computation of GNMA Liquid Assets Requirement |
44 | |||
| Computation of GNMA Insurance Requirement |
45 | |||
| Audit Firm Summary |
46 | |||
| Report on Internal Control Over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance with Government Auditing Standards |
47 - 48 | |||
| Report on Compliance for the Major HUD Program and on Internal Control Over Compliance Required by the Consolidated Audit Guide for Audits of HUD Programs |
49 - 52 | |||
| Schedule of Findings, Questioned Costs and Recommendations for HUD-Approved Title II Non-Supervised Mortgagees and Loan Correspondents |
53 | |||
| Schedule of the Status of Prior Audit Findings, Questioned Costs and Recommendations for HUD-Approved Title II Non-Supervised Mortgagees and Loan Correspondents |
54 | |||
Spiegel Accountancy Corp.
INDEPENDENT AUDITOR’S REPORT
To the Members and Board of Directors
CalCon Mutual Mortgage LLC
San Diego, California
Report on the Audit of the Consolidated Financial Statements
Opinion
We have audited the consolidated financial statements of CalCon Mutual Mortgage LLC, which comprise the consolidated balance sheets as of December 31, 2021 and 2020, and the related consolidated statements of income and expense, changes in members’ equity, and cash flows for the years then ended, and the related notes to the consolidated financial statements.
In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the financial position of CalCon Mutual Mortgage LLC as of December 31, 2021 and 2020, and the results of its operations and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.
Basis for Opinion
We conducted our audits in accordance with auditing standards generally accepted in the United States of America (GAAS) and the standards applicable to financial audits contained in Government Auditing Standards issued by the Comptroller General of the United States. Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Statements section of our report. We are required to be independent of CalCon Mutual Mortgage LLC and to meet our other ethical responsibilities, in accordance with the relevant ethical requirements relating to our audits. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Responsibilities of Management for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with accounting principles generally accepted in the United States of America, and for the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the consolidated financial statements, management is required to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about CalCon Mutual Mortgage LLC’s ability to continue as a going concern for one year after the date that the consolidated financial statements are issued.
To the Members and Board of Directors
CalCon Mutual Mortgage LLC
San Diego, California
Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements
Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance but is not absolute assurance and therefore is not a guarantee that an audit conducted in accordance with GAAS and Government Auditing Standards will always detect a material misstatement when it exists. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Misstatements are considered material if there is a substantial likelihood that, individually or in the aggregate, they would influence the judgment made by a reasonable user based on the consolidated financial statements.
In performing an audit in accordance with GAAS and Government Auditing Standards, we:
| • | Exercise professional judgment and maintain professional skepticism throughout the audit. |
| • | Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, and design and perform audit procedures responsive to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. |
| • | Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of CalCon Mutual Mortgage LLC’s internal control. Accordingly, no such opinion is expressed. |
| • | Evaluate the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluate the overall presentation of the consolidated financial statements. |
| • | Conclude whether, in our judgment, there are conditions or events, considered in the aggregate, that raise substantial doubt about CalCon Mutual Mortgage LLC’s ability to continue as a going concern for a reasonable period of time. |
We are required to communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit, significant audit findings, and certain internal control-related matters that we identified during the audit.
To the Members and Board of Directors
CalCon Mutual Mortgage LLC
San Diego, California
Supplementary Information
Our audit was conducted for the purpose of forming an opinion on the consolidated financial statements as a whole. The accompanying supplementary schedules as listed in the table of contents are presented for purposes of additional analysis and are not a required part of the consolidated financial statements. Such information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the consolidated financial statements. The information has been subjected to the auditing procedures applied in the audit of the consolidated financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the consolidated financial statements or to the financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the accompanying supplementary schedules as listed in the table of contents are fairly stated in all material respects in relation to the consolidated financial statements as a whole.
The accompanying Schedule of the Status of Prior Audit Findings, Questioned Costs and Recommendations has not been subjected to the auditing procedures applied in the audit of the consolidated financial statements, and accordingly, we do not express an opinion or provide any assurance on it.
Other Reporting Required by Government Auditing Standards
In accordance with Government Auditing Standards, we have also issued our report dated March 29, 2022 on our consideration of CalCon Mutual Mortgage LLC’s internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on the effectiveness of internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards in considering CalCon Mutual Mortgage LLC’s internal control over financial reporting and compliance.
| Pleasant Hill, California March 29, 2022 |
Spiegel Accountancy Corp. Certified Public Accountants |
Calcon Mutual Mortgage LLC
Consolidated Balance Sheets
| December 31, | ||||||||
| 2021 | 2020 | |||||||
| ASSETS |
| |||||||
| Assets: |
||||||||
| Cash and Cash Equivalents |
$ | 41,137,279 | $ | 19,795,907 | ||||
| Mortgage Loans Held for Sale at Fair Value |
253,169,656 | 403,961,571 | ||||||
| Mortgage Loans Receivable, Net |
70,117,236 | 22,863,706 | ||||||
| Loan Fees and Other Receivables |
9,364,200 | 7,432,604 | ||||||
| Derivative Assets |
2,845,650 | 6,890,125 | ||||||
| Mortgage Servicing Rights |
8,385,572 | 11,492,146 | ||||||
| Prepaid Expenses |
4,431,464 | 3,542,981 | ||||||
| Property and Equipment, Net |
143,650 | 225,803 | ||||||
| Deposits and Other Assets |
1,743,608 | 3,648,442 | ||||||
| Notes Receivable |
— | 2,462,498 | ||||||
|
|
|
|
|
|||||
| Total Assets |
$ | 391,338,315 | $ | 482,315,783 | ||||
|
|
|
|
|
|||||
| LIABILITIES AND EOUITY |
| |||||||
| Liabilities: |
||||||||
| Accounts Payable and Accrued Liabilities |
$ | 9,691,640 | $ | 11,316,191 | ||||
| Derivative Liabilities |
324,199 | 6,537,656 | ||||||
| Warehouse Lines of Credit |
300,038,134 | 401,458,793 | ||||||
| Deferred Revenue |
742,268 | — | ||||||
| Secondary Market Reserve |
2,000,000 | 500,000 | ||||||
| Notes Payable |
12,230,670 | 8,664,045 | ||||||
|
|
|
|
|
|||||
| Total Liabilities |
325,026,911 | 428,476,685 | ||||||
|
|
|
|
|
|||||
| Members’ Equity: |
||||||||
| Class B Members |
64,725,458 | 53,839,098 | ||||||
| Non-Controlling Interest |
1,585,946 | — | ||||||
|
|
|
|
|
|||||
| Total Members’ Equity |
66,311,404 | 53,839,098 | ||||||
| Total Liabilities and Equity |
$ | 391,338,315 | $ | 482,315,783 | ||||
|
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|
|
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See Notes to Consolidated Financial Statements
- 4 -
Calcon Mutual Mortgage LLC
Consolidated Statements of Income and Expense
| Years Ended December 31, | ||||||||
| 2021 | 2020 | |||||||
| Mortgage Lending Income: |
||||||||
| Gain on Sale of Mortgage Loans and Loan Origination Fees |
$ | 61,211,092 | $ | 98,126,509 | ||||
| Loan Fees from Lending Activities |
10,046,316 | 11,132,731 | ||||||
| Gain on Retention/ Fair Value Change of Mortgage Servicing Rights |
12,846,212 | 11,428,635 | ||||||
| Gain on Sale of Mortgage Servicing Rights |
3,236,035 | — | ||||||
| Mortgage Servicing Fees |
3,589,438 | 1,206,453 | ||||||
| Interest Income from Lending Activities |
17,906,172 | 9,469,370 | ||||||
|
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|
|
|
|||||
| Total Mortgage Lending Income |
108,835,265 | 131,363,698 | ||||||
|
|
|
|
|
|||||
| Mortgage Lending Expense: |
||||||||
| Loan Originator Commissions |
18,005,351 | 20,625,458 | ||||||
| Warehouse Lines of Credit Interest Expense |
13,147,403 | 8,907,143 | ||||||
| Loan Expense Related to Lending Activities |
5,405,805 | 5,990,519 | ||||||
| Mortgage Servicing Fee Expense |
2,150,089 | 648,721 | ||||||
| Provision for Secondary Market Reserve |
664,994 | 627,055 | ||||||
|
|
|
|
|
|||||
| Total Mortgage Lending Expense |
39,373,642 | 36,798,896 | ||||||
|
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|
|
|
|||||
| Gross Profit |
69,461,623 | 94,564,802 | ||||||
|
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| Operating Expense: |
||||||||
| Salaries, Payroll Taxes and Employee Benefits |
25,631,185 | 32,476,757 | ||||||
| Occupancy and Equipment Rent |
1,535,087 | 1,627,035 | ||||||
| Advertising and Marketing |
2,839,360 | 2,393,620 | ||||||
| General and Administrative |
24,538,836 | 12,055,364 | ||||||
|
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|||||
| Total Operating Expense |
54,544,468 | 48,552,776 | ||||||
|
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|
|||||
| Income from Operations |
14,917,155 | 46,012,026 | ||||||
| Other Income and (Expense): |
||||||||
| Gain on Forgiveness of Note Payable |
4,964,200 | — | ||||||
| Interest Income |
19,870 | 1,085,934 | ||||||
| Other (Expense) Income, Net |
118,635 | 342,015 | ||||||
| Interest Expense |
(289,470 | ) | (77,455 | ) | ||||
|
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|
|
|
|||||
| Total Other Income and Expense |
4,813,235 | 1,350,494 | ||||||
| Net Income Before Non-controlling Interest |
19,794,444 | 47,362,520 | ||||||
|
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| Net Loss from Non-controlling Interest |
(64,054 | ) | — | |||||
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|
|
|||||
| Net Income Attributable to the Company |
19,730,390 | 47,362,520 | ||||||
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See Notes to Consolidated Financial Statements
- 5 -
Calcon Mutual Mortgage LLC
Consolidated Statements of Changes in Members’ Equity
Years Ended December 31, 2021 and 2020
| Class B | Non-controlling Interest |
Total Equity | ||||||||||
| Balance at December 31, 2019 |
$ | 15,860,580 | $ | — | $ | 15,860,580 | ||||||
| Contributions |
974,792 | — | 974,792 | |||||||||
| Distributions |
(10,358,794 | ) | — | (10,358,794 | ) | |||||||
| Net Income |
47,362,520 | — | 47,362,520 | |||||||||
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| Balance at December 31, 2020 |
53,839,098 | — | 53,839,098 | |||||||||
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|||||||
| Contributions |
5,297,079 | 1,650,000 | 6,947,079 | |||||||||
| Distributions |
(14,205,163 | ) | — | (14,205,163 | ) | |||||||
| Net Income (Loss) |
19,794,444 | (64,054 | ) | 19,730,390 | ||||||||
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| Balance at December 31, 2021 |
$ | 64,725,458 | $ | 1,585,946 | $ | 66,311,404 | ||||||
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See Notes to Consolidated Financial Statements
- 6 -
Calcon Mutual Mortgage LLC
Consolidated Statements of Cash Flows
| Years Ended December 31, | ||||||||
| 2021 | 2020 | |||||||
| Cash Flows From Operating Activities: |
||||||||
| Net Income |
$ | 19,730,390 | $ | 47,362,520 | ||||
| Adjustment to Reconcile Net Income to Net Cash Flows From Operating Activities: |
||||||||
| Gain on Forgiveness of Note Payable |
(4,964,200 | ) | — | |||||
| Captive Insurance Amortization |
3,191,558 | 2,361,586 | ||||||
| Depreciation |
82,152 | 101,474 | ||||||
| Gain on Sale of Mortgage Servicing Rights |
(3,236,035 | ) | — | |||||
| Gain on Retention of Mortgage Servicing Rights |
(13,754,611 | ) | (11,492,146 | ) | ||||
| Fair Value Adjustment of Mortgage Servicing Rights |
908,399 | — | ||||||
| Loss on Sale of Investment Securities |
— | 74,843 | ||||||
| Amortization of Deferred Revenue |
(45,643 | ) | — | |||||
| Provision for Secondary Market Reserve |
664,994 | 627,055 | ||||||
| Increase (Decrease) in Operating Assets: |
||||||||
| Mortgage Loans Held for Sale |
150,791,915 | (190,123,687 | ) | |||||
| Mortgage Loans Receivable |
78,448,416 | (15,372,943 | ) | |||||
| Loan Fees and Other Receivables |
14,821,785 | (3,751,561 | ) | |||||
| Derivative Instruments |
(2,168,982 | ) | 1,145,093 | |||||
| Prepaid Expenses |
297,646 | (63,507 | ) | |||||
| Deposits and Other Assets |
2,762,834 | (3,414,637 | ) | |||||
| Decrease (Increase) in Operating Liabilities: |
||||||||
| Accounts Payable and Accrued Liabilities |
(4,671,341 | ) | 2,565,977 | |||||
| Related Parties Payable |
— | 198,141 | ||||||
| Deferred Revenue |
787,911 | |||||||
| Secondary Market Reserve |
(164,994 | ) | (627,055 | ) | ||||
|
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| Net Cash Provided by (Used in) Operating Activities |
243,482,194 | (170,408,847 | ) | |||||
|
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|
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| Cash Flows From Investing Activities: |
||||||||
| Proceeds from Sale of Mortgage Servicing Rights |
19,188,821 | 526,795 | ||||||
| Purchase of Property and Equipment |
— | (88,944 | ) | |||||
| Proceeds from Related Party Notes |
— | 2,521,545 | ||||||
| Issuance of Related Party Note |
32,498 | (1,700,000 | ) | |||||
|
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|
|
|||||
| Net Cash Provided by Investing Activities |
19,221,319 | 1,259,396 | ||||||
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| Cash Flows From Financing Activities: |
||||||||
| Proceeds from Warehouse Lines of Credit |
1,870,980,601 | 2,156,181,235 | ||||||
| Repayments on Warehouse Lines of Credit |
(2,096,913,291 | ) | (1,962,512,781 | ) | ||||
| Proceeds from Notes Payable |
— | 4,964,200 | ||||||
| Repayments of Notes Payable |
(5,593,454 | ) | (2,978,568 | ) | ||||
| Contributions |
2,719,165 | 974,792 | ||||||
| Non-controlling Interest Contributions |
1,650,000 | — | ||||||
| Dividend Distributions |
(14,205,163 | ) | (9,349,582 | ) | ||||
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|||||
| Net Cash (Used) Provided by Financing Activities |
(241,362,142 | ) | 187,279,296 | |||||
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|||||
| Net Increase in Cash and Cash Equivalents |
21,341,372 | 18,129,845 | ||||||
| Cash and Cash Equivalents - Beginning of Year |
19,795,907 | 1,666,062 | ||||||
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| Cash and Cash Equivalents - End of Year |
$ | 41,137,279 | $ | 19,795,907 | ||||
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| Supplementary Disclosure of Cash Flow Information: |
||||||||
| Cash Paid for: |
||||||||
| Interest |
$ | 8,656,780 | $ | 8,802,903 | ||||
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See Notes to Consolidated Financial Statements
- 7 -
CalCon Mutual Mortgage LLC
Notes to Consolidated Financial Statements
Years Ended December 31, 2021 and 2020
| 1. | SUMMARY OF ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES |
Organization
CalCon Mutual Mortgage LLC dba OneTrust Home Loans, Tabor Mortgage Group and Warp Speed Mortgage LLC (CalCon), which was incorporated in 2013 in the state of Delaware. CalCon is principally engaged in the origination of mortgage loans secured by residential real estate located in various states throughout the United States. Generally, such loans are subsequently sold to financial institutions or to other entities that sell such loans to investors. CalCon is registered with the Nationwide Mortgage Licensing System & Registry as well as applicable state licensing agencies. Additionally, CalCon is approved by the U.S. Department of Housing and Urban Development (HUD) to act as a non-supervised mortgagee and with the Federal National Mortgage Association (FNMA), Federal Home Loan Mortgage Corporation (FHLMC), and the Governmental National Mortgage Association (GNMA) to act as a seller/servicer.
Merger
On January I, 2021, CalCon merged with Yellowstone RE Holdings (Yellowstone), an entity under common control. CalCon purchases, owns, and occasionally sells pools of residential and commercial mortgage loans, including discounted and distressed mortgage loan purchases, all of which are secured by deeds of trust or mortgage contracts.
The transfer of assets and liabilities is further discussed in Note 13.
Basis of Consolidation
The accompanying consolidated financial statements include the accounts of CalCon; and its wholly owned subsidiary OTHLJV20, LLC, which has consolidating joint ventures with Schumacher Mortgage LLC; Team One Home Loans LLC, and Ardorio Lending LLC (altogether, the Company). All significant intercompany accounts, transactions, and profits have been eliminated in the consolidation.
Basis of Presentation and Use of Estimates
The Company’s consolidated financial statements are prepared on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America. The accrual basis of accounting requires the use of estimates and assumptions that affect the assets, liabilities, revenues and expenses reported in the consolidated financial statements, as well as amounts included in the notes thereto, including discussion and disclosure of contingent liabilities. Although the Company uses its best estimates and judgments, actual results could differ from these estimates as future confirming events occur.
- 8 -
CalCon Mutual Mortgage LLC
Notes to Consolidated Financial Statements
Years Ended December 31, 2021 and 2020
| 1. | SUMMARY OF ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) |
Cash and Cash Equivalents
For purposes of the consolidated statement of cash flows, cash and cash equivalents include money market securities and all highly liquid investments with original maturities of ninety days or less.
Mortgage Loans Held for Sale
The Company records originations of mortgage loans held for sale at fair value and estimates the fair value based on quoted market prices. In determining fair value, consideration is given to commitments on hand from investors and prevailing market prices. The fair value option was elected for mortgage loans held for sale because the Company believes fair value best reflects future economic performance.
Mortgage Loans Receivable
Mortgage loans receivable are recorded at their outstanding principal balance with interest thereon being accrued as earned. Mortgage loans will have varying terms at the discretion of the Company. Some loans have a draw component for construction purposes. Draws are funded and a receivable is recorded as the work is completed and verified. Company loans will have varying terms up to thirty years and provide for monthly payments of interest and principal or monthly payments of interest with a “balloon payment” at the end of the term.
The Company will not recognize interest income on loans once they are determined to be impaired until the interest is collected in cash. A loan is impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impairment is measured on a loan-by-loan basis by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price or the fair value of the underlying collateral.
Loan origination fees related to mortgage loans are deferred and recognized over the life of the loan, which ranges from one to thirty years.
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CalCon Mutual Mortgage LLC
Notes to Consolidated Financial Statements
Years Ended December 31, 2021 and 2020
| 1. | SUMMARY OF ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) |
Allowance for Losses on Mortgage Loans Receivable
The allowance for losses on mortgage loans receivable is established as losses are estimated to have occurred through a provision for loan loss that is charged to earnings. Loan losses are charged against the allowance when management believes the loan balance is not collectible. Subsequent recoveries, if any, are credited to income. The allowance for losses on loans is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experience, the types and dollar amounts of loans in the portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.
Derivative Instruments
In connection with the origination of mortgage loans, the Company enters into commitments to originate loans whereby the interest rate on the loans is determined prior to funding (interest rate lock commitments). The Company follows the provisions of derivatives and hedging accounting guidance, which require it to record derivative instruments at fair value. Therefore, interest rate lock commitments and investor forward loan sale contracts the Company intends to sell through mandatory delivery execution are recorded at fair value. The fair value of interest rate lock commitments is determined based on current secondary market prices for underlying loans with similar coupons, maturity and credit quality, subject to the anticipated loan funding probability or pull-through factor, net of direct costs.
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CalCon Mutual Mortgage LLC
Notes to Consolidated Financial Statements
Years Ended December 31, 2021 and 2020
| 1. | SUMMARY OF ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) |
Mortgage Servicing Rights
The Company originates mortgage loans for sale to the secondary market and sells the loans on either a servicing-retained or servicing-released basis. The Company has obligations to service residential first mortgage loans that are acquired through loans sold on a servicing-retained basis. These mortgage servicing rights (MSRs) are recognized as assets at the time a loan is sold on a servicing-retained basis and capitalized at fair value. Changes in fair value are recorded in fair value adjustments of mortgage servicing rights in the accompanying consolidated statements of income and expense.
Fair market value is based on the present value of estimated future cash flows using a discount rate commensurate with the risk involved. Estimates of fair market value include assumptions about contractual service fees, projected costs to service, prepayment speeds, default, interest rates and other factors, which are subject to change over time. Changes in these underlying assumptions could cause the fair market value of MSRs to specifically change in the future. The Company obtains a valuation from an independent third party on a monthly basis to support the reasonableness of the fair value estimate generated by the Company’s internal model.
The key assumptions used in determining the fair value of MSRs when they are initially recorded were as follows for the years ended December 31, 2021 and 2020:
| 2021 | 2020 | |||||||
| Discount Rates |
9.75 | % | 10.00 | % | ||||
| Annual Prepayment Speeds |
9.60 | % | 15.00 | % | ||||
| Cost of Servicing |
$ | 79 | $ | 80 | ||||
Property and Equipment
Property and equipment are stated at cost, net of accumulated depreciation. Depreciation is provided using the straight-line method over the estimated useful lives of the related assets ranging from three to seven years.
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CalCon Mutual Mortgage LLC
Notes to Consolidated Financial Statements
Years Ended December 31, 2021 and 2020
| 1. | SUMMARY OF ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) |
Secondary Market Reserve
Mortgage Loans Held for Sale
The Company sells residential mortgage loans originated into the secondary mortgage market. When the Company sells the mortgage loans, the Company makes representations and warranties to the purchasers about various characteristics of each loan such as the manner of origination, the nature and extent of underwriting standards applied, and the types of documentation being provided. Typically, these representations and warranties extend for the life of the loan. If a defect in the origination process is identified, the Company may be required to either repurchase the loan or indemnify the purchaser for losses it sustains on the loan. If there are no such defects, the Company has no liability to the purchaser for losses it sustains on the loan. The Company maintains a secondary market reserve to account for the expected losses on loans sold during the current accounting period, as well as adjustments to previous estimates of expected losses on loans sold. In each case, these estimates are based on the most recent data regarding loan repurchases and actual credit losses on repurchased loans, among other factors.
Mortgage Loans Receivable
The allowance for loan loss is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experience, the types and dollar amounts of loans in the portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.
Subscriptions Receivable
The Company has subscriptions receivable from prospective members. These receivables are classified as contra equity assets until cash is collected. At December 31, 2021 and 2020, the Company had no subscriptions receivable. During the year ended December 31, 2020, $874,999 of the subscriptions receivable were forgiven as part of member redemption requests, and the remaining $474,492 was contributed.
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CalCon Mutual Mortgage LLC
Notes to Consolidated Financial Statements
Years Ended December 31, 2021 and 2020
| 1. | SUMMARY OF ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) |
Revenue
Gain on Sale of Mortgage Loans and Loan Origination Fees
Gains and losses recognized upon the funding of loans are determined using the specific identification method. In conjunction with the sale of loans, the Company records realized gain or loss on the sale of loans when the loan is transferred to the buyer including settled forward commitments. For loans that have been funded and not yet sold, the Company recognizes the difference between fair value and carrying value as unrealized gain or loss on loans. Loan origination fees are recognized when the loan is funded. Realized and unrealized changes in interest rate lock commitments and investor forward loan sale contracts are recorded and recognized when settled or there is a change in fair value.
Loan Fees from Lending Activities
Loan origination fees earned on loans held for sale are recognized when the related loan is funded for loans held for sale. Loan origination fees for mortgage loans receivable are deferred and amortized over the life of the respective loan.
Mortgage Servicing Rights
The Company records retained mortgage servicing rights at fair value when the related loan is sold, and records changes in valuation on a monthly basis. Gains and sales on mortgage servicing rights are recorded when the transaction occurs. Servicing fee income is recorded when earned.
Interest Income from Lending Activities
Interest income on mortgage loans held for sale is recognized as earned based upon the principal amount outstanding and contractual interest rates.
Transfers of Financial Assets
Transfers of financial assets are accounted for as sales when control over the asset has been surrendered. Control over transferred assets is deemed to be surrendered when (i) the assets have been isolated from the Company, (ii) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (iii) the Company does not maintain effective control over transferred assets through an agreement to repurchase them before their maturity.
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CalCon Mutual Mortgage LLC
Notes to Consolidated Financial Statements
Years Ended December 31, 2021 and 2020
| 1. | SUMMARY OF ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) |
Fair Value Measurements
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The Company determines the fair values of its assets and liabilities based on a fair value hierarchy established under applicable accounting guidance which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. There are three levels of inputs that may be used to measure fair value. The three levels are defined as follows:
Level I inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.
Level 2 inputs are those other than quoted prices that are observable for the asset or liability, either directly or indirectly.
Level 3 inputs are unobservable inputs for the asset or liability. Unobservable inputs reflect the Company’s own financial model using assumptions that market participants would use in pricing the asset or liability (including assumptions about risk).
Valuation Process and Techniques
The Company has various processes and controls in place to ensure that fair value is reasonably estimated. A model validation policy governs the use and control of valuation models used to estimate fair value. This policy requires review and approval of models by personnel who are independent of the executive management as well as periodic reassessments of models to ensure that they are continuing to perform as designed. In addition, detailed reviews of trading gains and losses are conducted on a daily basis by personnel who are independent of executive management. A price verification group, which is also independent of executive management, utilizes available market information including executed trades, market prices and market-observable valuation model inputs to ensure that fair values are reasonably estimated. The Company performs due diligence procedures over third-party service providers in order to support their use in the valuation process. Where market information is not available to support internal valuations, independent reviews of the valuations are performed, and any material exposures are escalated through a management review process.
- 14 -
CalCon Mutual Mortgage LLC
Notes to Consolidated Financial Statements
Years Ended December 31, 2021 and 2020
| 1. | SUMMARY OF ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) |
Fair Value Measurements (Continued)
Valuation Process and Techniques (Continued)
While the Company believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.
During the years ended December 31, 2021 and 2020, there were no changes to the valuation techniques that had, or are expected to have, a material impact on Company’s financial position or results of operations.
The following methods and assumptions were used to estimate the fair value of the following asset groups:
Investment securities are based on quoted market prices and are classified as Level 1.
Mortgage loans held for sale are based on the selling price to investors who use secondary market prices for loans with similar credit and risk profile characteristics and are classified as Level 2. Non-performing and impaired mortgage loans are reported at the net realizable value of the collateral based on an observable market price or a current appraised value, and these loans are classified as Level 2. If an appraised value is not available or there is no observable market price, the Company reports the loan as Level 3. There were no loans classified as Level 3.
Interest rate lock commitments are valued based on quoted prices for similar assets in an active market with similar credit and risk profile characteristics, net of origination fees and direct production costs subject to a pull-through factor and are classified as Level 3.
- 15 -
CalCon Mutual Mortgage LLC
Notes to Consolidated Financial Statements
Years Ended December 31, 2021 and 2020
| 1. | SUMMARY OF ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) |
Fair Value Measurements (Continued)
Valuation Process and Techniques (Continued)
Investor forward loan sale contracts traded in the over-the-counter market are determined using quantitative models that utilize multiple market inputs including interest rates, prices and indices to generate continuous yield or pricing curves and volatility factors to value the position. The majority of market inputs are actively quoted and can be validated through external sources, including brokers, market transactions and third-party pricing services. When third-party pricing services are used, the methods and assumptions are reviewed by the Company. The fair values of derivative assets and liabilities include adjustments for market liquidity, counterparty credit quality and other instrument-specific factors where appropriate. Investor forward loan sale contracts are classified as Level 2.
Mortgage loans receivable that are performing are reported at their amortized cost. For non-performing loans in which a specific allowance is established, the Company reports the loan at the net realizable value of the underlying collateral based on an observable market price or a current appraised value. These loans are classified as Level 2. If an appraised value is not available or if there is no observable market price, the Company reports the loan as Level 3. At December 31, 2021 and 2020, there were no loans classified as Level 2 or 3.
Mortgage servicing rights are recorded at fair value based on the present value of estimated cash flows using a discount rate commensurate with the risks involved. While there is an active market for similar assets, and certain inputs such as fee rates and discount rates are observable, most of the other inputs are based on historical company data. Management obtains an independent, third-party valuation specialist to perform this analysis. Thus, mortgage servicing rights are classified as Level 3.
- 16 -
CalCon Mutual Mortgage LLC
Notes to Consolidated Financial Statements
Years Ended December 31, 2021 and 2020
| 1. | SUMMARY OF ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) |
Income Taxes
The Company is treated as a partnership under the Internal Revenue Code and a similar section of the state code. The members of a partnership are taxed on their proportionate share of the Company’s taxable income. Therefore, no provision or liability for federal income taxes has been included in these consolidated financial statements.
The Company has evaluated its current tax positions and has concluded that as of December 31, 2021 and 2020, no significant uncertain tax positions exist for which a reserve would be necessary.
The Company’s income tax returns are subject to review and examination by federal, state and local governmental authorities. As of December 31, 2021, there are three years open to examination by the Internal Revenue Service, state and local governmental authorities. To the extent penalties and interest are incurred through the examinations, they would be included in operating expenses on the consolidated statements of income and expense.
Recent Accounting Pronouncements
Accounting Standards Issued but Not Yet Effective
Credit Losses - In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-13, Financial Instruments - Credit Losses (Topic 326), and was clarified by FASB ASU 2019-04, Codification Improvements, and FASB ASUs 2019-05 and 2019-11, Targeted Transition Relief and Clarification. Prior to this pronouncement, generally accepted accounting principles required use of the incurred loss method for recognizing credit losses in the reserve. The incurred loss method recognizes a credit loss when it is probable that a loss has been incurred. The new guidance replaces the incurred loss method with one that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to form credit loss estimates. The pronouncement also allows for the irrevocable election of the fair value measurement for certain financial assets. FASB ASUs 2018-19 and 2019- 10, Codification Improvements to Topic 326, Financial Instruments - Credit Losses, have deferred the adoptions of these standards until interim and annual periods beginning after December 15, 2022. Management is currently evaluating the guidance and the impact it will have on the Company’s consolidated financial statements.
- 17 -
CalCon Mutual Mortgage LLC
Notes to Consolidated Financial Statements
Years Ended December 31, 2021 and 2020
| 1. | SUMMARY OF ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) |
Recent Accounting Pronouncements (Continued)
Accounting Standards Issued but Not Yet Effective (Continued)
Leases - In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) which was updated by FASB ASU 2018-10, Codification Improvements to Leases, FASB ASUs 2018-11 and 2019-01, Targeted Improvements, FASB ASU 2020-05, Leases, and FASB ASU 2021-09, Discount Rate for Lessees that Are Not Public Business Entities. The new lease standards require lessees to recognize virtually all leases as right-of-use assets and lease liabilities on the balance sheet, as well as disclose key information regarding leasing arrangements. The new lease standard also requires the separation of the lease agreement from other contract components, such as maintenance services. The guidance in these standards are effective for interim and annual periods beginning after December 15, 2021, with early adoption permitted. Management is currently evaluating the guidance and the impact it will have on the Company’s consolidated financial statements.
Accounting Standards Issued and Adopted
Reference Rate Reform - In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. On January 2021, the FASB issued ASU 2021-01, Reference Rate Reform. These standards provide optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the benefits of) reference rate reform on financial reporting. The amendments in ASU 2020-04 are elective and apply to all entities, subject to meeting certain criteria, that have contracts, amended contracts during 2021, hedging relationships, and other transactions that reference London Interbank Offered Rate (LIBOR) or another reference rate expected to be discontinued because of reference rate reform. The guidance is effective upon issuance and allows application to contract changes as early as March 12, 2020 through December 31, 2022. The Company has adopted the guidance and changed all applicable LIBOR rates for its warehouse lenders and other lines of credit and debt obligations, as applicable.
| 2. | CASH CONCENTRATION |
The Company maintains funds in various financial institutions that are members of the Federal Deposit Insurance Corporation. As such, funds are insured based on Federal Reserve limits. The Company has not experienced any losses in the past, and management believes it is not exposed to any significant credit risk on the current account balances. At times, cash balances may exceed insured amounts.
- 18 -
CalCon Mutual Mortgage LLC
Notes to Consolidated Financial Statements
Years Ended December 31, 2021 and 2020
| 3. | MORTGAGE LOANS HELD FOR SALE |
All mortgage loans held for sale are secured by residential property and are collateral for the warehouse lines of credit. Mortgage loans held for sale consisted of the following as of December 31,
| 2021 | 2020 | |||||||
| Mortgage Loans Held for Sale |
||||||||
| (Unpaid Principal Balance) |
$ | 245,095,615 | $ | 384,538,603 | ||||
| Fair Value Adjustment |
8,074,041 | 19,422,968 | ||||||
|
|
|
|
|
|||||
| Mortgage Loans Held for Sale at Fair Value |
$ | 253,169,656 | $ | 403,961,571 | ||||
|
|
|
|
|
|||||
| 4. | MORTGAGE LOANS RECEIVABLE |
The Company had the following mortgage loans receivable at December 31,
| 2021 | 2020 | |||||||
| Mortgage loans receivable consisted of notes to individuals secured by deeds of trust, bearing interest at various rates from 2.00% to 12.00% per annum, partially or fully amortized. These notes have original maturity dates from December 2022 through October 2052. |
$ | 187,130,448 | 34,891,526 | |||||
| Less: Construction Loan Commitments |
(117,013,212 | ) | (12,027,820 | ) | ||||
| Less: Allowance for Loan Losses |
— | — | ||||||
|
|
|
|
|
|||||
| Mortgage Loans Receivable, Net |
$ | 70,117,236 | $ | 22,863,706 | ||||
|
|
|
|
|
|||||
The Company expects to collect $1,137,761 in principal payments over the next twelve months.
Mortgage Loans in Foreclosure
At December 31, 2021 and 2020, the Company had loans amounting to $521,228 and $159,721, respectively, that were in the process of foreclosure. Real estate owned is included in mortgage loans receivable at December 31, 2021 and 2020. Management does not anticipate any losses related to these foreclosures.
- 19 -
CalCon Mutual Mortgage LLC
Notes to Consolidated Financial Statements
Years Ended December 31, 2021 and 2020
| 4. | MORTGAGE LOANS RECEIVABLE (CONTINUED) |
Mortgage Loans in Foreclosure (Continued)
Loan Modifications
At December 31, 2021 and 2020, the Company did not have any material loan modifications.
Mortgage Loans Concentrations
As of December 31, 2021, all mortgage loans receivable are primarily secured by first deeds of trust. There were 193 loans outstanding and the largest loan was $21,000,000. The loans are located in 42 different states.
As of December 31, 2020, all mortgage loans receivable are primarily secured by first deeds of trust. There were 106 loans outstanding and the largest loan was $716,100. The loans are located in 38 different states.
| 5. | DERIVATIVE INSTRUMENTS |
Derivative instruments are commitments to extend to borrowers, either at fixed or floating rates, and contracts to sell mortgage loans to investors at specific future dates and interest rates. Commitments to extend credit are generally agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee by the borrower. The market risk associated with the commitments to sell loans occurs when the estimated amount of the commitments to extend credit is not the same as the outstanding commitments to sell loans and from the possible inability of counterparties to meet the terms of their commitments.
- 20 -
CalCon Mutual Mortgage LLC
Notes to Consolidated Financial Statements
Years Ended December 31, 2021 and 2020
| 5. | DERIVATIVE INSTRUMENTS (CONTINUED) |
The Company recognized pre-tax net realized and unrealized gains/(losses) of $6,435,937 and $(15,324,750) for the years ended December 31, 2021 and 2020, respectively, on its hedging activity related to interest rate lock commitments and investor forward loan sale contracts. The Company had the following derivative instruments as of December 31,
| 2021 | ||||||||
| Volume | Fair Value | |||||||
| Interest Rate Lock Commitments |
$ | 104,277,241 | $ | 2,845,650 | ||||
| Investor Forward Loan Sale Contracts |
$ | 223,500,000 | $ | (324,199 | ) | |||
|
|
|
|||||||
| Total Derivative Instruments |
$ | 2,521,451 | ||||||
|
|
|
|||||||
| 2020 | ||||||||
| Volume | Fair Value | |||||||
| Interest Rate Lock Commitments |
$ | 237,084,795 | $ | 6,890,125 | ||||
| Investor Forward Loan Sale Contracts |
$ | 607,115,762 | $ | (6,537,656 | ) | |||
|
|
|
|||||||
| Total Derivative Instruments |
$ | 352,469 | ||||||
|
|
|
|||||||
The following table represents the quantitative information about interest rate lock commitments and the fair value measurements as of December 31,
| Loan Funding Probability (Pull-Through) |
||||||||
| 2021 | 2020 | |||||||
| Weighted Average |
87 | % | 86 | % | ||||
The Company had margin calls with a broker dealer totaling $280,235 and $4,713,219 at December 31, 2021 and 2020, respectively, which are located in loan fees and other receivables on the accompanying consolidated balance sheets.
- 21 -
CalCon Mutual Mortgage LLC
Notes to Consolidated Financial Statements
Years Ended December 31, 2021 and 2020
| 6. | MORTGAGE SERVICING RIGHTS |
Tue unpaid principal balance of mortgage servicing rights at December 31, 2021 and 2020 was $814,121,971 and $1,413,064,269, respectively. The following summarizes MSR activity for the years ended December 31,
| 2021 | 2020 | |||||||
| Beginning Balance |
$ | 11,492,146 | $ | — | ||||
| Capitalized Mortgage Servicing Rights |
13,754,611 | 11,492,611 | ||||||
| Fair Value Adjustment and Payoffs |
(908,399 | ) | — | |||||
| Sale of Mortgage Servicing Rights |
(19,188,821 | ) | — | |||||
| Gain on Sale of Mortgage Servicing Rights |
3,236,035 | — | ||||||
|
|
|
|
|
|||||
| Mortgage Servicing Rights |
$ | 8,385,572 | $ | 11,492,146 | ||||
|
|
|
|
|
|||||
During the year ended December 31, 2021, the Company sold MSRs with an unpaid principal balance of $1,782,517,355 for $19,188,821. No MSRs were sold during the year ended December 31, 2020.
The following table illustrates the impact of adverse changes on the discount rate and prepayment speeds at two different data points at December 31,
| Discount Rates | Prepayment Speeds | |||||||||||||||
| 10% Adverse Change |
20% Adverse Change |
10% Adverse Change |
20% Adverse Change |
|||||||||||||
| Mortgage Servicing Rights |
$ | (326,218 | ) | $ | (627,910 | ) | $ | (344,397 | ) | $ | (665,618 | ) | ||||
| Discount Rates | Prepayment Speeds | |||||||||||||||
| 10% Adverse Change |
20% Adverse Change |
10% Adverse Change |
20% Adverse Change |
|||||||||||||
| Mortgage Servicing Rights |
$ | (546,619 | ) | $ | (1,051,408 | ) | $ | (424,725 | ) | $ | (818,119 | ) | ||||
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CalCon Mutual Mortgage LLC
Notes to Consolidated Financial Statements
Years Ended December 31, 2021 and 2020
| 7. | PREPAID EXPENSES |
Business Continuation Insurance
During the years ended December 31, 2021 and 2020, management paid $4,362,938 and $3,481,700, respectively, of insurance premiums to a related insurance company (the Insurer) for the purpose of providing business continuation insurance to the Company. The policies purchased are on a one-year claims made basis and the Insurer’s loss is limited to the amount specified in the insurance policies issued.
At December 31, 2021 and 2020, the unamortized balance was $4,002,110 and $3,191,558, respectively.
The agreement between the Insurer and the Company requires that the premiums paid by the Company be deposited into the accounts of the Insurer. The accounts of the Insurer cannot be accessed by the Company. Early termination of the insurance policies by the Company requires any unearned insurance premiums to be refunded by the Insurer. The Company has no liability for any claims made to the Insurer.
During the year ended December 31, 2021, the Company financed the purchase through a $4,144,791 short term loan with a financial institution. The loan carries a 2.85% interest rate and requires equal monthly payments of $524,978 over an eight-month period starting February 1, 2022.
During the year ended December 31, 2020, the Company financed the purchase through a $3,307,615 short term loan with a financial institution. The loan carries a 2.85% interest rate and requires equal monthly payments of $418,941 over an eight-month period starting February 1, 2020.
| 8. | PROPERTY AND EQUIPMENT |
Property and equipment consisted of the following as of December 31,
| 2021 | 2020 | |||||||
| Furniture and Office Equipment |
$ | — | $ | 499,331 | ||||
| Computer Software |
350,204 | 350,204 | ||||||
|
|
|
|
|
|||||
| Total Property and Equipment |
350,204 | 849,535 | ||||||
| Less: Accumulated Depreciation |
(206,554 | ) | (623,732 | ) | ||||
|
|
|
|
|
|||||
| Property and Equipment, Net |
$ | 143,650 | $ | 225,803 | ||||
|
|
|
|
|
|||||
- 23 -
CalCon Mutual Mortgage LLC
Notes to Consolidated Financial Statements
Years Ended December 31, 2021 and 2020
| 8. | PROPERTY AND EQUIPMENT (CONTINUED) |
Depreciation charged to operations for the years ended December 31, 2021 and 2020 was $82,152 and $101,474, respectively. During the year ended December 31, 2021, the Company disposed of fully depreciated furniture and equipment of $499,331. No disposals occurred during the year ended December 31, 2020.
| 9. | WAREHOUSE LINES OF CREDIT |
At December 31, 2021 and 2020, the Company had warehouse lines of credit agreement with three financial institutions, whereby the Company received advances under the agreements up to a combined maximum of $561,000,000 and $507,000,000, respectively.
The Company had the following outstanding warehouse lines of credit at December 31,
| 2021 | 2020 | |||||||
| Merchants Bank |
$ | 202,117,058 | $ | 132,799,517 | ||||
| Centier Bank |
57,204,901 | 44,675,817 | ||||||
| NB |
40,716,175 | 200,572,864 | ||||||
| Yellowstone (Note 1) |
— | 23,410,595 | ||||||
|
|
|
|
|
|||||
| Total |
$ | 300,038,134 | $ | 401,458,793 | ||||
|
|
|
|
|
|||||
Merchants Bank
Advances are due to be repaid upon the earlier of the sale of the mortgage loans that are pledged as collateral or a specified period of time from the date on which the advance is received. The warehouse line of credit borrowings are personally guaranteed by certain members of the Company. Interest is payable when the loans are purchased and accrues at an applicable interest rate depending on duration of the warehouse period. At December 31, 2021 and 2020, the applicable interest rates ranged from 2.00% to 6.75% and 2.00% to 3.50%, respectively. The warehouse line of credit agreement contains financial covenants concerning minimum tangible net worth, which were met at December 31, 2021 and 2020. As further explained in Note 9, the Company also had a warehouse line agreement with the bank through its related party entity Yellowstone, which it periodically used to fund loans held for sale. This warehouse line agreement was consolidated with the merger of Yellowstone into the Company on January 31, 2021.
- 24 -
CalCon Mutual Mortgage LLC
Notes to Consolidated Financial Statements
Years Ended December 31, 2021 and 2020
| 9. | WAREHOUSE LINES OF CREDIT (CONTINUED) |
Merchants Bank (Continued)
The Company has a participation agreement with its warehouse lender, whereby the Company provides funds to the warehouse lender to reduce its cost of capital on mortgage lending activities. Through this arrangement, the Company participates in revenue earned by the financial institution on the loan interest paid to the warehouse lender by the Company. At December 31, 2021, the outstanding balance on the loan receivable was $17,000,000. The Company earned $3,845,223 from the arrangement, which is included as a reduction to interest expense in accompanying consolidated statements of income and expense. The Company had this agreement through its related party, Yellowstone, for the year ended December 31, 2020. This participation agreement has the right of offset with the warehouse line of credit and has therefore been present net on the accompany consolidated balance sheets.
Centier Bank
Advances are due to be repaid upon the earlier of the sale of the mortgage loans that are pledged as collateral or a specified period of time from the date on which the advance is received. The warehouse line of credit borrowings are personally guaranteed by certain members of the Company. Interest is payable when the loans are purchased and accrues at an applicable interest rate depending on duration of the warehouse period. At December 31, 2021 and 2020, the applicable interest rates ranged from 2.00% to 12.00% and 2.00% to 3.50%, respectively. The warehouse line of credit agreements contain financial covenants concerning minimum tangible net worth, which were met at December 31, 2021 and 2020.
Advances are due to be repaid upon the earlier of the sale of the mortgage loans that are pledged as collateral or a specified period of time from the date on which the advance is received. Interest is payable when the loans are purchased and accrues at an applicable interest rate depending on duration of the warehouse period. At December 31, 2021 and 2020, the applicable interest rates were 2.20% to 2.50% and 2.50%, respectively. The warehouse line of credit agreement contains a financial covenant concerning minimum tangible net worth, which was met at December 31, 2021 and 2020.
- 25 -
CalCon Mutual Mortgage LLC
Notes to Consolidated Financial Statements
Years Ended December 31, 2021 and 2020
| 10. | SECONDARY MARKET RESERVE |
The following is a summary of the secondary market reserve activity for the years ended December 31,
| 2021 | 2020 | |||||||
| Beginning Balance |
$ | 500,000 | $ | 500,000 | ||||
| Charge-Offs |
(164,994 | ) | (627,055 | ) | ||||
| Provision for Secondary Market Reserve |
1,664,994 | 627,055 | ||||||
|
|
|
|
|
|||||
| Ending Balance |
$ | 2,000,000 | $ | 500,000 | ||||
|
|
|
|
|
|||||
| 11. | NOTES PAYABLE |
Paycheck Protection Program Loan
During 2020, the Company received a loan from a financial institution in the amount of $4,964,200 under the Paycheck Protection Program established by the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The loan was subject to a note dated April 23, 2020 and could be forgiven to the extent proceeds of the loan were used for eligible expenditures such as payroll and other expenses described in the CARES Act. The loan bore interest at a rate of 1.00% and was payable in monthly installments of principal and interest beginning 6 months from the date of the note. The loan was repayable at any time with no prepayment penalty. During 2021, the note was forgiven in its entirety and the Company recorded a gain on extinguishrment of debt, which is reflected in the consolidated statements of income and expense, as well as the consolidated statements of cash flows as a non-cash item.
Insurance Loans
At December 31, 2021 and 2020, the Company has insurance loans of $4,144,791 and $3,307,615, respectively, which are discussed in Note 7.
Former Member Notes
During 2020, the Company paid for the redemptions of $1,009,212 in outstanding member units through the issuance of notes payable. At December 31, 2020, the amount due on these notes was $392,230. These notes were paid off in 2021.
- 26 -
CalCon Mutual Mortgage LLC
Notes to Consolidated Financial Statements
Years Ended December 31, 2021 and 2020
| 11. | NOTES PAYABLE (CONTINUED) |
Current Member Notes
The Company obtained notes payable from Yellowstone RE Holdings. These notes were from various members participating in a member loan program. The notes bear interest at LIBOR plus 3.00%. The note balance of $699,534 was paid off in January 2022.
Merchants Bank
At December 31, 2021, the Company has a loan of $2,952,487, which bears interest of 3.59%, and is due in 2024. Loan repayments are approximately $980,000 per year through 2024. Interest expense on this note was $118,965, which is located in other income and expense on the accompanying consolidated statements of income and expense.
PACREP Investment Company, LLC
At December 31, 2021, the Company has a note payable of $4,433,858 bearing interest at Libor plus a margin of 150 basis points per annum, with interest payable quarterly and principal payable upon the payoff of the mortgage loans that are pledged as collateral. This note was transferred from Yellowstone in the amount of $5,231,041. Interest expense on this note was $73,560 for the year ended December 31, 2021, which is located in other income and expense on the accompanying consolidated statements of income and expense.
| 12. | RELATED PARTY TRANSACTIONS |
Yellowstone Transactions
As discussed in Note 1, on January 31, 2021, Yellowstone, which was under common control, merged into the Company. The following asset, liabilities, and equity were transferred:
| Assets |
||||
| Operating Cash |
$ | 2,341,616 | ||
| Loan Fees and Other Receivables |
$ | 16,753,381 | ||
| Prepaid Expenses |
$ | 232,896 | ||
| Loans Held for Investment |
$ | 125,701,946 | ||
| Deposits |
$ | 858,000 |
- 27 -
CalCon Mutual Mortgage LLC
Notes to Consolidated Financial Statements
Years Ended December 31, 2021 and 2020
| 12. | RELATED PARTY TRANSACTIONS |
Yellowstone Transactions (Continued)
| Liabilities |
||||
| Related Party Payables |
$ | 2,430,000 | ||
| Accounts Payable |
$ | 3,046,789 | ||
| Warehouse Line of Credit |
$ | 124,512,033 | ||
| Notes Payable |
$ | 9,979,488 | ||
| Loan Loss Reserve |
$ | 1,000,000 | ||
| Equity |
$ | 4,919,530 |
Operating Accounts
At December 31, 2020, the Company had a net payable of $54,668 related to third party mortgage loans sold to Yellowstone whereby funds were advanced to pay for borrower loan obligations. The payable is located in loan fees and other receivables on the accompanying consolidated balance sheets.
Warehouse Line of Credit
At December 31, 2020, the Company had a warehouse line of credit agreement with Yellowstone up to a maximum of $50,000,000 based upon a percentage of construction and portfolio mortgage loans, which were pledged as collateral against the advances received. Advances were due to be repaid upon the earlier of the sale of the mortgage loans that were pledged as collateral or a specified period of time from the date on which the advance was received. Interest was accrued on a monthly basis at an applicable interest rate depending on duration of the warehouse period. At December 31, 2021 and 2020, the applicable interest rates ranged from 2.50% to 4.50% and 3.00% to 5.00%, respectively. During 2021, Yellowstone merged into the Company and related party facility merged into the existing Merchants Bank agreement.
Discounted Note Purchase
On December 23, 2019, the Company purchased a discounted participation in a third-party loan from Yellowstone for $2,000,000. This loan had a maturity date of December 31, 2020, with additional consideration required for the option to extend to June 30, 2021. The secured loan bore interest at 4.50%, with a contingent interest payment due at maturity. The note was paid off during the year ended December 31, 2020.
- 28 -
CalCon Mutual Mortgage LLC
Notes to Consolidated Financial Statements
Years Ended December 31, 2021 and 2020
| 12. | RELATED PARTY TRANSACTIONS (CONTINUED) |
Notes Receivables
At December 31, 2020, the Company had notes receivable totaling $2,430,000 related to general purpose matters. The notes bore interest of 10.00%. The notes receivable is included in notes receivable on the accompanying consolidated balance sheets. Interest income generated on this note for the year ended December 31, 2020 was $33,336. The note was eliminated with the merger of Yellowstone in 2021.
OneTrust International LLC
The Company receives outsourced operations support services from OneTrust International LLC, an entity under common control. During the years ended December 31, 2021 and 2020, the expenses were $7,045,971 and $4,104,222, respectively. The payable at December 31, 2021 and 2020 was $1,094,865 and $658,354, respectively, and is located in accounts payable and accrued liabilities on the accompanying consolidated balance sheets.
Island Vibez Management, LLC
The Company has a consulting agreement with a management services company to provide specific strategic finance and management services. The Company expensed $3,226,856 and $5,698,868 for the years ended December 31, 2021 and 2020, respectively, related to these services. The amount is included in general and administrative expenses in the accompanying consolidated statements of the income and expense.
| 13. | TRUST LIABILITIES |
The Company collects funds from borrowers in advance for payment of credit, taxes and insurance. The Company is required to maintain these funds in a separate trust account for the benefit of these borrowers. Total funds held in trust for others at December 31, 2021 and 2020 were $573,997 and 2,136,522, respectively. The trust assets and liabilities are not included on the accompanying consolidated balance sheets.
- 29 -
CalCon Mutual Mortgage LLC
Notes to Consolidated Financial Statements
Years Ended December 31, 2021 and 2020
| 14. | FAIR VALUE MEASUREMENTS |
The following table represents the Company’s fair value hierarchy for its assets measured at fair value on a recurring basis as of December 31,
| 2021 | ||||||||||||
| Level 1 | Level2 | Level 3 | ||||||||||
| Mortgage Loans Held for Sale |
$ | — | $ | 253,169,656 | $ | — | ||||||
| Interest Rate Lock Commitments |
— | — | 2,845,650 | |||||||||
| Mortgage Servicing Rights |
— | — | 8,385,572 | |||||||||
| Investor Forward Loan Sale Contracts |
— | (324,199 | ) | — | ||||||||
|
|
|
|
|
|
|
|||||||
| Total |
$ | — | $ | 252,845,457 | $ | 11,231,222 | ||||||
|
|
|
|
|
|
|
|||||||
| 2020 | ||||||||||||
| Level 1 | Level 2 | Level 3 | ||||||||||
| Investments Securities, Net |
$ | — | $ | — | $ | — | ||||||
| Mortgage Loans Held for Sale |
— | 403,961,571 | — | |||||||||
| Interest Rate Lock Commitments |
— | — | 6,890,125 | |||||||||
| Mortgage Servicing Rights |
— | — | 11,492,146 | |||||||||
| Investor Forward Loan Sale Contracts |
— | (6,537,656 | ) | — | ||||||||
|
|
|
|
|
|
|
|||||||
| Total |
$ | — | $ | 397,423,915 | $ | 18,382,270 | ||||||
|
|
|
|
|
|
|
|||||||
The following table presents a reconciliation of Level 3 assets measured at fair value on a recurring basis for the following years ended:
| Interest Rate Lock Commitments |
||||
| Balance at December 31 2019 |
$ | 1,531,800 | ||
| Net Transfers and Revaluations |
5,358,325 | |||
|
|
|
|||
| Balance at December 31, 2020 |
6,890,125 | |||
| Net Transfers and Revaluations |
(4,044,475 | ) | ||
|
|
|
|||
| Balance at December 31, 2021 |
$ | 2,845,650 | ||
|
|
|
|||
At December 31, 2021 and 2020, there were no non-recurring assets or liabilities recorded at fair value.
Due to their short term nature, the carrying values of loan fees and other receivables, prepaid expenses, certain notes receivable, accounts payable and accrued liabilities, warehouse lines of credit and certain notes payable approximate their fair values at December 31, 2021 and 2020.
- 30 -
CalCon Mutual Mortgage LLC
Notes to Consolidated Financial Statements
Years Ended December 31, 2021 and 2020
| 15. | RETIREMENT PLAN |
The Company has a 40l(k) plan (the Plan) which covers all eligible employees who have met the minimum eligibility requirements. Employees may elect to contribute up to a maximum percentage allowable, not to exceed federal tax law limitations, which may be adjusted each year based on cost-of-living calculations. The Company’s contributions are discretionary and are determined on an annual basis. For the years ended December 31, 2021 and 2020, Company contributions to the Plan were $318,342 and 390,372, respectively.
| 16. | PROFITS INTEREST PLAN |
The Company has a profits interest plan that allows key employees and consultants to receive interests in the Company’s profits through an entity established to hold Class C units of the Company (the holding company). Key employees and consultants are granted equivalent units in the holding company that enable them to share in the Company’s profits. Unless otherwise stated in the profits interest award agreement, units in the holding company will vest equally over four years beginning on the anniversary of the grant date. At December 31, 2021 and 2020, the Company had 12,500 fully vested units in both years. There was no vesting expense for the years ended December 31, 2021 and 2020.
| 17. | LEASE COMMITMENTS |
The Company leases office facilities under non-cancellable operating leases through 2025. The Company also leases office facilities and equipment on a month-to-month basis. These leases sometimes require the Company to pay for insurance and maintenance. Office and equipment lease expenses charged to operations for the years ended December 31, 2021 and 2020 were $1,535,087 and $1,627,035, respectively.
At December 31, 2021, future minimum lease payments are as follows:
| Amount | ||||
| 2022 |
$ | 763,729 | ||
| 2023 |
300,222 | |||
| 2024 |
127,143 | |||
| 2025 |
39,224 | |||
|
|
|
|||
| Total Future Minimum Lease Payments |
$ | 1,230,319 | ||
|
|
|
|||
- 31 -
CalCon Mutual Mortgage LLC
Notes to Consolidated Financial Statements
Years Ended December 31, 2021 and 2020
| 18. | ADVERTISING AND MARKETING |
The Company expenses advertising and marketing costs as incurred, which amounted to $2,839,360 and $2,393,620 for the years ended December 31, 2021 and 2020, respectively.
| 19. | RISKS AND UNCERTAINTIES |
Mortgage Operations
In the normal course of its business, the Company is exposed to certain economic and compliance risks including credit risk, investor risk, repurchase risk, concentration risk, interest rate risk, regulatory risk, securitization risk and operating risk.
Credit Risk
The Company is dependent on its warehouse lending partners and termination of one or more of these relationships could affect the Company’s financial results and overall operations. The Company expects that warehouse lines of credit will remain available to finance its mortgage lending activities and that the Company will be able to obtain access to additional warehouse lines of credit, if needed. However, there is no certainty that these lending relationships or any other current relationships will continue or that the Company will be able to obtain new credit facilities. If the warehouse lines of credit become unavailable or diminished, the reduction in the Company’s borrowing ability could have a material adverse effect on the results of its operations and financial position.
Investor Risk
The Company has requirements to maintain certain net worth and liquidity amounts for their approvals with government-sponsored entities as well as other third-party aggregators. Failure to meet these financial covenant requirements could have an adverse impact on the Company’s financial position.
Repurchase Risk
The Company has mortgage loan purchase agreements with various investors. The Company is obligated to perform certain procedures in accordance with these agreements. The agreements provide for conditions whereby the Company may be required to either repurchase mortgage loans or provide indemnification for losses suffered by investors due to borrower default for various reasons, among which may be one of the following: (i) a mortgage loan is originated in violation of the investor’s requirements, (ii) the Company breaches any term of the agreement, and/or (iii) an early payment default occurs from a mortgage originated by the Company.
- 32 -
CalCon Mutual Mortgage LLC
Notes to Consolidated Financial Statements
Years Ended December 31, 2021 and 2020
| 19. | RISKS AND UNCERTAINTIES (CONTINUED) |
Concentration Risk
The Company sells loans to various investors. For years ended December 31, 2021 and 2020, mortgage loans sold to the largest three investors consisted of approximately 73% and 75%, respectively, of its mortgage loan sales.
Interest Rate Risk
Until a rate guarantee is extended to a borrower, the Company is not exposed to interest rate risk. At December 31, 2021, the Company had commitments to extend credit for which interest rates were guaranteed to borrowers, subject to loan approval. If mortgage interest rates change between the time the rate guarantee is made to the borrower and the time such loan is priced for sale to an investor, there is a potential loss on the sale of the loan. In most cases, the Company elects to absorb price risk on a portion of its rate guarantees by waiting to formally commit loans to actual commitments until after closing and offsetting that risk through hedging activities.
In order to manage the price risk on this population of rate guarantees, the Company enters into mandatory delivery forward sale commitments to investors at different times during the period that the underlying loans are in process. This latter method of loan sales generally entails the assumption of somewhat greater interest rate risk but also usually produces a higher gain on loan sales. The Company mitigates this risk through its hedging activities. The Company is also subject to risks associated with changes in interest rates to the extent that such fluctuations may have an effect on loan production volumes.
Regulatory Risk
The Company is subject to comprehensive regulation and supervision by federal and state regulatory authorities covering all aspects of the organization, management and operations. Many regulations have undergone significant changes and will significantly change in the future. The Company continually evaluates the regulations to determine the extent of the impact on Company operations. Any of the various regulatory agencies may take enforcement actions against the Company in the event management does not operate in accordance with applicable regulations, policies and directives. Regulatory enforcement could adversely affect the business, financial condition and results of operations.
- 33 -
CalCon Mutual Mortgage LLC
Notes to Consolidated Financial Statements
Years Ended December 31, 2021 and 2020
| 19. | RISKS AND UNCERTAINTIES (CONTINUED) |
Securitization Risk
The Company originates mortgages for different agencies. Some of these investors aggregate these securities for the purposes of securitizing them in the public markets. To the extent that these investors are unable to finance these loans in the securitization markets at attractive prices, the marketability and liquidity of these loans could become impaired. As of December 31, 2021 and 2020, the secondary market provided adequate liquidity for these loans.
The Company is selling and servicing loans through a contractual agreement with an approved seller-servicer of GNMA I and II loans. The terms of the contractual agreement make the Company subject to similar risk and liabilities as the authorized seller/servicer. The Company also received approval as a seller-servicer of GNMA I and II loans during October 2021. The contractual agreement requires the Company to provide funds to the authorized seller/servicer for situations where money is advanced on the borrower’s behalf to i) pay security holders when borrower payments are late, ii) address errors in the calculation of principal and interest, iii) account for losses associated with removal of a loan from the loan pool, and iv) pay for tax and insurance when borrower payments are late. Liability risk exists when the Company is required to buyback defective mortgage loans and if GNMA incurs costs, losses or expenses as a result of the Company’s default.
The Company is required to advance a percentage of loans currently being serviced to cover these contingent expenses.
The Company is responsible for servicing GNMA I and II loans with an unpaid principal balance as of December 31, 2021 and 2020 of $26,749,532 and $502,077,083, respectively. The Company has advanced $939,474 and $3,521,739 at December 31, 2021 and 2020, respectively, to address these contingencies, which is located in loan fees and other receivables on the accompanying consolidated balance sheets, and which management believes is fully collectable.
During November 2021, the Company receive its approval as a GNMA seller/servicer. As of December 31, 2021, the Company did not have any outstanding loan pools related to this agreement.
- 34 -
CalCon Mutual Mortgage LLC
Notes to Consolidated Financial Statements
Years Ended December 31, 2021 and 2020
| 19. | RISKS AND UNCERTAINTIES (CONTINUED) |
Operating Risk
The impact of COVID-19, and its variants, continue to cause uncertainty in global and national markets, which may continue for a currently indeterminable period of time. The pandemic may continue to cause labor disruptions, supply chain shortages, increased consumer costs and related inflation. These negative factors either individually, or cumulatively, may cause an impact to financing and investing operations, the consequence of which cannot be readily determined, but may impact the Company’s ability to meet future obligations.
| 20. | CAPITAL AND LIQUIDITY REQUIREMENTS |
The Company is subject to various capital and liquidity requirements in connection with agreements that the Company has entered into with the warehouse lines of credit, HUD, FHLMC and FNMA. Failure to maintain capital requirements could result in the Company’s inability to originate and service loans for the respective warehouse lenders and, therefore, could have a direct material effect on the Company’s financial position.
The Company’s actual capital and liquidity amounts and the minimum amounts required for adequacy purposes by the warehouse lenders are as follows:
| As of December 31, 2021: | Actual Capital | Minimum Capital Requirements |
||||||
| HUD |
$ | 60,261,496 | $ | 2,500,000 | ||||
| FHLMC |
$ | 64,692,960 | $ | 4,536,237 | ||||
| FNMA |
$ | 64,725,458 | $ | 4,536,237 | ||||
| GNMA |
$ | 60,261,496 | $ | 2,500,000 | ||||
| Warehouse Line 1 |
$ | 64,725,458 | $ | 2,800,000 | ||||
| Warehouse Line 2 |
$ | 64,725,458 | $ | 5,000,000 | ||||
| Warehouse Line 3 |
$ | 64,725,458 | No Requirement | |||||
- 35 -
CalCon Mutual Mortgage LLC
Notes to Consolidated Financial Statements
Years Ended December 31, 2021 and 2020
| 20. | CAPITAL AND LIQUIDITY REQUIREMENTS (CONTINUED) |
| As of December 31, 2021: | Actual Liquidity | Minimum Liquidity Requirements |
||||||
| HUD |
$ | 41,137,279 | $ | 500,000 | ||||
| FHLMC |
$ | 41,137,279 | $ | 285,073 | ||||
| FNMA |
$ | 41,137,279 | $ | 285,073 | ||||
| GNMA |
$ | 41,137,279 | $ | 1,000,000 | ||||
| Warehouse Line 1 |
$ | 41,137,279 | No Requirement | |||||
| Warehouse Line 2 |
$ | 41,137,279 | No Requirement | |||||
| Warehouse Line 3 |
$ | 41,137,279 | No Requirement | |||||
| As of December 31, 2020: | Actual Capital | Minimum Capital Requirements |
||||||
| HUD |
$ | 51,358,358 | $ | 2,500,000 | ||||
| FHLMC |
$ | 51,358,358 | $ | 2,698,432 | ||||
| FNMA |
$ | 51,358,358 | $ | 318,845 | ||||
| Warehouse Line 1 |
$ | 53,839,098 | $ | 2,800,000 | ||||
| Warehouse Line 2 |
$ | 53,839,098 | $ | 5,000,000 | ||||
| Warehouse Line 3 |
$ | 53,839,098 | No Requirement | |||||
| Related Party Warehouse Line |
$ | 53,839,098 | No Requirement | |||||
| As of December 31, 2020: | Actual Liquidity | Minimum Liquidity Requirements |
||||||
| HUD |
$ | 19,795,907 | $ | 500,000 | ||||
| FHLMC |
$ | 19,795,907 | $ | 318,845 | ||||
| FNMA |
$ | 19,795,907 | $ | 318,845 | ||||
| Warehouse Line 1 |
$ | 19,795,907 | No Requirement | |||||
| Warehouse Line 2 |
$ | 19,795,907 | No Requirement | |||||
| Warehouse Line 3 |
$ | 19,795,907 | No Requirement | |||||
| Related Party Warehouse Line |
$ | 19,795,907 | No Requirement | |||||
| 21. | CONTINGENCIES |
The Company has claims arising in the normal course of business. In the opinion of the Company’s legal counsel and management, any outcome will be immaterial to the consolidated financial statements.
- 36 -
CalCon Mutual Mortgage LLC
Notes to Consolidated Financial Statements
Years Ended December 31, 2021 and 2020
| 22. | CASH FLOW INFORMATION |
Supplemental cash flow information was as follows for the years ended December 31,
| 2021 | 2020 | |||||||
| Cash Paid For: |
||||||||
| Interest Expense |
$ | 8,656,780 | $ | 8,802,903 | ||||
| Taxes |
$ | — | $ | — | ||||
| Non-Cash Transactions: |
||||||||
| Finance Buyout of Former Members |
$ | — | $ | 1,009,212 | ||||
| Finance of Captive Insurance Policy |
$ | 4,144,791 | $ | 3,307,615 | ||||
| Debt Forgiveness |
$ | 4,964,200 | $ | — | ||||
| Yellowstone Merger - See Note 12 |
$ | — | $ | — | ||||
| 23. | RECLASSIFICATIONS |
Reclassifications have been made to the prior year financial statements in order to conform to the classifications used in the current year financial statements. These reclassifications have no effect on the prior year net income, net worth or liquidity.
| 24. | SUBSEQUENT EVENTS |
The Company has evaluated subsequent events through March 29, 2022, the date the financial statements were available to be issued, and there was the following significant matter to report:
On March 16, 2022, an outside investor acquired an interest in the Company’s parent entity, Warp Speed Holdings, which will create a change of control.
- 37 -
Supplementary Schedules
CalCon Mutual Mortgage LLC
Consolidated Supplementary Schedule I - Operating Expenses
| Years Ended December 31, | ||||||||
| 2021 | 2020 | |||||||
| Operating Expenses: |
||||||||
| Salaries, Payroll Taxes and Employee Benefits: |
||||||||
| Salaries |
$ | 22,044,945 | $ | 29,194,314 | ||||
| Payroll Taxes |
2,275,121 | 2,423,784 | ||||||
| Employee Benefits |
1,311,119 | 858,659 | ||||||
|
|
|
|
|
|||||
| Total Salaries, Payroll Taxes and Employee Benefits |
25,631,185 | 32,476,757 | ||||||
|
|
|
|
|
|||||
| Occupancy and Equipment Rent: |
||||||||
| Occupancy Rent |
1,349,521 | 1,442,572 | ||||||
| Equipment Rent |
185,566 | 184,463 | ||||||
|
|
|
|
|
|||||
| Total Occupancy and Equipment Rent |
1,535,087 | 1,627,035 | ||||||
|
|
|
|
|
|||||
| Advertising and Marketing |
2,839,360 | 2,393,620 | ||||||
|
|
|
|
|
|||||
| General and Administrative: |
||||||||
| Accounting |
267,578 | 89,615 | ||||||
| Bad Debt |
134,886 | 12,225 | ||||||
| Bank Charges |
26,554 | 18,516 | ||||||
| Depreciation |
82,152 | 101,474 | ||||||
| Dues and Subscriptions |
512,252 | 413,670 | ||||||
| Janitorial |
17,057 | 18,072 | ||||||
| Insurance |
3,983,377 | 2,621,530 | ||||||
| Licenses and Fees |
363,759 | 694,479 | ||||||
| Meals and Entertainment |
15,509 | 4,377 | ||||||
| Miscellaneous Fees |
528,255 | 323,248 | ||||||
| Office Expense |
91,310 | 110,690 | ||||||
| Office Supplies |
122,982 | 193,617 | ||||||
| Outside Services |
15,252,372 | 5,362,639 | ||||||
| Postage and Delivery |
205,950 | 121,113 | ||||||
| Professional Fees |
1,384,093 | 661,220 | ||||||
| Software Licensing |
1,183,211 | 996,841 | ||||||
| Travel |
206,898 | 140,803 | ||||||
| Utilities |
141,073 | 150,681 | ||||||
| Printing and Reproduction |
10,544 | 11,754 | ||||||
| Property Taxes |
9,024 | 8,800 | ||||||
|
|
|
|
|
|||||
| Total General and Administrative |
24,538,836 | 12,055,364 | ||||||
|
|
|
|
|
|||||
| Total Operating Expenses |
$ | 54,544,468 | $ | 48,552,776 | ||||
|
|
|
|
|
|||||
See Notes to Consolidated Financial Statements
- 39 -
CalCon Mutual Mortgage LLC
Supplementary Schedule II
Computation of HUD Adjusted Net Worth Requirement
December 31, 2021
| Net Worth Requirement: |
||||
| FHA Servicing Portfolio |
$ | — | ||
| FHA Originations |
255,900,274 | |||
| FHA Purchases |
— | |||
|
|
|
|||
| Subtotal - FHA Loan Activity |
255,900,274 | |||
| FHA Origination Servicing Retained |
1,805,277 | |||
| FHA Purchase Servicing Retained |
— | |||
|
|
|
|||
| Subtotal - Servicing Retained |
1,805,277 | |||
| Total Adjusted FHA Loan Activity |
254,094,997 | |||
| Net Worth Required Baseline |
1,000,000 | |||
| Additional Net Worth Required |
2,290,950 | |||
|
|
|
|||
| Total Minimum Net Worth Required |
2,500,000 | |||
| Members’ Equity Ending Balance |
64,725,458 | |||
| Less Unacceptable Assets: |
||||
| Related Party Receivable |
32,498 | |||
| Prepaid Expenses |
4,431,464 | |||
|
|
|
|||
| Adjusted Net Worth |
60,261,496 | |||
|
|
|
|||
| Adjusted Net Worth Above Required Minimum Amount |
$ | 57,761,496 | ||
|
|
|
See Notes to Consolidated Financial Statements
- 40 -
CalCon Mutual Mortgage LLC
Supplementary Schedule II (Continued)
Computation of HUD Liquidity Requirement
December 31, 2021
| Liquidity Requirement: |
||||
| Cash and Cash Equivalents |
$ | 41,137,279 | ||
| Less Unacceptable Assets |
— | |||
|
|
|
|||
| Total Liquid Assets |
41,137,279 | |||
| Liquidity Required |
500,000 | |||
|
|
|
|||
| Liquidity Above the Program Requirement |
$ | 40,637,279 | ||
|
|
|
See Notes to Consolidated Financial Statements
- 41 -
CalCon Mutual Mortgage LLC
Supplementary Schedule III
Computation of GNMA Adjusted Net Worth Requirement
December 31, 2021
| Adjusted Net Worth Calculation: |
||||
| Members’ Equity per Statement of Financial |
||||
| Condition at the End of Reporting Period |
$ | 64,725,458 | ||
| Less: |
||||
| Unacceptable Assets |
||||
| Prepaid Expenses |
4,431,464 | |||
| Related Party Notes Receivable |
32,498 | |||
|
|
|
|||
| Total Unacceptable Assets |
4,463,962 | |||
|
|
|
|||
| Adjusted Net Worth |
$ | 60,261,496 | ||
|
|
|
|||
| Required Net Worth Calculation: |
||||
| Unpaid Principal Balance of Securities Outstanding |
$ | — | ||
| Plus: |
||||
| Outstanding Balance of Commitment Authority Issued and Requested |
— | |||
|
|
|
|||
| Total Outstanding Portfolio and Authority |
— | |||
|
|
|
|||
| Required Net Worth |
2,500,000 | |||
|
|
|
|||
| Excess Net Worth |
$ | 57,761,496 | ||
|
|
|
See Notes to Consolidated Financial Statements
- 42 -
CalCon Mutual Mortgage LLC
Supplementary Schedule III (Continued)
Computation of GNMA Capital Requirement
December 31, 2021
| Capital Requirement for Nondepository Institutions: |
|
|||||||
| Total Adjusted Net Worth |
$ | 60,261,496 | ||||||
|
|
|
|||||||
| Total Assets |
$ | 391,338,315 | ||||||
|
|
|
|||||||
| Meets 6% Requirement? | ||||||||
| Total Adjusted Net Worth/Total Assets |
15.40 | % | Yes | |||||
|
|
|
|||||||
See Notes to Consolidated Financial Statements
- 43 -
CalCon Mutual Mortgage LLC
Supplementary Schedule III (Continued)
Computation of GNMA Liquid Assets Requirement
December 31, 2021
| Liquid Assets Calculation: |
||||||||
| Required Net Worth |
$ | 2,500,000 | ||||||
|
|
|
|||||||
| Acceptable Liquid Assets: |
||||||||
| Cash and Cash Equivalents |
41,137,279 | |||||||
| Total Liquid Assets |
$ | 41,137,279 | ||||||
|
|
|
|||||||
| Required Liquid Assets: |
$ | 1,000,000 | ||||||
| Meets Requirement? | ||||||||
| Excess Liquid Assets |
$ | 40,137,279 | Yes | |||||
|
|
|
|||||||
See Notes to Consolidated Financial Statements
- 44 -
CalCon Mutual Mortgage LLC
Supplementary Schedule III (Continued)
Presentation of GNMA Insurance Requirement
December 31, 2021
| A. Identification of Affiliated Ginnie Mae Issuers: |
||||
| Affiliated Ginnie Mae Issuers: |
||||
| CalCon Mutual Mortgage LLC |
||||
| Affiliated Ginnie Mae Issuer #: |
4441 | |||
| Affiliated Issuers on Same Insurance Policies: |
Not Applicable | |||
| B. Required Insurance Calculation: |
||||
| Servicing Portfolio: |
||||
| Ginnie Mae |
$ | — | ||
| Fannie Mae |
707,408,331 | |||
| Freddie Mac |
80,964,353 | |||
| Conventional (Other) |
26,121,971 | |||
|
|
|
|||
| Total Servicing Portfolio |
$ | 814,494,655 | ||
| Required Fidelity Coverage |
$ | 1,293,118 | ||
| Required Servicing Errors and Omissions Coverage |
$ | 1,293,118 | ||
| C. Verification of Insurance Coverage: |
||||
| Fidelity Bond Coverage at End of Reporting Period |
$ | 2,750,000 | ||
|
|
|
|||
| Mortgage Servicing Errors and Omissions Coverage at End of Reporting Period |
$ | 1,000,000 | ||
|
|
|
|||
| D. Insurance Coverage: |
||||
| Fidelity Bond Coverage |
$ | 1,456,882 | ||
|
|
|
|||
| Required Mortgage Servicing Errors and Omissions Coverage |
$ | (293,118) | ||
|
|
|
|||
| E. Ginnie Mae Loss Payable Endorsement: |
||||
| Fidelity Bond Coverage |
No | |||
| Mortgage Servicing Errors and Omissions Coverage |
No |
See Notes to Consolidated Financial Statements
- 45 -
CalCon Mutual Mortgage LLC
Audit Firm Summary
December 31, 2021
| Audit Firm: | Spiegel Accountancy Corp. | |
| Lead Auditor: | Henry S. Chavez, CPA | |
| Address: | 2300 Contra Costa Blvd., Suite 425 | |
| Pleasant Hill, California 94523 | ||
| Phone: | (925) 977-4000 | |
| Federal ID: | 26-4802175 | |
- 46 -
Spiegel Accountancy Corp.
REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND ON
COMPLIANCE AND OTHER MATTERS BASED ON AN AUDIT OF FINANCIAL
STATEMENTS PERFORMED IN ACCORDANCE WITH GOVERNMENT AUDITING
STANDARDS
Independent Auditor’s Report
To the Members and Board of Directors
CalCon Mutual Mortgage LLC
San Diego, California
We have audited, in accordance with the auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards issued by the Comptroller General of the United States, the financial statements of Calcon Mutual Mortgage LLC (CalCon Mutual Mortgage LLC or the Company), which comprise the consolidated balance sheet as of December 31, 2021, and the related consolidated statements of income and expense, changes in members’ equity, and cash flows for the year then ended, and the related notes to the financial statements, and have issued our report thereon dated March 29, 2022.
Report on Internal Control over Financial Reporting
In planning and performing our audit of the financial statements, we considered the Company’s internal control over financial reporting to determine the audit procedures that are appropriate in the circumstances for the purpose of expressing our opinion on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we do not express an opinion on the effectiveness of the Company’s internal control over financial reporting.
A deficiency in internal control exists when the design or operation of a control does not allow management or its employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, misstatements on a timely basis. A material weakness is a deficiency, or combination of deficiencies, in internal control such that there is a reasonable possibility that a material misstatement of the Company’s financial statements will not be prevented, or detected and corrected, on a timely basis. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance.
Our consideration of internal control over financial reporting was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control over financial reporting that might be· material weaknesses or significant deficiencies. Given these limitations, during our audit we did not identify any deficiencies in internal control over financial reporting that we consider to be material weaknesses. However, material weaknesses may exist that have not been identified.
- 47 -
To the Members and Board of Directors
CalCon Mutual Mortgage LLC
San Diego, California
Report on Compliance and Other Matters
As part of obtaining reasonable assurance about whether the Company’s financial statements are free from material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts and grant agreements, with which noncompliance could have a direct and material effect on the determination of financial statement amounts. However, providing an opinion on compliance with those provisions was not an objective of our audit, and accordingly, we do not express such an opinion. The results of our tests disclosed no instance of noncompliance that is required to be reported under Government Auditing Standards.
Purpose of this Report
The purpose of this report is solely to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, but not to provide an opinion on the effectiveness of the Company’s internal control over financial reporting or compliance. This report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the Company’s internal control over financial reporting and compliance. Accordingly, this communication is not suitable for any other purpose.
| Pleasant Hill, California | Spiegel Accountancy Corp. | |
| March 29, 2022 | Certified Public Accountants |
- 48 -
Spiegel Accountancy Corp.
REPORT ON COMPLIANCE FOR THE MAJOR HUD PROGRAM AND ON
INTERNAL CONTROL OVER COMPLIANCE REQUIRED BY THE CONSOLIDATED
AUDIT GUIDE FOR AUDITS OF HUD PROGRAMS
Independent Auditor’s Report
To the Members and Board of Directors
Calcon Mutual Mortgage LLC
San Diego, California
Report on Compliance with Each Major Program
We have audited Calcon Mutual Mortgage LLC (Calcon Mutual Mortgage LLC or the Company)‘s compliance with the compliance requirements) described in the Consolidated Audit Guide for Audits of HUD Programs (the Guide that could have a direct and material effect on the Company’s major U.S. Department of Housing and Urban Development (HUD) programs for the year ended December 3 I, 2021. The Company’s major HUD programs and the related direct and material compliance requirements are as follows:
| Name of Major HUD Program |
Direct and Material Compliance Requirements | |
| HUD Title II Program | Quality Control Plan, Branch Office Operations, Loan Origination, Loan Servicing, Federal Financial and Activity Reports, Lender Annual Recertification, Adjusted Net Worth, Liquidity, Licensing. Loan Settlement, Escrow Accounts, and Kickbacks. | |
| GNMA Program | Federal Financial Reports, Eligibility to Issue Mortgage- Backed Securities, Review of Custodial Documents, Issuer’s administration of Pooled Mortgage, Review of Monthly Accounting Reports and Quarterly Submission, Securities Marketing and Trading Practices, Adjusted Net Worth, Institutionwide Capital Requirements; Liquid Asset Requirement | |
In our opinion, Calcon Mutual Mortgage LLC complied, in all material respects, with the compliance requirements referred to above that could have a direct and material effect on each of its major HUD programs for the year ended December 3 I, 202I.
Basis for Opinion on Each Major HUD Program
We conducted our audit of compliance in accordance with auditing standards generally accepted in the United States of America (GAAS), the standards applicable to financial audits contained in Government Auditing Standards issued by the Comptroller General of the United States and the Guide. Our responsibilities under those standards and the Guide are further described in the Auditor’s Responsibilities for the Audit of Compliance section of our report.
- 49 -
To the Members and Board of Directors
CalCon Mutual Mortgage LLC
San Diego, California
Basis for Opinion on Each Major HUD Program (Continued)
We are required to be independent of Calcon Mutual Mortgage LLC and to meet our other ethical responsibilities, in accordance with the relevant ethical requirements relating to our audit. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion on compliance for each major HUD program. Our audit does not provide a legal determination of’ s compliance with the compliance requirements referred to above.
Responsibilities of Management for Compliance
Management is responsible for compliance with the requirements referred to above and for the design, implementation, and maintenance of effective internal control over compliance with the requirements of laws, statutes, regulations, rules, and provisions of contracts or grant agreements applicable to Calcon Mutual Mortgage LLC’s HUD programs.
Auditor’s Responsibilities for the Audit of Compliance
Our objectives are to obtain reasonable assurance about whether material noncompliance with the compliance requirements referred to above occurred, whether due to fraud or error, and to express an opinion on Calcon Mutual Mortgage LLC’s compliance based on our audit. Reasonable assurance is a high level of assurance but is not absolute assurance and therefore is not a guarantee that an audit conducted in accordance with GAAS, Government Auditing Standards, and the Guide will always detect material noncompliance when it exists. The risk of not detecting material noncompliance resulting from fraud is higher than for that resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Noncompliance with the compliance requirements referred to above is considered material if there is a substantial likelihood that, individually or in the aggregate, it would influence the judgment made by a reasonable user of the report on compliance about Calcon Mutual Mortgage LLC’s compliance with the requirements of each major HUD program as a whole.
In performing an audit in accordance with GAAS, Government Auditing Standards, and the Guide, we:
| • | Exercise professional judgment and maintain professional skepticism throughout the audit. |
| • | Identify and assess the risks of material noncompliance, whether due to fraud or error, and design and perform audit procedures responsive to those risks. Such procedures include examining, on a test basis, evidence regarding Calcon Mutual Mortgage LLC’s compliance with the compliance requirements referred to above and performing such other procedures as we consider necessary in the circumstances. |
- 50 -
To the Members and Board of Directors
CalCon Mutual Mortgage LLC
San Diego, California
Auditor’s Responsibilities for the Audit of Compliance (Continued)
| • | Obtain an understanding of Calcon Mutual Mortgage LLC’s internal control over compliance relevant to the audit in order to design audit procedures that are appropriate in the circumstances and to test and report on internal control over compliance in accordance with the Guide, but not for the purpose of expressing an opinion on the effectiveness of Calcon Mutual Mortgage LLC’s internal control over compliance. Accordingly, no such opinion is expressed. |
We are required to communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and any significant deficiencies and material weaknesses in internal control over compliance that we identified during the audit.
Report on Internal Control over Compliance
A deficiency in internal control over compliance exists when the design or operation of a control over compliance does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, noncompliance with a compliance requirement of a HUD program on a timely basis. A material weakness in internal control over compliance is a deficiency, or combination of deficiencies, in internal control over compliance, such that there is a reasonable possibility that material noncompliance with a compliance requirement of a HUD program will not be prevented, or detected and corrected, on a timely basis. A significant deficiency in internal control over compliance is a deficiency, or a combination of deficiencies, in internal control over compliance with a compliance requirement of a HUD program that is less severe than a material weakness in internal control over compliance, yet important enough to merit attention by those charged with governance.
Our consideration of internal control over compliance was for the limited purpose described in the Auditor’s Responsibilities for the Audit of Compliance section above and was not designed to identify all deficiencies in internal control over compliance that might be material weaknesses or significant deficiencies in internal control over compliance. Given these limitations, during our audit we did not identify any deficiencies in internal control over compliance that we consider to be material weaknesses, as defined above. However, material weaknesses or significant deficiencies in internal control over compliance may exist that have not been identified.
Our audit was not designed for the purpose of expressing an opinion on the effectiveness of Calcon Mutual Mortgage LLC’s internal control over compliance. Accordingly, no such opinion is expressed.
- 51 -
To the Members and Board of Directors
CalCon Mutual Mortgage LLC
San Diego, California
Purpose of This Report
The purpose of this report on internal control over compliance is solely to describe the scope of our testing of internal control over compliance and the results of that testing based on the requirements of the Guide. Accordingly, this communication is not suitable for any other purpose.
| Pleasant Hill, California | Spiegel Accountancy Corp. | |
| March 29, 2022 | Certified Public Accountants |
- 52 -
Spiegel Accountancy Corp.
CalCon Mutual Mortgage LLC
Schedule of Findings, Questioned Costs and Recommendations
for HUD-Approved Title II Non-Supervised Mortgagees
and Loan Correspondents
December 31, 2021
Current Year Findings
Our audit disclosed no finding that are required to be reported herein under the Consolidated Audit Guide for Audits of HUD Programs.
- 53 -
CalCon Mutual Mortgage LLC
Schedule of the Status of Prior Audit Findings, Questioned Costs and Recommendations
for HUD-Approved Title II Non-Supervised Mortgagees
and Loan Correspondents
December 31, 2021
REGARDING THE PREVIOUS COMPLIANCE AUDIT
Audit report dated March 27, 2021 for the year ended December 31, 2020 issued by Spiegel Accountancy Corp.
No open findings from the prior year audit report.
REGARDING AUDITS, ATTESTATIONS, REVIEWS OR OTHER STUDIES OR MONITORING REPORTS
There were no letters or reports issued by HUD OIG, contract administrators or other federal agencies during the year covered by this audit.
REGARDING DEFICIENCES LISTED IN LETTERS OR REPORTS ISSUED BY HUD MANAGEMENT
There were no letters or reports issued by HUD management during the audit period.
- 54 -
Exhibit 99.2
CalCon Mutual Mortgage LLC
September 30, 2022
Consolidated Financial Statements
Calcon Mutual Mortgage LLC
Consolidated Balance Sheets
| Consolidated Balance Sheet |
1 | |||
| Consolidated Statement of Income and Expense |
2 | |||
| Consolidated Statement of Changes in Members’ Equity |
3 | |||
| Consolidated Statement of Cash Flows |
4 | |||
| Notes to Financial Statements |
5 - 14 | |||
Calcon Mutual Mortgage LLC
Consolidated Balance Sheets
| September 30, 2022 | ||||
| ASSETS |
||||
| Assets: |
||||
| Cash and Cash Equivalents |
$ | 16,275,735 | ||
| Mortgage Loans Held for Sale at Fair Value |
367,637,618 | |||
| Mortgage Loans Receivable, Net |
118,136,409 | |||
| Loan Fees and Other Receivables |
15,854,672 | |||
| Derivative Assets |
756,236 | |||
| Mortgage Servicing Rights |
6,412,612 | |||
| Prepaid Expenses |
1,349,411 | |||
| Property and Equipment, Net |
98,345 | |||
| Deposits and Other Assets |
125,705 | |||
|
|
|
|||
| Total Assets |
$ | 526,646,743 | ||
|
|
|
|||
| LIABILITIES AND EOUITY |
||||
| Liabilities: |
||||
| Accounts Payable and Accrued Liabilities |
$ | 9,673,030 | ||
| Derivative Liabilities |
3,688,969 | |||
| Warehouse Lines of Credit |
455,823,829 | |||
| Deferred Revenue |
2,384,478 | |||
| Secondary Market Reserve |
1,085,758 | |||
| Notes Payable |
6,823,392 | |||
|
|
|
|||
| Total Liabilities |
479,479,456 | |||
| Members’ Equity: |
||||
| Class B Members |
44,093,740 | |||
| Non-Controlling Interest |
3,073,547 | |||
|
|
|
|||
| Total Members’ Equity |
47,167,287 | |||
| Total Liabilities and Equity |
$ | 526,646,743 | ||
|
|
|
|||
See Notes to Consolidated Financial Statements
1
Calcon Mutual Mortgage LLC
Consolidated Statements of Income and Expense
Nine Months Ended September 30, 2022
| September 30, 2022 | ||||
| Mortgage Lending Income: |
||||
| Gain on Sale of Mortgage Loans and Loan Origination Fees |
$ | 35,703,245 | ||
| Loan Fees from Lending Activities |
9,321,460 | |||
| Gain on Retention/Fair Value Change of Mortgage Servicing Rights |
7,111,661 | |||
| Loss on Sale of Mortgage Servicing Rights |
(105,978 | ) | ||
| Mortgage Servicing Fees |
900,851 | |||
| Interest Income from Lending Activities |
16,518,251 | |||
|
|
|
|||
| Total Mortgage Lending Income |
69,449,490 | |||
|
|
|
|||
| Mortgage Lending Expense: |
||||
| Loan Originator Commissions |
10,471,336 | |||
| Warehouse Lines of Credit Interest Expense |
10,589,672 | |||
| Loan Expense Related to Lending Activities |
5,047,998 | |||
| Mortgage Servicing Fee Expense |
1,257,378 | |||
| Provision for Secondary Market Reserve |
173,421 | |||
|
|
|
|||
| Total Mortgage Lending Expense |
27,539,805 | |||
|
|
|
|||
| Gross Profit |
41,909,685 | |||
|
|
|
|||
| Operating Expenses: |
||||
| Salaries, Payroll Taxes and Employee Benefits |
18,900,357 | |||
| Occupancy and Equipment Rent |
1,245,321 | |||
| Advertising and Marketing |
4,974,593 | |||
| General and Administrative |
16,793,058 | |||
|
|
|
|||
| Total Operating Expense |
41,913,329 | |||
|
|
|
|||
| Loss from Operations |
(3,644 | ) | ||
|
|
|
|||
| Other Income and (Expenses): |
||||
| Interest Income |
693 | |||
| Interest Expense |
(229,216 | ) | ||
|
|
|
|||
| Total Other Income and (Expense) |
(228,523 | ) | ||
| Net Loss Before Non-controlling Interest |
(232,167 | ) | ||
|
|
|
|||
| Net Income from Non-controlling Interest |
(1,675,101 | ) | ||
|
|
|
|||
| Net Loss Attributable to the Company |
$ | (1,907,268 | ) | |
|
|
|
|||
See Notes to Consolidated Financial Statements
2
Calcon Mutual Mortgage LLC
Consolidated Statements of Changes in Members’ Equity
Nine Months Ended September 30, 2022
| Class B | Non-Controlling Interest |
Total Equity | ||||||||||
| Balance at December 31, 2021 |
$ | 64,725,458 | $ | 1,585,946 | $ | 66,311,404 | ||||||
| Contributions |
— | 812,500 | 812,500 | |||||||||
| Distributions |
(18,724,450 | ) | (1,000,000 | ) | (19,724,450 | ) | ||||||
| Net Income (Loss) |
(1,907,268 | ) | 1,675,101 | (232,167 | ) | |||||||
|
|
|
|
|
|
|
|||||||
| Balance at September 30, 2022 |
$ | 44,093,740 | $ | 3,073,547 | $ | 47,167,287 | ||||||
|
|
|
|
|
|
|
|||||||
See Notes to Consolidated Financial Statements
3
CalCon Mutual Mortgage LLC
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 2022
| September 30, 2022 | ||||
| Cash Flows from Operating Activities: |
||||
| Net Loss |
$ | (232,167 | ) | |
| Adjustment to Reconcile Net Income to Net Cash Flows from Operating Activities: |
||||
| Captive Insurance Amortization |
(4,144,791 | ) | ||
| Depreciation |
45,305 | |||
| Gain on Sale of Mortgage Servicing Rights |
105,978 | |||
| Gain on Retention of Mortgage Servicing Rights |
(4,945,558 | ) | ||
| Fair Value Adjustment of Mortgage Servicing Rights |
(2,166,103 | ) | ||
| Amortization of Deferred Revenue |
(982,685 | ) | ||
| Provision for Secondary Market Reserve |
173,421 | |||
| Increase (Decrease) in Operating Assets: |
||||
| Mortgage Loans Held for Sale |
(114,467,962 | ) | ||
| Mortgage Loans Receivable |
(48,019,173 | ) | ||
| Loan Fees and Other Receivables |
(6,490,472 | ) | ||
| Derivative Instruments |
5,454,184 | |||
| Prepaid Expenses |
3,082,053 | |||
| Deposits and Other Assets |
1,617,903 | |||
| Decrease (Increase) in Operating Liabilities: |
||||
| Accounts Payable and Accrued Liabilities |
(18,610 | ) | ||
| Deferred Revenue |
2,624,895 | |||
| Secondary Market Reserve |
(1,087,663 | ) | ||
|
|
|
|||
| Net Cash Used in Operating Activities |
(169,451,445 | ) | ||
|
|
|
|||
| Cash Flows From Investing Activities: |
||||
| Proceeds from Sale of Mortgage Servicing Rights |
8,978,643 | |||
|
|
|
|||
| Net Cash Provided by Investing Activities |
8,978,643 | |||
|
|
|
|||
| Cash Flows From Financing Activities: |
||||
| Proceeds from Warehouse Lines of Credit |
1,388,098,548 | |||
| Repayments on Warehouse Lines of Credit |
(1,232,312,853 | ) | ||
| Repayments of Notes Payable |
(1,262,487 | ) | ||
| Distributions |
(18,724,450 | ) | ||
| Non-controlling Interest Contributions |
812,500 | |||
| Non-controlling Interest Distributions |
(1,000,000 | ) | ||
|
|
|
|||
| Net Cash Provided by Financing Activities |
135,611,258 | |||
|
|
|
|||
| Net Increase in Cash and Cash Equivalents |
(24,861,544 | ) | ||
| Cash and Cash Equivalents – Beginning of Period |
41,137,279 | |||
|
|
|
|||
| Cash and Cash Equivalents – End of Period |
$ | 16,275,735 | ||
|
|
|
|||
| Supplementary Disclosure of Cash Flow Information: |
||||
| Cash Paid for Interest |
$ | 9,807,138 | ||
|
|
|
|||
See Notes to Consolidated Financial Statements
4
CalCon Mutual Mortgage LLC
Notes to Consolidated Financial Statements
Nine Months Ended September 30, 2022
| 1. | SUMMARY OF ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES |
Organization
CalCon Mutual Mortgage LLC dba OneTrust Home Loans, Tabor Mortgage Group and Warp Speed Mortgage LLC (CalCon), which was incorporated in 2013 in the state of Delaware. CalCon is principally engaged in the origination of mortgage loans secured by residential real estate located in various states throughout the United States. Generally, such loans are subsequently sold to financial institutions or to other entities that sell such loans to investors. CalCon is registered with the Nationwide Mortgage Licensing System & Registry as well as applicable state licensing agencies. Additionally, CalCon is approved by the U.S. Department of Housing and Urban Development (HUD) to act as a non-supervised mortgagee and with the Federal National Mortgage Association (FNMA), Federal Home Loan Mortgage Corporation (FHLMC), and the Governmental National Mortgage Association (GNMA) to act as a seller/servicer.
Merger
On January 1, 2021, CalCon merged with Yellowstone RE Holdings (Yellowstone), an entity under common control. CalCon purchases, owns, and occasionally sells pools of residential and commercial mortgage loans, including discounted and distressed mortgage loan purchases, all of which are secured by deeds of trust or mortgage contracts.
Basis of Consolidation
The accompanying consolidated financial statements include the accounts of CalCon; and its wholly owned subsidiary OTHLJV20, LLC, which has consolidating joint ventures with Schumacher Mortgage LLC; Team One Home Loans LLC, and Ardorio Lending LLC (altogether, the Company). All significant intercompany accounts, transactions, and profits have been eliminated in the consolidation.
Basis of Presentation and Use of Estimates
The Company’s consolidated financial statements are prepared on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP). The accrual basis of accounting requires the use of estimates and assumptions that affect the assets, liabilities, revenues and expenses reported in the consolidated financial statements, as well as amounts included in the notes thereto, including discussion and disclosure of contingent liabilities. Although the Company uses its best estimates and judgments, actual results could differ from these estimates as future confirming events occur.
5
CalCon Mutual Mortgage LLC
Notes to Consolidated Financial Statements
Nine Months Ended September 30, 2022
| 1. | SUMMARY OF ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) |
Basis of Presentation and Use of Estimates (Continued)
In the Company’s opinion, the accompanying financial statements contain all normal recurring adjustments necessary for a fair presentation of its financial statements for interim periods in accordance with U.S. GAAP. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been omitted. The information presented in these interim financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto included in the Company’s financial statements as of and for the year ended December 31, 2021. Operating results for the nine months ended September 30, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022.
Mortgage Servicing Rights
The Company originates mortgage loans for sale to the secondary market and sells the loans on either a servicing-retained or servicing-released basis. The Company has obligations to service residential first mortgage loans that are acquired through loans sold on a servicing-retained basis. These mortgage servicing rights (MSRs) are recognized as assets at the time a loan is sold on a servicing-retained basis and capitalized at fair value. Changes in fair value are recorded in fair value adjustments of mortgage servicing rights in the accompanying consolidated statements of income and expense.
Fair market value is based on the present value of estimated future cash flows using a discount rate commensurate with the risk involved. Estimates of fair market value include assumptions about contractual service fees, projected costs to service, prepayment speeds, default, interest rates and other factors, which are subject to change over time. Changes in these underlying assumptions could cause the fair market value of MSRs to specifically change in the future. The Company obtains a valuation from an independent third party on a monthly basis to support the reasonableness of the fair value estimate generated by the Company’s internal model.
The key assumptions used in determining the fair value of MSRs when they are initially recorded were as follows:
| September 30, 2022 | ||||
| Discount Rates |
12.50 | % | ||
| Annual Prepayment Speeds |
8.60 | % | ||
| Cost of Servicing |
$ | 94 | ||
6
CalCon Mutual Mortgage LLC
Notes to Consolidated Financial Statements
Nine Months Ended September 30, 2022
| 1. | SUMMARY OF ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) |
Fair Value Measurements
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The Company determines the fair values of its assets and liabilities based on a fair value hierarchy established under applicable accounting guidance which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. There are three levels of inputs that may be used to measure fair value. The three levels are defined as follows:
Level I inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.
Level 2 inputs are those other than quoted prices that are observable for the asset or liability, either directly or indirectly.
Level 3 inputs are unobservable inputs for the asset or liability. Unobservable inputs reflect the Company’s own financial model using assumptions that market participants would use in pricing the asset or liability (including assumptions about risk).
| 2. | MORTGAGE LOANS HELD FOR SALE |
All mortgage loans held for sale are secured by residential property and are collateral for the warehouse lines of credit. Mortgage loans held for sale consisted of the following as of:
| September 30, 2022 | ||||
| Mortgage Loans Held for Sale (Unpaid Principal Balance) |
$ | 372,923,235 | ||
| Fair Value Adjustment |
5,285,617 | |||
|
|
|
|||
| Mortgage Loans Held for Sale at Fair Value |
$ | 367,637,618 | ||
|
|
|
|||
7
CalCon Mutual Mortgage LLC
Notes to Consolidated Financial Statements
Nine Months Ended September 30, 2022
| 3. | MORTGAGE LOANS RECEIVABLE |
The Company had the following mortgage loans receivable at:
| September 30, 2022 | ||||
| Mortgage loans receivable consisted of notes to individuals secured by deeds of trust, bearing interest at various rates from 2.00% to 12.00% per annum, partially or fully amortized. These notes have original maturity dates from December 2022 through October 2052. |
$ | 410,174,133 | ||
| Less: Construction Loan Commitments |
(248,968,300 | ) | ||
|
|
|
|||
| Mortgage Loans Receivable, Net |
$ | 161,205,833 | ||
|
|
|
|||
Mortgage Loans in Foreclosure
At September 30, 2022, the Company had loans amounting to $2,668,699 that were in the process of foreclosure. Real estate owned is included in mortgage loans receivable at September 30, 2022. Management does not anticipate any losses related to these foreclosures.
Loan Modifications
At September 30, 2022, the Company did not have any material loan modifications.
| 4. | DERIVATIVE INSTRUMENTS |
Derivative instruments are commitments to extend to borrowers, either at fixed or floating rates, and contracts to sell mortgage loans to investors at specific future dates and interest rates. Commitments to extend credit are generally agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee by the borrower. The market risk associated with the commitments to sell loans occurs when the estimated amount of the commitments to extend credit is not the same as the outstanding commitments to sell loans and from the possible inability of counterparties to meet the terms of their commitments.
The Company recognized pre-tax net realized and unrealized gains of $23,701,211 for the nine months ended September 30, 2022, on its hedging activity related to interest rate lock commitments and investor forward loan sale contracts. The Company had the following derivative instruments as of:
| September 30, 2022 | ||||||||
| Volume | Fair Value | |||||||
| Interest Rate Lock Commitments |
$ | 93,677,461 | $ | 756,236 | ||||
| Investor Forward Loan Sale Contracts |
$ | 425,000,000 | (3,688,969 | ) | ||||
|
|
|
|||||||
| Total Derivative Instruments |
$ | (2,932,733 | ) | |||||
|
|
|
|||||||
8
CalCon Mutual Mortgage LLC
Notes to Consolidated Financial Statements
Nine Months Ended September 30, 2022
| 4. | DERIVATIVE INSTRUMENTS (CONTINUED) |
The following table represents the quantitative information about interest rate lock commitments and the fair value measurements as of:
| Loan Funding Probability (Pull-Through) |
||||
| September 30, 2022 | ||||
| Weighted Average |
91 | % | ||
The Company had margin calls with a broker dealer totaling $3,937,500 at September 30, 2022, which are located in loan fees and other receivables on the accompanying consolidated balance sheets.
| 5. | MORTGAGE SERVICING RIGHTS |
The following summarizes MSR activity for the nine months ended:
| September 30, 2022 | ||||
| Beginning Balance |
$ | 8,385,572 | ||
| Capitalized Mortgage Servicing Rights |
4,945,558 | |||
| Fair Value Adjustment and Payoffs |
1,794,350 | |||
| Sale of Mortgage Servicing Rights |
(9,009,332 | ) | ||
| Gain on Sale of Mortgage Servicing Rights |
296,464 | |||
|
|
|
|||
| Mortgage Servicing Rights |
$ | 6,412,612 | ||
|
|
|
|||
The following table illustrates the impact of adverse changes on the discount rate and prepayment speeds at two different data points at:
| September 30, 2022 |
||||||||||||||||
| Discount Rates | Prepayment Speeds | |||||||||||||||
| 10% Adverse Change |
20% Adverse Change |
10% Adverse Change |
20% Adverse Change |
|||||||||||||
| Mortgage Servicing Rights |
$ | (271,188 | ) | $ | (517,855 | ) | $ | (183,118 | ) | $ | (354,711 | ) | ||||
9
CalCon Mutual Mortgage LLC
Notes to Consolidated Financial Statements
Nine Months Ended September 30, 2022
| 6. | WAREHOUSE LINES OF CREDIT |
At September 30, 2022, the Company had warehouse lines of credit agreement with two financial institutions, whereby the Company received advances under the agreements up to a combined maximum of $800,000,000.
The Company had the following outstanding warehouse lines of credit at:
| September 30, 2022 | ||||
| Merchants Bank |
$ | (439,525,118 | ) | |
| Centier Bank |
(16,298,711 | ) | ||
|
|
|
|||
| Total |
$ | (455,823,829 | ) | |
|
|
|
|||
| 7. | SECONDARY MARKET RESERVE |
The following is a summary of the secondary market reserve activity for the nine months ended:
| September 30, 2022 | ||||
| Beginning Balance |
$ | 2,000,000 | ||
| Charge-Offs |
173,421 | |||
| Provision for Secondary Market Reserve |
(1,087,663 | ) | ||
|
|
|
|||
| Ending Balance |
$ | 1,085,758 | ||
|
|
|
|||
| 8. | NOTES PAYABLE |
Merchants Bank
At September 30, 2022, the Company has a loan of $2,389,820, which bears interest of 3.59%, and is due in 2024. Loan repayments are approximately $980,000 per year through 2024.
PACREP Investment Company. LLC
At September 30, 2022, the Company has a note payable of $4,433,572 bearing interest at Libor plus a margin of 150 basis points per annum, with interest payable quarterly and principal payable upon the payoff of the mortgage loans that are pledged as collateral. This note was transferred from Yellowstone in the amount of $5,231,041.
| 9. | TRUST LIABILITIES |
The Company collects funds from borrowers in advance for payment of credit, taxes and insurance. The Company is required to maintain these funds in a separate trust account for the benefit of these borrowers. Total funds held in trust for others at September 30, 2022, was $12,057,539. The trust assets and liabilities are not included on the accompanying consolidated balance sheets.
10
CalCon Mutual Mortgage LLC
Notes to Consolidated Financial Statements
Nine Months Ended September 30, 2022
| 10. | FAIR VALUE MEASUREMENTS |
The following table represents the Company’s fair value hierarchy for its assets measured at fair value on a recurring basis as of:
| September 30, 2022 | ||||||||||||
| Level 1 | Level 2 | Level 3 | ||||||||||
| Mortgage Loans Held for Sale |
$ | — | $ | 367,637,618 | $ | — | ||||||
| Interest Rate Lock Commitments |
— | — | 756,236 | |||||||||
| Mortgage Servicing Rights |
— | — | 6,412,612 | |||||||||
| Investor Forward Loan Sale Contracts |
— | (3,688,969 | ) | — | ||||||||
|
|
|
|
|
|
|
|||||||
| Total |
$ | — | $ | 363,948,649 | $ | 7,168,848 | ||||||
|
|
|
|
|
|
|
|||||||
The following table presents a reconciliation of Level 3 assets measured at fair value on a recurring basis for the following nine months ended:
| Interest Rate Lock Commitments |
||||
| Balance at December 31, 2021 |
$ | 2,845,650 | ||
| Net Transfers and Revaluations |
(2,089,414 | ) | ||
|
|
|
|||
| Balance at September 30, 2022 |
$ | 756,236 | ||
At September 30, 2022, there were no non-recurring assets or liabilities recorded at fair value.
Due to their short-term nature, the carrying values of loan fees and other receivables, prepaid expenses, certain notes receivable, accounts payable and accrued liabilities, warehouse lines of credit and certain notes payable approximate their fair values at September 30, 2022.
| 11. | RISKS AND UNCERTAINTIES |
Mortgage Operations
In the normal course of its business, the Company is exposed to certain economic and compliance risks including credit risk, investor risk, repurchase risk, concentration risk, interest rate risk, regulatory risk, securitization risk and operating risk.
11
CalCon Mutual Mortgage LLC
Notes to Consolidated Financial Statements
Nine Months Ended September 30, 2022
| 11. | RISKS AND UNCERTAINTIES (CONTINUED) |
Credit Risk
The Company is dependent on its warehouse lending partners and termination of one or more of these relationships could affect the Company’s financial results and overall operations. The Company expects that warehouse lines of credit will remain available to finance its mortgage lending activities and that the Company will be able to obtain access to additional warehouse lines of credit, if needed. However, there is no certainty that these lending relationships or any other current relationships will continue or that the Company will be able to obtain new credit facilities. If the warehouse lines of credit become unavailable or diminished, the reduction in the Company’s borrowing ability could have a material adverse effect on the results of its operations and financial position.
Investor Risk
The Company has requirements to maintain certain net worth and liquidity amounts for their approvals with government-sponsored entities as well as other third-party aggregators. Failure to meet these financial covenant requirements could have an adverse impact on the Company’s financial position.
Repurchase Risk
The Company has mortgage loan purchase agreements with various investors. The Company is
obligated to perform certain procedures in accordance with these agreements. The agreements provide for conditions whereby the Company may be required to either repurchase mortgage loans or provide indemnification for losses suffered by investors due to borrower default for various reasons, among which may be one of the following: (i) a mortgage loan is originated in violation of the investor’s requirements, (ii) the Company breaches any term of the agreement, and/or (iii) an early payment default occurs from a mortgage originated by the Company.
Concentration Risk
The Company sells loans to various investors. For nine months ended September 30, 2022, mortgage loans sold to the largest three investors consisted of approximately 53% of its mortgage loan sales.
Interest Rate Risk
Until a rate guarantee is extended to a borrower, the Company is not exposed to interest rate risk. At September 30, 2022, the Company had commitments to extend credit for which interest rates were guaranteed to borrowers, subject to loan approval. If mortgage interest rates change between the time the rate guarantee is made to the borrower and the time such loan is priced for sale to an investor, there is a potential loss on the sale of the loan. In most cases, the Company elects to absorb price risk on a portion of its rate guarantees by waiting to formally commit loans to actual commitments until after closing and offsetting that risk through hedging activities.
12
CalCon Mutual Mortgage LLC
Notes to Consolidated Financial Statements
Nine Months Ended September 30, 2022
| 11. | RISKS AND UNCERTAINTIES (CONTINUED) |
Interest Rate Risk (Continued)
In order to manage the price risk on this population of rate guarantees, the Company enters into mandatory delivery forward sale commitments to investors at different times during the period that the underlying loans are in process. This latter method of loan sales generally entails the assumption of somewhat greater interest rate risk but also usually produces a higher gain on loan sales. The Company mitigates this risk through its hedging activities. The Company is also subject to risks associated with changes in interest rates to the extent that such fluctuations may have an effect on loan production volumes.
Regulatory Risk
The Company is subject to comprehensive regulation and supervision by federal and state regulatory authorities covering all aspects of the organization, management and operations. Many regulations have undergone significant changes and will significantly change in the future. The Company continually evaluates the regulations to determine the extent of the impact on Company operations.
Any of the various regulatory agencies may take enforcement actions against the Company in the event management does not operate in accordance with applicable regulations, policies and directives. Regulatory enforcement could adversely affect the business, financial condition and results of operations.
Securitization Risk
The Company originates mortgages for different agencies. Some of these investors aggregate these securities for the purposes of securitizing them in the public markets. To the extent that these investors are unable to finance these loans in the securitization markets at attractive prices, the marketability and liquidity of these loans could become impaired. As of September 30, 2022, the secondary market provided adequate liquidity for these loans.
Operating Risk
The impact of COVID-19, and its variants, continue to cause uncertainty in global and national markets, which may continue for a currently indeterminable period of time. The pandemic may continue to cause labor disruptions, supply chain shortages, increased consumer costs and related inflation. These negative factors either individually, or cumulatively, may cause an impact to financing and investing operations, the consequence of which cannot be readily determined, but may impact the Company’s ability to meet future obligations.
| 12. | CONTINGENCIES |
The Company has claims arising in the normal course of business. In the opinion of the Company’s legal counsel and management, any outcome will be immaterial to the consolidated financial statements.
13
CalCon Mutual Mortgage LLC
Notes to Consolidated Financial Statements
Nine Months Ended September 30, 2022
| 13. | SUBSEQUENT EVENTS |
The Company has evaluated subsequent events through December 15, 2022, the date the financial statements were available to be issued.
On October 1, 2022, MVB Bank, Inc. (the “Bank”) and wholly-owned subsidiary of MVB Financial Corp. (“MVB”), completed the purchase of 3,748,392.93 Class B Common Units (the “MVB Investment”) of Warp Speed Holdings LLC, a Wyoming limited liability company (“Warp Speed”), pursuant to the terms of the Equity Purchase Agreement between the Bank and Warp Speed dated March 13, 2022, as thereby assigned by the Bank to MVB effective as of April 28, 2022 (as assigned, the “Purchase Agreement”). The MVB Investment represented 37.5% of the outstanding equity interests of Warp Speed on a fully-diluted basis.
Immediately prior to the closing of the MVB Investment, the pre-closing members of Warp Speed contributed to Warp Speed all of their equity interests in certain entities under common control of the sellers specified in the Purchase Agreement, in exchange for equity interests in Warp Speed (the “Put-Together Transaction”). As of October 1, 2022, Warp Speed serves as a holding company for the entities contributed in the Put-Together Transaction, which are focused on residential and commercial loan origination and servicing, business and personal insurance brokerage and data analytics. The Company is included as part of a number of entities that were contributed by the Warp Speed members to Warp Speed as part of the Put-Together Transaction.
14
Exhibit 99.3
|
MARCELO R. GUTIERREZ SUAREZ Certified Public Accountant & Consultant |
ONETRUST INTERNATIONAL LLC
FINANCIAL STATEMENTS
TOGETHER WITH INDEPENDENT AUDITOR’S REPORT
DECEMBER 31, 2021
35 Juan C: Borbon, Suite 67-319, Guaynabo, PR 00969 • Tel (787) 448-5970 • Fax (787) 919-0144
E-mail: mgutierrezcpa@gmaiLcom
ONETRUST INTERNATIONAL LLC
FINANCIAL STATEMENTS
DECEMBER 31, 2021
Table of Contents
| INDEPENDENT AUDITOR’S REPORT |
1-2 | |||
| FINANCIAL STATEMENTS: |
||||
| Statement of Financial Position |
3 | |||
| Statement of Operations |
4 | |||
| Statement of Changes in Members’ Equity |
5 | |||
| Statement of Cash Flows |
6 | |||
| NOTES TO FINANCIAL STATEMENTS |
7-13 | |||
|
|
MARCELO R. GUTIERREZ SUAREZ Certified Public Accountant & Consultant |
INDEPENDENT AUDITOR’S REPORT
To the Members of
OneTrust International LLC
San Juan, PR
Opinion
I have audited the accompanying statement of financial position of OneTrust International LLC (“the Company”) as of December 31, 2021, and the related statements of operations, changes in members’ equity and cash flows for the year then ended, and the related notes to financial statements.
In my opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2021, and the results of its operations and its cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America.
Basis for Opinion
I conducted my audit in accordance with auditing standards generally accepted in the United States of America. My responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Statements section of my report. I am required to be independent of the Company and to meet my other ethical responsibilities in accordance with the relevant ethical requirements relating to my audit. I believe that the audit evidence I have obtained is sufficient and appropriate to provide a basis for my audit opinion.
Emphasis of Matter
As discussed in Note 2 to the financial statements, the Company is member of a group of affiliated companies through common ownership. Because of these relationships, it is possible that the tenns of the related transactions are not the same as those that would result from transactions among unrelated parties.
Responsibilities of Management for the Financial Statements
Management is responsible for the preparation and fair presentation of the financial statements in accordance with accounting principles generally accepted in the United States of America, and for the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the financial statements, management is required to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the financial statements are available to be issued.
Independent Auditor’s Report
OneTrust International LLC
Auditor’s Responsibilities for the Audit of the Financial Statements
My objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes my opinion. Reasonable assurance is a high level of assurance but is not absolute assurance and therefore is not a guarantee that an audit conducted in accordance with generally accepted auditing standards will always detect a material misstatement when it exists. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Misstatements are considered material if there is a substantial likelihood that, individually or in the aggregate, they would influence the judgment made by a reasonable user based on the financial statements.
In performing an audit in accordance with generally accepted auditing standards, I:
| • | Exercise professional judgment and maintain professional skepticism throughout the audit. |
| • | Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, and design and perform audit procedures responsive to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. |
| • | Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control. Accordingly, no such opinion is expressed. |
| • | Evaluate the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluate the overall presentation of the financial statements. |
| • | Conclude whether, in my judgment, there are conditions or events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern for a reasonable period of time. |
I am required to communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit, significant audit findings, and certain internal control related matters that I identified during the audit.
Report on Other Legal and Regulatory Requirements
I further certify that the associates of my Firm are neither members nor employees of OneTrust International LLC.
|
|
/s/ Marcelo Gutierrez Suarez Marcelo Gutierrez Suarez, CPA Certified Public Accountant April 1, 2022 License Number 4118, In-force San Juan, Puerto Rico Expires December 1, 2024 |
ONETRUST INTERNATIONAL LLC
STATEMENT OF FINANCIAL POSITION
DECEMBER 31, 2021
| Amount | ||||
| ASSETS |
||||
| CURRENT ASSETS: |
||||
| Cash |
$ | 719,223 | ||
| Accounts Receivable |
1,279,292 | |||
| Prepaid Expenses |
260,454 | |||
|
|
|
|||
| Total Current Assets |
2,258,969 | |||
| PROPERTY AND EQUIPMENT, Net |
36,350 | |||
| OTHER ASSETS |
8,887 | |||
|
|
|
|||
| Total Assets |
$ | 2,304,206 | ||
|
|
|
|||
| LIABILITIES AND MEMBERS’ EQUITY |
||||
| CURRENT LIABILITIES: |
||||
| Accounts Payable and Accrued Expenses |
$ | 387,379 | ||
| Income Tax Payable |
50,559 | |||
|
|
|
|||
| Total Liabilities |
437,938 | |||
|
|
|
|||
| MEMBERS’ EQUITY: |
||||
| Paid-in Capital |
96,203 | |||
| Accumulated Earnings |
1,770,065 | |||
|
|
|
|||
| Total Members’ Equity |
1,866,268 | |||
|
|
|
|||
| Total Liabilities and Members’ Equity |
$ | 2,304,206 | ||
|
|
|
|||
The accompanying notes are an integral part of these financial statements. “See Independent Auditor’s Report”
3
ONETRUST INTERNATIONAL LLC
STATEMENT OF OPERATIONS
DECEMBER 31, 2021
| Amount | ||||
| REVENUES |
$ | 7,369,178 | ||
| OPERATING EXPENSES: |
||||
| Salaries and Benefits |
2,630,353 | |||
| Rent |
274,651 | |||
| Professional Services |
915,619 | |||
| General and Administrative |
700,730 | |||
|
|
|
|||
| Total Operating Expenses |
4,521,353 | |||
| INCOME BEFORE OTHER (INCOME) EXPENSES |
2,847,825 | |||
| OTHER (INCOME) EXPENSES |
(226,098 | ) | ||
| INCOME BEFORE INCOME TAX EXPENSE |
3,073,923 | |||
| INCOME TAX EXPENSE |
155,138 | |||
|
|
|
|||
| NET INCOME |
$ | 2,918,785 | ||
|
|
|
|||
The accompanying notes are an integral part of these financial statements. “See Independent Auditor’s Report”
4
ONETRUST INTERNATIONAL LLC
STATEMENT OF CHANGES IN MEMBERS’ EQUITY
DECEMBER 31, 2021
| Paid-in Capital |
Accumulated Earnings |
Total Members’ Equity |
||||||||||
| Balance - December 31, 2020 |
$ | 95,003 | $ | 2,068,274 | $ | 2,163,277 | ||||||
| Members’ Contributions |
1,200 | 1,200 | ||||||||||
| Net Income |
2,918,785 | 2,918,785 | ||||||||||
| Members’ Distributions |
(3,216,994 | ) | (3,216,994 | ) | ||||||||
|
|
|
|
|
|
|
|||||||
| Balance - December 31, 2021 |
$ | 96,203 | $ | 1,770,065 | $ | 1,866,268 | ||||||
|
|
|
|
|
|
|
|||||||
The accompanying notes are an integral part of these financial statements. “See Independent Auditor’s Report”
5
ONETRUST INTERNATIONAL LLC
STATEMENT OF CASH FLOWS
DECEMBER 31, 2021
| Amount | ||||
| CASH FLOWS FROM OPERATING ACTIVITIES: |
||||
| Net Income |
$ | 2,918,785 | ||
| Adjustments to reconcile net income to net cash provided by operating activities: |
||||
| Depreciation |
9,300 | |||
| Non Operating Gain |
(53,805 | ) | ||
| Decrease (Increase) in Assets- |
||||
| Accounts Receivable |
261,892 | |||
| Prepaid Expenses |
(143,137 | ) | ||
| Decrease in Liabilities- |
||||
| Accounts Payable and Accrued Expenses |
(23,575 | ) | ||
| Income Tax Payable |
(15,022 | ) | ||
|
|
|
|||
| NET CASH PROVIDED BY OPERATING ACTIVITIES |
2,954,438 | |||
|
|
|
|||
| CASH FLOWS FROM INVESTING ACTIVITIES: |
||||
| Collection of Notes Receivable to Related Party |
410,000 | |||
|
|
|
|||
| NET CASH FLOWS PROVIDED BY INVESTING ACTIVITIES |
410,000 | |||
|
|
|
|||
| CASH FLOWS FROM FINANCING ACTIVITIES: |
||||
| Members’ Contributions |
1,200 | |||
| Members’ Distributions |
(3,216,994 | ) | ||
|
|
|
|||
| NET CASH FLOWS USED IN FINANCING ACTIVITIES |
(3,215,794 | ) | ||
|
|
|
|||
| INCREASE IN CASH |
148,644 | |||
| CASH, Beginning of Year |
570,579 | |||
|
|
|
|||
| CASH, End of Year |
$ | 719,223 | ||
|
|
|
|||
The accompanying notes are an integral part of these financial statements. “See Independent Auditor’s Report”
6
ONETRUST INTERNATIONAL LLC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2021
1. Nature of Business and Summary of Significant Accounting Policies
ONETRUST INTERNATIONAL LLC, (the Company) was organized on June 14, 2019 in the city of San Juan, Puerto Rico as a domestic for profit limited liability company. The Company commenced operations on June 2019 and is engaged in providing mortgage loan servicing, consulting, centralized management, shared service center, and investment banking services.
The Company is a limited liability company. In a limited liability company (LLC), no member, manager, agent or employee of the LLC is personally liable for debts, obligations or liabilities of the LLC, whether arising from contract, tort or otherwise, for the acts or omission of any member, director, manager, agent or employee of the LLC, unless the individual signed a specific personal guarantee.
The following is a summary of significant accounting policies followed by the Company in the preparation of its financial statements:
a) Cash
Cash includes currency and deposits with financial institutions used as working capital to fund daily operations.
b) Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable are recorded at the invoiced amount and do not bear interest. Amounts collected on accounts receivable are included in net cash provided by operating activities in the statements of cash flows. The Company maintains an allowance for doubtful accounts for estimated losses inherent in its accounts receivable portfolio. In establishing the required allowance, management considers historical losses adjusted to take into account current market conditions and customers’ financial condition, the amount of receivables in dispute, and the current receivables aging and current payment patterns. The Company reviews its allowance for doubtful accounts annually. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. During the period ended December 31, 2021, no allowance for doubtful accounts was recognized. No balances were written off from accounts receivable. The Company does not have any off-balance-sheet credit exposure related to its customers.
c) Property and Equipment
Property and equipment are recorded at cost and depreciated using the straight-line method over the estimated useful lives of the assets, which is 5 years for software. Total depreciation for the period ended December 31, 2021 amounted to $9,300 and is presented within general and administrative expenses in the accompanying statement of operations.
7
ONETRUST INTERNATIONAL LLC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2021
Maintenance and repairs are charged to operations when incurred. Betterments and renewals, which substantially increase the life of the individual assets, are capitalized.
Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized in current operations is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less cost to sell.
d) Paycheck Protection Program
The Paycheck Protection Program note (“the PPP loan”) represents proceeds received as a result of an agreement with a banking institution in connection with the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), as amended by the Paycheck Protection Program Flexibility Act (“Flexibility Act”). This program was created by the Congress of the United States of America to keep workers on the payroll in response to the Coronavirus (“COVID-19”) pandemic crisis.
The PPP loan is issued by financial institutions and guaranteed by the United States Small Business Administration (SBA). Loan repayments are deferred and principal payments as well as the accrued interest can be forgiven (after the SBA remits the loan forgiven amount to the borrower) subject to compliance with certain conditions and approval by the borrower and the SBA. The amount of loan forgiveness will be reduced if the borrower terminates employees or reduces salaries during the coverage period, as defined. Although management believes that the Company has complied with the conditions and substantially all amounts due in relation to the PPP loan will be forgiven, the loan forgiveness application is still under review.
For purposes of derecognizing the PPP loan, management of the Company has elected the model of accounting under FASB ASC 450-30 Gain Contingencies. Under this model, the earnings impact of a gain contingency is recognized when all the contingencies related to receipt of the assistance have been met and the gain is realized or realizable.
e) Leases
The Company has entered in a non-cancelable lease agreement where it acts as a lessee. The Company accounts for leases in accordance with the provisions of FASB ASC 840 “Leases”. FASB ASC 840 requires that the Company evaluate each lease for classification as either a capital lease or an operating lease. The Company performs this evaluation at the date of inception of the lease and when a modification is made to a lease.
8
ONETRUST INTERNATIONAL LLC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2021
f) Revenue Recognition
The Company recognizes revenue when the services are provided.
g) Advertising Costs
Advertising costs are expensed as incurred. Total advertising expense for the period ended December 31, 2021 amounted to $8,239 and is presented within general and administrative expenses in the accompanying statement of operations.
h) Income Tax
Income tax is accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
In accordance with FASB ASC 740, Income Taxes, the Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. The Company recognizes the effect of income tax positions only if such positions were probable of being sustained. No liability for unrecognized tax benefits has been recorded in the accompanying statement of financial position as of December 31, 2021.
i) Members’ Account
The Company’s limited liability operating agreement provides for one class of membership.
j) Commitments and Contingencies
Liabilities for loss contingencies, arising from claims, assessments, litigation, fines, and penalties and other sources are recorded when it is probable that a liability has been incurred and the amount of the assessment and/or remediation can be reasonably estimated.
9
ONETRUST INTERNATIONAL LLC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2021
k) Use of Estimates
The preparation of the financial statements requires management of the Company to make a number of estimates and assumptions relating to the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities. at the date of the financial statements and the reported amounts of revenues and expenses during the period. Actual results could differ from those estimates.
I) Recently Issued Accounting Standards
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which supersedes FASB ASC Topic 840, Leases, and makes other conforming amendments to U.S. GAAP. ASU 2016-02 requires, among other changes to the lease accounting guidance, lessees to recognize most leases on-statement of financial position via a right of use asset and lease liability, and additional qualitative and quantitative disclosures. ASU 2016-02 is effective for the Company for annual periods in fiscal years beginning after December 15, 2021 (as amended in June 2020 by ASU 2020-05, Effective Dates for Certain Entities), that is, for year 2022. While the Company expects ASU 2016-02 to add right-of-use assets and lease liabilities to the statement of financial position, it is evaluating other effects that the new standard will have on the financial statements.
2. Transactions with Related Parties
The Company is member of a group of affiliated companies through common ownership. Because of these relationships, it is possible that the terms of the related transactions are not the same as those that would result from transactions among unrelated parties.
During the period ended December 31, 2021, the Company billed a total of $7,369,178 to its affiliates for services. The amount is included as revenues in the accompanying statement of operations. The balance due from the related parties at December 31, 2021 amounted to approximately $1,279,292 and is recorded within accounts receivable in the accompanying statement of financial position.
10
ONETRUST INTERNATIONAL LLC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2021
3. Income Tax
The Company operates for tax purposes as a C corporation, the maximum tax rate for a C corporation is 37.5% under the laws of the Commonwealth of Puerto Rico. On November 19, 2019, the Company received a grant from the Department of Economic Development and Commerce in order to operate with a tax exemption under the Act No. 20 of January 17, 2012 as amended (“the Act”). The Act provides for certain tax benefits for those local companies that provide eligible services activities outside of Puerto Rico.
Under the Act, the Company is subject to income tax on its export services income on a preferential tax rate of 4% based on the grant received. In order to maintain the exemption status under the Act, the Company must comply with various- requirements as described in the grant.
Income tax expense attributable to income from continuing operations for the year ended December 31, 2021 is as follows:
| Expected tax expense (37.5%) |
$ | 1,099,097 | ||
| Less: tax relief under Act # 20 |
(981,860 | ) | ||
|
|
|
|||
| Income tax expense under Act# 20 (4%) |
$ | 117,237 | ||
| Income tax expense excluded from Act # 20 |
37,901 | |||
|
|
|
|||
| Income tax expense |
$ | 155,138 | ||
|
|
|
4. Property and Equipment
Property and equipment as of December 31, 2021 consist of the following:
| Useful Lives (in years) |
Amount | |||||||
| Software |
5 | $ | 46,500 | |||||
| Less: Accumulated depreciation |
(10,150 | ) | ||||||
|
|
|
|||||||
| Total property and equipment, net |
$ | 36,350 | ||||||
11
ONETRUST INTERNATIONAL LLC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2021
5. Paycheck Protection Program Note
On May 9, 2020, the Company received loan proceeds in the amount of $53,805 under the PPP loan. The PPP loan provides qualifying businesses for amounts up to 2.5 times of the average monthly payroll expenses of the qualifying business.
During 2020, management of the Company submitted the PPP Loan Forgiveness Application (“the PPP Forgiveness Application”) in the amount of $53,805. On May 20, 2021, the Company received notice from the SBA that the PPP funds were used appropriately, and all amounts were fully forgiven.
6. Concentration of Credit Risk
Financial instruments, which potentially subject the Company to concentration of credit risk, consist principally of cash. The Company maintains its cash accounts at several high quality financial institutions, which may exceed at times the federally insured deposit limits. The amount by which cash deposits exceeded the amount insured by the Federal Deposit Insurance Corporation as of December 31, 2021 was approximately $579,444. The Company has not experienced any losses in such bank accounts while such financial institutions have strong credit ratings; therefore, management believes that credit risk related to these bank accounts are minimal and does not anticipate any non performance.
During the period ended December 31, 2021, three related party customers accounted for 100% of the Company’s revenues. A total of 100% of accounts receivable outstanding as of December 31, 2021 is concentrated in those three companies.
7. Leases
The Company leases its office, acting as a lessee, under a non cancelable operating lease that expires on February 28, 2024 and requires monthly payments of $14,687 of which approximately $5,800 are related to operating expenses such as taxes, utilities and others.
| Year | Amount | |||
| 2022 |
$ | 176,244 | ||
| 2023 |
176,244 | |||
| 2024 |
29,374 | |||
|
|
|
|||
| Total |
$ | 381,862 | ||
|
|
|
|||
During the period ended December 31, 2021, rent expense under this lease amounted to $274,651 and is presented as rent expense in the accompanying statement of operations.
12
ONETRUST INTERNATIONAL LLC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2021
The Company subleases part of the above mentioned office to four related parties, acting as a lessor, under non cancelable operating leases that expire on February 28, 2024 and require monthly payments of $3,247, $200, $1,607 and $7,306, respectively.
At December 31, 2021, minimum guaranteed income on all non cancelable operating leases is as follows:
| Year | Amount | |||
| 2022 |
$ | 148,320 | ||
| 2023 |
148,320 | |||
| 2024 |
24,720 | |||
|
|
|
|||
| Total |
$ | 321,360 | ||
|
|
|
|||
During the period ended December 31, 2021, rent income under these leases amounted to $146,719 and is presented as other income in the accompanying statement of operations.
8. Subsequent Events
The Company has evaluated subsequent events from the statement of financial position date through April 1, 2022, the date at which the financial statements were available to be issued.
13
Exhibit 99.4
ONETRUST INTERNATIONAL LLC
FINANCIAL STATEMENTS
SEPTEMBER 30, 2022
ONETRUST INTERNATIONAL LLC
FINANCIAL STATEMENTS
SEPTEMBER 30, 2022
Table of Contents
| FINANCIAL STATEMENTS: |
||||
| Statement of Financial Position |
1 | |||
| Statement of Operations |
2 | |||
| Statement of Changes in Members’ Equity |
3 | |||
| Statement of Cash Flows |
4 | |||
| NOTES TO FINANCIAL STATEMENTS |
5-6 | |||
ONETRUST INTERNATIONAL LLC
STATEMENT OF FINANCIAL POSITION
SEPTEMBER 30, 2022
| Amount | ||||
| ASSETS | ||||
| CURRENT ASSETS: |
||||
| Cash |
$ | 1,261,951 | ||
| Accounts Receivable |
726,183 | |||
| Prepaid Expenses |
276,551 | |||
|
|
|
|||
| Total Current Assets |
2,264,685 | |||
| PROPERTY AND EQUIPMENT, Net |
29,375 | |||
| OTHER ASSETS |
8,887 | |||
|
|
|
|||
| Total Assets |
$ | 2,302,947 | ||
|
|
|
|||
| LIABILITIES AND MEMBERS’ EQUITY | ||||
| CURRENT LIABILITIES: |
||||
| Accounts Payable and Accrued Expenses |
$ | 582,919 | ||
|
|
|
|||
| Total Liabilities |
582,919 | |||
|
|
|
|||
| MEMBERS’ EQUITY: |
||||
| Paid-in Capital |
96,203 | |||
| Accumulated Earnings |
1,623,825 | |||
|
|
|
|||
| Total Members’ Equity |
1,702,028 | |||
|
|
|
|||
| Total Liabilities and Members’ Equity |
$ | 2,302,947 | ||
|
|
|
|||
The accompanying notes are an integral part of these financial statements.
1
ONETRUST INTERNATIONAL LLC
STATEMENT OF OPERATIONS
SEPTEMBER 30, 2022
| Amount | ||||
| REVENUES |
$ | 5,942,102 | ||
| OPERATING EXPENSES: |
||||
| Salaries and Related Expenses |
2,215,617 | |||
| Occupancy, Equipment and Software |
790,305 | |||
| General and Administrative |
372,044 | |||
| Depreciation |
6,975 | |||
| Employee Benefits |
208,945 | |||
|
|
|
|||
| Total Operating Expenses |
3,593,886 | |||
| INCOME BEFORE OTHER INCOME |
2,348,216 | |||
| OTHER INCOME |
5,544 | |||
|
|
|
|||
| NET INCOME |
$ | 2,353,760 | ||
|
|
|
|||
The accompanying notes are an integral part of these financial statements.
2
ONETRUST INTERNATIONAL LLC
STATEMENT OF CHANGES IN MEMBERS’ EQUITY
SEPTEMBER 30, 2022
| Paid-In Capital | Accumulated Earnings |
Total Members’ Equity |
||||||||||
| Balance - December 31, 2021 |
$ | 96,203 | $ | 1,770,065 | $ | 1,866,268 | ||||||
| Net Income |
— | 2,353,760 | 2,353,760 | |||||||||
| Members’ Distributions |
— | (2,500,000 | ) | (2,500,000 | ) | |||||||
|
|
|
|
|
|
|
|||||||
| Balance – September 30, 2022 |
$ | 96,203 | $ | 1,623,825 | $ | 1,720,028 | ||||||
|
|
|
|
|
|
|
|||||||
The accompanying notes are an integral part of these financial statements.
3
ONETRUST INTERNATIONAL LLC
STATEMENT OF CASH FLOWS
SEPTEMBER 30, 2022
| Amount | ||||
| CASH FLOWS FROM OPERATING ACTIVITIES: |
||||
| Net Income |
$ | 2,353,760 | ||
| Adjustments to reconcile net income to net cash provided by operating activities: |
||||
| Depreciation |
6,975 | |||
| Changes in in Assets- |
||||
| Accounts Receivable |
553,109 | |||
| Prepaid Expenses |
(16,097 | ) | ||
| Changes in Liabilities- |
||||
| Accounts Payable and Accrued Expenses |
195,540 | |||
| Income Tax Payable |
(50,559 | ) | ||
|
|
|
|||
| NET CASH PROVIDED BY OPERATING ACTIVITIES |
3,042,728 | |||
|
|
|
|||
| CASH FLOWS FROM FINANCING ACTIVITIES: |
||||
| Members’ Distributions |
(2,500,000 | ) | ||
|
|
|
|||
| NET CASH FLOWS USED IN FINANCING ACTIVITIES |
(2,500,000 | ) | ||
|
|
|
|||
| INCREASE IN CASH |
542,728 | |||
| CASH, Beginning of Year |
719,223 | |||
|
|
|
|||
| CASH, End of Period |
$ | 1,261,951 | ||
|
|
|
|||
The accompanying notes are an integral part of these financial statement
4
ONETRUST INTERNATIONAL LLC
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2022
1. Nature of Business and Summary of Significant Accounting Policies
ONETRUST INTERNATIONAL LLC, (the Company) was organized on June 14, 2019 in the city of San Juan, Puerto Rico as a domestic for profit limited liability company. The Company commenced operations on June 2019 and is engaged in providing mortgage loan servicing, consulting, centralized management, shared service center, and investment banking services.
The Company is a limited liability company. In a limited liability company (LLC), no member, manager, agent or employee of the LLC is personally liable for debts, obligations or liabilities of the LLC, whether arising from contract, tort or otherwise, for the acts or omission of any member, director, manager, agent or employee of the LLC, unless the individual signed a specific personal guarantee.
In the Company’s opinion, the accompanying financial statements contain all normal recurring adjustments necessary for a fair presentation of its financial statements for interim periods in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been omitted. The information presented in these interim financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto included in the Company’s financial statements as of and for the year ended December 31, 2021. Operating results for the nine months ended September 30, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022.
2. Concentration of Credit Risk
Financial instruments, which potentially subject the Company to concentration of credit risk, consist principally of cash. The Company maintains its cash accounts at several high quality financial institutions, which may exceed at times the federally insured deposit limits. The amount by which cash deposits exceeded the amount insured by the Federal Deposit Insurance Corporation as of September 30, 2022, was approximately $1,011,951. The Company has not experienced any losses in such bank accounts while such financial institutions have strong credit ratings; therefore, management believes that credit risk related to these bank accounts are minimal and does not anticipate any nonperformance.
During the period ended September 30, 2022, three related party customers accounted for 100% of the Company’s revenues. A total of 100% of accounts receivable outstanding as of September 30, 2022 is concentrated in five related parties.
3. Subsequent Events
The Company has evaluated subsequent events from the statement of financial position date through December 15, 2022, the date at which the financial statements were available to be issued.
On October 1, 2022, MVB Bank, Inc. (the “Bank”) and wholly-owned subsidiary of MVB Financial Corp. (“MVB”), completed the purchase of 3,748,392.93 Class B Common Units (the “MVB Investment”) of Warp Speed Holdings LLC, a Wyoming limited liability company (“Warp Speed”), pursuant to the terms of the Equity Purchase Agreement between the Bank and Warp Speed dated March 13, 2022, as thereby assigned by the Bank to MVB effective as of April 28, 2022 (as assigned, the “Purchase Agreement”). The MVB Investment represented 37.5% of the outstanding equity interests of Warp Speed on a fully-diluted basis.
Immediately prior to the closing of the MVB Investment, the pre-closing members of Warp Speed contributed to Warp Speed all of their equity interests in certain entities under common control of the sellers specified in the Purchase Agreement, in exchange for equity interests in Warp Speed (the “Put-Together Transaction”). As of October 1, 2022,
5
ONETRUST INTERNATIONAL LLC
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2022
Warp Speed serves as a holding company for the entities contributed in the Put-Together Transaction, which are focused on residential and commercial loan origination and servicing, business and personal insurance brokerage and data analytics. The Company is included as part of a number of entities that were contributed by the Warp Speed members to Warp Speed as part of the Put-Together Transaction.
6
Exhibit 99.5
MVB Financial Corp.
Unaudited Pro Forma Consolidated Balance Sheet and Statements of Income
The unaudited pro forma consolidated balance sheet assumes that MVB Financial Corp.’s (“MVB”) investment in Warp Speed Holdings LLC (“Warp Speed”) occurred on September 30, 2022 and the unaudited pro forma consolidated statements of income assume that MVB’s investment in Warp Speed occurred on January 1, 2021. The unaudited pro forma adjustments are based on available information and certain estimates and assumptions that MVB believes are factually supportable, directly attributable to the transaction and are expected to have a continuing impact with respect to MVB’s consolidated statements of operations. The unaudited pro forma consolidated statements of income are not necessarily indicative of what actual results of operations would have been had the transaction occurred on the first day of the period presented, nor does it purport to represent the results of operations for future periods.
The consideration paid by MVB for the investment in Warp Speed was comprised of $38.4 million in cash, plus 313,030 shares of newly-issued common stock of MVB, with an aggregate value of $9.7 million. As a result of the investment, MVB owns 37.5% of Warp Speed and will account for its investment in Warp Speed as an equity method investment in its consolidated financial statements.
The pro forma information has been prepared in accordance with Article 11 of Regulation S-X and are based upon and should be read in conjunction with the historical consolidated financial statements and notes thereto as filed in MVB’s Annual Report on Form 10-K for the year ended December 31, 2021, MVB’s Quarterly Report on Form 10-Q for the period ended September 30, 2022 and the financial statements of Calcon Mutual Mortgage LLC (“Calcon”) and OneTrust International LLC (“OneTrust”), filed as Exhibits 99.1, 99.2, 99.3 and 99.4 to this Current Report on Form 8-K. Warp Speed serves as a holding company for four entities: Calcon, OneTrust, Yellowstone Global Investments LLC (“Yellowstone”) and Click2Bind Insurance Services, LLC (“Click2Bind”). MVB has obtained from the staff of the Securities and Exchange Commission a waiver from the requirements of Rule 3-05 of Regulation S-X to provide audited financial statements for Yellowstone and Click2Bind. Accordingly, MVB has not provided financial statements with respect to these entities.
Unaudited Pro Forma Consolidated Balance Sheet
As of September 30, 2022
| (in thousands) | MVB Historical |
Pro Forma Adjustments |
Pro Forma Combined |
|||||||||||||
| ASSETS |
||||||||||||||||
| Cash and cash equivalents: |
||||||||||||||||
| Cash and due from banks |
$ | 6,852 | $ | — | $ | 6,852 | ||||||||||
| Interest-bearing balances with banks |
73,094 | (38,404 | ) | (i | ) | 44,590 | ||||||||||
| 10,000 | (ii | ) | ||||||||||||||
| (100 | ) | (ii | ) | |||||||||||||
|
|
|
|
|
|
|
|||||||||||
| Total cash and cash equivalents |
79,946 | (28,504 | ) | 51,442 | ||||||||||||
| Investment securities available-for-sale |
366,742 | — | 366,742 | |||||||||||||
| Equity securities |
34,101 | — | 34,101 | |||||||||||||
| Loans held-for-sale |
19,977 | — | 19,977 | |||||||||||||
| Loans receivable |
2,471,395 | — | 2,471,395 | |||||||||||||
| Allowance for loan losses |
(26,515 | ) | — | (26,515 | ) | |||||||||||
|
|
|
|
|
|
|
|||||||||||
| Loans receivable, net |
2,444,880 | — | 2,444,880 | |||||||||||||
| Premises and equipment |
24,668 | — | 24,668 | |||||||||||||
| Bank-owned life insurance |
42,992 | — | 42,992 | |||||||||||||
| Equity method investments |
37,871 | 47,983 | (iii | ) | 87,268 | |||||||||||
| 1,414 | (iv | ) | ||||||||||||||
| Accrued interest receivable and other assets |
84,757 | (502 | ) | (iv | ) | 84,255 | ||||||||||
| Goodwill |
3,988 | — | 3,988 | |||||||||||||
|
|
|
|
|
|
|
|||||||||||
| TOTAL ASSETS |
$ | 3,139,922 | $ | 20,391 | $ | 3,160,313 | ||||||||||
|
|
|
|
|
|
|
|||||||||||
| LIABILITIES |
||||||||||||||||
| Deposits: |
||||||||||||||||
| Noninterest-bearing |
$ | 1,411,772 | $ | — | $ | 1,411,772 | ||||||||||
| Interest-bearing |
1,285,186 | — | 1,285,186 | |||||||||||||
|
|
|
|
|
|
|
|||||||||||
| Total deposits |
2,696,958 | — | 2,696,958 | |||||||||||||
| Accrued interest payable and other liabilities |
42,144 | 912 | (iv | ) | 43,056 | |||||||||||
| Repurchase agreements |
9,910 | — | 9,910 | |||||||||||||
| FHLB and other borrowings |
73,328 | 10,000 | (ii | ) | 83,228 | |||||||||||
| (100 | ) | (ii | ) | |||||||||||||
| Subordinated debt |
73,222 | — | 73,222 | |||||||||||||
|
|
|
|
|
|
|
|||||||||||
| Total liabilities |
2,895,562 | 10,812 | 2,906,374 | |||||||||||||
| STOCKHOLDERS’ EQUITY |
||||||||||||||||
| Common stock |
13,135 | 313 | (i | ) | 13,448 | |||||||||||
| Additional paid-in capital |
146,950 | 9,266 | (i | ) | 156,216 | |||||||||||
| Retained earnings |
140,546 | — | 140,546 | |||||||||||||
| Accumulated other comprehensive income |
(39,977 | ) | — | (39,977 | ) | |||||||||||
| Treasury stock |
(16,741 | ) | — | (16,741 | ) | |||||||||||
|
|
|
|
|
|
|
|||||||||||
| Total equity attributable to parent |
243,913 | 9,579 | 253,492 | |||||||||||||
| Noncontrolling interest |
447 | — | 447 | |||||||||||||
|
|
|
|
|
|
|
|||||||||||
| Total stockholders’ equity |
244,360 | 9,579 | 253,939 | |||||||||||||
|
|
|
|
|
|
|
|||||||||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY |
$ | 3,139,922 | $ | 20,391 | $ | 3,160,313 | ||||||||||
|
|
|
|
|
|
|
|||||||||||
Unaudited Pro Forma Consolidated Income Statement
Nine Months Ended September 30, 2022
| (in thousands, except per share data) | MVB Historical |
Pro Forma Adjustments |
Pro Forma Combined |
|||||||||||||
| INTEREST INCOME |
||||||||||||||||
| Interest and fees on loans |
$ | 79,074 | $ | — | $ | 79,074 | ||||||||||
| Interest on deposits with banks |
654 | — | 654 | |||||||||||||
| Interest on investment securities |
2,383 | — | 2,383 | |||||||||||||
| Interest on tax-exempt loans and securities |
3,144 | — | 3,144 | |||||||||||||
|
|
|
|
|
|
|
|||||||||||
| Total interest income |
85,255 | — | 85,255 | |||||||||||||
| INTEREST EXPENSE |
||||||||||||||||
| Interest on deposits |
4,291 | — | 4,291 | |||||||||||||
| Interest on short-term borrowings |
326 | 393 | (v | ) | 719 | |||||||||||
| Interest on subordinated debt |
2,284 | — | 2,284 | |||||||||||||
|
|
|
|
|
|
|
|||||||||||
| Total interest expense |
6,901 | 393 | 7,294 | |||||||||||||
|
|
|
|
|
|
|
|||||||||||
| NET INTEREST INCOME |
78,354 | (393 | ) | 77,961 | ||||||||||||
| Provision for loan losses |
11,500 | — | 11,500 | |||||||||||||
|
|
|
|
|
|
|
|||||||||||
| Net interest income after provision for loan losses |
66,854 | (393 | ) | 66,461 | ||||||||||||
|
|
|
|
|
|
|
|||||||||||
| NONINTEREST INCOME |
||||||||||||||||
| Payment card and service charge income |
9,970 | — | 9,970 | |||||||||||||
| Insurance and investment services income |
667 | — | 667 | |||||||||||||
| Gain on sale of available-for-sale securities, net |
650 | — | 650 | |||||||||||||
| Gain on sale of equity securities, net |
(56 | ) | — | (56 | ) | |||||||||||
| Gain on sale of loans, net |
3,786 | — | 3,786 | |||||||||||||
| Holding loss on equity securities, net |
(146 | ) | — | (146 | ) | |||||||||||
| Compliance and consulting income |
11,355 | — | 11,355 | |||||||||||||
| Equity method investment income |
666 | 1,045 | (vi | ) | 1,711 | |||||||||||
| Equity method investment gain. |
1,874 | — | 1,874 | |||||||||||||
| Other operating income |
3,204 | — | 3,204 | |||||||||||||
|
|
|
|
|
|
|
|||||||||||
| Total noninterest income |
31,970 | 1,045 | 33,015 | |||||||||||||
|
|
|
|
|
|
|
|||||||||||
| NONINTEREST EXPENSE |
||||||||||||||||
| Salaries and employee benefits |
55,260 | — | 55,260 | |||||||||||||
| Occupancy expense |
3,009 | — | 3,009 | |||||||||||||
| Equipment depreciation and maintenance |
4,012 | — | 4,012 | |||||||||||||
| Data processing and communications |
3,110 | — | 3,110 | |||||||||||||
| Marketing, contributions and sponsorships |
746 | — | 746 | |||||||||||||
| Professional fees |
8,034 | — | 8,034 | |||||||||||||
| Insurance, tax and assessment expense |
1,777 | — | 1,777 | |||||||||||||
| Travel, entertainment, dues and subscriptions |
6,355 | — | 6,355 | |||||||||||||
| Other operating expenses |
6,343 | (271 | ) | (vii | ) | 6,072 | ||||||||||
|
|
|
|
|
|
|
|||||||||||
| Total noninterest expense |
88,646 | (271 | ) | 88,375 | ||||||||||||
|
|
|
|
|
|
|
|||||||||||
| Income before income taxes |
10,178 | 923 | 11,101 | |||||||||||||
| Income taxes |
2,161 | 240 | (viii | ) | 2,401 | |||||||||||
|
|
|
|
|
|
|
|||||||||||
| Net income before noncontrolling interest |
8,017 | 683 | 8,700 | |||||||||||||
| Net loss attributable to noncontrolling interest |
521 | — | 521 | |||||||||||||
|
|
|
|
|
|
|
|||||||||||
| Net income |
$ | 8,538 | $ | 683 | $ | 9,221 | ||||||||||
|
|
|
|
|
|
|
|||||||||||
| Weighted-average shares outstanding: |
||||||||||||||||
| Basic |
12,170,028 | 313,030 | (ix | ) | 12,483,058 | |||||||||||
| Diluted |
12,852,574 | 313,030 | (ix | ) | 13,165,604 | |||||||||||
| Earnings per share: |
||||||||||||||||
| Basic |
$ | 0.70 | $ | 0.74 | ||||||||||||
| Diluted |
$ | 0.66 | $ | 0.70 | ||||||||||||
Unaudited Pro Forma Consolidated Income Statement
Year Ended December 31, 2021
| (in thousands, except per share data) | MVB Historical |
Pro Forma Adjustments |
Pro Forma Combined |
|||||||||||||
| INTEREST INCOME |
||||||||||||||||
| Interest and fees on loans |
$ | 75,282 | $ | — | $ | 75,282 | ||||||||||
| Interest on deposits with banks |
506 | — | 506 | |||||||||||||
| Interest on investment securities |
2,405 | — | 2,405 | |||||||||||||
| Interest on tax-exempt loans and securities |
5,236 | — | 5,236 | |||||||||||||
|
|
|
|
|
|
|
|||||||||||
| Total interest income |
83,429 | — | 83,429 | |||||||||||||
| INTEREST EXPENSE |
||||||||||||||||
| Interest on deposits |
3,977 | — | 3,977 | |||||||||||||
| Interest on short-term borrowings |
105 | 560 | (v | ) | 665 | |||||||||||
| Interest on subordinated debt |
2,188 | — | 2,188 | |||||||||||||
|
|
|
|
|
|
|
|||||||||||
| Total interest expense |
6,270 | 560 | 6,830 | |||||||||||||
|
|
|
|
|
|
|
|||||||||||
| NET INTEREST INCOME |
77,159 | (560 | ) | 76,599 | ||||||||||||
| Release of allownace for loan losses |
(6,275 | ) | — | (6,275 | ) | |||||||||||
|
|
|
|
|
|
|
|||||||||||
| Net interest income after provision for loan losses |
83,434 | (560 | ) | 82,874 | ||||||||||||
|
|
|
|
|
|
|
|||||||||||
| NONINTEREST INCOME |
||||||||||||||||
| Payment card and service charge income |
7,524 | — | 7,524 | |||||||||||||
| Insurance and investment services income |
1,003 | — | 1,003 | |||||||||||||
| Gain on sale of available-for-sale securities, net |
3,875 | — | 3,875 | |||||||||||||
| Gain on sale of equity securities, net |
5 | — | 5 | |||||||||||||
| Gain on sale of loans, net |
4,178 | — | 4,178 | |||||||||||||
| Holding gain on equity securities, net |
3,776 | — | 3,776 | |||||||||||||
| Compliance and consulting income |
9,625 | — | 9,625 | |||||||||||||
| Equity method investment income |
17,428 | 9,695 | (vi | ) | 27,123 | |||||||||||
| Gains on acquisition and divestiture activity |
10,783 | — | 10,783 | |||||||||||||
| Other operating income |
4,399 | — | 4,399 | |||||||||||||
|
|
|
|
|
|
|
|||||||||||
| Total noninterest income |
62,596 | 9,695 | 72,291 | |||||||||||||
|
|
|
|
|
|
|
|||||||||||
| NONINTEREST EXPENSE |
||||||||||||||||
| Salaries and employee benefits |
60,210 | — | 60,210 | |||||||||||||
| Occupancy expense |
4,347 | — | 4,347 | |||||||||||||
| Equipment depreciation and maintenance |
4,642 | — | 4,642 | |||||||||||||
| Data processing and communications |
4,431 | — | 4,431 | |||||||||||||
| Marketing, contributions and sponsorships |
525 | — | 525 | |||||||||||||
| Professional fees |
10,770 | — | 10,770 | |||||||||||||
| Insurance, tax and assessment expense |
2,032 | — | 2,032 | |||||||||||||
| Travel, entertainment, dues and subscriptions |
5,092 | — | 5,092 | |||||||||||||
| Other operating expenses |
5,403 | — | 5,403 | |||||||||||||
|
|
|
|
|
|
|
|||||||||||
| Total noninterest expense |
97,452 | — | 97,452 | |||||||||||||
|
|
|
|
|
|
|
|||||||||||
| Income before income taxes |
48,578 | 9,135 | 57,713 | |||||||||||||
| Income taxes |
9,882 | 2,375 | (viii | ) | 12,257 | |||||||||||
|
|
|
|
|
|
|
|||||||||||
| Net income before noncontrolling interest |
38,696 | 6,760 | 45,456 | |||||||||||||
| Net loss attributable to noncontrolling interest |
425 | — | 425 | |||||||||||||
|
|
|
|
|
|
|
|||||||||||
| Net income |
39,121 | 6,760 | 45,881 | |||||||||||||
| Preferred dividends |
35 | — | 35 | |||||||||||||
|
|
|
|
|
|
|
|||||||||||
| Net income available to common shareholders |
$ | 39,086 | $ | 6,760 | $ | 45,846 | ||||||||||
|
|
|
|
|
|
|
|||||||||||
| Weighted-average shares outstanding: |
||||||||||||||||
| Basic |
11,778,557 | 313,030 | (ix | ) | 12,091,587 | |||||||||||
| Diluted |
12,613,620 | 313,030 | (ix | ) | 12,926,650 | |||||||||||
| Earnings per share: |
||||||||||||||||
| Basic |
$ | 3.32 | $ | 3.79 | ||||||||||||
| Diluted |
$ | 3.10 | $ | 3.55 | ||||||||||||
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET AND STATEMENTS OF INCOME
1. Adjustments to Unaudited Pro Forma Consolidated Balance Sheet and Statements of Income
The adjustments included in the unaudited pro forma consolidated financial statements as of and for the nine months ended September 30, 2022 and the unaudited pro forma consolidated statement of income for the year ended December 31, 2021 are as follows:
| (i) | Reflects the payment of $38.4 million of cash and the issuance of 313,030 shares of MVB common stock, with a value of $30.60 per share, for an aggregate value of $9.6 million; |
| (ii) | Reflects a senior term loan of $10.0 million, net of $0.1 million of related fees, in connection with the investment in Warp Speed; |
| (iii) | Reflects the recording of $48.0 million as an equity method investment in Warp Speed; |
| (iv) | Reflects the capitalization of direct transactions costs of $1.4 million; |
| (v) | Reflects the recognition of interest expense of $0.4 million and $0.6 million for the nine months ended September 30, 2022 and year ended December 31, 2021, respectively, at an annual rate of 2.75%, plus term secured overnight financing rate, as a result of the senior term loan; |
| (vi) | Reflects the recording of MVB’s share of Warp Speed net income of $1.0 million and $9.7 million for the nine months ended September 30, 2022 and year ended December 31, 2021, respectively (note that the Warp Speed net income for the nine months ended September 30, 2022 is net of the elimination of intercompany income of $0.3 million between MVB and Warp Speed from Warp Speed’s statement of income); |
| (vii) | Reflects the elimination of intercompany expense of $0.3 million between MVB and Warp Speed from MVB’s statement of income for the nine months ended September 30, 2022; |
| (viii) | Reflects the recording of the income tax impact of the aforementioned statement of income items; and |
| (ix) | Reflects the increase in weighted-average shares outstanding for the issuance of 313,030 MVB common shares. |