UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended 06/30/2020
or
o TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission file number 000-25919
AMERICAN CHURCH MORTGAGE COMPANY
(Exact Name of Registrant as Specified in its Charter)
|
Minnesota |
|
41-1793975 |
|
State or Other Jurisdiction of
Incorporation or Organization
|
|
I.R.S. Employer Identification
No. |
|
|
|
|
|
10400 Yellow Circle Drive, Suite
102, Minnetonka, MN |
|
55343 |
|
Address of Principal Executive
Offices |
|
Zip Code |
(952) 945-9455
Registrant’s Telephone Number, Including Area Code
Securities registered pursuant to Section 12(b) of the Act:
|
Title of each class |
Trading Symbol |
Name of exchange on which
registered |
|
Common Stock, $0.01 par value per
share |
N/A |
N/A |
Indicate by check mark whether the
registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past
90 days. Yes x No o
Indicate by check mark whether the
registrant has submitted electronically every Interactive Data File
required to be submitted pursuant to Rule 405 of
Regulation S-T (§ 232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the
registrant was required to submit such
files). Yes x No o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer,
smaller reporting company, or an emerging growth company. See the
definitions of “large accelerated filer,” “accelerated filer,”
“smaller reporting company,” and “emerging growth company” in Rule
12b-2 of the Exchange Act.
|
Large accelerated filer ☐ |
Accelerated filer ☐ |
|
Non-accelerated
filer ☒ |
Smaller reporting company ☒ |
|
Emerging growth
company ☐ |
|
If an emerging growth company, indicate by check mark if the
registrant has elected not to use the extended transition period
for complying with any new or revised financial accounting
standards provided pursuant to Section 13(a) of the Exchange
Act. ☐
Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the
Act). Yes ☐ No ☒
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all
documents and reports required to be filed by Section 12, 13 or
15(d) of the Securities Exchange Act of 1934 subsequent to the
distribution of securities under a plan confirmed by a court.
Yes ☐ No ☐
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer’s
classes of common stock, as of the latest practicable date.
|
Class |
|
At August 13, 2020 |
|
Common Stock, $0.01 par value per
share |
|
1,676,598 shares |
|
AMERICAN CHURCH MORTGAGE COMPANY |
|
|
|
INDEX |
|
Page
No.
|
|
|
|
PART I. FINANCIAL INFORMATION |
|
|
|
| Item
1. Financial Statements: |
|
| |
|
| Balance
Sheets.…………………………………………………………….………… |
F-2
- F- 3 |
| |
|
| Statement of
Operations.…………………………………… ……………………… |
F-4
– F-5 |
| |
|
| Statement of
Stockholders’ Equity……………………………………………………… |
F-6
|
| |
|
| Statements of
Cash Flows……..…………………………………………………….. |
F-7
- F-8 |
| |
|
| Notes to
Financial Statements …………………………………………………………. |
F-9
- F-21 |
| |
|
| Item
2. Management’s Discussion and Analysis of
Financial |
|
| Condition and
Results of Operations………………………………………………….. |
22 –
26 |
| |
|
| Item
3. Quantitative and Qualitative Disclosures About Market
Risk……………….. |
26 |
| |
|
| Items 4.
Controls and Procedures…………..………………………………………… |
27 |
| |
|
|
PART II. OTHER INFORMATION |
|
|
|
| Item
1. Legal Proceedings……………………………………………………………. |
28 |
|
|
|
| Item 1A.
Risk Factors…………………………………………………………………... |
28 |
|
|
|
| Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds……………….. |
28 |
|
|
|
| Item 3.
Defaults Upon Senior Securities………………………………………..……. |
28 |
|
|
|
| Item
4. Mine Safety Disclosures……………………..…………………………..…… |
28 |
|
|
|
| Item
5. Other Information……………………………………………………………. |
28 |
|
|
|
| Item
6. Exhibits……………………………………………….………………………. |
29 |
|
|
|
|
Signatures………………………………………………….…………………..……… |
30 |
AMERICAN CHURCH MORTGAGE COMPANY
Minnetonka, Minnesota
Unaudited Financial Statements
June 30, 2020
|
AMERICAN
CHURCH MORTGAGE COMPANY |
| |
|
|
|
| Balance Sheets |
|
|
|
|
|
|
ASSETS |
June 30, 2020 |
|
December 31, 2019 |
| |
(unaudited) |
|
|
| |
|
|
|
| Assets |
|
|
|
| Cash and cash equivalents |
$ 50,853 |
|
$ 191,987 |
| Accounts receivable |
90,806 |
|
125,539 |
| Interest receivable |
174,702 |
|
185,190 |
| Investments |
- |
|
2,410 |
| Prepaid expenses |
13,117 |
|
13,121 |
|
Total
current assets |
329,478 |
|
518,247 |
| |
|
|
|
| |
|
|
|
| Mortgage Loans Receivable,
net of allowance of $1,477,195 and $1,429,487 |
|
|
|
| at June 30, 2020 and December 31, 2019
and deferred origination fees |
|
|
|
| of $266,033 and $278,633 at June 30,
2020 and December 31, 2019, respectively |
17,693,198 |
|
20,717,058 |
| |
|
|
|
| Bond Portfolio |
17,619,937 |
|
16,055,937 |
| |
|
|
|
| Real Estate Held for Sale |
550,045 |
|
651,398 |
|
Total
Assets |
$ 36,192,658 |
|
$ 37,942,640 |
| |
|
|
|
| |
|
|
|
| Notes to Financial Statements are an
integral part of this Statement. |
|
|
|
|
AMERICAN CHURCH MORTGAGE COMPANY |
| |
|
|
|
| Balance Sheets |
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY |
June 30, 2020 |
|
December 31, 2019 |
| |
(unaudited) |
|
|
| |
|
|
|
| Liabilities |
|
|
|
| Accounts payable |
3,950 |
|
12,311 |
| Management fee payable |
23,289 |
|
27,255 |
| Line of Credit |
1,199,000 |
|
1,445,000 |
| Dividends payable |
16,766 |
|
125,835 |
| |
|
|
|
| Secured Investor Certificates, Series
B |
7,486,250 |
|
8,855,000 |
| Secured Investor Certificates, Series
C |
6,289,000 |
|
6,324,000 |
| Secured Investor Certificates, Series
D |
8,054,000 |
|
8,109,000 |
| Secured Investor Certificates, Series
E |
3,738,000 |
|
3,562,000 |
|
|
|
|
|
| (Less) Deferred Offering
Costs,
net of accumulated amortization |
|
|
|
| of $1,018,170 and $956,811
at June 30, 2020 and |
|
|
|
| December 31, 2019, respectively |
(816,939) |
|
(865,533) |
|
Total
liabilities |
25,993,316 |
|
27,594,868 |
| |
|
|
|
| Stockholders’ Equity |
|
|
|
| Common stock, par value $.01 per
share |
|
|
|
| authorized,
30,000,000 shares, |
|
|
|
| issued and
outstanding, 1,676,598 shares at June 30, 2020 and |
|
|
|
| 1,677,798 at
December 31, 2019, respectively |
16,766 |
|
16,778 |
| Additional paid-in capital |
19,111,060 |
|
19,113,458 |
| Accumulated deficit |
(8,928,484) |
|
(8,782,464) |
|
Total
stockholders’ equity |
10,199,342 |
|
10,347,772 |
| |
|
|
|
|
Total
liabilities and stockholders' equity |
$ 36,192,658 |
|
$ 37,942,640 |
| |
|
|
|
| |
|
|
|
| Notes to Financial
Statements are an integral part of this Statement. |
|
|
AMERICAN CHURCH MORTGAGE
COMPANY |
| |
|
|
|
| Statements of
Operations |
|
|
|
|
|
| |
For the Six Months
Ended |
|
|
June 30, 2020 |
|
June 30, 2019 |
| |
(unaudited) |
| |
|
|
|
| Interest and Other
Income |
$ 1,232,224 |
|
$ 1,346,023 |
| |
|
|
|
| Interest Expense |
902,325 |
|
920,803 |
| |
|
|
|
| Net Interest Income |
329,899 |
|
425,220 |
| |
|
|
|
| Provision for losses on mortgage loans
receivable |
47,708 |
|
48,741 |
|
|
|
|
|
| Net Interest Income after Provision
for Mortgage |
282,191 |
|
376,479 |
| |
|
|
|
| Operating Expenses |
|
|
|
| Other than temporary impairment on bond
portfolio |
35,000 |
|
100,000 |
| Other operating
expenses |
309,333 |
|
310,559 |
| |
344,333 |
|
410,559 |
| |
|
|
|
| Net (Loss) |
$ (62,142) |
|
$ (34,080) |
| |
|
|
|
| Basic and Diluted Earnings (Loss) Per
Share |
$ (0.04) |
|
$ (0.02) |
| |
|
|
|
| Dividends Declared Per Share |
$ 0.05 |
|
$ 0.12 |
| |
|
|
|
| Weighted Average Common Shares
Outstanding - |
|
|
|
| Basic and
Diluted |
1,677,198 |
|
1,677,798 |
| |
|
|
|
| |
|
|
|
| Notes to Financial
Statements are an integral part of this Statement. |
|
AMERICAN CHURCH MORTGAGE
COMPANY |
| |
|
|
|
| Statements of
Operations |
|
|
|
|
|
| |
For the Three Months
Ended |
|
|
June 30, 2020 |
|
June 30, 2019 |
| |
(unaudited) |
| |
|
|
|
| Interest and Other
Income |
$ 604,247 |
|
$ 648,471 |
| |
|
|
|
| Interest Expense |
438,835 |
|
457,333 |
| |
|
|
|
| Net Interest Income |
165,412 |
|
191,138 |
| |
|
|
|
| Provision for losses on mortgage loans
receivable |
64,284 |
|
30,463 |
|
|
|
|
|
| Net Interest Income after Provision
for Mortgage |
101,128 |
|
160,675 |
| |
|
|
|
| Operating Expenses |
|
|
|
| Other than temporary impairment on bond
portfolio |
35,000 |
|
50,000 |
| Other operating
expenses |
196,672 |
|
183,975 |
| |
231,672 |
|
233,975 |
| |
|
|
|
| Net (Loss) |
$ (130,544) |
|
$ (73,300) |
| |
|
|
|
| Basic and Diluted Earnings (Loss) Per
Share |
$ (0.08) |
|
$ (0.04) |
| |
|
|
|
| Dividends Declared Per Share |
$ 0.01 |
|
$ 0.06 |
| |
|
|
|
| Weighted Average Common Shares
Outstanding - |
|
|
|
| Basic and
Diluted |
1,676,598 |
|
1,677,798 |
| |
|
|
|
| |
|
|
|
| Notes to Financial
Statements are an integral part of this Statement. |
|
AMERICAN CHURCH MORTGAGE
COMPANY |
| |
|
|
|
| Statements of
Operations |
|
|
|
|
|
| |
For the Three Months
Ended |
|
|
June 30, 2020 |
|
June 30, 2019 |
| |
(unaudited) |
| |
|
|
|
| Interest and Other
Income |
$ 604,247 |
|
$ 648,471 |
| |
|
|
|
| Interest Expense |
438,835 |
|
457,333 |
| |
|
|
|
| Net Interest Income |
165,412 |
|
191,138 |
| |
|
|
|
| Provision for losses on mortgage loans
receivable |
64,284 |
|
30,463 |
|
|
|
|
|
| Net Interest Income after Provision
for Mortgage |
101,128 |
|
160,675 |
| |
|
|
|
| Operating Expenses |
|
|
|
| Other than temporary impairment on bond
portfolio |
35,000 |
|
50,000 |
| Other operating
expenses |
196,672 |
|
183,975 |
| |
231,672 |
|
233,975 |
| |
|
|
|
| Net (Loss) |
$ (130,544) |
|
$ (73,300) |
| |
|
|
|
| Basic and Diluted Earnings (Loss) Per
Share |
$ (0.08) |
|
$ (0.04) |
| |
|
|
|
| Dividends Declared Per Share |
$ 0.01 |
|
$ 0.06 |
| |
|
|
|
| Weighted Average Common Shares
Outstanding - |
|
|
|
| Basic and
Diluted |
1,676,598 |
|
1,677,798 |
| |
|
|
|
| |
|
|
|
| Notes to Financial
Statements are an integral part of this Statement. |
|
|
AMERICAN CHURCH MORTGAGE COMPANY |
| |
|
|
|
|
|
|
|
|
|
|
| Statements of
Stockholders’ Equity |
| Unaudited |
| |
|
|
|
|
|
Additional |
|
|
|
|
| |
|
Common
Stock |
|
Paid-In |
|
Accumulated |
|
|
| |
|
Shares |
|
Amount |
|
Capital |
|
Deficit |
|
Totals |
| |
|
|
|
|
|
|
|
|
|
|
| Balance, December 31,
2018 |
|
|
1,677,798 |
|
|
$ |
16,778 |
|
|
$ |
19,113,458 |
|
|
$ |
(8,353,688 |
) |
|
$ |
10,776,548 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net loss |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(3,594 |
) |
|
|
(3,594 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(92,279 |
) |
|
|
(92,279 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance, March 31, 2019 |
|
|
1,677,798 |
|
|
|
16,778 |
|
|
|
19,113,458 |
|
|
|
(8,449,561 |
) |
|
$ |
10,680,675 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net loss |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(30,486 |
) |
|
|
(30,486 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(100,668 |
) |
|
|
(100,668 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance, June 30, 2019 |
|
|
1,677,798 |
|
|
$ |
16,778 |
|
|
$ |
19,113,458 |
|
|
$ |
(8,580,715 |
) |
|
$ |
10,549,521 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net loss |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
91,866 |
|
|
|
91,866 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(293,615 |
) |
|
|
(293,615 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance, December 31, 2019 |
|
|
1,677,798 |
|
|
$ |
16,778 |
|
|
$ |
19,113,458 |
|
|
$ |
(8,782,464 |
) |
|
$ |
10,347,772 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net
Income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
68,402 |
|
|
|
68,402 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(67,112 |
) |
|
|
(67,112 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance, March 31, 2020 |
|
|
1,677,798 |
|
|
|
16,778 |
|
|
|
19,113,458 |
|
|
|
(8,781,174 |
) |
|
$ |
10,349,062 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Re-purchase 1,200 shares |
|
|
(1,200 |
) |
|
|
(12 |
) |
|
|
(2,398 |
) |
|
|
— |
|
|
|
(2,410 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net
(Loss) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(130,544 |
) |
|
|
(130,544 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(16,766 |
) |
|
|
(16,766 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance, June 30, 2020 |
|
|
1,676,598 |
|
|
|
16,766 |
|
|
|
19,111,060 |
|
|
|
(8,928,484 |
) |
|
|
10,199,342 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Notes to Financial
Statements are an integral part of this Statement. |
|
|
AMERICAN CHURCH
MORTGAGE COMPANY |
| |
|
|
|
| Statements of Cash
Flows |
|
|
|
|
|
| |
For the Six Months
Ended |
|
|
June 30, 2020 |
|
June 30, 2019 |
| |
(unaudited) |
| |
|
|
|
| Cash Flows from Operating
Activities |
|
|
|
| Net (loss) |
$ (62,142) |
|
$ (34,080) |
| Adjustments to reconcile net (loss)
income to net cash |
|
|
|
| from operating
activities: |
|
|
|
| Net loss
on sales and impairment on real estate held for sale |
101,352 |
|
12,734 |
| Provision for
losses on mortgage loans receivable |
47,708 |
|
48,741 |
| Other than
temporary impairment on bond portfolio |
35,000 |
|
100,000 |
| Amortization of
loan origination discounts |
(12,600) |
|
40,000 |
| Amortization of
deferred offering costs |
61,359 |
|
54,420 |
| Change in
assets and liabilities |
|
|
|
|
Accounts
receivable |
34,733 |
|
(22,360) |
|
Interest
receivable |
10,488 |
|
(12,152) |
|
Prepaid
expenses |
4 |
|
(6,510) |
|
Accounts
payable |
(8,361) |
|
(400,855) |
|
Management
fee payable |
(3,966) |
|
(196) |
|
Net
cash provided by (used for) operating activities |
203,575 |
|
(220,258) |
| |
|
|
|
| Cash Flows from Investing
Activities |
|
|
|
| Net decrease in loans |
2,988,752 |
|
376,318 |
| Investment in bonds |
(1,721,000) |
|
(895,000) |
| Proceeds from bonds |
122,000 |
|
83,870 |
| Proceeds from real estate held for
sale |
- |
|
(100,537) |
|
Net
cash provided by (used for) investing activities |
1,389,752 |
|
(535,349) |
| |
|
|
|
| Cash Flows from Financing
Activities |
|
|
|
| Net decrease in secured investor
certificates |
(1,282,750) |
|
(2,024,000) |
| Payments for deferred costs |
(12,764) |
|
(27,528) |
| Net change in short term
borrowings |
(246,000) |
|
2,000,000 |
| Dividends paid |
(192,947) |
|
(234,893) |
|
Net
cash (used for) financing activities |
(1,734,461) |
|
(286,421) |
| |
|
|
|
| Net (Decrease) in Cash and Cash
Equivalents |
(141,134) |
|
(1,042,028) |
| |
|
|
|
| Cash and Cash Equivalents
- Beginning of Year |
191,987 |
|
2,183,441 |
| |
|
|
|
| Cash and Cash Equivalents
- End of Year |
$ 50,853 |
|
$ 1,141,413 |
| |
|
|
|
| Notes to Financial Statements are an integral part
of this Statement. |
|
AMERICAN CHURCH
MORTGAGE COMPANY |
| |
|
|
|
| Statements of Cash Flows
- Continued |
|
|
|
|
|
| |
For the Six Months
Ended |
|
|
June 30, 2020 |
|
June 30, 2019 |
| |
(unaudited) |
| |
|
|
|
| Supplemental Cash Flow
Information |
|
|
|
| |
|
|
|
| Interest paid |
$ 902,325 |
|
$ 920,803 |
| |
|
|
|
| Notes to Financial
Statements are an integral part of this Statement. |
|
|
AMERICAN CHURCH MORTGAGE COMPANY
Notes Unaudited Financial Statements
June 30, 2020
1. BASIS OF PRESENTATION
The accompanying unaudited interim financial statements and the
notes thereto have been prepared in accordance with generally
accepted accounting principles in the United States (“GAAP”). In
the opinion of management, the accompanying unaudited interim
financial statements contain all normal recurring adjustments
necessary to present fairly the financial positions result of
operations, changes in equity and cash flows for the periods
presented.
The accompanying unaudited financial statements and related notes
should be read in conjunction with the audited financial statements
and the notes thereto included in the Company’s Annual Report on
Form 10-K for the year ended December 31, 2019, as filed with the
Securities and Exchange Commission on May 8, 2020.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
American Church Mortgage Company, a Minnesota corporation, was
incorporated on May 27, 1994. The Company is engaged primarily in
the business of making mortgage loans to churches and other
nonprofit religious organizations throughout the United States, on
terms established for individual organizations.
Accounting Estimates
Management uses estimates and assumptions in preparing these
financial statements in accordance with accounting principles
generally accepted in the United States of America. Those estimates
and assumptions affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities,
and the reported revenues and expenses. Actual results could differ
from those estimates. The most sensitive estimates relate to the
realizability of the mortgage loans receivable, the valuation of
the bond portfolio and the valuation of real estate held for sale.
It is at least reasonably possible that these estimates could
change in the near term and that the effect of the change, if any,
may be material to the financial statements.
Concentration of Credit Risk
The
Company's loans have been granted to churches and other non-profit
religious organizations. The ability of the Company’s debtors to
honor their contracts is dependent on member contributions and the
involvement in the church or organization of its senior pastor.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments purchased
with maturities of three months or less to be cash equivalents.
AMERICAN CHURCH MORTGAGE COMPANY
Notes Unaudited Financial Statements
June 30, 2020
The Company maintains accounts primarily at two financial
institutions. At times throughout the year, the Company’s cash and
equivalents balances may exceed amounts insured by the Federal
Deposit Insurance Corporation. Cash in money market funds is not
federally insured. Management believes these financial institutions
have strong credit ratings and that the credit related to these
deposits is minimal. The Company has not experienced any losses in
such accounts.
Bond Portfolio
The Company accounts for the bond portfolio under the Accounting
Standards Codification (ASC) 320, Investments-Debt and Equity
Securities. The Company classifies the bond portfolio as
“available-for sale” and measures the portfolio at fair value.
While the bonds are generally held until contractual maturity, the
Company classifies them as available for sale as the bonds may be
used to repay secured investor certificates or provide additional
liquidity or working capital in the short term.
Allowance for Loan Losses on Mortgage Loans
Receivable
The Company records mortgage loans receivable at estimated net
realizable value, which is the unpaid principal balances of the
mortgage loans receivable, less the allowance for loan losses on
mortgage loans receivable and less deferred loan origination fees.
The Company’s loan policy provides an allowance for estimated
uncollectible loans based on an evaluation of the current status of
the loan portfolio with application of reserve percentages to
specific loans based on payment status. This policy reserves for
principal amounts outstanding on a specific loan if cumulative
interruptions occur in the normal payment schedule of the loan,
therefore, the Company recognizes a provision for losses and an
allowance for the outstanding principal amount of the loan in the
Company’s portfolio if the amount is in doubt of collection.
Additionally, no interest income is recognized on impaired loans
that are declared to be in default and are in the foreclosure
process. At June 30, 2020, the Company reserved $1,477,194 for
fourteen mortgage loans. Ten of these loans are three or more
mortgage payments in arrears of which three are declared to be in
default. The total principal amount of these fourteen loans totaled
approximately $6,582 ,000
at June 30, 2020. At December 31, 2019, the Company reserved
$1,429,487 for fourteen mortgage loans. Ten of these loans are
three or more mortgage payments in arrears of which three are
declared to be in default. The total principal amount of these
fourteen loans totaled approximately $5,987 ,000 at December 31, 2019.
AMERICAN CHURCH MORTGAGE COMPANY
Notes Unaudited Financial Statements
June 30, 2020
A summary of transactions in the allowance for mortgage loans for
the period ended June 30, 2020 and 2019 is as follows:
|
Balance at December 31, 2019 |
$ 1,429,487 |
|
Provisions for loan losses |
47,708 |
|
Loan charge-offs |
- |
|
Balance at June 30, 2020 |
$ 1,477,195 |
|
Balance at December 31, 2018 |
$ 1,672,003 |
|
Provisions for loan losses |
48,741 |
|
Loan charge-offs |
(100,537) |
|
Balance at June 30, 2019 |
$ 1,620,207 |
The total impaired loans, which are loans that are in the
foreclosure process or are declared to be in default, were
approximately $975,000 and $810,000 at June 30, 2020 and December
31, 2019, respectively, which the Company believes are adequately
secured by the underlying collateral and the allowance for mortgage
loans. Approximately $665,000 of the Company’s allowance for
mortgage loans was allocated to these loans for the period ended
June 30, 2020. Approximately $555,000 of the Company’s allowance
for mortgage loans was allocated to impaired loans for the year
ended December 31, 2019.
The Company will declare a loan to be in default and will place the
loan on non-accrual status when the following thresholds have been
met: (i) the borrower has missed three consecutive mortgage
payments; (ii) the borrower has not communicated to the Company any
legitimate reason for delinquency in its payments to the Company
and has not arranged for the re-continuance of payments; (iii)
lines of communication to the borrower have broken down such that
any reasonable prospect of rehabilitating the loan and return of
regular payments is gone.
The Company’s policies on payments received and interest accrued on
non-accrual loans are as follows: (i) The Company will accept
payments on loans that are currently on non-accrual status when a
borrower has communicated to us that they intend to meet their
mortgage obligations. The accrual of interest on a loan is
discontinued when the loan becomes 90 consecutive days delinquent
or whenever management believes the borrower will be unable to make
payments as they become due. The interest on these loans is
subsequently accounted for on the cash basis or using the
cost-recovery method until qualifying for return to accrual. Loans
are returned to accrual status when all the principal and interest
amounts contractually due are brought current or restructured and
future payments are reasonably assured. No interest income was
recognized on non-accrual loans for the periods ended June 30, 2020
and 2019, respectively.
AMERICAN CHURCH MORTGAGE COMPANY
Notes Unaudited Financial Statements
June 30, 2020
When a loan is declared in default according to the Company’s
policy or deemed to be doubtful of collection, the loan committee
of the Advisor to the Company will direct the staff to charge-off
the uncollectable receivables.
Loans totaling approximately $3,695,000 and $3,263,000 exceeded 90
days past due but continued to accrue interest for the period ended
June 30, 2020 and December 31, 2019, respectively. The Company
believes that continued interest accruals are appropriate because
the loans are well secured, not deemed to be in technical default
and the Company is actively pursuing collection of past due
payments.
Real Estate Held for Sale
The Company records real estate held for sale at the estimated fair
value, which is net of the expected expenses related to the sale of
the real estate. The fair value of our real estate held for
sale, which represents the carrying value, totaled $550,045 and
$651,398 for the periods ended June 30, 2020 and December 31, 2019,
respectively.
Carrying Value of Long-Lived Assets
The Company tests long-lived assets or asset groups for
recoverability when events or changes in circumstances indicate
that the carrying amount may not be recoverable. Circumstances
which could trigger a review include, but are not limited to:
significant decreases in the market price of the asset; significant
adverse changes in the business climate or legal factors;
accumulation of costs significantly in excess of the amount
originally expected for the acquisition or construction of the
asset; current period cash flow or operating losses combined with a
history of losses or a forecast of continuing losses associated
with the use of the asset; and current expectation that the asset
will more likely than not be sold or disposed of significantly
before the end of the estimated useful life.
Recoverability is assessed based on the carrying amount of the
asset compared to the sum of the undiscounted cash flows expected
to result from the use and the eventual disposal of the asset, as
well as specific appraisal in certain instances. An impairment loss
is recognized when the carrying amount is deemed not recoverable
and exceeds fair value as determined through various valuation
techniques including, but not limited to, discounted cash flow
models, quoted market values, and third party independent
appraisals.
Revenue Recognition
Interest income on mortgage loans receivable and the bond portfolio
is recognized as earned per the terms of the specific asset. Other
income included with interest represents cash received for loan
origination fees, which are recognized over the life of the loan as
an adjustment to the yield on the loan.
AMERICAN CHURCH MORTGAGE COMPANY
Notes Unaudited Financial Statements
June 30, 2020
Gain (Losses) on Real Estate Held For Sale
The Company records a gain or loss from real estate held for sale
when control of the property transfers to the buyer, which
generally occurs at the time of an executed deed. When the Company
finances real estate held for sale to the buyer, the Company
assesses whether the buyer is committed to perform their
obligations under the contract and whether collectability of the
transaction price is probable. Once these criteria are met, real
estate held for sale is derecognized and the gain or loss on sale
is recorded upon the transfer of control of the property to the
buyer. In determining the gain or loss on the sale, the Company
adjusts the transaction prices and related gain (loss) on sale if a
significant financing component is present.
Deferred Financing Costs
The Company defers the costs related to obtaining financing. These
costs are amortized over the life of the financing using the
straight line method, which approximates the effective interest
method.
Income (Loss) Per Common Share
There were no dilutive shares for the periods ended June 30, 2020
and December 31, 2019, respectively.
Recent Accounting Pronouncements
In 2016 the FASB issued ASU 2016-13, “Financial Instruments-Credit
Losses (Topic 326), Measurement of Credit Losses on Financial
Instruments.” ASU 2016-13 is intended to provide financial
statement users with more decision-useful information about the
expected credit losses on financial instruments and other
commitments to extend credit. For public entities, deemed smaller
reporting companies, ASU 2016-13 is effective for fiscal years
beginning after December 15, 2022, including interim periods within
those fiscal years. The Company has not yet fully evaluated the
potential effects of adopting ASU 2016-13 on the Company’s results
of operations, financial position or cash flows.
Income Taxes
The Company elected to be taxed as a Real Estate Investment Trust
(REIT). Accordingly, the Company is not subject to Federal income
tax to the extent of distributions to its shareholders if the
Company meets all the requirements under the REIT provisions of the
Internal Revenue Code.
The Company evaluated its recognition of income tax benefits using
a two-step approach to recognizing and measuring tax benefits when
realization of the benefits is uncertain. The first step is to
determine whether the benefit meets the more-likely-than-not
condition for recognition and the second step is to determine the
amount to be recognized based on the cumulative probability that
exceeds 50%. Primarily due to the Company’s tax status as a REIT,
the Company does not have any significant tax uncertainties that
would require recognition or disclosure.
AMERICAN CHURCH MORTGAGE COMPANY
Notes Unaudited Financial Statements
June 30, 2020
Subsequent Events
The Company has evaluated events and transactions through August
13, 2020, the date the financial statements were available to be
issued. The outbreak of the coronavirus (COVID-19) pandemic has
affected churches due to shelter-in-place directives which has
ceased social gatherings such as church worship services. The
Company’s borrowers have experienced financial duress during the
Covid-19 shelter in place restrictions, amplified by the financial
setbacks for many of the church members who have lost their jobs,
been furloughed, or had their incomes diminished. The Company has
provided some temporary relief by allowing its borrower’s to either
make interest only payments for a period of ninety days or forgo
one monthly mortgage payment (forbearance). This relief will impact
the Company’s revenue and the Company will experience declines in
payments due from borrowers and missed bond payments on the bonds
owned by the Company which will impact operating income and may
potentially impact future distributions and the ability to make
payments due on the Company’s certificates and dividends to its
shareholders.
The (COVID-19) has severely exacerbated deal procurement challenge
since churches, who cannot meet and worship at previous attendance
levels has unfortunately caused American Investors Group, Inc. to
withdraw as a broker-dealer and is no longer qualified to conduct
securities transactions. The subsequent closing of American
Investors Group, Inc. has not had an immediate effect on the
Company. However, the Company will no longer have this resource for
interim loan financings or new church bond product in the
foreseeable future.
3. FAIR VALUE MEASUREMENT
The Company measures certain financial instruments at fair value in
our balance sheets. The fair value of these instruments is based on
valuations that include inputs that can be classified within one of
the three levels of a hierarchy. Level 1 inputs include quoted
market prices in an active market for identical assets or
liabilities. Level 2 inputs are market data, other than Level 1,
that are observable either directly or indirectly. Level 2 inputs
include quoted market prices for similar assets or liabilities,
quoted market prices in an inactive market, and other observable
information that can be corroborated by market data. Level 3 inputs
are unobservable and corroborated by little or no market data.
Except for the bond portfolio, which is required by authoritative
accounting guidance to be recorded at fair value in our balance
sheets, the Company elected not to record any other financial
assets or liabilities at fair value on a recurring basis. We
recorded an aggregate other than temporary impairment for losses on
our Agape and Soul Repears bonds (Note 4), which totaled $693,000
and $658,000 for the periods ended June 30, 2020 and December 31,
2019, respectively. The following table summarizes the Company’s
financial instruments that were measured at fair value on a
recurring basis:
|
|
|
Fair Value Measurement |
|
June 30, 2020 |
Fair Value |
Level 3 |
|
|
|
|
|
Bond portfolio |
$17,619,937 |
$17,619,937 |
|
|
|
Fair Value Measurement |
|
December 31, 2019 |
Fair Value |
Level 3 |
|
|
|
|
|
Bond portfolio |
$16,055,937 |
$16,055,937 |
We determine the fair value of the bond portfolio shown in the
table above by comparing the bonds with similar instruments in
inactive markets. The analysis reflects the contractual terms of
the bonds, which are callable at par by the issuer at any time, and
the anticipated cash flows of the bonds and uses observable and
unobservable market-based inputs. Unobservable inputs include our
internal credit rating and selection of similar bonds for
valuation.
The change in Level 3 assets measured at fair value on a recurring
basis is summarized as follows:
| |
|
Bond
Portfolio |
|
Balance at December 31, 2019 |
|
$ |
16,055,937 |
|
| Other than
temporary impairment losses on bond portfolio |
|
|
(35,000 |
) |
| Purchases |
|
|
1,721,000 |
|
|
Proceeds |
|
|
(122,000 |
) |
| Balance at
June 30, 2020 |
|
$ |
17,619,937 |
|
Real estate held for sale and impaired loans are recorded at fair
value on a nonrecurring basis. The fair value of real estate held
for sale was based upon the listed sales price less expected
selling costs, which is a Level 3 input. The resulting impairment
charges were $0 for both periods ended June 30, 2020 and December
31, 2019, respectively.
The following table summarizes the Company’s financial instruments
that were measured at fair value on a nonrecurring basis:
| |
|
June 30,
2020 |
| |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Fair Value at
June 30,
2020 |
|
Impaired Loans |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
5,105,245 |
|
|
$ |
5,105,245 |
|
| Real
estate held for resale |
|
|
— |
|
|
|
— |
|
|
|
550,045 |
|
|
|
550,045 |
|
| Totals |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
5,655,290 |
|
|
$ |
5,655,290 |
|
AMERICAN CHURCH MORTGAGE COMPANY
Notes Unaudited Financial Statements
June 30, 2020
| |
|
December 31,
2019 |
| |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Fair Value at
December 31,
2019 |
|
Impaired Loans |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
4,557,326 |
|
|
$ |
4,557,326 |
|
| Real
estate held for resale |
|
|
— |
|
|
|
— |
|
|
|
651,398 |
|
|
|
651,398 |
|
| Totals |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
5,208,724 |
|
|
$ |
5,208,724 |
|
Loans with a carrying amount of $6,582,440 were considered impaired
and written down to their fair market value of $5,105,245 as of
June 30, 2020. As a result, the Company recognized a specific
valuation allowance against these impaired loans totaling
$1,477,194 as of June 30, 2020. Loans with a carrying amount of
$5,986,813 were considered impaired and written down to their fair
market value of $4,557,326 as of December 31, 2019. As a result,
the Company recognized a specific valuation allowance against these
impaired loans totaling $1,429,487 as of December 31, 2019.
The Company held real estate for sale which was acquired through
foreclosure or via deed in lieu of foreclosure with a fair value
less costs to sell of $550,045 and $651,398 for the periods ended
June 30, 2020 and December 31, 2019, respectively.
| |
|
Fair
Value |
|
Valuation Technique |
|
Significant Unobservable Inputs(s) |
|
Range/Weighted |
| |
|
|
|
|
|
|
|
|
|
June 30, 2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired Loans |
|
$ |
5,105,245 |
|
|
Market or Income Approach |
|
Discount to Appraised Values |
|
|
10-20% |
|
| Real Estate
Held for Sale |
|
$ |
550,045 |
|
|
Market or
Income Approach |
|
Discount to
Appraised Values |
|
|
10-20% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
| Impaired
Loans |
|
$ |
4,557,326 |
|
|
Market or
Income Approach |
|
Discount to
Appraised Values |
|
|
10-20% |
|
| Real Estate
Held for Sale |
|
$ |
651,398 |
|
|
Market or
Income Approach |
|
Discount to
Appraised Values |
|
|
10-20% |
|
The fair value of impaired loans referenced above was determined by
obtaining independent third-party appraisals and/or internally
developed collateral valuations to support the Company’s estimates
and judgments in determining the fair value of the underlying
collateral supporting impaired loans.
The fair value of real estate held for resale referenced above was
determined by obtaining market price valuations from independent
third parties wherever such quotes were available for the other
collateral owned. The Company utilized independent third party
appraisals to support the Company’s estimates and judgments in
determining fair value for other real estate owned.
4. MORTGAGE LOANS RECEIVABLE AND BOND PORTFOLIO
At June 30, 2020, the Company had mortgage loans receivable
totaling $19,436,425. The loans bear interest ranging from 0% to
10.25% with a weighted average of approximately 7.69% at June 30,
2020. At December 31, 2019, the Company hadmortgage loans
receivable totaling $22,425,178. The
AMERICAN CHURCH MORTGAGE COMPANY
Notes Unaudited Financial Statements
June 30, 2020
loans bear interest ranging from 0% to 10.25% with a weighted
average of approximately 7.86% at December 31, 2019.
The Company has a portfolio of secured church bonds at June 30,
2020 and December 31, 2019, which are carried at fair value. The
bonds pay either semi-annual or quarterly interest ranging from
3.75% to 9.75%. The aggregate par value of secured church bonds
equaled approximately $18,312,937 at June 30, 2020 with a weighted
average interest rate of 6.83% and approximately $16,713,937 at
December 31, 2019 with a weighted average interest rate of 6.43%.
These bonds are due at various maturity dates through February
2047. The Company has recorded an aggregate other than temporary
impairment of $693,000 and $658,000 for the periods ended June 30,
2020 and December 31, 2019, respectively for the First Mortgage
Bonds issued by Agape Assembly Baptist Church and Soul Reapers
Worship Center. These bond series in the aggregate constitute
approximately 10.51% and 6.13% of the bond portfolio at June 30,
2020 and December 31, 2019, respectively. The Company had
maturities and redemptions of bonds of approximately $122,000 and
$1,137,000 for the periods ended June 30, 2020 and December 31,
2019, respectively.
The contractual maturity
schedule for mortgage loans receivable and the bond portfolio as of
June 30, 2020, is as follows:
|
|
Mortgage Loans |
Bond Portfolio |
| |
|
|
| July 1, 2020
through December 31, 2020 |
$ 1,302,687 |
$ 80,000 |
| 2021 |
645,876 |
224,000 |
| 2022 |
1,440,414 |
139,000 |
| 2023 |
797,511 |
263,000 |
| 2024 |
1,731,671 |
455,000 |
|
Thereafter |
13,518,267 |
17,151,937 |
|
|
19,436,426 |
18,312,937 |
|
Less loan loss and other than temporary impairment on bonds
allowance |
(1,477,195) |
(693,000) |
| Less deferred
origination fees |
(266,033) |
___-____ |
|
Totals |
$17,693,198 |
$17,619,937 |
The Company currently owns $529,000 First Mortgage Bonds and
$497,000 Second Mortgage Bonds issued by Agape Assembly Baptist
Church located in Orlando, Florida. The total principal amount of
First Mortgage Bonds issued by Agape is $7,200,000, and the total
principal amount of Second Mortgage Bonds issued is $715,000. Agape
defaulted on its payment obligations to bondholders in September
2010. The church subsequently commenced a Chapter 11 bankruptcy
reorganization proceeding regarding the property that secures the
First Mortgage Bonds in December 2010. In October 2014, the
bondholders of Agape agreed to a modification in the terms of their
bonds which resulted in the temporary resumption of both principal
and interest payments to both the first and second mortgage bond
holders. Both the First Mortgage Bonds and Second Mortgage Bonds
were modified to a fully amortized fixed rate, quarterly interest
payment of 6.25% with a new maturity date of September 2037 for all
the
AMERICAN CHURCH MORTGAGE COMPANY
Notes Unaudited Financial Statements
June 30, 2020
issued and outstanding bonds. The Company, along with all other
bondholders, has a superior lien over all other creditors. The
Church subsequently defaulted on their modification agreement in
2016 and no interest payments were made to bondholders during the
period ended June 30, 2020. However, the trustee made a
distribution to bondholders during 2017 of $18.54 per $1,000 bond
as a repayment of principal only, effectively reducing the
outstanding balance of each $1,000 bond to approximately $826. The
trustee again initiated foreclosure action against the Church and
prevailed in its pursuit to foreclose on the Church’s property on
November 1, 2019. However, on the eve of the foreclosure sale, the
Church again filed for bankruptcy protection. The trustee is
monitoring the bankruptcy proceedings and will keep the bondholders
informed when a material event transpires.
The Company currently owns $900,000 First Mortgage Bonds issued by
Soul Reapers Worship Center International located in Raleigh, North
Carolina. The total principal amount of First Mortgage Bonds issued
by Soul Reapers is $1,920,000. The Church has failed to make
payments as required under the terms of the Trust Indenture. As a
Bondholder, the Company expected to receive interest and principal
payment(s) on time and according to the terms of the Bonds. The
Company has not received two consecutive quarterly interest
payments from the issuer as of June 30, 2020.
The Company has an aggregate other than temporary impairment of
$693,000 and $658,000 for the First and Second Mortgage Bonds at
June 30, 2020 and December 31, 2019, respectively, which
effectively reduces the bonds to the fair value amount management
believes will be recovered.
The Company did not restructure any loans during the periods ended
June 30, 2020 and December 31, 2019, respectively. A summary of
loans re-structured or modified for the periods ended June 30, 2020
and December 31, 2019 are shown below. All of the loans, except
two, shown are currently performing under the terms of the
modifications for their mortgage obligations. The first
non-performing loan is a second mortgage loan with a current unpaid
principal balance of approximately $45,000. This loan has been
declared to be in default. The second non-performing loan is a
first mortgage loan with current unpaid principal balance of
approximately $1,283,000. This loan is located in the boroughs of
New York City and the Church has not been able to meet due to the
Coronavirus (COVID-19) shelter in place requirements.
|
|
June 30, 2020 |
|
|
|
|
|
|
|
|
Type of Loan |
Number of Loans |
Original Principal Balance |
Original Average Interest Rate |
Unpaid Principal Balance |
Modified Average Interest Rate |
|
Mortgage Loans |
6 |
$4,100,544 |
7.892% |
$3,164,006 |
5.58% |
AMERICAN CHURCH MORTGAGE COMPANY
Notes Unaudited Financial Statements
June 30, 2020
|
|
December 31, 2019 |
|
|
|
|
|
|
|
|
Type of Loan |
Number of Loans |
Original Principal Balance |
Original Average Interest Rate |
Unpaid Principal Balance |
Modified Average Interest Rate |
|
Mortgage Loans |
6 |
$4,100,544 |
7.892% |
$3,185,720 |
5.58% |
|
|
|
|
|
|
|
5. SECURED INVESTOR CERTIFICATES
Secured investor certificates are collateralized by certain
mortgage loans receivable or secured church bonds of approximately
the same value as the certificates. The weighted average interest
rate on the certificates was 6.25% and 6.33% for the periods ended
June 30, 2020 and December 31, 2019, respectively. Holders of the
secured investor certificates may renew certificates at the current
rates and terms upon maturity at the Company’s discretion. Renewals
upon maturity are considered neither proceeds from nor issuance of
secured investor certificates. Renewals totaled approximately
$530,000 and $793,000 for the periods ended June 30, 2020 and
December 31, 2019, respectively. The secured investor certificates
have certain financial and non-financial covenants identified in
the respective series’ trust indentures.
The estimated maturity schedule for the secured investor
certificates at June 30, 2020 is as follows:
|
July 1, 2020 through December 31, 2020 |
$ 2,128,000 |
|
|
2021 |
2,168,000 |
|
|
2022 |
1,042,000 |
|
|
2023 |
3,384,000 |
|
|
2024 |
1,335,000 |
|
|
Thereafter |
15,510,250 |
|
|
|
$25,567,250 |
|
|
Less deferred offering costs |
(816,939) |
|
|
Totals |
$24,750,311 |
|
6. TRANSACTIONS WITH AFFILIATES
The Company has an Advisory Agreement with Church Loan Advisors,
Inc. (the “Advisor”). The Advisor is responsible for the day-to-day
operations of the Company and provides office space and
administrative services. The Advisor and the Company are related
through common ownership and common management. For its services,
the Advisor is entitled to receive a management fee equal to 1.25%
annually of the Company's Average Invested Assets, plus one-half of
any origination fee charged to borrowers on mortgage loans made by
the Company. A majority of the independent board members approve
the Advisory Agreement on an annual basis. The Company paid the
Advisor management and
AMERICAN CHURCH MORTGAGE COMPANY
Notes Unaudited Financial Statements
June 30, 2020
origination fees of approximately $145,000 and $159,000 for the
periods ended June 30, 2020 and June 30, 2019, respectively. The
Company paid the Advisor management and origination fees of
approximately $71,000 and $80,000 for the three months periods
ended June 30, 2020 and June 30, 2021, respectively.
7. LINE OF CREDIT
On April 9, 2018, the Company entered into a Loan and Security
Agreement (the “Loan Agreement”) with Alerus Financial, N.A., as
lender (the “Lender”), and a Revolving Note (the “Note”) evidencing
a $4,000,000 revolving loan (the “Revolving Loan”). The Lender
agrees to make loans to the Company from time to time and after the
date of the loan agreement and the Company may repay and re-borrow
pursuant to the terms and conditions of the Revolving Loan as long
as no borrowing causes that dollar limit to be exceeded and the
Company is not otherwise in default on the Revolving Loan. The
Revolving Loan is secured by a first priority security interest in
substantially all of the Company’s assets other than collateral
pledged to secure the Company’s secured investor certificates, both
those currently issued and any potentially issued in the future.
The Company borrowed against the line of credit and has an
outstanding balance of $1,199,000 and $1,145,000 for the periods
ended June 30, 2020 and December 31, 2019, respectively. The
original maturity date of the Note was April 9, 2019 and the
interest rate is the prevailing London Interbank Offering Rate
(LIBOR) plus 2.70% adjusted monthly. On July 22, 2019 the revolving
loan was extended for an additional year to July 22, 2020. On July
22, 2020 the revolving loan was extended for an additional 90 day
period to October 20, 2020.
8. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company is required to disclose the fair value information
about financial instruments, where it is practicable to estimate
that value. Because assumptions used in these valuation techniques
are inherently subjective in nature, the estimated fair values
cannot always be substantiated by comparison to independent market
quotes and, in many cases, the estimated fair values could not
necessarily be realized in an immediate sale or settlement of the
instrument.
The fair value estimates presented herein are based on relevant
information available to management for the periods ended June 30,
2020 and December 31, 2019, respectively. Management is not aware
of any factors that would significantly affect these estimated fair
value amounts. As these reporting requirements exclude certain
financial instruments and all non-financial instruments, the
aggregate fair value amounts presented herein do not represent
management’s estimate of the underlying value of the Company.
AMERICAN CHURCH MORTGAGE COMPANY
Notes Unaudited Financial Statements
June 30, 2020
The estimated fair values of the Company’s financial instruments,
none of which are held for trading purposes, are as follows:
| |
|
June 30,
2020 |
|
December 31,
2019 |
| |
|
Carrying |
|
Fair |
|
Carrying |
|
Fair |
| |
|
Amount |
|
Value |
|
Amount |
|
Value |
| |
|
|
|
|
|
|
|
|
| Cash
and equivalents |
|
$ |
50,583 |
|
|
$ |
50,583 |
|
|
$ |
191,987 |
|
|
$ |
191,987 |
|
| Accounts
receivable |
|
|
90,806 |
|
|
|
90,806 |
|
|
|
125,539 |
|
|
|
125,539 |
|
| Interest
receivable |
|
|
174,702 |
|
|
|
174,702 |
|
|
|
185,190 |
|
|
|
185,190 |
|
| Mortgage loans
receivable |
|
|
19,436,426 |
|
|
|
23,748,139 |
|
|
|
22,425,177 |
|
|
|
24,573,176 |
|
| Bond
portfolio |
|
|
17,619,937 |
|
|
|
17,619,937 |
|
|
|
16,055,937 |
|
|
|
16,055,937 |
|
| Secured investor
certificates |
|
|
25,567,250 |
|
|
|
31,893,329 |
|
|
|
26,850,000 |
|
|
|
32,389,253 |
|
Item 2. Management’s Discussion and Analysis of Financial
Condition and Results of Operations.
Safe Harbor Statement Under the Private Securities Litigation
Reform Act of 1995
Certain statements contained in this section and elsewhere in this
Form 10-Q constitute “forward-looking statements” within the
meaning of the Private Securities Litigation Reform Act of 1995.
Such forward-looking statements involve a number of known and
unknown risks, uncertainties and other factors which may cause our
actual results, performance or achievements to be materially
different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Such
factors include, but are not limited to, (i) trends affecting our
financial condition or results of operations; (ii) our business and
growth strategies; (iii) the mortgage loan industry and the
financial status of religious organizations; (iv) The uncertainty
and economic slowdown caused by the Covid-19 pandemic; (v) our
financing plans; and other risks detailed in the Company’s other
periodic reports filed with the Securities and Exchange Commission.
The words “believe”, “expect”, “anticipate”, “may”, “plan”,
“should”, and similar expressions identify forward-looking
statements. Readers are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of the date
the statements were made and are not guarantees of future
performance.
A detailed statement of risks and uncertainties is contained in our
reports to the SEC, including, in particular, our Annual Report on
Form 10-K for the year ended December 31, 2019 and other public
filings and disclosures. Investors and shareholders are urged
to read these documents carefully.
Plan of Operation
We were founded in May 1994 and commenced active business
operations on April 15, 1996 after the completion of our initial
public offering.
We currently have fifty-one mortgage loans aggregating $19,436,425
in principal amount and a first and second mortgage bond portfolio
with par values aggregating $18,312,937. Funding of additional
first mortgage loans and purchase of first mortgage bonds issued by
churches is expected to continue on an on-going basis as more
investable assets become available through: (i) future sales of
securities; (ii) prepayment and repayment at maturity of existing
loans and bonds; and (iii) borrowed funds. These capital sources
and interest received on loans and bonds provide general working
capital to the Company.
Impact of Covid-19
The outbreak of the coronavirus (Covid-19) pandemic has affected
churches due to shelter-in-place directives which has ceased social
gatherings such as church worship services. The Company’s borrowers
have and may continue to experience severe financial duress during
the Covid-19 shelter in place restrictions, amplified by the
financial setbacks for many of the church members who have lost
their jobs, been furloughed, or had their incomes diminished. The
Company has provided some temporary relief by allowing its
borrower’s to either make interest only payments for a period of
ninety days or forgo one monthly mortgage payment (forbearance).
This relief has impacted the Company’s revenue and will continue
impact the Company’s operations. The Company may continue to
experience declines in payments due from borrowers and missed bond
payments on the bonds owned by the Company which will impact
operating income and may potentially impact future distributions
and the ability to make payments due on the Company’s certificates
and dividends to its shareholders.
Results of Operations
Fiscal 2020 Six Months Ended June 30, 2020 Compared to Fiscal
2019 Six Months Ended June 30, 2019
Our net (loss) for the six months ended June 30, 2020 and 2019 was
approximately $(62,000) and $(34,000), respectively, on total
interest and other income of approximately $1,232,000 and
$1,346,000, respectively. Interest and other income is comprised of
interest from loans, interest from bonds, amortization of bond
discounts and amortization of loan origination fees. As of June 30,
2020, our loans receivable have interest rates ranging from 0% to
10.25%, with an average, principal-adjusted interest rate of 7.69%.
Our bond portfolio has an average current yield of 6.83% as of June
30, 2020. As of June 30, 2019, the average, principal-adjusted
interest rate on our portfolio of loans was 8.09% and our portfolio
of bonds had an average current yield of 6.87%. The decrease in
interest income was due predominantly to a decrease in assets under
management.
Interest expense was approximately $902,000 and $921,000 for the
six months ended June 30, 2020 and 2019, respectively. The decrease
in interest expense was due to the decrease in interest paid on our
Secured Investor Certificates resulting from a dec333333333rease in
the amount of Secured Investor Certificates outstanding. Net
interest margin decreased from 31.59% to 26.77% for the six months
ended June 30, 2020 versus the prior year’s comparative period,
resulting primarily from a decrease in interest income of
approximately 8.45% along with a decrease in interest expense of
approximately 2.00%.
We follow a loan loss allowance policy on our portfolio of loans
outstanding. This critical policy requires complex judgments and
estimates. We record mortgage loans receivable at their estimated
net realizable value, which is the unpaid principal balance less
the allowance for mortgage loans. Our loan policy provides an
allowance for estimated uncollectible loans based on an evaluation
of the current status of the loan portfolio. This policy provides
for principal amounts outstanding on a particular loan if
cumulative interruptions occur in the normal payment schedule of a
loan. Our policy will provide for the outstanding principal amount
of a loan in our portfolio if the amount is in doubt of being
collected. Additionally, no interest income is recognized on
impaired loans or loans that are in the foreclosure process.
The accrual of interest on a loan is discontinued when the loan
becomes 90 days delinquent or whenever management believes the
borrower will be unable to make payments as they become due. When
loans are placed on nonaccrual status or charged off, all unpaid
accrued interest is reversed against interest income. The interest
on these loans is subsequently accounted for on the cash basis or
using the cost-recovery method until qualifying for return to
accrual. Loans are returned to accrual status when all the
principal and interest amounts contractually due are brought
current and future payments are reasonably assured.
Allowance for losses on mortgage loans receivable increased during
the six months ended June 30, 2020 as we recorded additional
provisions against the mortgage loans. We recorded an additional
provision for losses on loans during the six months ended June 30,
2020 of approximately $48,000 compared to approximately $49,000 for
the six months ended June 30, 2019. At June 30, 2020, we provided
approximately $1,477,000 for fourteen mortgage loans, of which ten
are three or more mortgage payments in arrears of which three of
these loans are declared to be in default. At December 31, 2019, we
provided approximately $1,429,000 for fourteen mortgage loans, of
which eleven were three or more mortgage payments in arrears, three
were declared to be in default and two were in the foreclosure
process.
Our lending practices limit deployment of our capital to churches
and other non-profit religious organizations. The total principal
amount of our second mortgage loans is limited to 20% of our
average invested assets. We currently have three second mortgage
loans totaling approximately $218,000 in principal amount
outstanding. We do not loan to any borrower who has been in
operation for less than two years and the borrower must demonstrate
they can service the debt outstanding for the prior three years
based on historical financial statements. We do not loan money
based on projections or pledge programs. The loan amount to any
borrower cannot exceed 75% loan to appraised value. Typically, we
do not loan over 70% loan to value except in extenuating
circumstances. In addition, the borrower’s long-term debt
(including the proposed loan) cannot exceed four times the
borrower’s gross income for the previous twelve month period.
Historically, loans in our portfolio are outstanding for an average
of seven years. Our borrowers are typically small independent
churches with little or no borrowing history. Once a church
establishes a payment history with us, they typically look to
refinance their loan with a local bank, credit union or other
financial institution which is willing to provide financing since
the borrower has established a payment history and have
demonstrated they can meet their mortgage debt obligations.
Operating expenses for the six months ended June 30, 2020 decreased
to approximately $344,000 compared to $411,000 for the six months
ended June 30, 2019. The decrease was the result of a decrease in
other than temporary impairment on our bond portfolio.
Fiscal 2020 Second Quarter Compared to Fiscal 2019 Second
Quarter
The Company had a net loss of approximately $131,000 for the three
months ended June 30, 2020 compared to a net loss of approximately
$73,000 for the three months ended June 30, 2019, on total interest
and other income of approximately $604,000 and $648,000,
respectively. Interest expense was approximately $439,000 and
$457,000 for the three months ended June 30, 2020 and 2019,
respectively. The decrease in net interest income from the prior
three month period was approximately $26,000.
Operating expenses for the three months ended June 30, 2020
decreased to approximately $232,000 compared to $234,000 at June
30, 2019. The decrease in operating expenses was due to a decrease
in other than temporary impairment on our bond portfolio.
Mortgage Loans and Bond Portfolio
Two new bridge loans were funded during the six months ended June
30, 2020 for approximately $737,000. A bridge loan typically has a
maturity of one year or less.
We currently own $529,000 First Mortgage Bonds and $497,000 Second
Mortgage Bonds issued by Agape Assembly Baptist Church located in
Orlando, Florida. Agape defaulted on its payment obligations to
bondholders in September 2010. The aggregate amount of the
defaulted bonds equals $7,915,000; the total principal amount of
First Mortgage Bonds issued by Agape is $7,200,000 and the total
principal amount of Second Mortgage Bonds issued is $715,000. The
church commenced a Chapter 11 bankruptcy reorganization proceeding
regarding the property that secures the First Mortgage Bonds in
December 2010. In October 2014, the bondholders of Agape agreed to
a modification in the terms of their bonds which resulted in the
temporary resumption of both principal and interest payments to
both the first and second mortgage bond holders. Both the First
Mortgage Bonds and Second Mortgage Bonds were modified to a fully
amortized fixed rate, quarterly interest payment of 6.25% with a
new maturity date of September 2037 for all the issued and
outstanding bonds. We, along with all other bondholders, have a
superior lien over all other creditors. The Church subsequently
defaulted on their modification agreement in 2016 and no interest
payments were made to bondholders during the six-month period ended
June 30, 2020.
We currently own $900,000 First Mortgage Bonds issued by Soul
Reapers Worship Center International located in Raleigh, North
Carolina. The total principal amount of First Mortgage Bonds issued
by Soul Reapers is $1,920,000. The Church has failed to make
payments as required under the terms of the Trust Indenture. As a
bondholder, the Company expected to receive interest and principal
payment(s) on time
and according to the terms of the bonds. The Company has not
received two consecutive quarterly interest payments from the
issuer as of June 30, 2020.
We have an aggregate other than temporary impairment of $693,000
and $658,000 for the First and Second Mortgage Bonds issued by
Agape Assembly and Soul Reapers Worship Center International at
June 30, 2020 and December 31, 2019, respectively, which
effectively reduces the bonds to the fair value amount management
believes will be recovered.
Real Estate Held for Sale
We record real estate held for sale at the estimated fair value,
which is net of the expected expenses related to the sale of the
real estate. We did not record any additional loss on our real
estate held for sale for the six month period ended June 30, 2020
and 2019, respectively.
Dividends
We have elected to operate as a real estate investment trust
(REIT), therefore we are required, among other things, to
distribute to shareholders at least 90% of “Taxable Income” in
order to maintain our REIT status.
We paid a dividend of $.01 for each share held of record on July
29, 2020. The dividend, which was paid July 31, 2020.
We paid a dividend of $.06 for each share held of record on July
29, 2019. The dividend, which was paid July 31, 2019.
Liquidity and Capital Resources
We generate revenue through implementation of our business plan of
making mortgage loans to, and acquiring first mortgage bonds issued
by, churches and other non-profit religious organizations. Our
revenue is derived principally from interest income, and
secondarily through the origination fees and renewal fees generated
by the mortgage loans we make. We also earn income through interest
on funds that are invested pending their use in funding mortgage
loans and on income generated on church bonds. Our principal
recurring expenses are advisory fees, legal and accounting fees and
interest payments on secured investor certificates. Our liabilities
as of June 30, 2020 are primarily comprised of dividends declared
as of June 30, 2020 but not yet paid, our line of credit and our
secured investor certificates.
Our current funding sources are expected to provide adequate cash
for our operations for the next twelve months. Future capital needs
are expected to be met by: (i) prepayment and repayment at maturity
of mortgage loans we make; (ii) bonds that mature; and (iii) funds
available from our line of credit. We believe that the “rolling”
effect of mortgage loans maturing and bond repayments will provide
a supplemental source of capital to fund our business operations in
future years. We continually review the market for other sources of
capital. There can be no assurance we will be able to raise
additional capital on terms acceptable for such purposes.
During the six months ended June 30, 2020, total assets decreased
by approximately $1,750,000 due to a decrease in our loan and bond
portfolio outstanding. Liabilities decreased by approximately
$1,602,000 for the six months ended June 30, 2020 due to a decrease
in our secured investor certificates and our line of credit.
For the six months ended June 30, 2020, net cash provided by (used
for) operating activities increased to $203,575 from $(220,258)
from the comparative period ended June 30, 2019, primarily due to
an decrease in our accounts payable and an increase in our sale of
real estate held for sale.
For the six months ended June 30, 2020, net cash provided by (used
for) investing activities was $1,389,753 compared to $(535,349)
from the comparative six months ended June 30, 2019, due to a
decrease in investments in our mortgage loans.
For the six months ended June 30, 2020, net cash (used for)
financing activities increased to $(1,734,462) from $(286,421) for
the comparative six months ended June 30, 2019, primarily due to
pay-down on our line of credit.
Critical Accounting Estimates
Preparation of our financial statements requires estimates and
judgments to be made that affect the amounts of assets,
liabilities, revenues and expenses reported. Such decisions include
the selection of the appropriate accounting principles to be
applied and the assumptions on which to base accounting estimates.
We evaluate these estimates based on assumptions we believe to be
reasonable under the circumstances.
The difficulty in applying these policies arises from the
assumptions, estimates and judgments that have to be made currently
about matters that are inherently uncertain, such as future
economic conditions, operating results and valuations as well as
management intentions. As the difficulty increases, the level of
precision decreases, meaning that actual results can and probably
will be different from those currently estimated.
Management uses estimates and assumptions in preparing these
financial statements in accordance with generally accepted
accounting principles. Those estimates and assumptions affect the
reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities, and the reported revenues and
expenses. Actual results could differ from those estimates. The
most sensitive estimates relate to the realizability of the
mortgage loans receivable and the valuation of the bond portfolio
and real estate held for sale. It is at least reasonably possible
that these estimates could change in the near term and that the
effect of the change, if any, may be material to the financial
statements.
We estimate the value of real estate we hold pending re-sale based
on a number of factors. We look at the current condition of the
property as well as current market conditions in determining a fair
value, which will determine the listing price of each property.
Each property is valued based on its current listing price less any
anticipated selling costs, including for example, realtor
commissions. Since churches are single use facilities the listing
price of the property may be lower than the total amount owed to
us. Attorney fees, taxes, utilities along with real estate
commission fees will also reduce the amount we collect from the
sale of a property we have acquired through foreclosure. The fair
value of the real estate held for sale includes estimates of
expenses related to the sale of the real estate.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
Item 3. Quantitative and Qualitative Disclosures About Market
Risk
N/A
Items 4. Controls and Procedures
Disclosure Controls and Procedures
An evaluation was carried out under the supervision and with the
participation of the Company’s management, including the principal
executive officer and the principal accounting officer, of the
effectiveness of the Company’s disclosure controls and procedures
as of the end of the quarter ended June 30, 2020. Based on that
evaluation, the principal executive officer and the principal
accounting officer concluded that the Company’s disclosure controls
and procedures were not effective to provide reasonable assurance
that information required to be disclosed by the Company in reports
that it files or submits under the Securities and Exchange
Commission is recorded, processed, summarized and reported within
the time periods specified in Securities and Exchange Commission
rules and forms and that information required to be disclosed in
reports that we file or submit under the Exchange Act is
accumulated and communicated to our management, including our
principal accounting officer, to allow timely decisions regarding
required disclosure. We have limited number of personnel performing
finance and accounting functions. Were there a larger staff, it
would be possible to provide for enhanced disclosure of financial
reporting matters. Management is required to apply its judgement in
evaluating the cost benefit relationship of possible controls and
procedures. Management realizes this is a material weakness.
Changes in Internal Controls Over Financial Reporting
During the three months ended June 30, 2020, there were no changes
in the Company’s internal control over financial reporting that
have materially affected, or are reasonably likely to materially
affect, its internal control over financial reporting.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 1A. Risk Factors.
Not applicable.
Item 2. Unregistered Sales of Equity Securities and
Use of Proceeds.
|
(c) |
Purchases of equity securities during the quarter
ended June 30, 2020 are described below: |
Issuer Purchases of Equity Securities
Dates of
Shares
Purchased |
|
Total Number
of
Shares
Purchased |
|
Average
Price
Paid per
Share |
|
Total Number of
Shares
Purchased as Part
of
Public
Announced
Plans or
Programs |
|
Maximum Number
of
Shares that May Yet
Be
Purchased Under
the
Plans or
Programs |
|
April 1 - April 30,
2020 |
|
0 |
|
|
0 |
|
NA |
|
|
NA |
|
|
May 1 - May 30,
2020 |
|
0 |
|
|
0 |
|
NA |
|
|
NA |
|
|
June 1 - June 30,
2020 |
|
1,200 |
|
|
$2.00 |
|
NA |
|
|
NA |
|
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not
Applicable
Item 5. Other Information.
None.
Item 6. Exhibits
Exhibit
Number Title of Document
|
31.1 |
Certification of the Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. |
|
31.2 |
Certification of the Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. |
|
32.1 |
Certification of the Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. |
|
32.2 |
Certification of the Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. |
|
101 |
The following financial information
from our Quarterly Report on Form 10-Q for the second quarter of
fiscal year 2020 filed with the Securities and Exchange Commission
on August 14, 2020, is formatted in eXtensible Business Reporting
Language (XBRL): (i) the Balance Sheets at June 30, 2020 and
December 31, 2019; (ii) Statements of Operations for the six months
and three months ended June 30, 2020 and 2019; (iii) the Statements
of Cash Flows for the six months ended June 30, 2020 and 2019; and
(iv) the Notes to Financial Statements (Unaudited). |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused the report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Dated: August 13, 2020
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AMERICAN CHURCH MORTGAGE COMPANY |
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By: |
/s/ Philip J. Myers |
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Philip J. Myers |
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Chief Executive Officer |
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(Principal Executive Officer) |
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By: |
/s/ Scott J. Marquis |
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Scott
J. Marquis |
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Chief
Financial Officer and Treasurer |
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(Principal
Financial and Accounting Officer) |
