UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Under Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the Quarterly Period Ended March 31, 2009
or
[ ] Transition Report Under 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.)
10237 Yellow Circle Drive Minnetonka, MN 55343
(Address of principal executive offices) (Zip Code)
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(952) 945-9455
(Registrant's telephone number, including area code)
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 __
Indicate by check mark whether the registrant has submitted electronically
and posted on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T
during the preceding 12 months (or such shorter period that the registrant was
required to submit and post such files). Yes __ No __
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer or a smaller reporting company.
See the definitions of "large accelerated filer," "accelerated filer" and
"smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer __ Accelerated filer __
Non-accelerated filer __ Smaller reporting company X
(Do not check if a smaller reporting company)
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Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes __ No X
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding at May 15, 2009
--------------------------------------------- -------------------------------
Common Stock, $0.01 par value per share 2,472,081 shares
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AMERICAN CHURCH MORTGAGE COMPANY
INDEX Page
No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Balance Sheets ..............................................................2 - 3
Condensed Statements of Operations ........................................................4
Condensed Statements of Cash Flows.....................................................5 - 6
Notes to Condensed Financial Statements ..............................................7 - 13
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations .................................................14 - 17
Items 4T. Controls and Procedures..................................................................18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.........................................................................19
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds...............................19
Item 3. Defaults Upon Senior Securities...........................................................19
Item 4. Submission of Matters to a Vote of Security Holders.......................................19
Item 5. Other Information.........................................................................19
Item 6. Exhibits..................................................................................19
Signatures................................................................................20
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AMERICAN CHURCH MORTGAGE COMPANY
Minnetonka, Minnesota
Financial Statements
March 31, 2009
AMERICAN CHURCH MORTGAGE COMPANY
Condensed Balance Sheets
-----------------------------------------------------------------------------------------------------------------------------------
ASSETS March 31, 2009 December 31, 2008
-----------------------------------------------------------------------------------------------------------------------------------
(Unaudited)
Current Assets
Cash and equivalents $ 444,453 $ 271,373
Accounts receivable 134,823 133,638
Interest receivable 178,201 154,466
Current maturities of mortgage loans receivable, net of
allowance of $140,802 and $107,308 and deferred
origination fees of $32,253 and $32,531 at
March 31, 2009 and December 31, 2008, respectively 438,399 463,841
Current maturities of bond portfolio 64,000 342,000
Prepaid expenses 17,848 9,724
-------------- -----------
Total current assets 1,277,724 1,375,042
Mortgage Loans Receivable, net of current maturities 31,670,458 32,100,196
Bond Portfolio, net of current maturities 11,488,796 11,536,937
Real Estate Held for Sale 1,260,332 1,261,832
Deferred Secured Investor Certificates Offering Costs,
net of accumulated amortization of $482,239 and $977,237
at March 31, 2009 and December 31, 2008, respectively 771,268 654,810
Deferred Line of Credit Costs, net of accumulated
amortization of $11,013 and $5,835 at March 31, 2009
and December 31, 2008, respectively 27,204 32,383
------------- -------------
Total Assets $ 46,495,782 $ 46,961,200
============= =============
Notes to Condensed Financial Statements are an integral part of this Statement.
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2
AMERICAN CHURCH MORTGAGE COMPANY
Condensed Balance Sheets
------------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY March 31, 2009 December 31, 2008
------------------------------------------------------------------------------------------------------------------------------------
(Unaudited)
Current Liabilities
Current maturities of secured investor certificates $ 3,874,000 $ 3,969,000
Line of credit 4,500,000 4,500,000
Accounts payable 149,742 23,317
Building funds payable - 352,595
Dividends payable 222,487 123,604
----------- -----------
Total current liabilities 8,746,229 8,968,516
Secured Investor Certificates, Series A 2,980,000 3,151,000
Secured Investor Certificates, Series B 14,510,000 14,518,000
Stockholders' Equity
Common stock, par value $.01 per share
Authorized, 30,000,000 shares
Issued and outstanding, 2,472,081 at March 31,
2009 and December 31, 2008 24,721 24,721
Additional paid-in capital 22,814,911 22,814,911
Accumulated deficit (2,580,079) (2,515,948)
----------- -----------
Total stockholders' equity 20,259,553 20,323,684
----------- -----------
Total liabilities and equity $ 46,495,782 $ 46,961,200
========== ==========
Notes to Condensed Financial Statements are an integral part of this Statement.
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3
AMERICAN CHURCH MORTGAGE COMPANY
Condensed Statements of Operations
-----------------------------------------------------------------------------------------------------------------------------------
Three Months Ended
March 31, 2009 March 31, 2008
-----------------------------------------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited)
Interest and Other Income $ 906,572 $ 922,492
Interest Expense 449,766 486,652
-------------- -----------
Net Interest Income 456,806 435,840
Provision for losses on mortgage loans receivable 33,494 12,945
-------------- -----------
Net Interest Income after provision for mortgage losses 423,312 422,895
Operating Expenses
Other operating expenses 265,815 212,589
Real estate impairment - 93,000
-------------- -----------
Total operating expenses 265,815 305,589
-------------- -----------
Operating income 157,497 117,306
Other income 859 1,580
-------------- -----------
Net Income $ 158,356 $ 118,886
============== ===========
Basic and Diluted Income Per Share $ 0.06 $ 0.05
============== ===========
Weighted Average Common Shares Outstanding -
Basic and Diluted 2,472,081 2,493,595
============== ===========
Notes to Financial Statements are an integral part of this Statement.
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4
AMERICAN CHURCH MORTGAGE COMPANY
Condensed Statements of Cash Flows
-----------------------------------------------------------------------------------------------------------------------------------
For the Three Months Ended
March 31, 2009 March 31, 2008
-----------------------------------------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited)
Cash Flows from Operating Activities
Net income $ 158,356 $ 118,886
Adjustments to reconcile net income to net cash
from operating activities:
Impairment on real estate held for sale - 93,000
Provision for losses on mortgage loans receivable 33,494 12,945
Amortization of loan origination discounts (14,576) (13,166)
Amortization of deferred costs 30,365 49,742
Change in assets and liabilities
Accounts receivable 30,436 (12,322)
Interest receivable (23,735) (2,373)
Prepaid expenses (8,124) (17,567)
Accounts payable 50,981 11,016
Accrued expenses - (18,022)
Net cash from operating activities 257,197 222,139
----------- ----------
Cash Flows from Investing Activities
Investment in mortgage loans (352,595) (50,000)
Collections of mortgage loans 406,141 485,662
Investment in bonds - (621,825)
Proceeds from bonds 326,141 9,783
Proceeds from sale of property - 180,532
----------- ----------
Net cash provided by investing activities 379,687 4,152
Cash Flows from Financing Activities
Proceeds from line of credit, net - 150,000
Payments on secured investor certificate maturities (274,000) (154,000)
Payments for deferred costs (66,200) (4,492)
Dividends paid (123,604) (124,680)
------------ -----------
Net cash used for financing activities (463,804) (133,172)
------------ -----------
Net Increase in Cash and Equivalents 173,080 93,119
Cash and Equivalents - Beginning of Period 271,373 285,118
------------ ----------
Cash and Equivalents - End of Period $ 444,453 $ 378,237
============ =========
Notes to Financial Statements are an integral part of this Statement.
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5
AMERICAN CHURCH MORTGAGE COMPANY
Condensed Statements of Cash Flows - Continued
-----------------------------------------------------------------------------------------------------------------------------------
For the Three Months Ended
March 31, 2009 March 31, 2008
-----------------------------------------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited)
Supplemental Cash Flow Information
Dividends payable $ 222,487 $ 249,360
============ ===========
Deferred costs in accounts payable $ 75,444 $ -
============ ===========
Interest paid $ 419,402 $ 448,536
============ ===========
Notes to Financial Statements are an integral part of this Statement.
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6
AMERICAN CHURCH MORTGAGE COMPANY
Notes to Condensed Financial Statements - Unaudited
March 31, 2009
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited condensed financial statements have been prepared in
accordance with the instructions for interim statements and, therefore, do not
include all information and disclosures necessary for fair presentation of
results of operations, financial position, and changes in cash flow in
conformity with generally accepted accounting principles. However, in the
opinion of management, such statements reflect all adjustments (which include
only normal recurring adjustments) necessary for fair presentation of financial
position, results of operations, and cash flows for the period presented.
The unaudited condensed financial statements of the Company should be read in
conjunction with its December 31, 2008 audited financial statements included in
the Company's Annual Report on Form 10-K, as filed with the Securities and
Exchange Commission for the year ended December 31, 2008. Operating results for
the periods presented are not necessarily indicative of the results that may be
expected for the year ending December 31, 2009.
Nature of Business
American Church Mortgage Company, a Minnesota corporation, was incorporated on
May 27, 1994. The Company was organized to engage 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 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.
Cash and Equivalents
The Company considers all highly liquid debt instruments purchased with
maturities of three months or less to be cash equivalents.
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. The Company has not experienced any
losses in such accounts.
7
AMERICAN CHURCH MORTGAGE COMPANY
Notes to Condensed Financial Statements - Unaudited
March 31, 2009
Bond Portfolio
The Company accounts for the bond portfolio under Financial Accounting Standards
No. 115, "Accounting for Certain Investments in 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 in
the short term.
Allowance for Mortgage Loans and Accounts Receivable
The Company records mortgage loans receivable at estimated net realizable value,
which is the unpaid principal balances of the mortgage loans receivable and
accounts receivable, less the allowance for mortgage loan losses. The Company's
loan policy provides an allowance for estimated uncollectible loans based on an
evaluation of the current status of the loan portfolio. This policy reserves for
principal amounts outstanding on a particular loan if cumulative interruptions
occur in the normal payment schedule of a loan, therefore; the Company
recognizes a provision for losses and an allowance for the outstanding principal
amount of a 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 in the foreclosure process. At March 31, 2009, the Company reserved
$140,802 for eleven mortgage loans, of which six are three or more mortgage
payments in arrears. Three of the loans are in the foreclosure process. At
December 31, 2008, the Company reserved $107,308 for eleven mortgage loans, of
which five were three or more mortgage payments in arrears. One of the loans was
in the foreclosure process.
A summary of transactions in the allowance for credit losses for the quarter
ended March 31, 2009 is as follows:
Balance at December 31, 2008 $ 107,308
Provision for additional losses 33,494
Charge-offs -
-------
Balance at March 31, 2009 $ 140,802
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The total impaired loans, which are loans that are in the foreclosure process or
are no longer performing, were approximately $1,559,000 and $640,000 at March
31, 2009 and December 31, 2008, respectively, which the Company believes is
adequately secured by the underlying collateral.
Loans totaling approximately $1,111,000 and $901,000 exceeded 90 days past due
but continued to accrue interest as of March 31, 2009 and December 31, 2008,
respectively. The Company believes that continued interest accruals are
appropriate because the loans are well secured, not deemed impaired and the
Company is actively pursuing collection of past due payments.
8
AMERICAN CHURCH MORTGAGE COMPANY
Notes to Condensed Financial Statements - Unaudited
March 31, 2009
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.
Revenue Recognition
Interest income on mortgage loans receivable and the bond portfolio is
recognized as earned. 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.
Reclassifications
The Company made certain reclassifications to the statement of operations for
the three months ended March 31, 2008, to conform to classifications for the
three months ended March 31, 2009. Amortization of loan costs and other costs of
approximately $56,000 are reclassified from operating expenses to interest
expense in the statement of operations for the three months ended March 31,
2008. Other income of approximately $1,600 was reclassified from interest and
other income to other income in the statement of operations for the three months
ended March 31, 2008. Total stockholders' equity, net income, and cash flows are
unchanged due to these reclassifications.
2. FAIR VALUE MEASUREMENTS
The Company measures certain financial instruments at fair value in our balance
sheets. The fair value of these instruments are based on valuations that include
inputs that can be classified within one of the three levels of a hierarchy
established by Statement of Financial Accounting Standard No. 157, "Fair Value
Measurements" (SFAS 157). SFAS 157 requires the utilization of the lowest
possible level of input to determine fair value. 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.
No events occurred during the three months ended March 31, 2009 that would
require adjustment to the recognized balances of assets or liabilities, which
are recorded at fair value on a nonrecurring basis.
9
AMERICAN CHURCH MORTGAGE COMPANY
Notes to Condensed Financial Statements - Unaudited
March 31, 2009
The following table summarizes the Company's financial instruments that were
measured at fair value on a recurring basis:
Fair Value
Measurement
March 31, 2009 Fair Value Level 3
----------- -------
Bond portfolio $11,552,796 $11,552,796
=========== ==========
Fair Value
Measurement
December 31, 2008 Fair Value Level 3
----------- -------
Bond portfolio $11,878,937 $11,878,937
=========== ==========
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We determine the fair value of the bond portfolio shown in the table above by
comparing it with similar instruments in inactive markets as well as using
widely accepted valuation techniques, including, for example, discounted cash
flow analysis on the expected cash flows of the bonds. The analysis reflects the
contractual terms of the bonds, which are callable at par by the issuer at any
time, including the period to maturity 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, 2008 $11,878,937
Purchases -
Proceeds (326,141)
Provision for losses -
-----------
Balance at March 31, 2009 $11,552,796
==========
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3. MORTGAGE LOANS RECEIVABLE AND BOND PORTFOLIO
At March 31, 2009, the Company had first mortgage loans receivable totaling
$32,832,528. The loans bear interest ranging from 5.00% to 12.00% with a
weighted average of approximately 8.34% at March 31, 2009. The Company had first
mortgage loans receivable totaling $33,268,791 that bore interest ranging from
5.00% to 12.00% with a weighted average of approximately 8.70% at December 31,
2008.
The Company has a portfolio of secured church bonds at March 31, 2009 and
December 31, 2008, which are carried at fair value. The bonds pay either
semi-annual or quarterly interest ranging from 4.50% to 10.45%. The aggregate
par value of secured church bonds equaled $11,971,000 at March 31,
10
AMERICAN CHURCH MORTGAGE COMPANY
Notes to Condensed Financial Statements - Unaudited
March 31, 2009
2009 and $12,298,000 at December 31, 2008. These bonds are due at various
maturity dates through February 2039. The contractual maturity schedule for
mortgage loans receivable and the bond portfolio as of March 31, 2009, is as
follows:
Mortgage Loans Bond Portfolio
-------------- --------------
April 1, 2009 through March 31, 2010 $ 611,454 $ 64,000
April 1, 2010 through December 31, 2010 910,755 167,000
2011 705,276 525,000
2012 779,360 351,000
2013 1,455,026 659,000
Thereafter 28,370,657 10,186,796
---------- ----------
32,832,528 11,952.796
Less loan loss and bond loss provisions (140,802) (400,000)
-----------
Less deferred origination income (582,868)
----------
Totals $ 32,108,858 $11,552,796
========== ===========
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The Company currently owns $2,035,000 First Mortgage Bonds issued by St. Agnes
Missionary Baptist Church located in Houston, Texas. St. Agnes defaulted on its
payment obligations to bondholders in June 2007. The church subsequently
commenced a Chapter 11 bankruptcy reorganization proceeding regarding the three
properties that secure the First Mortgage Bonds in November 2007, which was
dismissed in September 2008, and the church was subsequently foreclosed upon.
The Company, along with all other bondholders, has a superior lien over all
other creditors. No accrual for interest receivable from the First Mortgage
Bonds is recorded by the Company. The Company has a provision for losses of
$400,000 for the First Mortgage Bonds at March 31, 2009 and December 31, 2008,
respectively, which effectively reduces the bonds to the fair value amount
management believes will be recovered. St. Agnes signed a lease on the facility
with the bond trustee in March 2009. Payments on that lease will be remitted to
bondholders as partial interest payments beginning in the second quarter of
2009.
4. 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 6.84%
and 6.86% at March 31, 2009 and December 31, 2008, 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 total approximately $407,000 and $77,000 for the three months ended
March 31, 2009 and 2008, respectively. The secured investor certificates have
certain financial and non-financial covenants.
11
AMERICAN CHURCH MORTGAGE COMPANY
Notes to Condensed Financial Statements - Unaudited
March 31, 2009
The estimated maturity schedule for the secured investor certificates at March
31, 2009 is as follows:
April 1, 2009 through March 31, 2010 $ 3,874,000
April 1, 2010 through December 31, 2010 588,000
2011 850,000
2012 1,213,000
2013 1,135,000
Thereafter 13,704,000
-----------
Totals $21,364,000
==========
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In October 2008, the Company filed a registration statement with the Securities
and Exchange Commission to offer Series "C" secured investors certificates of
$20,000,000. The offering was declared effective by the SEC on March 30, 2009,
and the certificates will be offered in multiples of $1,000 with interest rates
ranging from 6.25% to 7.25%, subject to changing market rates, and maturities
from 13 to 20 years. The certificates will be collateralized by certain mortgage
loans receivable and church bonds of approximately the same value.
5. LINE OF CREDIT
The Company has a $4,500,000 line of credit with Beacon Bank until September
2010. Advances on the line of credit are available up to $4,500,000, subject to
borrowing base limitations, until Beacon Bank participates out the remaining
portion of the line of credit up to $8,000,000. Interest on the new line of
credit is charged monthly at the prime rate with minimum interest of 5.00%. If
the prime rate becomes greater than 6.00%, the interest rate will be the prime
rate less .50%, subject to a minimum interest rate of 6.00%. The line of credit
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 Series
"A" and Series "B" secured investor certificates. The line of credit has various
financial and non-financial covenants. At March 31, 2009 and December 31, 2008,
the interest rate on the line of credit was 5.00% with an outstanding balance of
$4,500,000.
6. TRANSACTIONS WITH AFFILIATES
The Company has an Advisory Agreement with 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. The Company paid the Advisor
management fees of approximately $98,000 and $97,000 during the periods ended
March 31, 2009 and 2008, respectively.
12
AMERICAN CHURCH MORTGAGE COMPANY
Notes to Condensed Financial Statements - Unaudited
March 31, 2009
7. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments, none of which
are held for trading purposes, are as follows:
March 31, 2009 December 31, 2008
---------------------------- ------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
--------- ---------- ----------- ----------
Cash and equivalents $ 444,453 $ 444,453 $ 271,373 $ 271,373
Accounts receivable 134,823 134,823 141,821 141,821
Interest receivable 178,201 178,201 154,466 154,466
Mortgage loans receivable 32,108,858 32,557,884 32,564,037 33,469,004
Bond portfolio 11,552,796 11,552,796 11,878,937 11,878,937
Secured investor certificates 21,364,000 21,981,015 21,638,000 23,341,297
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The fair value of the mortgage loans receivable is currently greater than the
carrying value as the portfolio is currently yielding a higher rate than similar
mortgages with similar terms for borrowers with similar credit quality. The
changes in the credit markets in which we transact has experienced a decrease in
interest rates resulting in the fair value of the mortgage loans rising during
the three months ended March 31, 2009. We determine the fair value of the bond
portfolio shown in the table above by comparing with similar instruments in
inactive markets as well as using widely accepted valuation techniques,
including, for example, discounted cash flow analysis on the expected cash flows
of the bonds. The analysis reflects the contractual terms of the bonds, which
are callable at par by the issuer at any time, including the period to maturity
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 fair value of the secured investor
certificates is currently greater than the carrying value due to higher interest
rates than current market rates.
13
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 status of religious organizations; (iv) 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.
Plan of Operation
We were founded in May 1994 and commenced active business operations on
April 15, 1996 after completion of our initial public offering.
We have completed four public offerings of common stock, the last of which
also included debt securities. We also completed a public offering of debt
securities on October 7, 2006. We sold $14,860,000 Series "B" secured investor
certificates of the $23,000,000 offered. On October 29, 2008, we filed a
registration statement with the Securities and Exchange Commission for a public
offering of $20,000,000 of Series "C" secured investor certificates, which may
be purchased in multiples of $1,000 at interest rates ranging from 6.25% to
7.25%, subject to changing market rates, and maturities from 13 to 20 years. The
offering was declared effective on March 30, 2009.
We currently have seventy-five first mortgage loans aggregating $32,832,528
in principal amount and a first mortgage bond portfolio with par values
aggregating $11,971,000. 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.
Results of Operations
Net income for the Company's three month periods ended March 31, 2009 and
2008 was approximately $158,000 and $119,000, respectively, on total interest
and other income of approximately $907,000 and $924,000, 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
March 31, 2009, the Company's loans receivable have interest rates ranging from
5.00% to 12.00%, with an average, principal-adjusted interest rate of 8.34%. The
Company's bond portfolio has an average current yield of 7.72% as of March 31,
2009. As of March 31, 2008, the average, principal-adjusted interest rate on the
Company's portfolio of loans was 8.80% and the Company's portfolio of bonds had
an average current yield of 7.68%. The decrease in interest income was largely
due to the repayment of mortgage loans without new loans being issued.
Interest expense was approximately $450,000 and $487,000 for the three
month periods ended March 31, 2009 and 2008, respectively. The decrease in
interest expense was due to the maturity of secured investor
14
certificates and the decline in the interest rate on our line of credit. Net
interest margin increased from 47.25% to 50.39% resulting from a decline in
interest expense as secured investor certificates were repaid, being offset by a
reduction in interest income from mortgage loans receivable and bonds as
balances outstanding declined during the three month period ended March 31,
2009.
Provision for losses on mortgage loans receivable increased as we recorded
additional allowance against the mortgage loans. We recorded a provision for
losses on loans during the three-months ended March 31, 2009 of approximately
$33,000 compared to approximately $13,000 for the three-months ended March 31,
2008. We continually assess our loan portfolio and reserve for potential losses
based on the payment history and status of loans. At March 31, 2009, we reserved
approximately $141,000 for eleven mortgage loans, of which six are three or more
mortgage payments in arrears. Three of these loans are in the foreclosure
process. Two of the loans that are in the foreclosure process have filed
bankruptcy proceedings. At December 31, 2008, we reserved approximately $107,000
for eleven mortgage loans, of which five were three or more mortgage payments in
arrears.
Operating expenses for the three months ended March 31, 2009 decreased to
approximately $266,000 compared to $306,000 at March 31, 2008. The decrease
relates to the lack of impairment charges for real estate held for sale
partially offset by increases in professional fees.
Mortgage Loans and Real Estate Held for Sale
One mortgage loan was paid in full during the three months ended March 31,
2009. We did not fund any new loans during the three months ended March 31,
2009. Foreclosure was initiated on two loans to the same borrower totaling
approximately $919,000 during the three months ended March 31, 2009. The
borrower filed a Chapter 11 bankruptcy proceeding prior to the sheriff's sales
of the properties. We have filed motions to remove our collateral from the
assets protected under the bankruptcy filing.
We currently own $2,035,000 First Mortgage Bonds issued by St. Agnes
Missionary Baptist Church, which is located in Houston, Texas. St. Agnes has
defaulted on its payment obligation to bondholders, who are currently owed
approximately $13,027,000 excluding any accrued interest, fees or expenses.
Herring Bank, Amarillo, Texas, is trustee for the First Mortgage Bondholders.
Since September 30, 2007, the Company has not recorded an accrual for interest
from these bonds. Additionally, the Company has reserved $400,000 for the St.
Agnes bonds at March 31, 2009 and December 31, 2008 as part of the fair value
adjustment.
St. Agnes agreed to rent the property back from Herring Bank and has agreed
to maintain the property as it seeks either re-financing or a buyer for the
properties. The lease was signed in March 2009. Lease payments will be remitted
to bondholders as partial interest payments beginning in the second quarter of
2009. The lease payments represent approximately half of their monthly debt
obligation under the current trust indenture.
Dividends
We have elected to operate as a real estate investment trust, therefore we
are required, among other things, to distribute to shareholders at least 90% of
"Taxable Income" in order to maintain our REIT status. The dividends declared
and paid to shareholders may include cash from origination fees even though they
are not recognized as income in their entirety for the period under generally
accepted accounting principles in the United States. There were no origination
fees for the three months ended March 31, 2009 and 2008, respectively.
15
Our Board of Directors declared dividends of $.09 for each share held of
record on April 27, 2009. The dividend, which was paid April 30, 2009,
represents a 3.60% annual rate of return on each share of common stock owned,
assuming a purchase price of $10 per share.
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 and our line of credit. Our liabilities at March 31, 2009
are primarily comprised of: dividends declared as of March 31, 2009 but not yet
paid; our line of credit balance; and our secured investor certificates.
Our future capital needs are expected to be met by: (i) the additional sale
of securities; (ii) prepayment, repayment at maturity, and renewal of mortgage
loans we make; and (iii) borrowed funds. We believe that the "rolling" effect of
mortgage loans maturing will provide a supplemental source of capital to fund
our business operations in future years. Nevertheless, we believe that it may be
desirable, if not necessary, to sell additional securities, in order to enhance
our capacity to make mortgage loans on a continuous basis. There can be no
assurance we will be able to raise additional capital on terms acceptable for
such purposes.
The Company has a $4.5 million line of credit with Beacon Bank. Advances on
the line of credit are available up to $4,500,000, subject to borrowing base
limitations, until Beacon Bank participates out the remaining portion of the
line of credit up to $8,000,000. Interest is charged at the prime rate with a
minimum interest rate of 5.00%. When the prime rate is greater than 6.00%, the
interest rate is prime less .50%, subject to a minimum interest rate of 6.00%.
At March 31, 2009, the interest rate on the line of credit was 5.00% and we had
an outstanding balance of $4,500,000. The line of credit 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 Series "A" and Series "B"
secured investor certificates.
On October 29, 2008, the Company filed with the Securities and Exchange
Commission a registration statement to offer an additional $20,000,000 in
Secured Investor Certificates ("Series C") to qualified investors. The offering
was declared effective on March 30, 2009. These certificates are expected to
provide a source of capital to fund additional loans to qualified borrowers, pay
down existing maturing certificates and to pay down our line of credit which, at
times, may provide funds at less favorable terms than funds obtained through our
certificate offering.
During the three months ended March 31, 2009, our total assets decreased by
approximately $465,000 due to a decrease in mortgage loans receivable resulting
from payments, primarily the prepayment of one mortgage loan. Current
liabilities decreased by approximately $222,000 for the three months ended March
31, 2009 due to decreases in current maturities of our secured investor
certificates and building funds payable. Non-current liabilities decreased by
approximately $179,000 for the three months ended March 31, 2009 due to the
maturation of secured investor certificates.
For the three months ended March 31, 2009, cash from operating activities
increased to approximately $257,000 from $235,000 from the comparative period
ended March 31, 2008, due to the decrease in prepaid and accrued expenses.
16
For the three months ended March 31, 2009, cash provided by investing
activities was approximately $380,000 compared to cash provided by investing
activities of approximately $4,000 from the comparative three months ended March
31, 2008, due to an increase in activity in mortgage loans and bonds.
For the three months ended March 31, 2009, cash used for financing
activities increased to approximately $464,000 from $133,000 for the comparative
three months ended March 31, 2008, primarily due to an increase in payments on
maturities of our secured investor certificates and payments for deferred costs
and a decrease in funds drawn from 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.
Of our significant accounting policies described in the notes to our
financial statements included herewith, we believe that the estimation of fair
value of our mortgage loans receivable involves a high degree of judgment. We
estimate the fair value of our mortgage loans receivable and related allowance
for loan losses based on the current status of loans, the history of payments
and the number of payments in arrears. We estimate the fair value of the bond
portfolio based on similar bonds in inactive markets and widely accepted
valuation techniques. We had one bond series default, which was subsequently
foreclosed upon by the bond trustee. We have estimated losses on this bond based
on the underlying collateral, the anticipated selling price of the properties,
the current credit environment, and the condition of the economy in general. The
recorded losses on the defaulted bonds effectively reduced the bonds to fair
value, which is the amount management believes will be recovered.
We estimate the value of real estate we hold for re-sale on a number of
factors. We look at the current condition of the property as well as current
market conditions in determining fair value. Since churches are primarily single
use facilities, the listing price of the property may be lower than the total
amount owed to us. Attorney fees, taxes, utilities and 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 re-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.
17
Items 4T. 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 Chief Executive Officer
("CEO")/Chief Financial Officer ("CFO"), of the effectiveness of the Company's
disclosure controls and procedures as of the end of the quarter ended March 31,
2009. Based on that evaluation, the CEO/CFO 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 CEO/CFO, to
allow timely decisions regarding required disclosure. We continue to evaluate
internal controls, particularly segregation of duties, to provide greater
segregation and improve overall internal control. Some of the remediation
actions we are undertaking include, but are not limited to, the following: a)
having an internal control review done by an Independent Board Member who
performs periodic testing of our internal controls and procedures; b) having
separate oversight of bank reconciliations and other cash management procedures
by individuals who are not involved in the day to day operations of the Company;
and c) improve monitoring of changes to financial reporting requirements. The
Company has previously reported that it has a limited number of personnel in the
finance and accounting functions. Were there a larger staff, it would be
possible to provide for enhanced disclosure of financial reporting matters and
greater segregation of duties which would permit checks and balances and reviews
that would improve internal control.
Changes In Internal Controls Over Financial Reporting
During the three months ended March 31, 2009, 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.
18
PART II
OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
(a) Not Applicable
(b) Not Applicable
(c) Not Applicable
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of security holders during the
quarter ended March 31, 2009.
Item 5. Other Information.
None.
Item 6. Exhibits
Exhibit
Number Title of Document
31.1 Certification of the Chief Executive Officer and 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 Chief Executive Officer and Chief Financial Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the of the Sarbanes-Oxley Act of 2002.
19
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: May 15, 2009
AMERICAN CHURCH MORTGAGE COMPANY
By: /s/ Philip J. Myers
------------------------------------------------
Philip J. Myers
Chief Executive Officer and Chief Financial Officer
(Principal Executive Officer and Principal Financial
and Accounting Officer)
|
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