UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒ xQuarterly Report Under SectionQUARTERLY REPORT PURSUANT TO SECTION 13 orOR 15(d) ofOF THE SECURITIES EXCHANGE ACT OF 1934
the Securities Exchange Act of 1934
For the Quarterly Period Ended September 30, 2016
quarterly period ended06/30/2017
or
☐ oTransition Report Under SectionTRANSITION REPORT PURSUANT TO SECTION 13 orOR 15(d) ofOF THE SECURITIES EXCHANGE ACT OF 1934
the Securities Exchange Act of 1934
For the Transition Periodtransition period from ------------to------------
___________ to ___________
Commission File Number file number000-25919
American Church Mortgage CompanyAMERICAN CHURCH MORTGAGE COMPANY
(Exact nameName of registrantRegistrant as specifiedSpecified in its charter)
Charter)
| Minnesota | 41-1793975 | |
State or Incorporation or | I.R.S. Employer Identification No. | |
| 55343 | ||
| | Zip Code |
(952) 945-9455
(Registrant’s telephone number, including area code)Telephone Number, Including Area Code
Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report
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☐ No☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Webweb site, if any, every Interactive Data File required to be submitted and posted 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 and post 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, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”filer,” “smaller reporting company,” and “smaller reporting“emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer | Accelerated filer |
Non-accelerated filer ☐ (Do not check if a smaller reporting company) | 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 Exchange Act). Yes o☐ No x☐
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'sissuer’s classes of common stock, as of the latest practicable date.
| Class | Outstanding at | |
| Common Stock, $0.01 par value per share | 1,677,798 shares |
| AMERICAN CHURCH MORTGAGE COMPANY | |||
| INDEX | |||
Page No. | |||
| PART I. FINANCIAL INFORMATION | |||
| Item 1. Financial Statements: | |||
| Balance Sheets.………………………………………………………………… | 2 - 3 | ||
| Statements of Operations……. | 4 - 5 | ||
| Statements of Cash Flows……..………………………………………………………… | 6 | ||
| Notes to Financial | |||
| Item 2. Management’s Discussion and Analysis of Financial | |||
| Condition and Results of Operations………… | |||
| Item 3. Quantitative and Qualitative Disclosures About Market Risk………………….. | 22 | ||
| Items 4. Controls and Procedures……………..………………………………………… | |||
| 23 | |||
| PART II. OTHER INFORMATION | |||
| Item 1. Legal Proceedings……………………………………………………………… | |||
| Item 1A. Risk Factors………………………………….……………………………… | |||
| Item 2. Unregistered Sales of Equity Securities and Use of Proceeds………………… | |||
| Item 3. Defaults Upon Senior Securities………………………………………… | |||
| Item 4. Mine Safety Disclosures……………………… | |||
| Item 5. Other Information……………………………………………………………… | |||
| Item 6. Exhibits………………………………………………….……………………… | |||
| Signatures… | |||
| 26 | |||
AMERICAN CHURCH MORTGAGE COMPANY
Minnetonka, Minnesota
Financial Statements
SeptemberJune 30, 20162017
| AMERICAN CHURCH MORTGAGE COMPANY | |||
| Balance Sheets | |||
| ASSETS | September 30, 2016 | December 31, 2015 | |
| (Unaudited) | |||
| Current Assets | |||
| Cash and equivalents | $ 4,483,963 | $ 4,377,110 | |
| Accounts receivable | 220,116 | 189,609 | |
| Interest receivable | 172,526 | 172,169 | |
| Current maturities of mortgage loans receivable, net of | |||
| allowance of $41,075 and $57,663 and deferred | |||
| origination fees of $21,150 and $23,406 at September | |||
| 30, 2016 and December 31, 2015, respectively | 731,949 | 1,134,157 | |
| Current maturities of bond portfolio | 104,000 | 84,000 | |
| Prepaid expenses | 4,156 | 19,904 | |
| Total current assets | 5,716,710 | 5,976,949 | |
| Mortgage Loans Receivable, net of current maturities, | |||
| allowance of $1,245,714 and $1,147,170 and deferred | |||
| origination fees of $323,644 and $311,923 at September | |||
| 30, 2016 and December 31, 2015, respectively | 22,483,059 | 22,680,542 | |
| Bond Portfolio,net of current maturities | 11,115,616 | 10,429,428 | |
| Real Estate Held for Sale | 340,872 | 697,422 | |
| Deferred Offering Costs, | |||
| net of accumulated amortization of $1,071,323 and $974,991 | |||
| at September 30, 2016 and December 31, 2015, respectively | 842,915 | 861,810 | |
| Total Assets | $ 40,499,172 | $ 40,646,151 | |
| Notes to Unaudited Financial Statements are an integral part of this Statement. | |||
| AMERICAN CHURCH MORTGAGE COMPANY | |||
| Balance Sheets | |||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | September 30, 2016 | December 31, 2015 | |
| (Unaudited) | |||
| Current Liabilities | |||
| Current maturities of secured investor certificates | $ 4,005,000 | $ 3,120,000 | |
| Accounts payable | 22,844 | 29,417 | |
| Dividends payable | 100,668 | 125,836 | |
| Total current liabilities | 4,128,512 | 3,275,253 | |
| Deposit on real estate held for sale | - | - | |
| Secured Investor Certificates, Series B,net of current maturities | 11,147,000 | 13,074,000 | |
| Secured Investor Certificates, Series C,net of current maturities | 6,765,000 | 6,723,000 | |
| Secured Investor Certificates, Series D | 6,840,000 | 5,329,000 | |
| Total liabilities | 28,880,512 | 28,401,253 | |
| Stockholders’ Equity | |||
| Common stock, par value $.01 per share | |||
| Authorized, 30,000,000 shares | |||
| Issued and outstanding, 1,677,798 shares at | |||
| September 30, 2016 and December 31, 2015, respectively | 16,778 | 16,778 | |
| Additional paid-in capital | 19,113,458 | 19,113,458 | |
| Accumulated deficit | (7,511,576) | (6,885,338) | |
| Total stockholders’ equity | 11,618,660 | 12,244,898 | |
| Total liabilities and stockholders' equity | $ 40,499,172 | $ 40,646,151 | |
| Notes to Unaudited Financial Statements are an integral part of this Statement. | |||
| AMERICAN CHURCH MORTGAGE COMPANY | |||
| Statements of Operations | |||
| For the Nine Months Ended | |||
| September 30, 2016 | September 30, 2015 | ||
| (Unaudited) | (Unaudited) | ||
| Interest and Other Income | $ 1,989,106 | $ 2,254,675 | |
| Interest Expense | 1,518,067 | 1,493,017 | |
| Net Interest Income | 471,039 | 761,658 | |
| Provision for losses on mortgage loans receivable | 161,312 | 142,120 | |
| Provision for losses on bond portfolio | 180,000 | - | |
| 341,312 | 142,120 | ||
| Net Interest Income after Provision for Mortgage Losses | 129,727 | 619,538 | |
| Operating Expenses | 453,961 | 472,406 | |
| Operating (Loss) Income | (324,234) | 147,132 | |
| Other Income | - | 4,053 | |
| Net (Loss) Income | $ (324,234) | $ 151,185 | |
| Basic and Diluted (Loss) Income Per Share | $ (0.19) | $ 0.09 | |
| Dividends Declared Per Share | $ 0.06 | $ 0.18 | |
| Weighted Average Common Shares Outstanding - | |||
| Basic and Diluted | 1,677,798 | 1,677,798 | |
| Notes to Unaudited Financial Statements are an integral part of this Statement. | |||
| AMERICAN CHURCH MORTGAGE COMPANY | |||
| Statements of Operations | |||
| For the Three Months Ended | |||
| September 30, 2016 | September 30, 2015 | ||
| (Unaudited) | (Unaudited) | ||
| Interest and Other Income | $ 650,876 | $ 728,782 | |
| Interest Expense | 512,411 | 503,441 | |
| Net Interest Income | 138,465 | 225,341 | |
| Provision for losses on mortgage loans receivable | 16,836 | 46,108 | |
| Provision for losses on bond portfolio | 60,000 | - | |
| 76,836 | 46,108 | ||
| Net Interest Income after Provision for Mortgage Losses | 61,629 | 179,233 | |
| Operating Expenses | 111,724 | 154,616 | |
| Operating (Loss) Income | (50,095) | 24,617 | |
| Other Income | - | - | |
| Net (Loss) Income | $ (50,095) | $ 24,617 | |
| Basic and Diluted (Loss) Income Per Share | $ (0.03) | $ 0.01 | |
| Dividends Declared Per Share | $ 0.06 | $ 0.04 | |
| Weighted Average Common Shares Outstanding - | |||
| Basic and Diluted | 1,677,798 | 1,677,798 | |
| Notes to Unaudited Financial Statements are an integral part of this Statement. | |||
| AMERICAN CHURCH MORTGAGE COMPANY | |||
| Statements of Cash Flows | |||
| For the Nine Months Ended | |||
| September 30, 2016 | September 30, 2015 | ||
| (Unaudited) | (Unaudited) | ||
| Cash Flows from Operating Activities | |||
| Net (loss) income | $ (324,234) | $ 150,185 | |
| Adjustments to reconcile net income to net cash | |||
| from operating activities: | |||
| Impairment on real estate held for sale | (62,043) | 103,623 | |
| Provision for losses on mortgage loans receivable | 161,312 | 142,120 | |
| Provision for losses on bond portfolio | 180,000 | - | |
| Amortization of loan origination discounts | 9,450 | (141,773) | |
| Amortization of deferred costs | 96,332 | 97,695 | |
| Change in assets and liabilities | |||
| Accounts receivable | (30,507) | 54,144 | |
| Interest receivable | (357) | (34,009) | |
| Prepaid expenses | 15,748 | (2,817) | |
| Accounts payable | (43,131) | 50,831 | |
| Net cash provided by operating activities | 2,570 | 419,999 | |
| Cash Flows from Investing Activities | |||
| Investment in mortgage loans | (697,447) | (1,242,335) | |
| Collections of mortgage loans | 1,581,527 | 4,470,581 | |
| Investment in bonds | (965,000) | (1,406,053) | |
| Proceeds from bonds | 78,812 | 142,275 | |
| Net cash (used for) provided by investing activities | (2,108) | 1,964,468 | |
| Cash Flows from Financing Activities | |||
| Proceeds from secured investor certificates | 996,000 | 1,593,000 | |
| Payments on secured investor certificate maturities | (485,000) | (1,034,000) | |
| Payments for deferred costs | (77,437) | (104,192) | |
| Dividends paid | (327,172) | (402,672) | |
| Net cash provided by financing activities | 106,391 | 52,136 | |
| Net Increase in Cash and Equivalents | 106,853 | 2,436,603 | |
| Cash and Equivalents- Beginning of Period | 4,377,110 | 3,767,102 | |
| Cash and Equivalents- End of Period | $ 4,483,963 | $ 6,203,705 | |
| Notes to Unaudited Financial Statements are an integral part of this Statement. | |||
| AMERICAN CHURCH MORTGAGE COMPANY | |||
| Statements of Cash Flows - Continued | |||
| For the Nine Months Ended | |||
| September 30, 2016 | September 30, 2015 | ||
| (Unaudited) | (Unaudited) | ||
| Supplemental Cash Flow Information | |||
| Dividends payable | $ 100,668 | $ 67,112 | |
| Interest paid | $ 1,421,735 | $ 1,395,322 | |
| Non-cash investing activity: | |||
| Real estate held for sale financed through | |||
| mortgage loans receivable | $ 340,872 | $ - | |
| Notes to Unaudited Financial Statements are an integral part of this Statement. | |||
| AMERICAN CHURCH MORTGAGE COMPANY | |||
| Balance Sheets | |||
| ASSETS | June 30, 2017 | December 31, 2016 | |
| (unaudited) | |||
| Current Assets | |||
| Cash and equivalents | $ 963,383 | $ 3,382,994 | |
| Accounts receivable | 237,509 | 219,352 | |
| Interest receivable | 178,477 | 175,912 | |
| Investments | 2,410 | 2,410 | |
| Current maturities of mortgage loans receivable, net of | |||
| allowance of $101,393 and $41,912 and deferred | |||
| origination fees of $41,611 and $22,444 at June 30, | |||
| 2017 and December 31, 2016, respectively | 1,725,407 | 725,727 | |
| Current maturities of bond portfolio | 131,000 | 111,000 | |
| Prepaid expenses | 11,109 | 1,489 | |
| Total current assets | 3,249,295 | 4,618,884 | |
| Mortgage Loans Receivable, net of current maturities, | |||
| allowance of $1,262,389 and $1,270,071 and deferred | |||
| origination fees of $278,338 and $276,055 at June | |||
| 30, 2017 and December 31, 2016, respectively | 21,721,841 | 22,396,071 | |
| Bond Portfolio,net of current maturities | 12,915,616 | 11,371,616 | |
| Real Estate Held for Sale | 225,872 | 340,872 | |
| Deferred Offering Costs, net of accumulated amortization | |||
| of $1,161,088 and $1,101,441 at June 30, 2017 and | |||
| December 31, 2016, respectively | 819,087 | 839,195 | |
| Total Assets | $ 38,931,711 | $ 39,566,638 | |
| Notes to Financial Statements are an integral part of this Statement. | |||
AMERICAN CHURCH MORTGAGE COMPANY
Notes to Financial Statements - Unaudited
| 2 |
| AMERICAN CHURCH MORTGAGE COMPANY | |||
| Balance Sheets | |||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | June 30, 2017 | December 31, 2016 | |
| (unaudited) | |||
| Current Liabilities | |||
| Current maturities of secured investor certificates | $ 1,461,000 | $ 2,803,000 | |
| Accounts payable | 49,204 | 36,951 | |
| Dividends payable | 117,446 | 100,668 | |
| Total current liabilities | 1,627,650 | 2,940,619 | |
| Secured Investor Certificates, Series B,net of current maturities | 11,800,000 | 11,486,000 | |
| Secured Investor Certificates, Series C,net of current maturities | 6,237,000 | 6,339,000 | |
| Secured Investor Certificates, Series D | 7,965,000 | 7,296,000 | |
| Total liabilities | 27,629,650 | 28,061,619 | |
| Stockholders’ Equity | |||
| Common stock, par value $.01 per share | |||
| authorized, 30,000,000 shares, issued and outstanding, 1,677,798 at June 30, 2017 and December 31, 2016 | 16,778 | 16,778 | |
| Additional paid-in capital | 19,113,458 | 19,113,458 | |
| Accumulated deficit | (7,828,175) | (7,625,217) | |
| Total stockholders’ equity | 11,302,061 | 11,505,019 | |
| Total liabilities and stockholders' equity | $ 38,931,711 | $ 39,566,638 | |
| Notes to Financial Statements are an integral part of this Statement. | |||
September 30, 2016
| 3 |
| AMERICAN CHURCH MORTGAGE COMPANY | |||
| Statements of Operations | |||
| For the Six Months Ended | |||
| June 30, 2017 | June 30, 2016 | ||
| (Unaudited) | (Unaudited) | ||
| Interest and Other Income | $ 1,382,792 | $ 1,338,230 | |
| Interest Expense | 955,754 | 1,005,657 | |
| Net Interest Income | 427,038 | 332,573 | |
| Provision for losses on mortgage loans receivable | 51,799 | 144,476 | |
| Net Interest Income after Provision for Mortgage Losses | 375,239 | 188,097 | |
| Other than temporary impairment on bond portfolio | - | 120,000 | |
| Operating Expenses | 343,305 | 342,236 | |
| Operating Income (Loss) | 31,934 | (274,139) | |
| Other Income | - | - | |
| Net Income (Loss) | $ 31,934 | $ (274,139) | |
| Basic and Diluted Income (Loss) Per Share | $ 0.02 | $ (0.16) | |
| Dividends Declared Per Share | $ 0.07 | $ 0.06 | |
| Weighted Average Common Shares Outstanding - | |||
| Basic and Diluted | 1,677,798 | 1,677,798 | |
| Notes to Unaudited Financial Statements are an integral part of this Statement. | |||
| 4 |
| AMERICAN CHURCH MORTGAGE COMPANY | |||
| Statements of Operations | |||
| For the Three Months Ended | |||
| June 30, 2017 | June 30, 2016 | ||
| (Unaudited) | (Unaudited) | ||
| Interest and Other Income | $ 700,067 | $ 661,666 | |
| Interest Expense | 474,622 | 506,338 | |
| Net Interest Income | 225,445 | 155,328 | |
| Provision for losses on mortgage loans receivable | 28,425 | 92,377 | |
| Net Interest Income after Provision for Mortgage Losses | 197,020 | 62,951 | |
| Other than temporary impairment on bond portfolio | - | 60,000 | |
| Operating Expenses | 143,632 | 177,310 | |
| Operating Income (Loss) | 53,388 | (174,359) | |
| Other Income | - | - | |
| Net Income (Loss) | $ 53,388 | $ (174,359) | |
| Basic and Diluted Income (Loss) Per Share | $ 0.03 | $ (0.10) | |
| Dividends Declared Per Share | $ 0.07 | $ 0.06 | |
| Weighted Average Common Shares Outstanding - | |||
| Basic and Diluted | 1,677,798 | 1,677,798 | |
| Notes to Unaudited Financial Statements are an integral part of this Statement. | |||
| 5 |
| AMERICAN CHURCH MORTGAGE COMPANY | |||
| Statements of Cash Flows | |||
| For the Six Months Ended | |||
| June 30, 2017 | June 30, 2016 | ||
| (Unaudited) | (Unaudited) | ||
| Cash Flows from Operating Activities | |||
| Net income (loss) | $ 31,934 | $ (274,139) | |
| Adjustments to reconcile net income (loss) to net cash | |||
| from operating activities: | |||
| Net gain (loss) on sales and impairment on real estate held for sale | 66,971 | (62,043) | |
| Provision for losses on mortgage loans receivable | 51,799 | 144,476 | |
| Other than temporary impairment on bond portfolio | - | 120,000 | |
| Accretion of deferred loan origination fees | 21,450 | 6,000 | |
| Amortization of deferred costs | 59,647 | 64,082 | |
| Change in assets and liabilities | |||
| �� Accounts receivable | (18,157) | (16,858) | |
| Interest receivable | (2,565) | (2,411) | |
| Prepaid expenses | (9,620) | 10,772 | |
| Accounts payable | (15,276) | 38,156 | |
| Management fee payable | 27,529 | - | |
| Net cash provided by operating activities | 213,712 | 28,035 | |
| Cash Flows from Investing Activities | |||
| Investment in mortgage loans | (3,088,230) | (690,497) | |
| Collections of mortgage loans | 2,689,530 | 1,035,652 | |
| Proceeds from sale of real estate held for sale | 48,029 | - | |
| Investment in bonds | (1,621,000) | (930,000) | |
| Proceeds from bonds | 57,000 | 44,000 | |
| Net cash (used for) investing activities | (1,914,671) | (540,845) | |
| Cash Flows from Financing Activities | |||
| Proceeds from secured investor certificates | 661,000 | 996,000 | |
| Payments on secured investor certificate maturities | (1,122,000) | (151,000) | |
| Payments for deferred costs | (39,538) | (60,522) | |
| Dividends paid | (218,114) | (226,504) | |
| Net cash (used for) provided by financing activities | (718,652) | 557,974 | |
| Net (Decrease) Increase in Cash and Equivalents | (2,419,611) | 45,164 | |
| Cash and Equivalents- Beginning of Period | 3,382,994 | 4,377,110 | |
| Cash and Equivalents- End of Period | $ 963,383 | $ 4,422,274 | |
| Notes to Unaudited Financial Statements are an integral part of this Statement. | |||
| 6 |
| AMERICAN CHURCH MORTGAGE COMPANY | |||
| Statements of Cash Flows - Continued | |||
| For the Six Months Ended | |||
| June 30, 2017 | June 30, 2016 | ||
| (Unaudited) | (Unaudited) | ||
| Supplemental Cash Flow Information | |||
| Dividends payable | $ 117,446 | $ 100,668 | |
| Loan origination fees | $ 31,750 | $ - | |
| Interest paid | $ 896,108 | $ 942,575 | |
| Non-cash investing activity: | |||
| Real estate held for sale financed through | |||
| mortgage loans receivable | $ - | $ 340,872 | |
| Notes to Unaudited Financial Statements are an integral part of this Statement. | |||
| 7 |
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited 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 financial statements of the Company should be read in conjunction with the December 31, 20152016 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, 2015.2016. Operating results for the periods presented are not necessarily indicative of the results that may be expected for the year ending December 31, 2016.2017.
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 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 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.
| 8 |
AMERICAN CHURCH MORTGAGE COMPANY
Notes to Financial Statements - Unaudited
September 30, 2016
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 had $1,169,528$629 and $2,233,533$14,841 in money market fund accounts at SeptemberJune 30, 20162017 and December 31, 2015,2016, respectively. 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. 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. The Company has classified $104,000$131,000 and $84,000$111,000 in bonds as current assets as of SeptemberJune 30, 20162017 and December 31, 2015,2016, respectively, based on management’s estimates for liquidity requirements and contractual maturities of certain bonds maturing in 2017 and 2016, respectively.
Allowance for 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 mortgage loans. The Company’s loan loss 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; 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 additional interest income is recognized on impaired loans that are declared to be in default and are in the foreclosure process. At SeptemberJune 30, 2016,2017, the Company provided $1,286,789$1,363,782 for seventeen mortgage loans, of which seven totaling approximately $3,460,000$3,457,000 are three or more mortgage payments in arrears, three loans totaling $1,225,659approximately $1,226,000 are declared to be in default and two loans totaling $623,648approximately $633,000 are in the foreclosure process. At December 31, 2015,2016, the Company provided $1,205,000$1,311,983 for eighteenseventeen mortgage loans, of which eightseven totaling approximately $3,724,000$3,449,000 were three or more mortgage payments in arrears, twothree loans totaling approximately $1,004,000$1,226,000 were declared to be in default and threetwo loans totaling approximately $775,000$627,000 were in the foreclosure process.
| 9 |
AMERICAN CHURCH MORTGAGE COMPANY
Notes to Financial Statements - Unaudited
September 30, 2016
A summary of transactions in the allowance for credit losses for the ninethree months ended SeptemberJune 30, 20162017 is as follows:
| Balance at December 31, 2015 | $ | 1,204,833 | ||
| Provision for additional losses | 161,312 | |||
| Reclassified to real estate held for sale | (29,806 | ) | ||
| Charge-offs | (49,550 | ) | ||
| Balance at September 30, 2016 | $ | 1,286,789 |
| Balance at December 31, 2016 | $ 1,311,983 | |
| Provision for additional losses | 51,799 | |
| Balance at June 30, 2017 | $ 1,363,782 |
The total impaired loans, which are loans that are in the foreclosure process or are declared to be in default, were approximately $1,849,000$1,858,000 and $1,779,000$1,853,000 at SeptemberJune 30, 20162017 and December 31, 2015, respectively, which2016, respectively. Which the Company believes are adequately secured by the underlying collateral and the allowance for mortgage loans. Approximately $652,000$688,000 and $581,000$663,000 of the Company’s allowance for mortgage loans was allocated to impaired loans at SeptemberJune 30, 20162017 and December 31, 2015,2016, respectively.
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. A payment made on a non-accrual loan is considered a good faith deposit as to the intent to resume their mortgage payment obligation. This good faith deposit is credited back to interest first then principal as stated in the mortgage loan documentation. (ii) A letter outlining the re-payment terms or the restructure terms (if any) of the loan is provided to the borrower. This letter will be signed by the Senior Pastor and all board members of the borrower. This letter resumes the obligation to make payments on non-accrual loans. (iii) The borrower must meet all its payment obligations for the next 120 days without interruption in order to be removed from non-accrual status.
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 $3,460,000$3,457,000 and $3,724,000$3,449,000 exceeded 90 days past due but continued to accrue interest at SeptemberJune 30, 20162017 and December 31, 2015,2016, respectively. The Company believes that the loans are well secured, not deemed to be in default and the Company is actively pursuing collection of past due payments.
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AMERICAN CHURCH MORTGAGE COMPANY
Notes to Financial Statements - Unaudited
September 30, 2016
Real Estate Held for Sale
As of SeptemberJune 30, 2016,2017, the Company had two propertiesone property acquired through foreclosure, and one via deed in lieu of foreclosure, with outstanding loan balances totaling approximately $618,000. The Company has listed the properties for sale through local realtors except for the property for which we received a deed in lieu of foreclosure.$225,872. The Church is still occupying this property and paying rent while trying to either sell the building or obtain refinancing. Each property is valued based on its current listing price less any anticipated selling costs, including, for example, realtor commissions. 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, is approximately $341,000$225,872 as of SeptemberJune 30, 2016 after an2017. There was no additional impairment of approximately $277,000.for the six month period ended June 30, 2017.
The Company sold one property acquired through foreclosureand disposed of a second property during the six month period ended June 30, 2017. The first property was sold to an unrelated third party for approximately $32,000$48,000. The second property was disposed by way of a “Quit-Claim Deed” to an unrelated third party. The disposed property had no carrying value. The Company realized an additional loss of approximately $67,000 on property that was sold as of June 30, 2017. The Company sold two properties during the nine monthssix month period ended SeptemberJune 31, 2016. The two properties were sold for approximately $380,000. The Company provided seller financing to the borrowers. The Company realized an additional loss of approximately $52,000 on both properties as of June 30, 2016.
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 allowance for losses 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. 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.
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AMERICAN CHURCH MORTGAGE COMPANY
Notes to Financial Statements - Unaudited
September 30, 2016
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
No adjustments were made to income for the purpose of calculating earnings (loss) per share, as there were no potential dilutive shares outstanding.
2. FAIR VALUE MEASUREMENTS
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 allowance for losses on our Agape bonds (see Note 3), which totaled $380,000 and $200,000$458,000 for theboth periods ended SeptemberJune 30, 20162017 and December 31, 2015, respectively.2016.
The following table summarizes the Company’s financial instruments that were measured at fair value on a recurring basis:
Fair Value Measurement | ||
| Fair Value | Level 3 | |
| Bond portfolio | $13,046,616 | $13,046,616 |
Fair Value Measurement | ||
| December 31, 2016 | Fair Value | Level 3 |
| Bond portfolio |
| ||
| $ | $ |
We determine the fair value of the bond portfolio shown in the table above by comparing it 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
| 12 |
AMERICAN CHURCH MORTGAGE COMPANY
Notes to Financial Statements - Unaudited
September 30, 2016
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, 2015 | $ | 10,513,428 | ||
| Purchases | 965,000 | |||
| Proceeds | (78,812 | ) | ||
| Additional Bond Fund Reserve | (180,000 | ) | ||
| Balance at September 30, 2016 | $ | 11,219,616 |
| Bond Portfolio | |
| Balance at December 31, 2016 | $11,482,616 |
| Purchases | 1,621,000 |
| Proceeds | (57,000) |
| Balance at June 30, 2017 | $13,046,616 |
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 $48,979$0 and $193,104$19,173 for the six month periods ended SeptemberJune 30, 20162017 and December 31, 2015,2016, respectively. A reduction in impairment charges of approximately $62,000 occurred due to the sale of one property held for sale during the nine months ended September 30, 2016.
The following table summarizes the Company’s financial instruments that were measured at fair value on a nonrecurring basis:
| September 30, 2016 | June 30, 2017 | |||||||||||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Fair Value at September 30, 2016 | Level 1 | Level 2 | Level 3 | Fair Value at March 31, 2017 | |||||||||||||||||||||||||
| Impaired Loans | $ | — | $ | — | $ | 1,184,625 | $ | 1,184,625 | $ | — | $ | — | $ | 1,172,294 | $ | 1,172,294 | ||||||||||||||||
| Real estate held for resale | — | — | 340,872 | 340,872 | — | — | 225,872 | 225,872 | ||||||||||||||||||||||||
| $ | — | $ | — | $ | 1,525,497 | $ | 1,525,497 | $ | — | $ | — | $ | 1,398,166 | $ | 1,398,166 | |||||||||||||||||
| December 31, 2015 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Fair Value at December 31, 2015 | |||||||||||||
| Impaired Loans | $ | — | $ | — | $ | 1,197,302 | $ | 1,197,302 | ||||||||
| Real estate held for resale | — | — | 697,422 | 697,422 | ||||||||||||
| $ | — | $ | — | $ | 1,894,724 | $ | 1,894,724 | |||||||||
AMERICAN CHURCH MORTGAGE COMPANY
Notes to Financial Statements - Unaudited
September 30, 2016
| December 31, 2016 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Fair Value at December 31, 2016 | |||||||||||||
| Impaired Loans | $ | — | $ | — | $ | 1,189,873 | $ | 1,189,873 | ||||||||
| Real estate held for resale | — | — | 340,872 | 340,872 | ||||||||||||
| $ | — | $ | — | $ | 1,530,745 | $ | 1,530,745 | |||||||||
The change in Level 3 assets measured at fair value on a nonrecurring basis is summarized as follows:
| Impaired Loans | Real Estate Held for Sale | |||||||
| Balance at December 31, 2015 | $ | 1,197,302 | $ | 697,422 | ||||
| Additions/Acquisitions | 221,683 | 134,173 | ||||||
| Dispositions/Proceeds | (134,173 | ) | (471,550 | ) | ||||
| Provision for other than temporary losses | (100,187 | ) | (19,173 | ) | ||||
| Balance at September 30, 2016 | $ | 1,184,625 | $ | 340,872 | ||||
| Impaired Loans | Real Estate Held for Sale | |||||||
| Balance at December 31, 2016 | $ | 1,189,873 | $ | 340,872 | ||||
| Additions | 7,036 | — | ||||||
| Dispositions | — | (115,000 | ) | |||||
| Provision for other than temporary losses | (24,615 | ) | — | |||||
| Balance at June 30, 2017 | $ | 1,172,294 | $ | 225,872 | ||||
3. MORTGAGE LOANS RECEIVABLE AND BOND PORTFOLIO
At SeptemberJune 30, 2016,2017, the Company had mortgage loans receivable totaling $24,879,522.$25,130,979. The loans bear interest ranging from 0% to 10.25% with a weighted average of approximately 8.27%8.20% at SeptemberJune 30, 2016.2017. The Company had mortgage loans receivable totaling $25,354,876$24,732,280 that bore interest ranging from 1.00%0% to 10.25% with a weighted average of approximately 8.35%8.25% at December 31, 2015.2016.
The Company has a portfolio of secured church bonds at SeptemberJune 30, 20162017 and December 31, 2015,2016, which are carried at fair value. The bonds pay either semi-annual or quarterly interest ranging from 2.50%2.75% to 9.75%. The aggregate value of secured church bonds equaled approximately $11,600,000$13,505,000 at SeptemberJune 30, 2017 with a weighted average interest rate of 6.84% and approximately $11,941,000 at December 31, 2016 with a weighted average interest rate of 6.73% and approximately $10,713,000 at December 31, 2015 with a weighted average interest rate of 6.92%6.77%. These bonds are due at various maturity dates through May 15, 2046.
The contractual maturity schedule for mortgage loans receivable and the bond portfolio as of SeptemberJune 30, 2016,2017, is as follows:
| Mortgage Loans | Bond Portfolio | |
| October 1, 2016 through September 30, 2017 | $ 794,175 | $ 104,000 |
| October 1, 2017 through December 31, 2017 | 2,380,015 | 41,000 |
| 2018 | 1,340,662 | 139,000 |
| 2019 | 1,355,748 | 144,000 |
| 2020 | 1,380,671 | 156,000 |
| Thereafter | 17,595,321 | 11,015,616 |
| 24,846,591 | 11,599,616 | |
| Less loan loss and bond loss allowances | (1,286,789) | (380,000) |
| Less deferred origination income | (344,794) | ______-__ |
| Totals | $23,215,008 | $11,219,616 |
| Mortgage Loans | Bond Portfolio | |
| July 1, 2017 through June 30, 2018 | $ 1,868,411 | $ 131,000 |
| July 1, 2018 through December 31, 2018 | 2,742,724 | 83,000 |
| 2019 | 1,301,152 | 155,000 |
| 2020 | 1,362,089 | 168,000 |
| 2021 | 784,343 | 236,000 |
| Thereafter | 17,072,260 | 12,731,616 |
| 25,130,979 | 13,504,616 | |
| Less loan loss and bond other than temporary impairment | (1,363,782) | (458,000) |
| Less deferred origination income | (319,949) | ______-__ |
| Totals | $23,447,248 | $13,046,616 |
| 14 |
AMERICAN CHURCH MORTGAGE COMPANY
Notes to Financial Statements - Unaudited
September 30, 2016
The Company currently owns $627,000$529,000 First Mortgage Bonds and $487,000$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. Agape is currently performing under a loan modification agreement. In October 2013, in excess2014, a minimum of 80% of the bondholders of Agape agreed to a modification in the terms of their bonds which has resulted in the 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 have been 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. Agape has missed two quarterly interest payments to all bondholders for the nine month period ended September 30, 2016. A principal distribution of approximately $20,000 was made during the quarter ended September 30, 2016 reducing the principal balance outstanding. The Company, along with all other bondholders, has a superior lien over all other creditors. The Company has an aggregate allowance for lossesother than temporary impairment of $380,000 and $200,000$458,000 for the First and Second Mortgage Bonds both at September 30, 2016June 31, 2017 and December 31, 2015,2016, which effectively reduces the bonds to the fair value amount management believes will be recovered. The Church has subsequently defaulted on their modification agreement in 2016 and no interest payments were made to bondholders during the six month period ended June 30, 2017. However, the trustee made a distribution to bondholders during the quarter of $18.75 per $1,000 bond as a repayment of principal only, effectively reducing the outstanding balance of each $1,000 bond to approximately $826.
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 6.66%6.45% and 6.44%6.47% at September 30, 2016March 31, 2017 and December 31, 2015,2016, 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 $231,000$141,000 and $356,000$174,000 for the three months ended SeptemberJune 30, 20162017 and 2015,2016, 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 SeptemberJune 30, 20162017 is as follows:
| October 1, 2016 through September 30, 2017 | $ 4,005,000 | |||
| October 1, 2017 through December 31, 2017 | 463,000 | |||
| 2018 | 4,116,000 | |||
| July 1, 2017 through June 30, 2018 | $ 1,461,000 | |||
| July 1, 2018 through December 31, 2018 | 3,539,000 | |||
| 2019 | 2,333,000 | 2,333,000 | ||
| 2020 | 4,058,000 | 4,062,000 | ||
| 2021 | 1,928,000 | |||
| Thereafter | 13,782,000 | 14,140,000 | ||
| Totals | $28,757,000 | $27,463,000 | ||
In July 2014, the Company filed a registration statement with the Securities and Exchange Commission to offer $10,000,000 worth of Series D secured investor certificates. The offering was
| 15 |
AMERICAN CHURCH MORTGAGE COMPANY
Notesdeclared effective by the SEC on August 12, 2014. The offering was renewed with an effective date of September 23, 2016. The certificates are being offered in multiples of $1,000 with interest rates ranging from 4.00% to Financial Statements - Unaudited
6.50%, subject to changing market rates, and maturities from 5 and 7 to 15 years. The certificates are collateralized by certain mortgage loans receivable and church bonds of approximately the same value. At June 30, 2017, approximately 7,965 Series D certificates had been issued and were outstanding for $7,965,000. The offering will be terminated in September 30, 20162017.
5. 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. A majority of the independent board members approve the advisory agreement on an annual basis. The Company paid the Advisor management fees of approximately $78,000$81,000 and $80,000 forduring the three months ended September 30,June, 2017 and 2016, and 2015, respectively and management fees of approximately $238,000$162,000 and $265,000$160,000 for the ninesix months ended SeptemberJune 30, 20162017 and 2015,2016, respectively.
6. 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 as of SeptemberJune 30, 20162017 and December 31, 2015,2016, 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.
The estimated fair values of the Company’s financial instruments, none of which are held for trading purposes, are as follows:
| September 30, 2016 | December 31, 2015 | June 30, 2017 | December 31, 2016 | |||||||||||||||||||||||||||||
| Carrying | Fair | Carrying | Fair | Carrying | Fair | Carrying | Fair | |||||||||||||||||||||||||
| Amount | Value | Amount | Value | Amount | Value | Amount | Value | |||||||||||||||||||||||||
| Cash and equivalents | $ | 4,483,963 | $ | 4,483,963 | $ | 4,377,110 | $ | 4,377,110 | $ | 963,383 | $ | 963,383 | $ | 3,382,994 | $ | 3,382,994 | ||||||||||||||||
| Accounts receivable | 220,116 | 220,116 | 189,609 | 189,609 | 237,509 | 237,509 | 219,352 | 219,352 | ||||||||||||||||||||||||
| Interest receivable | 172,526 | 172,526 | 172,169 | 172,169 | 178,477 | 178,477 | 175,912 | 175,912 | ||||||||||||||||||||||||
| Mortgage loans receivable | 24,879,552 | 30,214,164 | 25,354,876 | 29,054,399 | 23,227,248 | 27,494,751 | 24,732,280 | 25,646,901 | ||||||||||||||||||||||||
| Bond portfolio | 11,599,616 | 11,599,616 | 10,713,428 | 10,713,428 | ||||||||||||||||||||||||||||
| Secured investor certificates | 28,757,000 | 40,614,165 | 28,246,000 | 36,995,152 | ||||||||||||||||||||||||||||
| 16 |
AMERICAN CHURCH MORTGAGE COMPANY
Notes to Financial Statements - Unaudited
September 30, 2016
| Bond portfolio | 13,046,616 | 13,046,616 | 11,940,616 | 11,940,616 | ||||||||||||
| Secured investor certificates | 27,463,000 | 33,746,095 | 27,924,000 | 35,415,944 |
The following methods and assumptions were used by the Company to estimate the fair value of each class of financial instrument for which it is practicable to estimate that value:
Cash and equivalents
Due to their short-term nature, the carrying amount of cash and cash equivalents approximates fair value.
Accounts receivable
The carrying amount of accounts receivable approximates fair value.
Interest receivable
The carrying amount of interest receivable approximates fair value.
Mortgage loans receivable
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.
Bond portfolio
We determine the fair value of the bond portfolio shown in the table above by comparing 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 Company’s bonds and uses observable and unobservable market-based inputs. Unobservable inputs include our internal credit rating and selection of similar bonds for valuation.
Secured investor certificates
The fair value of the secured investor certificates is currently greater than the carrying value due to higher interest rates than current market rates.
| 17 |
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 operatinggrowth strategies; (iii) the mortgage loan industry and the financial 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.
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, 20152016 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 operate as a real estate investment trust.
We currently have sixty-one first mortgage loans aggregating $24,837,700$24,905,098 in principal amount, twothree second mortgage loans totaling $58,891$225,881 in principal amount and a first mortgage bond portfolio with par values aggregating $11,599,616.$13,504,616. 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.
Results of Operations
Fiscal 2016 Nine2017 Six Months Ended June 30, 2017 Compared to Fiscal 2015 Nine2016 Six Months Ended June 30, 2016
Our net income (loss) income for the ninesix months ended SeptemberJune 30, 2017 and 2016 was $31,934 and 2015 was approximately $(324,000) and $150,000,$(274,139), respectively, on total interest and other income of approximately $1,989,000$1,382,792 and $2,255,000,$1,338,230, 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 SeptemberJune 30, 2016,2017, our loans receivablereceivables have interest rates ranging from 0% to 10.25%, with an average, principal-adjusted interest rate of 8.27%8.20%. Our bond portfolio has an average current yield of 6.73%6.84% as of SeptemberJune 30, 2016.2017. As of SeptemberJune 30, 2015,2016, the average, principal-adjusted interest rate on our portfolio of loans was 8.36%8.28% and our portfolio of bonds had an average current yield of 6.93%6.78%. The decreaseincrease in interest and other income during the six months ended June 30, 2017 versus the six months ended June 30, 2016 was due to the scheduled repaymentadditional funding of mortgage loans and the maturation and redemption of some of the bonds in our portfolio.
loans.
Interest expense was approximately $1,518,000$955,754 and $1,493,000$1,005,657 for the ninesix months ended SeptemberJune 30, 20162017 and 2015,2016, respectively. The increasedecrease in interest expense was due to the sale and issuance of our secured investor certificates.decrease in Secured Investor Certificates outstanding during the six month period ended June 30, 2017. Net interest margin decreasedincreased from 33.78% 24.85%
| 18 |
to 23.68%30.80% resulting primarily from an decreaseincrease in interest and other income of approximately 11.78%3.33% and an increasedecrease in interest expense of approximately 1.68%4.96%.
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 declared to be in default or loans that are in the foreclosure process.
We 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.
Our policies on payments received and interest accrued on non-accrual loans are as follows: (i) We 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. A payment made on a non-accrual loan is considered a good faith deposit as to the intent to resume their mortgage payment obligation. This good faith deposit is credited back to interest first then principal as stated in the mortgage loan documentation. (ii) A letter outlining the re-payment terms or the restructure terms (if any) of the loan is provided to the borrower. This letter will be signed by the Senior Pastor and all board members of the borrower. This letter resumes the obligation to make payments on non-accrual loans. (iii) The borrower must meet all its payment obligations for the next 120 days without interruption in order to be removed from non-accrual status.
When a loan is declared in default according to our policy or deemed to be doubtful of collection, the loan committee of our Advisor will direct the staff to charge-off the uncollectable receivables.
Allowance for losses on mortgage loans receivable increased during the ninesix months ended SeptemberJune 30, 20162017 as we recorded additional provisions against the mortgage loans. We recorded an additional provision for losses on loans during the ninesix months ended SeptemberJune 30, 20162017 of approximately $161,000$51,799 compared to approximately $142,000$144,476 for the ninesix months ended SeptemberJune 30, 2015.2016. At SeptemberJune 30, 2016,2017, we provided approximately $1,286,789$1,364,000 for seventeen mortgage loans, of which seven are three or more mortgage payments in arrears, three loans have beenare declared to be in default and two arewere in the foreclosure process. At December 31, 2015,2016, we provided approximately $1,205,000$1,312,000 for eighteenseventeen mortgage loans, of which eightseven were three or more mortgage payments in arrears, two loans have beenthree 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 two second mortgage loans totaling approximately $59,000$226,000 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
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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 sixseven years. Our borrowers are typically small independent churches with little or no borrowing history. Once a church establishes a payment history with us, they 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 hashave demonstrated they can meet their mortgage debt obligations.
Operating expenses for the ninesix months ended SeptemberJune 30, 2016 decreased2017 increased approximately $1,000 to approximately $454,000$343,000 compared to $473,000$342,000 at SeptemberJune 30, 2015.2016. The decrease isminimal increase was primarily the result of reduced real estate impairment reservean increase in 2016.legal expenses but a reduction in all other expenses.
Fiscal 2016 Third2017 Second Quarter Compared to Fiscal 2015 Third2016 Second Quarter
The Company had a net lossincome of approximately $(50,000)$53,000 for the three months ended SeptemberJune 30, 20162017 and had net incomeloss of approximately $25,000$(174,000) for the three months ended SeptemberJune 30, 2015,2016, on total interest and other income of approximately $651,000$700,000 and $729,000,$662,000, respectively. Interest expense was approximately $512,000$475,000 and $503,000$506,000 for the three months ended SeptemberJune 30, 20162017 and 2015,2016, respectively. The decreaseincrease in net interest income was approximately $87,000.$70,000. In addition, the Company experienced an increasea decrease in provisions for losses on its bond portfolio of approximately $60,000 for the three month periodsperiod ended SeptemberJune 30, 2016.2017.
Operating expenses for the three months ended SeptemberJune 30, 20162017 decreased to approximately $112,000$144,000 compared to $155,000$177,000 at SeptemberJune 30, 2015.2016. The decrease in operating expenses iswas due to decreasesa decrease in monthly bank charges and legal feesreal estate impairment and costs associated with real estate held for sale.
Mortgage Loans and Bond Portfolio
ThreeTwo new bridge loans were funded during the ninesix months ended SeptemberJune 30, 2016. Two2017 totaling $2,215,000. Bridge loans provides short-term financing to a church who has obtained financing through the issuance of thechurch-bonds through our affiliate. These loans were provided seller financing by us on real estate we heldtypically are only outstanding for sale totaling approximately $380,000. The thirdsixty to ninety days. One loan was additional funding to a current loanpaid in the amount of $200,000. In addition, two loans totaling approximately $307,000 paid offfull during the nine monthssix month period ended SeptemberJune, 30, 2016.2107, while the second loan had a balance outstanding of $42,000 for the six month period ended June 30, 2017.
WeThe Company currently own $627,000owns $529,000 First Mortgage Bonds and $487,000$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 Churchchurch subsequently commenced a Chapter 11 bankruptcy reorganization proceeding regarding the property that secures the First Mortgage Bonds in December 2010. Agape is currently performing under a loan modification agreement. In October 2013, in excess2014, a minimum of 80% of the bondholders of Agape agreed to a modification in the terms of their bonds which has resulted in the 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 have beenwere 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. Agape has missed three quarterly interest payments to all bondholders for the nine month period ended September 30, 2106. We,The Company, along with all other bondholders, havehas a superior lien over
all other creditors. We haveThe Company has an aggregate allowance for lossesother than temporary impairment of $380,000 and $200,000$458,000 for the First and Second Mortgage Bonds at September 30, 2016June 31, 2017 and December 31, 2015, respectively,2016, which effectively reduces the bonds to the fair value amount management believes will be recovered. The Church has subsequently defaulted on their modification agreement in 2016 and no interest payments were made to bondholders during the six month period ended June 30, 2017. However, the trustee made a distribution
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to bondholders during the quarter of $18.75 per $1,000 bond as a repayment of principal only, effectively reducing the outstanding balance of each $1,000 bond to approximately $826.
Real Estate Held Forfor 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 recorded andid not record any additional impairment on our real estate held for sale of approximately $19,000 and $104,000 for the ninesix month period ended SeptemberJune 30, 2016 and 2015, respectively. This additional impairment was to properly reflect the value of two of our properties we believe we will recover in a sale.2017.
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. 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. We earned approximately$31,750 and $6,000 and $0 in origination fees for the ninesix months ended SeptemberJune 30, 2017 and 2016, and 2015, respectively.
We paid a dividend of $.07 for each share held of record on April 25, 2017. The dividend was paid April 28, 2017.
Our Board of Directors declared a dividend of $.06 for each share held of record on May 1, 2016. The dividend, which was paid May 3, 2016, represents a 2.40% annual rate of return on each share of common stock owned, assuming a purchase price of $10 per share.
Our Board of Directors declared a dividend of $.06$.07 for each share held of record on July 30, 2016.28, 2017. The dividend which was paid August 1, 2016, represents a 2.40% annual rate of return on each share of common stock owned, assuming a purchase price of $10 per share.
Our Board of Directors declared a dividend of $.06 for each share held of record on September 28, 2016. The dividend, which was paid OctoberJuly 31, 2016, represents a 2.40% annual rate of return on each share of common stock owned, assuming a purchase price of $10 per share.
2017.
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 current liabilities at SeptemberJune 30, 20162017 are primarily comprised of dividends declared as of June 30, 2017 but not yet paid and current maturities ofpayable on our secured investor certificates.
Our futurecurrent 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) the additional sale of securities; (ii) prepayment and repayment at maturity of mortgage loans we make; (iii) borrowed funds; and (iv)(iii) bonds that mature or we sell from our bond portfolio. 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 for the next twelve months and 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 onWe continually review the market for other sources of capital such as a continuous basis.new line of credit. There can be no assurance we will be able to raise additional capital on terms acceptable for such purposes.
In July 2014, we filed with the Securities and Exchange Commission a registration statement to offer $10,000,000 worth of Series D Secured Investor Certificates to qualified investors. The offering was declared effective August 12, 2014. At September 30, 2016, approximately $5,045,000 has been collected from the issuance of 5,045 Series D certificates (less underwriting fees). The proceeds are being used to fund new mortgage loans and pay down maturing certificates. We may also use proceeds from the sale of secured investor certificates to pay dividends, if needed.
During the ninesix months ended SeptemberJune 30, 2016,2017, total assets decreased by approximately $147,000$635,000 due to a decrease in loans outstanding which was offset by an increase in cash.our cash position due to the maturity of Secured Investor Certificates. Current liabilities increaseddecreased by approximately $853,000$1,313,000 for the ninesix months ended SeptemberJune 30, 20162017 due to an increasea decrease in current maturities of our secured investor certificates.Secured Investor Certificates. Non-current liabilities increaseddecreased by $479,000approximately $432,000 for the ninesix months ended SeptemberJune 30, 20162017 due to an increase of secured investor certificatesdecrease in Secured Investor Certificates outstanding.
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For the ninesix months ended SeptemberJune 30, 2016,2017, net cash provided by operating activities decreasedincreased to approximately $3,000$213,712 from $420,000$28,035 from the comparative period ended SeptemberJune 30, 2015,2016, primarily due to an increasedecrease in our provision for losses on our bond portfolio.
For the ninesix months ended SeptemberJune 30, 2017, net cash (used for) investing activities was approximately $(1,915,000) compared to $(541,000) from the comparative six months ended June 30, 2016, due to a increase in investment in mortgage loans.
For the six months ended June 30, 2017, net cash (used for) provided by investing activities was approximately $(2,000) compared to cash provided by investing activities of approximately $1,964,000 from the comparative nine months ended September 30, 2015. This decrease was due to an decrease in collections from mortgage loans of approximately $2,889,000.
For the nine months ended September 30, 2016, net cash provided by financing activities increaseddecreased to approximately $106,000$(719,000) from $52,000$558,000 for the comparative ninesix months ended SeptemberJune 30, 2015,2016, primarily due to an decrease in issuance of our secured investor certificates which was offset by a decreaseincrease in payments on ourmaturing secured investor certificates.
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
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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 SeptemberJune 30, 2016.2017. Based on that evaluation, the principal executive officer and the principal accounting officer concluded that the Company’s disclosure controls and procedures were 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.
Changes in Internal Controls Over Financial Reporting
As ofDuring the end of the quarterthree months ended SeptemberJune 30, 2016,2017, there were no changes in the Company’s internal controlcontrols over financial reporting that have materially affected, or are reasonably likely to materially affect, its internal controlcontrols over financial reporting.
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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.
| (a) | Not Applicable |
| (b) | Not Applicable |
| (c) | Not Applicable |
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 906 of the 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 906 of the of the Sarbanes-Oxley Act of 2002. |
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| 101 | The following financial information from our Quarterly Report on Form 10-Q for the |
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: November 15, 2016August 14, 2017
| AMERICAN CHURCH MORTGAGE COMPANY | |
| By: | /s/ Philip J. Myers |
| Philip J. Myers | |
| Chief Executive Officer | |
| (Principal Executive Officer) | |
| By: | /s/ Scott J. Marquis |
| Scott J. Marquis | |
| Chief Financial Officer and Treasurer | |
| (Principal Financial and Accounting Officer) |
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