UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2008
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM ------------TO------------
Commission File Number 000-25919
American Church Mortgage Company
(Exact name of registrant as specified in its charter)
Minnesota 41-1793975
(State or other jurisdiction of
incorporation or organization) (I.R.S. Employer Identification No.)
10237 Yellow Circle Drive Minnetonka, MN 55343
(Address of principal executive offices) (Zip Code)
(952) 945-9455
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class: which registered:
- --------------------- -------------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Shares, par value $.01 per share
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes|_| No|X| Indicate by check mark
if the registrant is not required to file reports pursuant to Section 13 or
15(d) of the Act. Yes|_| No|X|
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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.|_|
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)
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes |_| No |X|
The aggregate market value of the common stock of the registrant held by
non-affiliates on June 30, 2008 (the last business day of the registrant's most
recently completed second fiscal quarter) was $8,925,000, based upon the closing
sales price of the registrant's common stock on such date as quoted by the Pink
Sheets, L.L.C. Such over-the counter market quotations reflect inter-dealer
prices, without retail mark-up, mark-down or commission and may not represent
actual transaction. On June 30, 2008, there were 2,472,081 shares of the
registrant's common stock outstanding.
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 March 31, 2009
- --------------------------------------- ------------------------------------
Common Stock, $0.01 par value per share 2,472,081 shares
Documents Incorporated by Reference
Portions of the Company's Proxy Statement to be delivered to its shareholders in
connection with the Company's 2009 Annual Meeting of Shareholders, which the
Company plans to file with the Securities and Exchange Commission within 120
days of the end of the fiscal year covered by this report, are incorporated by
reference in Part III of this report (Items 10, 11, 12, 13 and 14).
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INDEX
Page
No.
PART I
Item 1. Description of Business.............................................................5
Item 1A. Risk Factors.......................................................................13
Item 1B. Unresolved Staff Comments..........................................................19
Item 2. Description of Property............................................................19
Item 3. Legal Proceedings..................................................................20
Item 4. Submission of Matters to a Vote of Security Holders................................20
PART II
Item 5. Market for Common Equity and Related Stockholder Matters,
and Small Business Issuer Purchases of Equity Securities..........................20
Item 6. Selected Financial Data............................................................22
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations .........................................................22
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.........................28
Item 8. Financial Statements:..............................................................28
Report of Independent Registered Public Accounting Firm....................F-1
Balance Sheets
December 31, 2008 and 2007....................................................F-2
Statements of Operations
Years Ended December 31, 2008 and 2007......................................F-4
Statements of Stockholders' Equity
Years Ended December 31, 2008 and 2007......................................F-5
Statements of Cash Flows
Years Ended December 31, 2008 and 2007......................................F-6
Notes to Financial Statements.................................................F-8
Item 9. Changes In and Disagreements With
Accountants on Accounting and Financial Disclosure.................................28
Item 9A(T). Controls and Procedures............................................................28
Item 9B. Other Information..................................................................29
PART III
Item 10. Directors, Executive Officers, and Corporate Governance............................29
Item 11. Executive Compensation.............................................................29
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters.........................................30
Item 13. Certain Relationships and Related Transactions, and Director Independence..........30
3
Item 14. Principal Accountant Fees and Services.............................................30
PART IV
Item 15. Exhibits...........................................................................31
Signatures ...................................................................................32
4
PART I
In connection with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, readers of this document and any document
incorporated by reference herein, are advised that this document and documents
incorporated by reference into this document contain both statements of
historical facts and forward looking statements. Forward looking statements are
subject to certain risks and uncertainties, which could cause actual results to
differ materially from those indicated by the forward looking statements.
Examples of forward looking statements include, but are not limited to (i)
projections of revenues, income or loss, earning or loss per share, capital
expenditures, dividends, capital structure and other financial items; (ii)
statements of plans and objectives of ours or our management or Board of
Directors, including any public sale of our securities, or estimates or
predictions of actions by borrowers, competitors or regulatory authorities;
(iii) statements of future economic performance; and (iv) statements of
assumptions underlying other statements and statements about our business.
This document and documents incorporated by reference herein also identify
important factors which could cause actual results to differ materially from
those indicated by forward looking statements. These risks and uncertainties
include, among other things, interest rate fluctuations as they effect the
relative yield of our loan portfolio and our ability to compete in making loans
to borrowers; payment default on loans made by us, which could adversely affect
our ability to make distributions to our shareholders; the actions of
competitors; the effects of government regulation; and other factors which are
described herein and/or in documents incorporated by reference herein, including
the risks described at the end of Item 1.
The cautionary statements made pursuant to the Private Securities
Litigation Reform Act of 1995 above and elsewhere by us should not be construed
as exhaustive or as any admission regarding the adequacy of disclosures made by
us prior to the effective date of such Act. Matters which are the subject of
forward looking statements are beyond our ability to control and in many cases
we cannot predict what factors would cause results to differ materially from
those indicated by the forward looking statements.
Item 1. Description of Business
General
We are a Minnesota corporation incorporated on May 27, 1994. We operate as
a Real Estate Investment Trust ("REIT") and are engaged in the business of
making mortgage loans to churches and other non-profit religious organizations
throughout the United States. The principal amount of loans we offer ranges from
$100,000 to $2,000,000. We may also invest up to 30% of our Average Invested
Assets in mortgage secured debt securities (bonds) issued by churches and other
non-profit religious organizations. Between the date upon which we began active
business operations (April 15, 1996), and February 28, 2009, we have made 172
loans to 143 churches in the aggregate amount of $88,528,677, with the average
principal amount of such loans being $514,702. Of the 172 loans we have made, 80
loans totaling $37,343,158 have been repaid early by the borrowing churches. We
also own, as of February 28, 2009, $12,127,000 principal amount of Church Bonds
(hereinafter defined), which we purchased at a price of par value ($1,000) or
less. At no time have we paid a premium for any of the bonds in our portfolio.
Subject to supervision of our Board of Directors, our day to day business
operations are managed by Church Loan Advisors, Inc. (the "Advisor"), which
provides investment advisory and administrative services to us. The principals
of the Advisor include principals of American Investors Group, Inc.
("American"), a FINRA member broker-dealer which has served as underwriter of
the public offerings of our common stock, as well as our public offerings of
secured investor certificates.
Public Offerings
On October 29, 2008 we filed a registration statement with the Securities
and Exchange Commission for our sixth public offering of $20,000,000 worth of
secured investor certificates under SEC file 333-154831. The Offering will be
conducted on a "best-efforts" basis pursuant to applicable rules of the
Securities and Exchange Commission. The Offering will be sold through our
advisor's affiliate, American Investors Group, Inc., to public investors.
The Company's Business Activities
Our business is managed by the Advisor. We have no employees. The Advisor's
affiliate, American, has been engaged since 1987 in the business of underwriting
first mortgage bonds for churches throughout the United States. In underwriting
church bonds, American reviews financing proposals, analyzes prospective
borrowers' financial capability, and structures, markets and sells,
mortgage-backed securities which are debt obligations (bonds) of such borrowers
to the investing general public. Since its inception, American has underwritten
approximately 239 church bond financings, in which approximately
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$460,770,000 in first mortgage bonds have been sold to public investors. The
average size of single church bond financings underwritten by American since its
inception is approximately $1,928,000.
In the course of its business, American identified a demand from potential
borrowers for smaller loans of $100,000 to $2,000,000. Because of the
regulatory, administrative expenses and complexity normally associated with the
bond financing business, American determined that the economic feasibility of
bond financing diminished for financings under $1,000,000. As a result, we
believe that many churches are forced to either forego the project for which
their financing request was made, fund their project from cash flow over a
period of time and at greater expense, or seek bank financing at terms that are
not always favorable or available to them, due to the historic reluctance of
banks to lend to churches for other than economic reasons. Our objective is to
provide a lending source to this segment of the industry by capitalizing on the
human resources and experience available at American and the Advisor, and taking
advantage of the marketing, advertising and general goodwill of American.
Financing Business
Our primary business is to make first mortgage loans in amounts ranging
from $100,000 to $2,000,000, to churches and other non-profit religious
organizations, and selecting and investing in mortgage-secured debt instruments
("Church Bonds") issued by churches and other non-profit religious organizations
throughout the United States. We attempt to apply our working capital (after
adequate reserves determined by the Advisor) toward making mortgage loans and
investing in Church Bonds. We seek to enhance returns on investments on such
loans by:
o offering terms of up to 30 years, generating the highest yields possible
under current market conditions;
o seeking origination fees (i.e. "points") from the borrower at the outset of
a loan and upon any renewal of a loan;
o making a limited amount of higher-interest rate second mortgage loans to
qualified borrowers; and
o purchasing mortgage-secured debt securities having various maturities
issued by churches and other non-profit religious organizations.
Our policies limit the amount of second mortgage loans to 20% of the
Company's Average Invested Assets (hereinafter defined) on the date any second
mortgage loan is closed and limit the amount of mortgage-secured debt securities
to 30% of Average Invested Assets on the date of their purchase.
"Average Invested Assets" for any period is defined as the average of the
aggregated book value of the assets of the corporation invested, directly
Interest Rate Origination Fee ((1)) or indirectly, in loans (or interests in
loans) secured by real estate, and first mortgage bonds, before reserves for
depreciation or bad debts or other similar non-cash reserves computed by taking
the average of such values at the end of each calendar month during such period.
All other mortgage loans made by us (or Church Bonds purchased for
investment) will be secured by a first mortgage (or deed of trust) lien in favor
of us. Although we attempt to make mortgage loans for various terms typically
ranging from three to thirty years, we may determine to emphasize longer-term
fixed-rate loans in our discretion, in order to reduce the risk to us of
downward interest rate fluctuations.
Our lending and investing operations, including determination of a
prospective borrower's or church bond issuer's financial credit worthiness, are
made on our behalf by the Advisor. The Advisor conducts all aspects of our
business, including (i) marketing and advertising; (ii) communication with
prospective borrowers; (iii) processing loan applications; (iv) closing the
loans; (v) servicing the loans; (vi) enforcing the terms of our loans; (vii)
shareholder relations and (viii) administering our day-to-day business. For its
services, the Advisor is entitled to receive a management fee equal to 1 1/4%
annually of the Company's Average Invested Assets, plus one-half of any
origination fee charged to borrowers on mortgage loans we make. The management
fee is reduced to 1% on assets from $35 million to $50 million and to .75% on
assets over $50 million. The Advisor's management fees are computed and payable
monthly.
Current First Mortgage Loan Terms
We offer prospective borrowers a selection of "Loan Types," which include a
choice of fixed or variable rates of interest indexed to the "prime" rate of
interest or other generally recognized reference index, and having various terms
to maturity, origination fees and other terms and conditions. The Loan Types,
interest rates and fees offered and charged by us may from time-to-time be
limited, changed or otherwise unilaterally amended by the Advisor in its
discretion as a result of such factors (among others) as (i) balance of Loan
Types in our portfolio; (ii) competition from other lenders; (iii) anticipated
need to increase the overall yield to our mortgage loan portfolio; (iv) local
and national economic factors; (v) actual experience in borrowers' demand for
the loans; and (vi) available funds. In addition, we may make mortgage loans on
terms other than those
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identified in our list of Loan Types. Subject to change, modification or
elimination at our complete discretion, the following is a list of the currently
available Loan Types we may offer to prospective borrowing institutions:
Loan Type Interest Rate Origination Fee (1)
--------------------------------------------------------------------------------------------------
30 Year Term (2) Fixed @ 8.95% 3.5%
--------------------------------------------------------------------------------------------------
25 Year Term (2) Fixed @ 8.50% 3.5%
--------------------------------------------------------------------------------------------------
Renewable Term 5 Year (3) Fixed @: 7.95% 2.5%
==================================================================================================
(1) Origination fees are based on the original principal amount of the
loan and are collected from the borrower at the origination and
renewal of loans, one-half of which is payable directly to the
Advisor. Origination fees are often subject to negotiations with
borrowers and thus, may be less than these amounts.
(2) Fully amortized repayment term. Amortization terms may vary, as may
other loan terms, depending on individual loan negotiations and
competitive forces.
(3) Renewable term loans are repaid based on a 30-year amortization
schedule, and are renewable at the conclusion of their initial term
for additional like terms up to an aggregated maximum of 30 years. We
charge a fee of 1/2% to the borrower upon each renewal date. If
renewed by the borrower, the interest rate is adjusted to Prime plus a
specified basis point "spread," i.e., 250 basis points.
The above table describes certain material terms of Loan Types, interest
rates and fees currently offered and charged by us. The table does not, however,
purport to identify all possible Loan Types, terms, rates, and fees that we may
offer from time-to-time. We may determine at any time to modify the terms
identified above and/or offer loan terms different than any of the Loan Types,
interest rates and fees identified above and do, in fact, negotiate these terms
and fees with certain of our borrowers. In practice, loan terms vary widely
depending upon quality of the prospective borrowers, our working capital
situation, presence or absence of competitive influences on specific loans, and
general economic conditions.
Mortgage Loan Processing and Underwriting
Mortgage loan applications are prepared and verified by our Advisor's
personnel in our Loan Origination and Underwriting Department. Verification
procedures are designed to assure a borrower's qualification under our Financing
Policies which are specifically identified herein and include, among other
things, obtaining:
o applications containing key information concerning the prospective
borrowers;
o project description;
o financial statements in accordance with our Financing Policies;
o corporate records and other organizational documents of the borrower;
o preliminary title report or commitment for mortgagee title insurance;
and
o a real estate appraisal in accordance with the Financing Policies.
All appraisals are prepared by independent third-party professionals who we
approve based on their experience, reputation and education. All financial
statements are prepared by independent third-party professionals or a qualified
accountant that we employ that is independent of the borrower. Completed loan
applications, together with a written summary are then presented to our
Underwriting Committee. Our loan Underwriting Committee is comprised of the
Advisor's President and Vice-President and certain members of its staff
including staff members of American. Our Advisor may arrange for the provision
of mortgage title insurance and for the services of professional independent
third-party accountants and appraisers on behalf of borrowers in
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order to achieve pricing efficiencies on their behalf and to assure the
efficient delivery of title commitments, preliminary title reports and title
policies, and financial statements and appraisals meet our underwriting
criteria. Our Advisor may arrange for the direct payment for such professional
services and for the direct reimbursement to it of such expenditures by
borrowers and prospective borrowers. Upon closing and funding of mortgage loans,
an origination fee based on the original principal amount of each loan may be
charged, of which one-half is payable by the borrower to our Advisor, and the
other one-half to us.
Loan Commitments
Subsequent to approval by our Underwriting Committee, and prior to funding
a loan, we may issue a loan commitment to qualified applicants. A loan
commitment deposit may be required from the borrowing church to commence the
loan preparation procedure. These deposits are directly applied by the Advisor
to engage accountants and appraisers to prepare their respective reports on the
Church. Commitments may indicate, among other things, the loan amount,
origination fees, closing costs, underwriting expenses (if any), funding
conditions, approval expiration dates and interest rate and other terms.
Commitments generally set forth a "prevailing" interest rate that is subject to
change in accordance with market interest rate fluctuations until the final loan
closing documents are prepared, at which time we commit to a stated interest
rate. In certain cases we may establish ("lock in") interest rate commitments up
to sixty (60) days from the commitment to closing; however, interest rate
commitments beyond sixty days will not normally be issued unless we receive an
appropriate fee premium based upon our assessment of the risk associated with a
longer period.
Loan Portfolio Management
Our portfolio of mortgage loans and Church Bonds is managed and serviced by
our Advisor in accordance with the Advisory Agreement. The Advisor is
responsible for all aspects of our mortgage loan business, including closing and
recording of mortgage loans; collecting payments of principal and interest
regularly and upon the maturity of a loan; enforcing loan payments and other
lender's requirements; periodic review of each mortgage loan file and
determination of its reserve classification; and exercising our remedies in
connection with any defaulted or non-performing loans. Fees and costs of
attorneys, insurance, bonds and other direct expenses incurred in connection
with the exercise of such remedies are our responsibility. We may, however,
recoup these expenses from the borrower in the process of pursuing our remedies.
The Advisor will not receive any additional compensation for services rendered
in connection with loan portfolio management or exercising remedies on our
behalf in the event of a loan default.
Loan Funding and Bank Borrowing
Our mortgage loans (and our purchases of Church Bonds) are funded with
available cash resources and, at the discretion of the Advisor, with borrowings
under a line of credit with a commercial lender or bank.
The Company had a $15 million revolving credit facility with KeyBank that
was paid in full on September 15, 2008. The credit facility was replaced by an
$8 million line of credit with Beacon Bank. Advances on the line of credit are
available up to $4.5 million, subject to borrowing base limitations, until and
if Beacon Bank is able to secure participants for the remaining portion of the
facility up to $8 million. 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
December 31, 2008, 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. Additionally, the Company is required to meet
certain financial covenants at each year end. As of December 31, 2008, the
Company was in compliance with all required covenants.
Currently, we may borrow up to 300% of our shareholder's equity (in the
absence of a satisfactory showing that a higher level of borrowing is
appropriate; any excess in borrowing over such 300% level must be approved by a
majority of the Independent Directors and disclosed to shareholders in the next
quarterly report along with justification for such excess) to make loans
regardless of our capacity to (i) sell our securities on a continuing basis, or
to (ii) reposition assets from the maturity or early repayment of mortgage loans
in our secured investor certificates, minus reserves for operating expenses, and
bad-debt reserves, as determined by the Advisor. Cash resources available to us
for lending purposes include, in addition to the net proceeds from any future
sales of our common stock, secured investor certificates (if any) or other debt
securities, (i) principal repayments from borrowers on loans made by us and (ii)
funds borrowed under any line of credit arrangement.
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The Advisory Agreement
We have entered into a contract with the Advisor (the "Advisory Agreement")
under which the Advisor furnishes advice and recommendations concerning our
business affairs, provides administrative services to us and manages our
day-to-day operations. We have no employees. All of our personnel needs are met
through the personnel and expertise of the Advisor and its affiliates. Among
other things, the Advisor:
o serves as our mortgage loan underwriter and advisor in connection with
our primary business of making loans to churches;
o advises and selects Church Bonds to be purchased and held for
investment by us;
o services all mortgage loans we make;
o provides marketing and advertising and generates loan leads directly
and through its affiliates;
o deals with regulatory agencies, borrowers, lenders, banks,
consultants, accountants, brokers, attorneys, appraisers, insurers and
others;
o supervises the preparation, filing and distribution of tax returns and
reports to governmental agencies and to shareholders and acts on our
behalf in connection with shareholder relations;
o provides office space and personnel as required for the performance of
the foregoing services; and
o as requested by us, makes reports to us of its performance of the
foregoing services and furnishes advice and recommendations with
respect to other aspects of our business.
In performing its services under the Advisory Agreement, the Advisor may
use facilities, personnel and support services of its affiliates. Expenses such
as legal and accounting fees, stock transfer agent, registrar and paying agent
fees and proxy solicitation expenses are direct expenses of ours and are not
provided for by the Advisor as part of its services.
The Advisory Agreement is renewable annually by us for one-year periods,
subject to our determination, including a majority of the Independent Directors,
that the Advisor's performance has been satisfactory and that the compensation
paid the Advisor has been reasonable. We may terminate the Advisory Agreement
with or without cause upon 60 days written notice to the Advisor. Upon
termination of the Advisory Agreement by either party, the Advisor may require
us to change our name to a name that does not contain the word "American,"
"America" or the name of the Advisor or any approximation or abbreviation
thereof, and that is sufficiently dissimilar to the word "America" or "American"
or the name of the Advisor as to be unlikely to cause confusion or
identification with either the Advisor or any person or entity using the word
"American" or "America" in its name. Our Board of Directors shall determine that
any successor Advisor possess sufficient qualifications to perform the advisory
function for us and justify the compensation provided for in its contract with
us.
Pursuant to the Advisory Agreement, the Advisor is required to pay all of
the expenses it incurs in providing services to us, including, but not limited
to, personnel expenses, rental and other office expenses, expenses of officers
and employees of the American, including travel and all of its overhead and
miscellaneous administrative expenses relating to performance of its functions
under the Advisory Agreement. We are required to pay all other expenses we incur
in the daily operations of our business-such as the costs and expenses of
reporting to various governmental agencies and the shareholders; the general
conduct of our operations as a mortgage lender; fees and expenses of appraisers,
directors, auditors, outside legal counsel and transfer agents, directors and
officers liability insurance premiums, unreimbursed costs directly relating to
closing of loan transactions, and costs relating to the enforcement of loan
agreements and/or foreclosure proceedings.
In the event that our Total Operating Expenses exceed in any calendar year
the greater of (a) 2% of our Average Invested Assets or (b) 25% of our net
income, the Advisor is obligated to reimburse us, to the extent of its fees for
such calendar year, for the amount by which the aggregate annual operating
expenses paid or incurred by us exceed the limitation. Total operating expenses
as defined in the Advisory Agreement exclude expenses of raising capital,
interest payments, taxes, non-cash expenditures (including, but not limited to,
depreciation, amortization and bad debt reserves), incentive fees and property
operation and disposition costs. The Independent Directors may, upon a finding
of unusual and non-recurring factors which they deem sufficient, determine that
a higher level of expenses is justified in any given year.
9
Our bylaws provide that the Independent Directors are to determine at least
annually the reasonableness of the compensation we pay to our Advisor. On April
24, 2008, our Directors reviewed and unanimously approved renewal of the
Advisory Agreement for another year. Factors to be considered in reviewing the
Advisory Fee include the size of the fees of the Advisor in relation to the
size, composition and profitability of our loan portfolio, the rates charged by
other investment advisors performing comparable services, the success of the
Advisor in generating opportunities that meet our investment objectives, the
amount of additional revenues realized by the Advisor for other services
performed for us, the quality and extent of service and advice furnished by the
Advisor, the quality of our investments in relation to investments generated by
the Advisor for its own account, if any, and the performance of our investments.
The Advisory Agreement provides for indemnification by us of the Advisor
and each of its directors and officers against expense or liability arising out
of such person's activities in rendering services to us, provided that the
conduct against which the claim is made was determined by such person, in good
faith, to be in our best interests and was not the result of negligence or
misconduct.
Financing Policies
Our business of mortgage lending to churches and other non-profit religious
organizations is managed in accordance with and subject to the policies,
guidelines, restrictions and limitations identified herein (collectively, the
"Financing Policy"). The intent of the Financing Policy is to identify for our
shareholders not only the general business in which we are involved, but the
parameters of our lending business. These policies may not be changed (except in
certain immaterial respects by majority approval of the Board of Directors)
without the approval of a majority of the Independent Directors, and the holders
of a majority of our outstanding shares at a duly held meeting for that purpose:
(i) Loans made by us will be limited to churches and other non-profit
religious organizations, and will be secured by mortgages. The total
principal amount of all second mortgage loans that we fund is limited
to 20% of Average Invested Assets. All other loans will be first
mortgage loans.
(ii) The total principal amount of mortgage-secured debt securities we
purchase from churches and other non-profit religious organizations is
limited to 30% of our Average Invested Assets.
(iii) The loan amount cannot exceed 75% of the value of the real estate and
improvements securing each loan, such value being determined based on
a written appraisal prepared by an appraiser acceptable to the
Advisor. On all loans, we will require a written appraisal certified
by a member of the Appraisal Institute ("MAI"), or a state-certified
appraiser.
(iv) An ALTA (American Land Title Association) or equivalent Mortgage Title
Policy must be furnished to us by the borrower insuring our mortgage
interest.
(v) The borrower's long-term debt (including the proposed loan) cannot
exceed four times their gross income for the previous twelve (12)
months.
(vi) The borrower must furnish us with financial statements (balance sheet
and income and expense statement) for its last three (3) complete
fiscal years and current financial statements for the period within
ninety (90) days of the loan closing date. A borrower must have the
last complete fiscal year financial statements reviewed by a certified
public accountant (CPA) engaged by the borrower and who is independent
of the borrower. On loans in excess of $500,000 our advisor may
require the last complete fiscal year be audited by a CPA engaged by
the borrower and who is independent of the borrower. In lieu of the
above requirement, we or our advisor may employ a qualified
accountant. The qualified accountant we employ would be required to be
independent of the borrower. Our employed qualified accountant would
not be independent of us. Compiled financial statements of the
borrower are acceptable from our employed qualified accountant. Along
with the compiled financial statements of the borrower, our employed
qualified accountant would perform partial and targeted review
examination procedures for borrowers. On loans in excess of $500,000,
the advisor may require partial and targeted audit examination
procedures for borrowers.
(vii) Borrowers in existence for less than three (3) fiscal years must
provide financial statements since their inception. No loan will be
extended to a borrower in operation less than two (2) calendar years
absent express approval by our Board of Directors.
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(viii) The Advisor typically requires the borrower to arrange for automatic
electronic payment or drafting of monthly payments.
(ix) The Advisor may require (i) key-man life insurance on the life of the
senior pastor of a church; (ii) personal guarantees of church members
and/or affiliates; and (iii) other security enhancements for our
benefit.
(x) The borrower must agree to provide to us annual reports (including
financial statements) within 120 days of each fiscal year end
beginning with the fiscal year end next following the funding of the
loan.
(xi) The Advisor may require the borrower to grant to us a security
interest in all personal property located and to be located upon the
mortgaged premises (excluding property leased by the borrower).
(xii) We require borrowers to maintain a general perils and liability
coverage insurance policy naming us as the loss-payee in connection
with damage or destruction to the property of the borrower which
typically includes weather-related damage, fire, vandalism and theft.
Our Advisor may require the borrower to provide flood, earthquake
and/or other special coverage.
These Financing Policies are in addition to the investments policies and
operating restrictions identified below and which are set forth in our Bylaws.
Investment Policies and Operating Restrictions
Our Bylaws impose certain investment policies and operating restrictions on
our investment and financing activities, including prohibitions against:
(i) Investing more than 10% of our total assets in unimproved real
property or mortgage loans on unimproved real property;
(ii) Investing in commodities or commodity futures contracts other than
"interest rate futures" contracts intended only for hedging purposes;
(iii) Investing in mortgage loans (including construction loans) on any one
property which in the aggregate with all other mortgage loans on the
property would exceed 75% of the appraised value of the property
unless substantial justification exists because of the presence of
other underwriting criteria;
(iv) Investing in mortgage loans that are subordinate to any mortgage or
equity interest of the Advisor or the Directors or any of their
Affiliates;
(v) Investing in equity securities;
(vi) Engaging in any short sales of securities or in trading, as
distinguished from investment activities;
(vii) Issuing redeemable equity securities;
(viii) Engaging in underwriting or the agency distribution of securities
issued by others;
(ix) Issuing options or warrants to purchase our shares at an exercise
price less than the fair market value of the shares on the date of the
issuance or if the issuance thereof would exceed 10% in the aggregate
of our outstanding shares;
(x) The aggregate borrowings of the corporation, secured and unsecured,
must be reasonable in relation to the Shareholder's Equity of the
corporation and must be reviewed by the Independent Directors at least
quarterly. The maximum amount of such borrowings cannot exceed 300% of
Shareholder's Equity in the absence of a satisfactory showing that a
higher level of borrowing is appropriate. Any excess in borrowing over
such 300% level must be approved by a majority of Independent
Directors and disclosed to shareholders in the next quarterly report
along with justification for such excess;
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(xi) Investing in real estate contracts of sale unless such contracts are
in recordable form and are appropriately recorded in the chain of
title;
(xii) Selling or leasing to the Advisor, a Director or any Affiliate
thereof unless approved by a majority of our Directors (including a
majority of our Independent Directors), who are not otherwise
interested in such transaction, as being fair and reasonable to us;
(xiii) Acquiring property from any Advisor or Director, or any Affiliate
thereof, unless a majority of our Directors (including a majority of
our Independent Directors) who are not otherwise interested in such
transaction approve the transaction as being fair and reasonable and
at a price to us which is no greater than the cost of the asset to
such Advisor, Director or any Affiliate thereof, or if the price to us
is in excess of such cost, that substantial justification for such
excess exists and such excess is reasonable. In no event shall the
cost of such asset exceed its current appraised value;
(xiv) Investing or making mortgage loans unless a mortgagee's or owner's
title insurance policy or commitment as to the priority of the
mortgage or condition of title is obtained; or
(xv) Issuing shares on a deferred payment basis or other similar
arrangement.
We do not invest in the securities of other issuers for the purpose of
exercising control, to engage in the purchase and sale of investments other than
as described in this Report, to offer securities in exchange for property unless
deemed prudent by a majority of the Directors or to make loans to other persons
except in the ordinary course of our business as described herein.
We will not make loans to or borrow from, or enter into any contract, joint
venture or transaction with, any of our Directors or officers, the Advisor or
any Affiliate of any of the foregoing unless a majority of our Directors,
including a majority of our Independent Directors, approves the transaction as
fair and reasonable to us and the transaction is on terms and conditions no less
favorable to us than those available from unaffiliated third parties. Any
investment by us in any property, mortgage or other real estate interest
pursuant to a transaction with the Advisor or any Directors or officers thereof
will be based upon an appraisal of the underlying property from an independent
qualified appraiser selected by the Independent Directors and will not be made
at a price greater than fair market value as determined by such appraisal.
Under Performing and Non-Performing Loans
As of December 31, 2008, we have five first mortgage loans totaling
approximately $2,188,000 that are three or more monthly payments in arrears. We
may incur a loss if these borrowers are unable to bring their payments current
and we are compelled to foreclose on their properties. We may be unable to
dispose of the foreclosed properties on terms that enable us to recoup our
expenses and outstanding balances. We have initiated foreclosure proceedings on
one of these loans and expect to take possession of this church and list the
property for sale. In addition, we have foreclosed and have taken possession of
six properties with total loan balances outstanding totaling approximately
$1,974,000 and have listed the properties for sale through local realtors. Three
of the properties were acquired through foreclosure proceedings in 2008. The
fair value of the properties was approximately $1,262,000 at December 31, 2008.
Competition
The business of making loans to churches and other non-profit religious
organizations is highly competitive. We compete with a wide variety of investors
and other lenders, including banks, savings and loan associations, insurance
companies, pension funds and fraternal organizations which may have investment
objectives similar to our own. A number of these competitors have greater
financial resources, larger staffs and longer operating histories than we do. We
compete principally by limiting our business "niche" to lending to churches and
other non-profit religious organizations, offering loans with competitive and
flexible terms, and emphasizing our expertise in the specialized industry
segment of lending to churches and other religious organizations. Our
competitive "specialty" is in offering fixed-rate, long-term loans, which few of
our competitors make available to churches.
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Employees
We have no employees. Our daily operations and other material aspects of
our business are managed by Church Loan Advisors, Inc. (the "Advisor") on a
"turn-key" basis using employees of the Advisor and/or its Affiliates. At
present, certain officers and directors of American and the Advisor are
providing services to us at no charge and which will not be reimbursed to them.
These services include, among others, legal and analytic services relating to
the execution of our business plan, development and preparation of reports to be
filed under the Securities Exchange Act, and utilization of proprietary forms
and documents utilized by the Advisor in connection with our business
operations.
Subject to the supervision of the Board of Directors, our business is
managed by the Advisor, which provides us investment advisory and administrative
services. Philip J. Myers, our Chief Executive Officer, Treasurer and a
Director, is President of the Advisor and President of American Investors Group,
Inc., the underwriter of our past public offerings. The Advisor utilizes three
employees of American on a part-time or other basis. The Company does not
presently expect to directly employ anyone in the foreseeable future, since all
of our administrative functions and operations are contracted through the
Advisor. However, legal, accounting and certain other services are provided to
us by outside professionals and paid by us directly.
Operations
Our operations currently are located in the 8,200 square foot offices of
the Advisor's affiliate, American Investors Group, Inc., 10237 Yellow Circle
Drive, Minnetonka, Minnesota 55343. These facilities are owned by Yellow Circle
Partners, L.L.P., a partnership owned in part by Philip J. Myers, our Chief
Executive Officer, Treasurer and a Director. We are not separately charged any
rent for our use of these facilities, or for our use of copying services,
telephones, facsimile machines, postage service, office supplies or employee
services, since these costs are covered by the advisory fee paid to the Advisor.
However, we do pay postage service for costs associated with the distribution of
dividends and proxy materials to our shareholders.
Item 1A. Risk Factors
Risks Related to Mortgage Lending
We Are Subject to the Risks Generally Associated with Mortgage Lending.
Mortgage lending involves various risks, many of which are unpredictable and
beyond our control and foresight. It is not possible to identify all potential
risks associated with mortgage lending. Some of the more common risks
encountered may be summarized as follows:
o low demand for mortgage loans o availability of alternative financing and competitive
conditions
o interest rate and real estate valuation fluctuations
o factors affecting specific borrowers
o changes in the level of consumer confidence
o losses associated with default, foreclosure of a
o availability of credit-worthy borrowers mortgage, and sale of the mortgaged property
o national and local economic conditions o state and federal laws and regulations
o demographic and population patterns o bankruptcy or insolvency of a borrower
o borrower's misrepresentation(s) and/or fraud
o zoning regulations
o taxes and tax law changes
Losses Associated with Default, Foreclosure of a Mortgage and Sale of
Mortgaged Property Pose Additional Risks. We have experienced losses associated
with default, foreclosure of mortgages, and sales of mortgaged properties. The
time frame to foreclose on a property varies from state to state, and delays can
occur due to backlog in court dockets; we have experienced delays from 12 to 18
months. Such delays have and can cause the value of the mortgaged property to
further deteriorate due to lack of maintenance. Theft and vandalism have also
occurred on our foreclosed properties. Some borrowers have removed fixtures and
furnishings including sound systems, chairs, pulpits, appliances, mechanical and
electrical systems prior to vacating the facility which further reduces the
value of our collateral. The properties also incur operating expenses pending
their sale (property insurance, security, repairs and maintenance) and these
expenses could be substantial if we cannot readily dispose of the property.
Expenses related to the foregoing could prevent us from recovering the full
value of a loan in the event of
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foreclosure, which shortfall would decrease the value of assets held by the
Company and could negatively impact the Company's ability to pay interest on the
certificates or dividends to shareholders.
Real Estate Taxes Resulting from a Foreclosure May Prevent Us from
Recovering the Full Value of a Loan. If we foreclose on a mortgage and take
legal title to a church's real estate, real estate taxes could be levied and
assessed against the property since the property would no longer be owned by a
non-profit entity. These expenses would be our financial responsibility, and
could be substantial in relation to our prior loan if we cannot readily dispose
of the property. Such expenses could prevent us from recovering the full value
of a loan in the event of foreclosure, which shortfall would decrease the value
of assets held by the Company.
Second Mortgage Loans Pose Additional Risks. Our financing policies allow
us to make second mortgage loans. The principal amount of such loans may not
exceed 20% of our Average Invested Assets. Second mortgage loans entail more
risk than first mortgage loans, as foreclosure of senior indebtedness or liens
could require us to pay the senior debt or risk losing our mortgage, or reduced
collateral value may reduce or eliminate our security.
Fixed and Variable-Rate Debt Can Result in Yield Fluctuations. Fixed and
variable-rate debt obligations carry certain risks. A general rise in interest
rates could make the yield on a particular mortgage loan lower than prevailing
rates. This could negatively affect our value and consequently the value of our
shares and certificates. Neither we nor our advisor can predict changes in
interest rates. We will attempt to reduce this risk by maintaining medium and
longer-term mortgage loans and through offering adjustable rate loans to
borrowers. We do not intend to borrow funds or sell certificates if the cost of
such borrowing exceeds the income we believe we can earn from lending the funds.
The average holding period of our debt is less than three years which has
mitigated this risk in yield fluctuations.
The Mortgage Banking Industry Is Highly Competitive. We compete with a wide
variety of lenders, including banks, savings and loan associations, insurance
companies, pension funds and fraternal organizations for mortgage loans. Many
competitors have greater financial resources, larger staffs and longer operating
histories than we have, and thus may be a more attractive lender to potential
borrowers. We intend to compete by limiting our business "niche" to lending to
churches and other non-profit religious organizations, offering loans with
competitive and flexible terms, and emphasizing our expertise in the specialized
industry segment of lending to churches and other non-profit religious
organizations.
Fluctuations in Interest Rates May Affect Our Ability to Generate New
Loans. Prevailing market interest rates impact borrower decisions to obtain new
loans or to refinance existing loans, possibly having a negative effect upon our
ability to originate mortgage loans. If interest rates decrease and the economic
advantages of refinancing mortgage loans increase, then prepayments of higher
interest mortgage loans in our portfolio would likely reduce our portfolio's
overall rate of return (yield).
We Are Subject to the Risks Associated with Fluctuations in National and
Local Economic Conditions. The mortgage lending industry is subject to increased
credit risks and rates of foreclosures during economic downturns. In addition,
because we provide mortgages to churches and other religious organizations who
generally receive financing through charitable contributions, our financial
results are subject to fluctuations based on a lack of consumer confidence or a
severe or prolonged national or regional recession. As a result of these and
other circumstances, our potential borrowers may decide to defer or terminate
plans for financing their properties. In addition, during such economic times we
may be unable to locate as many credit-worthy borrowers. In addition, we believe
the risks associated with our business are more severe during periods of
economic slowdown or recession if these periods are accompanied by declining
values in real estate. For example, declining real estate values would likely
reduce the level of new loan originations, since borrowers often use increases
in the value of their existing properties to support the purchase of or
investment in additional properties. Borrowers may also be less able to pay
principal and interest on our loans if the real estate economy weakens, which
could result in higher default rates. Higher default rates could adversely
affect the Company's results of operations, which could negatively impact the
Company's ability to pay interest on the certificates. Further, declining real
estate values significantly increase the likelihood that we will incur losses in
the event of default because the value of our collateral may be insufficient to
cover our basis in the investment.
The Company Faces Certain Risks and Uncertainties Related to Financing and
Liquidity, and These Volatilities Could Have an Impact on Its Operations and Its
Ability to Maintain its Long-term Capital Needs and/or Secure Additional
Financing. The Company faces certain risks and uncertainties, particularly
during volatile market conditions, such as the dramatic changes in interest
rates that have occurred recently. In addition, liquidity has tightened in all
financial markets, including the debt and equity markets. These volatilities
could have an impact on operations to the extent that the Company experiences
slower maturities or repayment of mortgage loans, illiquid markets for our bond
portfolio, or a higher redemption rates on our secured investor certificates
than has been the case historically.
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Our Business May Be Adversely Affected if Our Borrowers Become Insolvent or
Bankrupt. If any of our borrowers become insolvent or bankrupt, the borrower's
mortgage payments will be delayed and may cease entirely. For example, due to
the difficult and uncertain national and economic conditions, many companies
have been forced to cut employee salaries and many jobs have been either
temporarily or permanently eliminated. Because our borrowers are churches and
other religious organizations who generally receive financing through charitable
contributions, if their members experience a decrease in pay or lose their jobs
and are unable to secure new ones, they may make fewer or no contributions to
our borrowers, which could result in the borrower's inability to make mortgage
payments or make them on time. In those situations, we may be forced to
foreclose on the mortgage and take legal title to the real estate and incur
expenses related to the foreclosure and disposition of the property. Such
increased expenses paired with possible lower real estate values (having been
reduced by the foregoing expenses) could adversely affect the Company's results
of operations.
We Have Fluctuating Earnings. As mortgage lenders, we make provision for
losses relating to our loan portfolio and sometimes take impairment charges due
to our borrowers defaulting or declaring bankruptcy. As the national and local
economies have worsened, increases in the occurrence of such events have
resulted in greater fluctuation of our earnings, which can reduce our net
income. Our earnings are also impacted by non-performing assets and the carrying
cost of maintaining such assets (taxes, insurance and maintenance). Inconsistent
earnings could adversely affect the Company's financial condition and results of
operations.
Risks Related to Mortgage Lending to Churches
Churches Rely on Member Contributions to Repay Our Loans. Churches
typically rely on member contributions for their primary source of income. As
such, member contributions are the primary source used to repay our loans. The
membership of a church or the per capita contributions of its members may not
increase or remain constant after a loan is funded. A decrease in a church's
income could result in its temporary or continued inability to pay its
obligation to us, which may affect our ability to pay dividends on our common
stock or pay interest or principal due on the certificates. We have no control
over the financial performance of a borrowing church after a loan is funded.
Churches Depend Upon Their Senior Pastors. A church's senior pastor usually
plays an important role in the management, leadership and continued viability of
that church. A senior pastor's absence, resignation or death could have a
negative impact on a church's operations, and thus its continued ability to
generate revenues sufficient to service its obligations to us.
The Limited Use Nature of Church Facilities Can Limit the Resale Value of
Our Mortgage Collateral. Our loans are secured principally by first mortgages
upon the real estate and improvements owned or to be owned by borrowing
churches. Although we will require an appraisal of the premises as a
pre-condition to making a loan, the appraised value of the premises cannot be
relied upon as being the actual amount which might be obtained in the event we
need to foreclose after a default by the borrower. The actual liquidation value
of church, school or other institutional premises could be adversely affected
by, among other factors: (i) its limited use nature; (ii) the availability on
the market of similar properties; (iii) the availability and cost of financing,
rehabilitation or renovation to prospective buyers; (iv) the length of time the
seller is willing to hold the property on the market; or (v) the availability in
the area of the mortgaged property of congregations or other buyers willing to
pay the fair value for a church facility. This factor may influence our decision
to restructure the terms of a non-performing loan rather than foreclosing on the
church property.
Expenses of Foreclosure May Prevent Us From Recovering the Full Value of a
Loan. If we foreclose on a mortgage and take legal title to a church's real
estate, real estate taxes could be levied and assessed against the property
until sold since the property would no longer be owned by a non-profit entity.
The property may also incur operating expenses pending its sale, such as
property insurance, utilities, security, repairs and maintenance. These expenses
would be our financial responsibility, and could be substantial in relation to
our prior loan if we cannot readily dispose of the property. Such expenses could
prevent us from recovering the full value of a loan in the event of foreclosure.
Risks Related to Us
Our Failure to Qualify as a Real Estate Investment Trust Could Reduce the
Funds We Have Available For Investment. We operate as a real estate investment
trust ("REIT"). As a REIT, we are allowed a deduction for dividends paid to our
shareholders in computing our taxable income. Thus, only our shareholders are
taxed on our taxable income that we distribute.
15
This treatment substantially eliminates the "double taxation" of earnings
to which most corporations and their shareholders are subject. Qualification as
a REIT involves the application of highly technical and complex Internal Revenue
Code provisions.
To qualify and maintain our status as a REIT, we must meet certain share
ownership, income, asset and distribution tests on a continuing basis. No
assurance can be given that we will satisfy these tests at all times. Further,
the requirements for a REIT may substantially affect day-to-day decision-making
by our advisor. Our advisor may be forced to take action it would not otherwise
take or refrain from action which might otherwise be desirable in order to
maintain our REIT status.
If we fail to qualify as a REIT in any taxable year, then we would be
subject to federal income tax on our taxable income at regular corporate rates
and not be allowed a deduction for distributions to shareholders. We would be
disqualified from treatment as a REIT for the four taxable years following the
year of losing our REIT status. We intend to continue to operate as a REIT.
However, future economic, market, legal, tax or other consequences may cause our
board of directors to revoke the REIT election. The payment of taxes resulting
from our disqualification as a REIT or revocation of REIT status would reduce
the funds available for distribution to shareholders or for investment. Because
interest paid to certificate holders will be a deductible business expense to
us, loss of our REIT status would not necessarily impede our ability to make
interest payments to holders of certificates.
Conflicts of Interest Arise From Our Relationship with Our Advisor. The
terms of transactions involving our formation and the formation of our Advisor,
and our contractual relationship with our Advisor, were not negotiated at
arm's-length. Our non-independent directors and officers may have conflicts of
interest in enforcing agreements between us and our Advisor. Future business
arrangements and agreements between us and our Advisor and their affiliates must
be approved by our board of directors, including a majority of our independent
directors.
Risks Related to the Shares
Lack of Liquidity and Inconsistent Public Market Price. Our common stock is
not currently listed or traded on any exchange or market and is not quoted on
the National Association of Securities Dealers, Inc. Automated Quotation System
("NASDAQ"), and it is not expected that a material market for the shares will
develop any time soon. "Pink Sheet" price quotations for our stock under the
symbol "ACMC" were made at certain isolated times during 2008 by other
broker-dealers at prices as low as $1.55 per share and as high as $5.25 per
share. In addition, the market for REIT securities historically has been less
liquid than non-real estate types of publicly-traded equity securities. Because
of such illiquidity and the fact that the shares would be valued by
market-makers (if a material market develops) based on market forces which
consider various factors beyond our control, there can be no assurance that the
market value of the shares at any given time would be the same or higher than
the public purchase price of our shares. In addition, the market price, if a
material market develops, could decline if the yields from other competitive
investments exceed the actual dividends paid by us on our shares.
There Are Restrictions on Certain Transfers of Our Shares. Our articles of
incorporation and bylaws prohibit a transfer of shares to any person who, as a
result, would beneficially own shares in excess of 9.8% of the outstanding
capital stock and allow us to redeem shares held by any person in excess of 9.8%
of the outstanding capital stock. These provisions may reduce market activity
for the shares and the opportunity for shareholders to receive a premium for
their shares.
Fluctuations in Interest Rates May Cause the Value of Our Shares to
Fluctuate. Prevailing market interest rates impact borrower decisions to obtain
new loans or to refinance existing loans, possibly having a negative effect upon
our ability to originate mortgage loans. Fluctuations in interest rates may
cause the value of the shares to fluctuate unpredictably. If interest rates
decrease and the economic advantages of refinancing mortgage loans increase,
then prepayments of higher interest mortgage loans in our portfolio would likely
reduce the portfolio's overall rate of return (yield).
Interest Payments to Certificate Holders May Reduce Dividend Payments on
Our Shares. We attempt to deploy our capital into new loans at rates that
provide a positive interest rate spread. This spread, however, may be materially
and adversely affected by changes in prevailing interest rates which would
reduce our net income. If this occurs, we may not have sufficient net income
after paying interest on the certificates to maintain dividends to shareholders
at the levels paid in the past or even to pay dividends at all. In addition,
because dividends are directly affected by the yields generated on the Company's
portfolio of loans and bonds, shareholders dividends can be expected to
fluctuate significantly with interest rates generally.
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Risks Related to the Certificates
We May Incur More Indebtedness. We may incur additional indebtedness in the
future. We may assign or pledge some of our mortgage-secured promissory notes or
other collateral in connection with incurring this additional indebtedness.
Under our Bylaws, as amended, we may incur indebtedness up to 300% of our
shareholder's equity, the level permitted under North American Securities
Administrators Association ("NASAA") guidelines, in the absence of a
satisfactory showing that a higher level of borrowing is appropriate; any excess
in borrowing over such 300% level must be approved by a majority of the
Independent Directors and disclosed to shareholders in the next quarterly report
along with justification for such excess.
There Are Potential Adverse Effects Associated With Lending Borrowed Funds.
We have deployed the proceeds from the sale of secured investor certificates
into loans to churches and other non-profit religious organizations. We have
also used our line of credit from time to time, to fund loans, and intend to use
our line of credit in this way in the future. Lending borrowed funds is subject
to greater risks than in unleveraged lending. The profit we realize from lending
borrowed funds is largely determined by the difference, or "spread," between the
interest rates we pay on the borrowed funds and the interest rates that our
borrowers pay us. Our spread may be materially and adversely affected by changes
in prevailing interest rates. Furthermore, the financing costs associated with
lending borrowed funds could decrease the effective spread in lending borrowed
funds, which could adversely affect our ability to pay interest on and repay the
certificates as they mature.
There Is No Public Market for the Certificates. There is no market for the
certificates. It is unlikely that a market will develop. There are no current
plans to list the certificates on any exchange or for a broker-dealer to make a
market in the certificates. In addition, the market for REIT securities
historically has been less liquid than the markets for other types of
publicly-traded securities.
There Is No Sinking Fund, Insurance or Guarantee Associated With the
Certificates. We do not contribute funds to a separate account, commonly known
as a sinking fund, to repay principal or interest on the certificates upon
maturity or default. Our certificates are not certificates of deposit or similar
obligations of, or guaranteed by, any depository institution. Further, no
governmental or other entity insures or guarantees payment on the certificates
if we do not have enough funds to make principal or interest payments.
Therefore, holders of our certificates have to rely on our revenue from
operations, along with the security provided by the collateral for the
certificates, for repayment of principal and interest on the certificates.
The Collateral for the Certificates May Not Be Adequate If We Default. The
certificates must at all times be secured by mortgage-secured promissory notes
and church bonds having an outstanding principal balance equal to at least 100%
of the outstanding principal balance of the certificates. If we default in the
repayment of the certificates, or another event of default occurs, the trustee
will not be able to foreclose on the mortgages securing the promissory notes and
bonds in order to obtain funds to repay certificate holders. Rather, the trustee
will need to look to the revenue stream associated with our borrowers' payments
on or repayment of the promissory notes and bonds or revenue derived from sale
of the promissory notes or bonds to repay certificate holders. If the trustee
chooses to rely on revenues received from our borrowers, certificate holders may
face a delay in payment on certificates in the event of default, as borrowers
will repay their obligations to us in accordance with amortization schedules
associated with their promissory notes or bonds. If the trustee chooses to sell
promissory notes or bonds in the event of our default, the proceeds from the
sales may not be sufficient to repay our obligations on all outstanding or
defaulted certificates.
The Certificates Are Not Negotiable Instruments and Are Subject to
Restrictions on Transfer. The certificates are not negotiable debt instruments.
Rights of record ownership of the certificates may be transferred only with our
Advisor's prior written consent. Certificate holders are not able to freely
transfer the certificates.
We Are Obligated To Redeem Certificates Only In Limited Circumstances.
Certificate holders have no right to require us to prepay or redeem any
certificate prior to its maturity date, except in the case of death or if we
replace our current Advisor. Further, even in the event of death, we will not be
required to redeem certificates if we have redeemed at least $25,000 of
principal amount of certificates for the benefit of estates during the calendar
quarter. There is no present intention to redeem certificates prior to maturity
except in the case of death of a certificate holder.
We May Not Have Sufficient Available Cash to Redeem Certificates If We
Terminate Our Advisory Agreement With Our Current Advisor. We will be required
to offer to redeem all outstanding certificates if we terminate our advisory
agreement with Church Loan Advisors, Inc., our current Advisor, for any reason.
If the holders of a significant principal amount of certificates request that we
redeem their certificates, we may be required to sell a portion of our mortgage
loan and church bond portfolio to satisfy the redemption requests. Any such sale
could be at a discount to the recorded value of the mortgage loans
17
and bonds being sold. Further, if we are unable to sell loans or church bonds in
our portfolio, we may be unable to satisfy the redemption obligations.
The Indenture Contains Limited Protection For Holders of Certificates. The
indenture governing the certificates contains only limited events of default
other than our failure to pay principal and interest on the certificates on
time. Further, the indenture provides for only limited protection for holders of
certificates upon a consolidation or merger between us and another entity or the
sale or transfer of all or substantially all of our assets. If we default in the
repayment of the certificates under the indenture, certificate holders will have
to rely on the trustee to exercise any remedies on their behalf. Certificate
holders will not be able to seek remedies against us directly.
Risks Related to Management
We Are Dependent Upon Our Advisor. Our Advisor, Church Loan Advisors, Inc.,
manages us and selects our investments subject to general supervision by our
Board of Directors and compliance with our lending policies. We depend upon our
Advisor and its personnel for most aspects of our business operations. Our
success depends on the success of our Advisor in locating borrowers and
negotiating loans upon terms favorable to us. Among others, our Advisor performs
the following services for us:
o mortgage loan marketing and procurement o managing relationships with our accountants and
o bond portfolio selection and investment attorneys
o mortgage loan underwriting o corporate management
o mortgage loan servicing o bookkeeping
o money management o reporting to state, federal, tax and other regulatory
o developing and maintaining business relationships authorities
o maintaining "goodwill" o reports to shareholders and shareholder relations
o loan enforcement and collections
Our shareholders' right to participate in management is generally limited
to the election of directors. Certificate holders have no right to participate
in our management. Certificate holders must be willing to entrust our management
to our Advisor and our Board of Directors.
We Have Conflicts of Interest with Our Advisor and Affiliates. Affiliations
and conflicts of interests exist among our officers and directors and the owner
and officers and directors of our Advisor and affiliates. Our Advisor and
affiliates are both controlled by our Chief Executive Officer and President,
Philip Myers. Our President and the officers and directors of our Advisor are
involved in the church financing business through their affiliations with
American Investors Group, Inc. ("American"). American originates, offers and
sells first mortgage bonds for churches. We may purchase first mortgage bonds
issued by churches through American in its capacity as underwriter for the
issuing church, or as broker or dealer on the secondary market. In such event,
American would receive commissions (paid by the issuing church) on original
issue bonds, or "mark-ups" in connection with any secondary transactions. If we
sell church bonds in our portfolio, the bonds will be sold through American. We
would pay American commissions in connection with such transactions, but in no
event, in excess of those normally charged to customers.
Our Bylaws limit the amount of all commissions, mark-downs or mark-ups paid
to American. Our business dealings with our Advisor and its affiliates outside
of the ordinary course of our activities are subject to approval by a majority
of our Board of Directors, including a majority of our Independent Directors.
Generally, mortgage loans we originate are smaller than the bond financings
originated by American. However, there may be circumstances where our Advisor
and American could recommend either type of financing to a prospective borrower.
The decisions of our Advisor and American could affect the credit quality of our
portfolio.
Redemption Obligations Relating to the Certificates May Affect Our Ability
to Replace our Advisor. We will be required to offer to redeem all outstanding
certificates if we terminate our advisory agreement with Church Loan Advisors,
Inc. Our independent directors are required to review and approve the advisory
agreement with our Advisor on an annual basis. The redemption provision relating
to the certificates may have the effect of reducing our ability to replace our
current Advisor.
18
Risks Related to Environmental Laws
We May Face Liability Under Environmental Laws. Under federal, state and
local laws and regulations, a secured lender (like us) may be liable, under
certain limited circumstances, for the costs of removal or remediation of
certain hazardous or toxic substances and other costs (including government
fines and injuries to persons and adjacent property). Liability may be imposed
whether or not the owner or lender knew of, or was responsible for, the presence
of hazardous or toxic substances. The costs of remediation or removal of
hazardous or toxic substances, or of fines for personal or property damages, may
be substantial and material to our business operations. The presence of
hazardous or toxic substances, or the failure to promptly remediate such
substances, may adversely affect our ability to resell real estate collateral
after foreclosure or could cause us to forego foreclosure. This is a changing
area of the law. The courts have found both in favor and against lender
liability in this area under various factual scenarios.
The Collateral For Our Loans and Our Lenders May Be Subject to
Environmental Claims. If there are environmental problems associated with the
real estate securing any of our loans, the associated remediation or removal
requirements imposed by federal, state and local laws could affect our ability
to realize value on our collateral or our borrowers' ability to repay their
loans.
Item 1B. Unresolved Staff Comments
As a smaller reporting company, as defined in Rule 12b-2 of the Securities
Exchange Act of 1934 (the "Exchange Act"), we are not required to provide the
information required at this time.
Item 2. Description of Property
Our operations are located in the leased offices of American Investors
Group, Inc., in Minnetonka, Minnesota. It is expected that for the foreseeable
future our operations will continue to be housed in these or similar leased
premises along with American's operations and those of the Advisor. We are not
directly charged for rent, nor do we incur other costs relating to such leased
space, since the Advisor is including this expense in the Advisory Fee.
Real Estate Held for Sale/Description of Properties Acquired through Foreclosure
As of December 31, 2008, we have six properties acquired through
foreclosure. Each property is valued based on its current listing price less any
anticipated selling costs, including, for example, realtor commissions. The fair
value of our real estate held for re-sale is approximately $1,262,000 as of
December 31, 2008. Once a property is acquired by us, comparable sales
information is obtained and a local realtor is engaged to determine demand for
our properties. The general competitive conditions surrounding the potential
sale of our properties are tied, in large part, to the fact that they are
special-use properties with variable zoning restrictions. We principally lend to
churches, which are commonly exempt from zoning restrictions. However, while a
church property may be exempt from zoning restrictions, if it is located in a
residential area, it still may only be used as a church, thereby limiting the
pool of potential buyers. On the other hand, a church or other property that is
zoned for commercial use generally experiences higher demand, as potential
buyers can convert the property to their own business use. As such, our
properties that are located in residential areas typically experience less
demand than those zoned for commercial use. Descriptions of the five properties
we have acquired through foreclosure are listed below.
Foreclosure of a $216,000 loan was completed on a church located in Battle
Creek, Michigan in May 2004. The church congregation has disbanded and the
church's property is currently unoccupied. We have taken possession of the
church and have listed the property for sale through a local realtor. Battle
Creek has a commercial store-front building and a single church building located
in a residential area.
Foreclosure of a $332,000 loan was completed on a church located in Tyler,
Texas in June 2005. The church congregation has disbanded and the church's
property is currently unoccupied. We have taken possession of the church and
have listed the property for sale through a local realtor. This property is
located in a residential area.
Foreclosure of a $420,000 loan was completed on a church located in Dayton,
Ohio in August 2006. The church congregation is now meeting in a different
location and the church property is currently unoccupied. The Company has taken
possession of the church and has listed the property for sale through a local
realtor. This property is located in a residential area.
19
Foreclosure of a $385,000 loan was completed on a church located in
Anderson, Indiana in May 2008. The Company has taken possession of the property
and has listed it for sale through a local realtor. This property is located in
a residential area.
Foreclosure of a $383,000 loan was completed on a church located in
Lancaster, Texas. The Company took possession of the property in July 2008 and
has listed the property for sale. In order to obtain a certificate of occupancy,
a new parking lot must be completed, as the previous owner began to replace the
parking lot without city approval. The Company has factored the cost of the new
parking lot into its fair value calculation. This property is located in a
residential area.
A deed in lieu of foreclosure of $238,000 was received from a church
located in Pine Bluff, Arkansas in 2008. The Company took possession of the
church while it attempts to obtain financing from another lender. If alternative
financing cannot be obtained, the Company will list the church for sale with a
local realtor.
Item 3. Legal Proceedings.
There are presently no legal actions against us or our advisor, pending or
threatened.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities.
Outstanding Securities
As of February 28, 2009, 2,472,081 shares of our common stock and
$21,615,000 of secured investor certificates were issued and outstanding. We did
not sell any securities in 2008.
Holders of Our Common Shares
As of February 28, 2009, we had 1,035 record holders of our $.01 par common
stock.
Lack of Liquidity and Absence of Public Market Price.
There is virtually no market for our common shares. It is not expected that
a material market for the shares will develop any time soon. In addition, the
market for REIT securities historically has been less liquid than non-real
estate types of publicly-traded equity securities. Because of such illiquidity
and the fact that the shares would be valued by market-makers (if a market
develops) based on market forces that consider various factors beyond our
control, there can be no assurance that the market value of the shares at any
given time would be the same or higher than the public purchase price of our
shares. In addition, the market price, if a market develops, could decline if
the yields from other competitive investments exceed the actual dividends paid
by us on our shares. Our common stock is not currently listed or traded on any
exchange or market and is not quoted on the National Association of Securities
Dealers, Inc. Automated Quotation System ("NASDAQ").
Our Class A Common Stock, $.01 par value per share, traded on the
over-the-counter market pink sheets under the symbol "ACMC.PK" from September 4,
2007 through December 31, 2008 The following table sets forth the high bid
quotation and the low bid quotation as quoted by the Pink Sheets in the fourth
quarter of 2007 and all four quarters of 2008. Such over-the-counter market
quotations reflect inter-dealer prices, without retail mark-up, mark-down or
commission and may not necessarily represent actual transactions.
-------------------------------------- ------------------ ---------------
High Low
-------------------------------------- ------------------ ---------------
-------------------------------------- ------------------ ---------------
Calendar Year 2008
-------------------------------------- ------------------ ---------------
-------------------------------------- ------------------ ---------------
First Quarter $4.94 $3.29
-------------------------------------- ------------------ ---------------
-------------------------------------- ------------------ ---------------
Second Quarter $4.87 $3.65
-------------------------------------- ------------------ ---------------
-------------------------------------- ------------------ ---------------
Third Quarter $5.25 $2.50
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-------------------------------------- ------------------ ---------------
Fourth Quarter $3.25 $1.20
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20
High Low
-------------------------------------- ------------------ ---------------
-------------------------------------- ------------------ ---------------
Calendar Year 2007
-------------------------------------- ------------------ ---------------
-------------------------------------- ------------------ ---------------
Fourth Quarter 2007 $5.64 $4.23
-------------------------------------- ------------------ ---------------
As of March 31, 2009 there were 2,472,081 shares of Class A Common Stock
outstanding held by approximately 1,033 holders of record (excluding
shareholders for whom shares are held in a "nominee" or "street" name).
Repurchase of Our Shares
Although our shares of common stock are not redeemable by us, we may at our
complete discretion, repurchase shares offered to us from time to time by our
shareholders. In such event, we may pay whatever price the Advisor, a related
party, deems appropriate and reasonable, and any such shares repurchased will be
re-designated as "unissued," will no longer be entitled to distribution of
dividends and will cease to have voting rights. The Company's board of directors
has authorized the repurchase of shares subject to availability of capital and
generally limited to prices at which no dilution of equity (book value) is
experienced by remaining shareholders. We repurchased 21,514 shares at $5.25 per
share from American Investors Group, Inc. during fiscal year 2008.
Dividends
We paid dividends on our common stock for the fiscal years ended December
31, 2008 and 2007 as follows:
==============================================================================================================
For Quarter Ended: Dollar Amount Distributed Annualized Yield Per $10
Per Share: Share Represented:
--------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------
2008 2007 2008 2007
--------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------
March 31st $.100 $.1625 4.00% 6.50%
--------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------
June 30th $.100 $.025 4.00% 1.00%
--------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------
September 30th $.100 $.025 4.00% 1.00%
--------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------
December 31st $.050 $.050 2.00% 2.00%
--------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------
Totals: $.350 $.2625 3.50% 2.625%
==============================================================================================================
As a Real Estate Investment Trust, we make regular quarterly distributions
to shareholders. The amount of distributions to our shareholders must equal at
least 90% of our "real estate investment trust taxable income" in order for us
to retain REIT status. Shareholder distributions are estimated for our first
three quarters each fiscal year and adjusted annually based upon our audited
year-end financial report. Cash available for distribution to our shareholders
is derived primarily from the interest portion of monthly mortgage payments we
receive from churches borrowing money from us, from origination and other fees
paid to us by borrowers in connection with loans we make, interest income from
mortgage-backed securities issued by churches and other non-profit religious
organizations purchased and held by us for investment purposes, and earnings on
any permitted temporary investments made us. All dividends are paid by us at the
discretion of the Board of Directors and will depend upon our earnings and
financial condition, maintenance of real estate investment trust status, funds
available for distribution, results of operations, economic conditions, and such
other factors as our Board of Directors deems relevant.
During any period where our shares of common stock are being offered and
sold and the proceeds there from accumulated for the purpose of funding loans to
be made by us, the relative yield generated by such capital, and, thus,
dividends (if any) to shareholders, could be less than expected until we have
fully invested such funds into loans. We seek to address this issue by (i)
collecting from borrowers an origination fee at the time a loan is made, (ii)
timing our lending activities to coincide as much as possible with sales of our
securities, and (iii) investing our un-deployed capital in permitted temporary
investments that offer the highest yields together with safety and liquidity.
However, there can be no assurance that these strategies will improve current
yields to our shareholders. In order to qualify for the beneficial tax treatment
afforded real estate investment trusts by the Internal Revenue Code, we are
required to pay dividends to holders of our shares in annual amounts which are
equal to at least 90% of our "real estate investment trust taxable income." For
the fiscal year ended December 31, 2008, we distributed substantially all of our
taxable income to our shareholders in the form of quarterly dividends. We intend
to continue distributing virtually all of such income to our shareholders on a
quarterly basis, subject to (i) limitations imposed by applicable
21
state law, and (ii) the factors identified above. The portion of any dividend
that exceeds our earnings and profits will be considered a return of capital and
will not currently be subject to federal income tax to the extent that such
dividends do not exceed a shareholder's basis in their shares.
Funds available to us from the repayment of principal (whether at maturity
or otherwise) of loans made by us, or from sale or other disposition of any
properties or any of our other investments, may be reinvested in additional
loans to churches, invested in mortgage-backed securities issued by churches or
other non-profit organizations, or in permitted temporary investments, rather
than distributed to the shareholders. We can pass through the capital gain
character of any income generated by computing its net capital gains and
designating a like amount of our distribution to our shareholders as "capital
gain dividends." The distribution requirement to maintain qualification as a
real estate investment trust does not require distribution of net capital gains,
if generated. Thus, if we have a choice of whether to distribute any such gains,
undistributed net capital gains (if any) will be taxable to us. The Board of
Directors, including a majority of the Independent Directors, will determine
whether and to what extent the proceeds of any disposition of property will be
distributed to our shareholders.
Equity Compensation Plans
We do not have any equity compensation plans under which equity securities
of the Company are authorized for issuance.
Item 6. Selected Financial Data
As a smaller reporting company, as defined in Rule 12b-2 of the Securities
Exchange Act of 1934 (the "Exchange Act"), we are not required to provide the
information required at this time.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The following discussion regarding our financial statements should be read
in conjunction with the financial statements and notes thereto included in this
Report beginning at page F-1.
Financial Condition
Our total assets decreased from approximately $47,656,000 at December 31,
2007 to $46,961,000 at December 31, 2008. The primary reason for the decrease in
total assets from December 31, 2007 through December 31, 2008 was a decrease in
mortgage loans receivable due to the payoff of loans and a decrease in real
estate held for sale, offset by purchases of bonds. Our primary liabilities at
December 31, 2008 and 2007 were our secured investor certificates, which were
$21,638,000 and $22,831,000 respectively, and our line of credit, which was
$4,500,000 and $3,350,000, respectively. Another material liability for both
periods includes dividends declared as of the end of the period reported on, but
which are not paid until the 30th day of the ensuing month. Shareholders' equity
decreased from approximately $21,254,000 at December 31, 2007 to approximately
$20,324,000 at December 31, 2008 primarily due to a stock repurchases, decrease
in net income as well as declared dividends.
Comparison of the fiscal years ended December 31, 2008 and 2007
The following table shows the results of our operations for fiscal 2008 and
2007:
Statement of Operations Data 2008 2007
--------------- --------------
--------------- --------------
Interest and other income $3,690,434 $3,932,815
Interest expense 2,066,432 1,988,594
--------------- --------------
--------------- --------------
Net Interest Income 1,624,002 1,944,221
Total provision for losses on mortgage loans and bonds 352,670 133,101
--------------- --------------
--------------- --------------
Net Interest Income after provision for mortgage and bonds losses 1,271,332 1,811,120
Operating expenses 781,439 755,443
Real estate impairment losses 460,865 217,362
--------------- --------------
--------------- --------------
Total operating expenses 1,242,304 972,805
--------------- --------------
--------------- --------------
Operating income 29,028 838,315
Other income 21,403 14,875
--------------- --------------
--------------- --------------
Net Income $50,431 $853,190
=============== ==============
=============== ==============
Basic and diluted earnings per share $0.02 $0.34
=============== ==============
22
Results of Operations
Since we began active business operations on April 15, 1996, we have paid
50 consecutive quarterly dividend payments to shareholders. These dividend
payments have resulted in an average annual return of 7.023% to shareholders who
purchased shares in our public offerings at $10 per share. Each loan funded
during the quarter generates origination income which is due and payable to
shareholders as taxable income even though origination income was not recognized
in its entirety for the period under generally accepted accounting principles
("GAAP"). We anticipate distributing our taxable income in the form of dividends
to our shareholders in the foreseeable future to maintain our REIT status and to
provide a reliable income source to our shareholders.
Our Board of Directors declared dividends of $.100 for each share of record
on March 31, 2008, $.10 for each share held of record on June 30, 2008, $.10 for
each share held of record September 30, 2008 and $.050 for each share held of
record on December 31, 2008. Based on the quarters ended March 31, 2008, June
30, 2008, September 30, 2008 and December 31, 2008, the dividends paid
represented a 4.00%, 4.00%, 4.00% and 2.00% annualized yield to shareholders,
respectively, for an effective overall annual yield of 3.50% in 2008. We aim to
provide a reliable dividend to our investors. In 2008, 51% of dividends paid to
shareholders was taxable ordinary dividends, while 49% of the dividends paid to
shareholders was return of capital and is reported as non-dividend
distributions.
The total amount of dividends paid in 2008 was $868,455 which number
includes $124,680 of dividends declared but not paid in 2007 and $123,604 of
dividends declared but not paid in 2008. In 2008, the total amount of dividends
declared and paid to shareholders was $867,379. Of the $867,379 amount paid,
approximately $438,763, or 51%, was a distribution of taxable income, and
$428,616, or 49%, was a return of capital because it was a distribution of
shareholder equity and not a distribution of taxable income. The Company decided
to pay cash from operating and financing activities to shareholders to provide a
reliable income source to shareholders.
Interest and other income was approximately $3,690,000 for fiscal 2008
compared to $3,933,000 for fiscal 2007. The decline relates to reduced interest
income on mortgage loans and bonds as well as a reduction in origination income.
Interest on mortgage loans receivable declined as the weighted average rate
declined from 8.80% to 8.70% as the loan balances outstanding declined by
$772,000. Bond balances have increased approximately $615,000 from approximately
$11,264,000 at December 31, 2007 to approximately $11,879,000 at December 31,
2008. The weighted average interest rate on the bonds declined from 8.14% at
December 31, 2007 to 7.94% at December 31, 2008. Although the bond balances have
increased, we have not received interest since May 2007 on approximately
$2,035,000 of bonds that we hold as the bond issuer is in default. These bonds
had been paying interest at approximately 6.72%. The trustee of the bonds has
foreclosed on the property and is working to sell the property.
The Company distributed virtually all of its cash from operating activities
and investing activities for the fiscal year ending December 31, 2008 in the
form of dividends to shareholders. Total cash for operating income and investing
activities totaled $1,016,000 and $93,000 for the fiscal year ending December
31, 2008 respectively. In addition, the Company increased its real estate
impairment reserve and its bond portfolio reserve by $461,000 and $300,000 for
the fiscal year ending December 31, 2008 respectively. This increase in loan
loss reserves was recognized in its entirety for the period under generally
accepted accounting principles ("GAAP"), but does not affect taxable income
distributions we are required to make to maintain our status as a REIT. We
anticipate distributing all of our taxable income (100%) in the form of
dividends to our shareholders in the foreseeable future to maintain our REIT
status and to provide a reliable income source to our shareholders.
Origination income is recognized over the life of the loans. As loans are
repaid prior to maturity, the remaining deferred origination income is
recognized. In 2007, the Company recognized higher amounts of origination income
due to the early repayment of loans. Excluded from revenue for fiscal 2008 is
$73,000 of origination income, or "points," we received for loans issued in
2008. Recognition of origination income under GAAP must be deferred over the
expected life of each loan. However, under tax principles, origination income is
recognized in the period received. Accordingly, because our status as a REIT
requires, among other things, the distribution to shareholders of at least 90%
of taxable income, the dividends declared and paid to our shareholders for the
quarters ended March 31, 2008, June 30, 2008, September 30, 2008 and December
31, 2008 included origination income even though it was not recognized in its
entirety as income for the period under GAAP.
23
Interest expense increased from approximately $1,989,000 in fiscal 2007 to
approximately $2,066,000 in 2008. Interest expense consists of interest paid on
secured investor certificates and the line of credit as well as the amortization
of loan costs related to these debt obligations. The increase in the total
interest expense resulted from higher balances on the line of credit during 2008
compared to 2007 and the write-off of loan costs of approximately $179,000 in
September 2008 when we replaced our line of credit with KeyBank with a new line
of credit with Beacon Bank. These increases were partially offset by a reduction
in the balances outstanding and interest rates of the secured investor
certificates and a lower interest rate on the line of credit.
Net interest income represents the difference between interest and other
income less interest expense. Net interest income declined from approximately
$1,944,000 in fiscal 2007 to approximately $1,624,000 in fiscal 2008 due to the
reduction in interest income produced by mortgage loans and bonds as well as
increases in interest expense resulting from the write-off of loan costs when
the line of credit was replaced, and higher balances outstanding on the line of
credit.
Provision for losses on mortgage loans receivable and bonds increased as we
recorded additional allowance against the mortgage loans as well as a provision
for losses on one bond that was in default. We recorded a provision for losses
on loans during 2008 of approximately $53,000 compared to approximately $33,000
in 2007. We continually assess our loan portfolio and reserve for potential
losses based on the payment history and status of loans. At December 31, 2008,
we reserved approximately $107,000 for eleven mortgage loans, of which five are
three or more mortgage payments in arrears. One of these loans is in the
foreclosure process. At December 31, 2007, we reserved approximately $72,000 for
fourteen mortgage loans, of which four were three or more mortgage payments in
arrears. Three of these loans were in the foreclosure process, of which one had
declared bankruptcy.
The additional provision for losses on our bond portfolio relates to bonds
that we hold of the St. Agnes Missionary Baptist Church ("St. Agnes") in
Houston, Texas. The St. Agnes bonds are secured by three properties that were
listed for approximately $19,167,000. St. Agnes stopped making full payments on
the bonds in May 2007, but had been making reduced payments, which are being
held in escrow. We recorded a provision for losses on the bonds of $100,000 in
2007. The trustee for the St. Agnes bonds foreclosed on the property that served
as collateral for the bonds in 2008. St. Agnes has been searching for financing
to replace the bonds in 2008, but has not been successful. The trustee has
received offers on one of the properties in 2008, but nothing definitive has
been signed. While these offers did not result in the sale of one or all of the
properties, they did provide a further basis as to the potential sale value of
the properties. St. Agnes stopped making reduced payments to the trustee once
the properties were foreclosed on. We recorded a provision for additional losses
of $300,000 due to the delays in selling the properties and deterioration in the
credit and economic environment.
Our operating expenses for fiscal 2008 were approximately $1,242,000
compared to approximately $973,000 for fiscal 2007. This increase in operating
expenses was a result of additional losses on real estate owned by us of
approximately $244,000. We recorded additional losses on property that we own
based on the estimated selling prices in 2008. We disposed of two properties in
2008. We expect to dispose of two properties in 2009. We expect to foreclose on
two additional properties in 2009 and may incur costs to secure and prepare
these properties for sale. We exhaust all options available to us to before
proceeding to foreclosure. We do not foresee any additional increase in
foreclosures other than these two churches.
Net income for fiscal 2008 was approximately $50,000 on total revenues of
approximately $3,690,000 compared to net income of approximately $853,000 on
total revenues of approximately $3,933,000 for fiscal 2007. This decrease in net
income was due to a reduction in interest income from mortgage loans and bonds
resulting from lower interest rates and lower mortgage balances, a reduction in
net interest margin resulting from the write off of loan costs when we replaced
our KeyBank line of credit with one from Beacon Bank, additional losses on the
St. Agnes bonds that were foreclosed upon, and real estate impairment losses.
Liquidity and Capital Resources
Our revenue is derived principally from interest income, and secondarily,
from origination fees and renewal fees generated by mortgage loans that we make.
We also earn income through interest on funds that are invested pending their
use in funding mortgage loans or distributions of dividends to our shareholders,
and on income generated on church bonds we may purchase and own. We generate
revenue through (i) permitted temporary investments of cash, and (ii) making
mortgage loans to churches and other non-profit religious organizations. Our
principal expenses are advisory fees, legal and auditing fees, communications
costs with our shareholders, and the expenses of our transfer agents and
registrar.
24
Our loan portfolio consists primarily of long term fixed rate loans. We
currently do not have any short term variable rate loans or renewable loans in
our portfolio. Historically, loans in our portfolio are outstanding for an
average of just under three 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 re-finance their loan with a local bank,
credit union or other financial institution that is willing to provide financing
since the borrower has established a payment history and have demonstrated they
can meet their mortgage debt obligations.
Currently, our bond portfolio comprises 25% of our assets under management.
The total principal amount of mortgage- secured debt securities we purchase from
churches and other non-profit religious organizations is limited to 30% of our
Average Invested Assets. The total par value of the outstanding bonds was
$12,278,000 as of December 31, 2008. We have recorded a provision for losses on
one bond as the bond trustee has foreclosed on the property and is working to
sell the property. Prior to 2007 we did not experience any loss of income from
our bond portfolio. We may sell bonds to match maturities of secured investor
certificates to the extent that interest income combined with repayment and
normal maturities of our mortgage loans do not cover these amounts.
We work to match maturities of mortgage loans and bonds to meet the
maturities of our secured investor certificates. We have also used funds from
prepayment of mortgage loans and bonds that have been called for payments on our
maturing secured investor certificates. In addition, if needed, we are able to
sell bonds that we own to meet the maturities of secured investor certificates.
In 2008 and 2007, we used funds from operating, investing and financing
activities to make payments on maturing secured investor certificates and
shareholder distributions. While we have generally paid amounts in excess of the
taxable dividend requirement, to maintain our REIT status, in the future, we may
have to reduce these excess amounts in order to maintain our debt service
requirements on our maturing secured investor certificates.
We had deficits in working capital at December 31, 2008 and 2007. The main
reasons for this deficit were the repayment of mortgage loans receivable, the
renewal of a portion of secured investor certificates when they mature, and the
continuation of our line of credit, even though it is classified as a current
liability. Historically, mortgage loans receivable have been refinanced or paid
off prior to the stated maturities. There is no assurance that this will
continue. If maturities and prepayment of loans, along with other potential cash
flows from the sale of real estate owned, are not sufficient to meet current
maturities of secured investor certificates, we may have to sell bonds in our
bond portfolio to meet these obligations. While we have historically sold bonds
at par value, there is no assurance that we will always be able to do so. A
portion of the secured investor certificates have renewed at maturity at the
current rates and terms. There is no assurance that the rate of renewal will
continue or that the terms of the renewal will be as favorable as it has been
historically.
In addition, we are able to borrow funds in an amount up to 300% of
shareholder's equity (in the absence of a satisfactory showing that a higher
level of borrowing is appropriate; any excess in borrowing over such 300% level
must be approved by a majority of the Independent Directors and disclosed to
shareholders in the next quarterly report along with justification for such
excess) in order to increase our lending capacity. We currently have an
$4,500,000 secured revolving credit facility with Beacon Bank, Shorewood,
Minnesota. Advances on the line of credit are available up to $4,500,000,
subject to borrowing base limitations. As of December 31, 2008 we have an
outstanding balance of $4,500,000 against our line of credit. This credit line
is secured by a first priority interest in substantially all of the Company's
assets other than the collateral pledged to secure the Company's Series "A" and
Series "B" secured investor certificates. Interest on our line of credit is
payable to Beacon Bank on a monthly basis. We believe that the rate at which we
lend funds will always be higher than the cost at which we borrow the funds
(currently the rate at which we can borrow funds under this line of credit is
the prime rate with a minimum interest rate of 5.00%). However, there can be no
assurance that we can always lend funds out at rates higher than the rate at
which we borrow the funds. When we do carry an outstanding balance on this line
of credit we plan to "pay-down" any future borrowings on our line of credit by
applying the proceeds from principal payments on our current loan portfolio
payments and any loan re-payments. Increases or decreases in the lending rates
charged by our bank sources as well as the increase or decrease in the rate of
interest charged on our loans has and likely will continue to impact interest
income we will earn and, accordingly, influence dividends declared by our Board
of Directors.
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. Upon being declared effective by the SEC, 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. Our future capital
needs are expected to be met by (i) future public offerings of our shares and/or
our certificates; (ii) the repayment of existing loans and bonds and potential
sale of bonds; and (iii) borrowing under our existing line of credit.
25
Loan Loss Reserve Policy
We follow a loan loss reserve policy on our portfolio of loans outstanding.
This critical policy requires complex judgments and the need to make estimates
of future events, which may or may not materialize as planned. This policy
reserves for principal amounts outstanding on a particular loan if cumulative
interruptions occur in the normal payment schedule of a loan. Our policy will
reserve for the outstanding principal amount of a loan in our portfolio if the
amount is in doubt of being collected. At December 31, 2008, we reserved
$107,308 against eleven mortgage loans. As of December 31, 2008, we had five
first mortgage loans that are three or more payments in arrears. One of the
loans is in the process of being foreclosed. The loan has an outstanding balance
of approximately $640,000. The church missed one mortgage payment in 2007 and
twelve mortgage payments in 2008. We plan to take possession of this property in
2009 and list it for sale through a local realtor.
The second loan has an outstanding balance of approximately $248,000. The
church missed one mortgage payment in 2007 and three mortgage payments in 2008.
The church is working to bring its account current.
The third loan has an outstanding balance of approximately $464,000. The
church missed three payments in 2008. The church is making payments toward the
arrearage.
The fourth loan has an outstanding balance of approximately $187,000. The
church missed four mortgage payments in 2008. The church is getting a new
pastor, and we are working with the denomination and the regional bishop to get
the church back to a monthly mortgage payment schedule.
The fifth loan has an outstanding balance of approximately $650,000. The
church missed three payments in 2008. The church has listed the property for
sale and expects to have the sale completed by March 31, 2009.
As of December 31, 2007, we had four first mortgage loans that are three or
more payments in arrears. Three of the loans were in the process of being
foreclosed. The first loan had an outstanding balance of approximately $385,000.
The church missed one mortgage payment in 2006 and ten mortgage payments in
2007. As of December 31, 2008, the Company had obtained ownership of the
property, which required the Company to reclassify the loan as real estate held
for sale.
The second loan had an outstanding balance of approximately $238,000. The
church missed five mortgage payments in 2007. We had obtained a deed in lieu of
foreclosure from the church and recorded the deed in the county where the church
resides. As of December 31, 2008, the Company had obtained ownership of the
property, which required the Company to reclassify the loan as real estate held
for sale.
The third loan had an outstanding balance of approximately $383,000. The
church missed six mortgage payments in 2007. We initiated the foreclosure
process, but on the day on which we were to take possession through Sheriff
Sale, the church filed bankruptcy. As of December 31, 2008, the Company obtained
ownership of the property and it is classified as real estate held for sale.
The fourth loan had an outstanding balance of approximately $150,000. The
church missed one payment in 2006 and two payments in 2007. The church submitted
a repayment plan which was accepted. As of December 31, 2008, the borrower had
continued the accepted payment plan and was not behind on payments.
We presently expect our loan loss reserves to be adequate to cover all
losses. Listed below is our current loan loss reserve policy:
==============================================================================================================================
Incident Percentage of Loan Reserved Status of Loan
==============================================================================================================================
------------------------------------------------------------------------------------------------------------------------------
1. None Loan is current, no
interruption in payments
during history of the loan,
("interruption" means receipt
by us more than 30 days after
scheduled payment date).
------------------------------------------------------------------------------------------------------------------------------
2. None Loan current, previous
interruptions experienced,
but none in the last six
month period. Applies to
restructured loans or loans
given forbearance.
------------------------------------------------------------------------------------------------------------------------------
3. None Loan current, previous interruptions experienced, but none in the last 90
day period.
26
==============================================================================================================================
Incident Percentage of Loan Reserved Status of Loan
==============================================================================================================================
- ------------------------------------------------------------------------------------------------------------------------------
4. 1.00% Loan serviced regularly, but 1 to 3 payments cumulative in arrears.
Delinquency notice sent.
------------------------------------------------------------------------------------------------------------------------------
5. 5.00% Loan serviced regularly, but 4 or 5 payments cumulative in arrears.
Repayment plan requested
------------------------------------------------------------------------------------------------------------------------------
6. The greater of: (i) accumulated Loan is declared in default. Foreclosure proceeding underway or
reserve during default period equal imminent. Reserve amount dependent on value of collateral. All expenses
to principal loan balance in excess related to enforcing loan agreements are expensed.
of 65% of original collateral
value; or (ii) 1% of the remaining
principal balance each quarter
during which the default remains in
effect.
==============================================================================================================================
The Company's Advisor, on an ongoing basis, will review reserve amounts
under the policy stated above and determine the need, if any, to reserve amounts
in excess of its current policy. Any additional reserve amounts will be equal to
or greater than its current reserve policy. Loan loss reserves are recorded on a
quarterly basis.
Bond Loss Policy
Bond loss reserves are estimated by management and are determined by
reviewing payment history, our experience with defaulted bond issues as well as
historical trends.
We currently own $2,035,000 First Mortgage Bonds issued by St. Agnes
Missionary Baptist Church. St. Agnes has defaulted on its payment obligations to
bondholders. Currently, Herring Bank, trustee for the bondholders of St. Agnes,
has foreclosed on the Church's property and has filed an unlawful detainer
against St. Agnes because the Church has not agreed to pay rent to Herring while
a buyer for their properties is sought. St. Agnes received a continuance from
the courts to not enforce the unlawful detainer while they continue to either
find new financing or a buyer for the properties.
On August 8, 2008 a local church executed a First Amendment to an Exclusive
Real Estate Purchase Contract to purchase one of the three properties of St.
Agnes known as the Gamma Center for $3,500,000. The potential buyer breached the
contract by failing to make the required escrow payments and then later failing
to close on the purchase of the Gamma Center. A lawsuit is intended if the
potential buyer does not honor its contract. Herring Bank has learned that the
potential buyer has moved in or is currently using the Gamma Center and paying
rent to St. Agnes. The attorneys for Herring Bank advised the potential buyer
that Herring Bank, not St. Agnes, is the owner of the property. Therefore, any
payments to St. Agnes should cease and the contract must be honored.
We are monitoring these proceedings and have reserved $400,000 against the
$2,035,000 St. Agnes bonds it owns. It is difficult to determine the correct
reserve amount since no viable offers have been made for the other two
facilities St. Agnes owns. We do not know the condition of the three facilities
at this time, as we are investors in the bonds issued by St. Agnes, not the loan
originator and St. Agnes' is still occupying the facilities. The increase in the
loan reserve from $100,000 to $400,000 is appropriate in our view as the
collateral backing the bonds will incur deferred maintenance costs given that
churches do not continue to repair or maintain their facilities in these
scenarios until they either sell their properties or the default is cured.
The Company, along with all other bondholders, has a superior lien over all
other creditors. We have not received interest payments from St. Agnes since May
2007. We are not accruing any missed interest payments from the bonds. We
foresee that we will not receive any interest payments from St. Agnes through
the first half of 2009.
Critical Accounting Policies and 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.
27
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 do not consider the availability of a
market for a loan in estimating fair value at this time. 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 a 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 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 re-sale includes estimates of expenses related to the sale of the real
estate.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
As a smaller reporting company, as defined in Rule 12b-2 of the Securities
Exchange Act of 1934 (the "Exchange Act"), we are not required to provide the
information required at this time.
Item 8. Financial Statements.
Financial Statements required by this item can be found at pages F-1
through F-17 of this Form10-K and are deemed incorporated herein by reference.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
None.
Item 9A(T). Controls and Procedures.
Disclosure Controls and Procedures
Under the supervision and with the participation of our senior management,
consisting of Philip J. Myers, our chief executive officer and chief financial
officer, we conducted an evaluation of the effectiveness of the design and
operation of our disclosure controls and procedures, as defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended,
as of the end of the period covered by this report (the "Evaluation Date").
Based on this evaluation, our chief executive officer and chief financial
officer concluded, as of the Evaluation Date, that our disclosure controls and
procedures are not effective as a result of limited resources devoted to
financial reporting and limited segregation of duties such that financial
information required to be disclosed in our Securities and Exchange Commission
("SEC") reports (i) is recorded, processed, summarized and reported within the
time periods specified in SEC rules and forms, and (ii) is accumulated and
communicated to our management, including our chief executive officer and chief
financial officer, as appropriate to allow timely decisions regarding required
disclosure. More specifically, the Company 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. Management recognizes that these are
material weaknesses. A material weakness is a deficiency, or combination of
deficiencies, in internal control over financial reporting, such that there is a
reasonable possibility that a material misstatement of the Company's annual or
interim financial statements will not be prevented or detected in a timely
basis.
28
Management's Annual Report on Internal Control Over Financial Reporting
The management of American Church Mortgage Company is responsible for
establishing and maintaining an adequate system of internal control over
financial reporting (as defined in Exchange Act Rule 13a-15(f)). Under the
supervision and with the participation of our senior management, we also
conducted an evaluation of our internal control over financial reporting as of
the Evaluation Date. Our internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes of
accounting principles generally accepted in the United States. Because of its
inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Therefore, even those systems determined to be
effective can provide only reasonable assurance of achieving their control
objectives. In evaluating the effectiveness of our internal control over
financial reporting, our management used the criteria set forth by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO) in Internal
Control - Integrated Framework. Based on that evaluation, our chief executive
officer and chief financial officer concluded that, as of the Evaluation Date,
we did not maintain effective internal control over financial reporting as a
result of the material weakness described above. We continue to evaluate
internal control improvements, particularly related to financial reporting for
ongoing changes to our operations and 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.
This annual report does not include an attestation report of our
independent registered public accounting firm regarding internal control over
financial reporting. Management's report was not subject to attestation by our
registered public accounting firm pursuant to temporary rules of the Securities
and Exchange Commission that permit us to provide only management's report in
this annual report.
Our independent registered public accountants have reported to our Board of
Directors certain matters of involving internal controls that they considered to
be material weaknesses on the Evaluation Date, under standards established by
the American Institute of Certified Public Accountants. The material weaknesses
relates to the limited resources related to financial reporting and available to
provide segregation of duties.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting,
except for the material weakness identified above related to limited resources
devoted to financial reporting that occurred during the last fiscal quarter of
the period covered by this report that have materially affected or are
reasonably likely to materially affect our internal control over financial
reporting.
Item 9B. Other Information
Not applicable.
PART III
Item 10. Directors, Executive Officers, Promoters and Corporate Governance.
The information required by Item 10 will be included in the Company's
definitive proxy statement for the annual meeting of shareholders to be held on
or about June 12, 2009, to be filed with the Securities and Exchange Commission
not later than 120 days after the end of the fiscal year covered by this report
and is incorporated herein by reference.
Item 11. Executive Compensation
The information required by Item 11 will be included in the Company's
definitive proxy statement for the annual meeting of shareholders to be held on
or about June 12, 2009, to be filed with the Securities and Exchange Commission
not later than 120 days after the end of the fiscal year covered by this report
and is incorporated herein by reference.
29
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by Item 12 will be included in the Company's
definitive proxy statement for the annual meeting of shareholders to be held on
or about June 12, 2009, to be filed with the Securities and Exchange Commission
not later than 120 days after the end of the fiscal year covered by this report
and is incorporated herein by reference
Item 13. Certain Relationships and Related Transactions, and Director
Independence
The information required by Item 13 will be included in the Company's
definitive proxy statement for the annual meeting of shareholders to be held on
or about June 12, 2009, to be filed with the Securities and Exchange Commission
not later than 120 days after the end of the fiscal year covered by this report
and is incorporated herein by reference
Item 14. Principal Accountants Fees and Services
The information required by Item 14 will be included in the Company's
definitive proxy statement for the annual meeting of shareholders to be held on
or about June 12, 2009, to be filed with the Securities and Exchange Commission
not later than 120 days after the end of the fiscal year covered by this report
and is incorporated herein by reference.
30
Item 15. Exhibits
Exhibit
No. Title
3.1 Amended and Restated Articles of Incorporation 1
3.2 Third Amended and Restated Bylaws 2
4.1 Specimen Common Stock Certificate 1
4.2 Trust Indenture between the Company and The Herring National Bank dated April 26, 2002 3
4.3 Supplemental Trust Indenture between the Company and The Herring National Bank dated September 28, 4
2004
4.4 First Supplemental Indenture to 2002 Indenture dated July 2, 2007 2
4.5 First Supplemental Indenture to 2004 Indenture dated July 2, 2007 2
10.1 Amended and Restated REIT Advisory Agreement with Church Loan Advisors, Inc. dated January 22, 2004 5
10.2 Security Agreement between the Company and The Herring National Bank, as Trustee dated April 26, 2002 3
10.3 Supplemental Security Agreement between the Company and The Herring National Bank, as Trustee dated 4
September 28, 2004
10.4 Form of Loan and Security Agreement by and between the Company and Beacon Bank 6
10.5 Form of Revolving Note 6
10.6 Form of Securities Account Control Agreement by and among the Company, Herring Bank and Beacon Bank 6
31.1 Certification Pursuant to Section 302 of Sarbanes Oxley Act of 2002 7
31.2 Certification Pursuant to 19 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes 7
Oxley Act of 2002
(1) Incorporated herein by reference to the Company's Registration Statement on Form 8-A, filed April 30, 1999.
(2) Incorporated herein by reference to the Company's Current Report on Form 8-K, filed July 3, 2007.
(3) Incorporated herein by reference to the Company's Registration Statement on Form S-11/A, filed April 26, 2002.
(4) Incorporated herein by reference to the Company's Registration Statement on Form S-11/A, filed September 29, 2004.
(5) Incorporated herein by reference to the Company's Current Report on Form 8-K/A, filed August 1, 2007.
(6) Incorporated herein by reference to the Company's Current Report on Form 8-K, filed September 17,2008.
(7) Filed herewith.
31
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant has
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
AMERICAN CHURCH MORTGAGE COMPANY
Dated: March 31, 2009 By: /s/ Philip J. Myers
---------------- -------------------------------------
Philip J. Myers, President, Treasurer
Chief Executive Officer, President and Treasurer
Principal Executive Officer and Principal
Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated.
By: /s/ Philip J. Myers Date: 03/31/2009
---------------------------------- ------------------
Philip J. Myers
President, Treasurer and Director
By: /s/ Dennis J. Doyle Date: 03/31/2009
---------------------------------- -----------------
Dennis J. Doyle, Director
By: /s/ Michael G. Holmquist Date: 03/31/2009
---------------------------------- -----------------
Michael G. Holmquist, Director
By: /s/ Kirbyjon H. Caldwell Date: 03/31/2009
---------------------------------- -----------------
Kirbyjon H. Caldwell, Director
32
AMERICAN CHURCH MORTGAGE COMPANY
Minnetonka, Minnesota
Financial Statements
December 31, 2008 and 2007
[GRAPHIC OMITTED]
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors
American Church Mortgage Company
Minnetonka, Minnesota
We have audited the accompanying balance sheets of American Church Mortgage
Company as of December 31, 2008 and 2007 and the related statements of
operations, stockholders' equity, and cash flows for each of the years in the
two-year period ended December 31, 2008. American Church Mortgage Company
management is responsible for these financial statements. Our responsibility is
to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of American Church Mortgage
Company as of December 31, 2008 and 2007, and the results of its operations and
its cash flows for each of the years in the two-year period ended December 31,
2008 in conformity with accounting principles generally accepted in the United
States of America.
/s/ Boulay, Heutmaker, Zibell * Co., P.L.L.P.
Certified Public Accountants
Minneapolis, Minnesota
March 31, 2009
F-1
AMERICAN CHURCH MORTGAGE COMPANY
Balance Sheets
December 31
- ---------------------------------------------------------------------------------------------------------------------------
ASSETS 2008 2007
- ---------------------------------------------------------------------------------------------------------------------------
Current Assets
Cash and equivalents $ 271,373 $ 285,118
Accounts receivable 133,638 112,546
Interest receivable 154,466 151,105
Current maturities of mortgage loans receivable, net of
allowance of $107,308 and $72,056 and deferred
origination fees of $32,531 and $30,412 at
December 31, 2008 and 2007, respectively 463,841 877,400
Current maturities of bond portfolio 342,000 41,000
Prepaid expenses 9,724 7,072
-------------- ---------
Total current assets 1,375,042 1,474,241
Mortgage Loans Receivable, net of current maturities 32,100,196 32,464,951
Bond Portfolio, net of current maturities 11,536,937 11,222,713
Real Estate Held for Sale 1,261,832 1,566,561
Deferred Secured Investor Certificates Offering Costs,
net of accumulated amortization of $977,237 and $871,437
at December 31, 2008 and 2007, respectively 654,810 700,479
Deferred Line of Credit Costs, net of accumulated
amortization of $5,835 and $36,652 at
December 31, 2008 and 2007, respectively 32,383 227,278
-------------- ----------
Total Assets $ 46,961,200 $ 47,656,223
============== ==========
Notes to Financial Statements are an integral part of this Statement.
F-2
AMERICAN CHURCH MORTGAGE COMPANY
Balance Sheets
December 31
- ---------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY 2008 2007
- ---------------------------------------------------------------------------------------------------------------------------
Current Liabilities
Current maturities of secured investor certificates $ 3,969,000 $ 2,197,000
Line of credit 4,500,000 3,350,000
Accounts payable 23,317 28,941
Accrued expenses - 18,022
Building funds payable 352,595 50,000
Dividends payable 123,604 124,680
---------- ---------
Total current liabilities 8,968,516 5,768,643
Secured Investor Certificates, Series A 3,151,000 6,008,000
Secured Investor Certificates, Series B 14,518,000 14,626,000
Stockholders' Equity
Common stock, par value $.01 per share
Authorized, 30,000,000 shares
Issued and outstanding, 2,472,081 and 2,493,595
at December 31, 2008 and 2007, respectively 24,721 24,936
Additional paid-in capital 22,814,911 22,927,644
Accumulated deficit (2,515,948) (1,699,000)
----------- ----------
Total stockholders' equity 20,323,684 21,253,580
----------- ----------
Total liabilities and equity $ 46,961,200 $ 47,656,223
=========== ==========
Notes to Financial Statements are an integral part of this Statement.
F-3
AMERICAN CHURCH MORTGAGE COMPANY
Statements of Operations
- ---------------------------------------------------------------------------------------------------------------------------
Years Ended December 31
2008 2007
- ---------------------------------------------------------------------------------------------------------------------------
Interest and Other Income $ 3,690,434 $ 3,932,815
Interest Expense 2,066,432 1,988,594
----------- ----------
Net Interest Income 1,624,002 1,944,221
Provision for losses on mortgage loans receivable 52,670 33,101
Provision for losses on bonds 300,000 100,000
----------- ----------
Total provision for losses on mortgage loans and bonds 352,670 133,101
----------- ----------
Net Interest Income after provision for mortgage and bond losses 1,271,332 1,811,120
Operating Expenses
Other operating expenses 781,439 755,443
Real estate impairment loss 460,865 217,362
----------- ----------
Total operating expenses 1,242,304 972,805
----------- ----------
Operating income 29,028 838,315
Other income 21,403 14,875
----------- ----------
Net Income $ 50,431 $ 853,190
=========== ==========
Basic and Diluted Income Per Share $ 0.02 $ 0.34
=========== ==========
Weighted Average Common Shares Outstanding - Basic and Diluted 2,480,392 2,493,595
=========== ==========
Notes to Financial Statements are an integral part of this Statement.
F-4
AMERICAN CHURCH MORTGAGE COMPANY
Statements of Stockholders' Equity
- --------------------------------------------------------------------------------------------------------------------------
Additional
Common Stock Paid-In Accumulated
Shares Amount Capital Deficit
- --------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2006 2,493,595 $ 24,936 $ 22,927,644 $ (1,897,618)
Net income 853,190
Dividends declared (654,572)
--------------------------------------------------------------------
Balance, December 31, 2007 2,493,595 $ 24,936 $ 22,927,644 $ (1,699,000)
Repurchase of 21,514 shares of common stock (21,514) (215) (112,733)
Net income 50,431
---------------------------------------------------------------------
Dividends declared (867,379)
Balance, December 31, 2008 $ 2,472,081 $ 24,721 $ 22,814,911 $ (2,515,948)
=====================================================================
Notes to Financial Statements are an integral part of this Statement.
F-5
AMERICAN CHURCH MORTGAGE COMPANY
Statements of Cash Flows
- ---------------------------------------------------------------------------------------------------------------------------
Years Ended December 31
2008 2007
- ---------------------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities
Net income $ 50,431 $ 853,190
Adjustments to reconcile net income to net cash
from operating activities:
Impairment loss on real estate held for sale 460,865 217,362
Provision for losses on mortgage loans receivable 52,670 33,101
Provision for losses on bond portfolio 300,000 100,000
Amortization of loan origination discounts (102,152) (123,473)
Amortization of deferred costs 159,972 202,067
Recognition of loan costs with line of credit refinancing 178,941 -
Other - 60,000
Change in assets and liabilities
Accounts receivable (55,067) 24,163
Interest receivable (3,361) 13,818
Prepaid expenses (2,652) 1,300
Accounts payable (5,624) 2,630
Accrued expenses (18,022) 18,022
---------- ----------
Net cash from operating activities 1,016,001 1,402,180
Cash Flows from Investing Activities
Investment in mortgage loans (1,954,644) (6,807,144)
Proceeds from origination fees 73,022 76,135
Collections of mortgage loans 2,709,320 9,891,776
Investments in bonds (1,372,355) (2,533,620)
Proceeds from bonds 457,131 720,604
Proceeds from sale of property 180,532 130,343
------------ -----------
Net cash provided from investing activities 93,006 1,478,094
Cash Flows from Financing Activities
Proceeds from line of credit, net 1,150,000 61,185
Payments on secured investor certificate maturities (1,193,000) (1,851,000)
Payments for deferred costs (98,349) (110,289)
Stock redemptions (112,948) -
Dividends paid (868,455) (927,310)
----------- ------------
Net cash used for financing activities (1,122,752) (2,827,414)
------------ ------------
Net (Decrease) Increase in Cash and Equivalents (13,745) 52,860
Cash and Equivalents - Beginning of Year 285,118 232,258
----------- -----------
Cash and Equivalents - End of Year $ 271,373 $ 285,118
=========== ===========
Notes to Financial Statements are an integral part of this Statement.
F-6
AMERICAN CHURCH MORTGAGE COMPANY
Statements of Cash Flows - Continued
- ---------------------------------------------------------------------------------------------------------------------------
Years Ended December 31
2008 2007
- ---------------------------------------------------------------------------------------------------------------------------
Supplemental Cash Flow Information
Dividends payable $ 123,604 $ 124,680
============ ===========
Mortgages and accounts receivable
to real estate held for sale $ 989,083 $ 789,076
============ ===========
Mortgage loans closed but not paid $ 352,595 $ 50,000
============ ===========
Line of credit borrowings use for deferred offering costs $ - $ 166,815
============ ===========
Line of credit borrowings used for payment of secured
investor certificates $ - $ 1,956,000
============ ===========
Real estate held for sale to mortgage loans $ 645,000 $ -
============ ===========
Line of credit refinanced $ 4,200,000 $ -
============ ===========
Cash paid during the year for
Interest $ 2,084,454 $ 1,760,693
============ ============
Notes to Financial Statements are an integral part of this Statement.
F-7
AMERICAN CHURCH MORTGAGE COMPANY
Notes to Financial Statements
December 31, 2008 and 2007
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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, 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.
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. The Company has classified $342,000 in bonds as current assets
based on management's estimates for liquidity requirements and contractual
maturities of certain bonds maturing in 2009.
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
F-8
AMERICAN CHURCH MORTGAGE COMPANY
Notes to Financial Statements
December 31, 2008 and 2007
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 December 31, 2008, the Company reserved
$107,308 for eleven mortgage loans, of which five are three or more mortgage
payments in arrears. One of the loans is in the foreclosure process. At December
31, 2007, the Company reserved $72,056 for fourteen mortgage loans, of which
four were three or more mortgage payments in arrears. Three of the loans were in
the foreclosure process, of which one had declared bankruptcy.
A summary of transactions in the allowance for credit losses for the years ended
December 31 is as follows:
2008 2007
-----------------------------------------
Balance at beginning of year $ 72,056 $ 97,262
Provision for additional losses 52,670 33,101
Charge-offs (17,418) (58,307)
-----------------------------------------
Balance at end of year $ 107,308 $ 72,056
=========================================
Charge-offs include amounts related to transfers to real estate held for sale.
The total impaired loans, which are loans that are in the foreclosure process or
are no longer performing, were approximately $640,000 and $1,156,000 at December
31, 2008 and 2007, respectively, which the Company believes is adequately
secured by the underlying collateral.
Loans totaling approximately $901,000 and $150,000 exceeded 90 days past due but
continued to accrue interest as of December 31, 2008 and 2007, 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.
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.
Foreclosure was completed in 2004 on a church located in Battle Creek, Michigan.
The church congregation disbanded and the church property is currently
unoccupied. The Company owns and took possession of the church and has listed
the property for sale through a local realtor.
Foreclosure was also completed on a church located in Tyler, Texas in 2005. The
church congregation is now meeting in a different location and the church
property is currently unoccupied. The Company owns and took possession of the
church and has listed the property for sale through a local realtor.
F-9
AMERICAN CHURCH MORTGAGE COMPANY
Notes to Financial Statements
December 31, 2008 and 2007
Foreclosure was completed in 2006 on a church located in Dayton, Ohio. The
church congregation is now meeting in a different location and the church
property is currently unoccupied. The Company owns and took possession of the
church and listed the property for sale through a local realtor.
Foreclosure was completed in 2008 on a church located in Anderson, Indiana. The
Company owns and took possession of the property in May 2008 and listed it for
sale.
Foreclosure was completed in 2008 on a church located in Lancaster, Texas. The
Company owns and took possession of the property in July 2008 and listed the
property for sale. In order to obtain a certificate of occupancy, a new parking
lot must be completed, as the previous owner began to replace the parking lot
without city approval. The Company has factored the costs of parking lot
replacement into its fair value calculation of the property.
A deed in lieu of foreclosure was received in 2008 from a church located in Pine
Bluff, Arkansas. The Company owns and took possession of the church while it
attempts to obtain financing from another lender. If alternative financing
cannot be obtained, the Company will list the church for sale with a local
realtor.
A deed in lieu of foreclosure was received from a church located in Cleveland,
Ohio. The Company took possession of the church and listed the property for sale
through a local realtor. The sale of the property was completed on January 18,
2008. The property sold for approximately $215,000 and the Company received
approximately $181,000 from the sale of the property after closing costs and
realtor fees.
Foreclosure was also completed on a church located in Dallas, Texas. The Company
took possession of the property. The Company received an earnest money deposit
from a buyer, the certificate of occupancy was obtained, and the sale of the
property was completed on September 30, 2008, for approximately $650,000.
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 and
compared to the sum of the undiscounted cash flows expected to result from the
use and the eventual disposal of the asset, as well as specific appraisal in
certain instances. An impairment loss is recognized when the carrying amount is
deemed not recoverable and exceeds fair value as determined through various
valuation techniques
F-10
AMERICAN CHURCH MORTGAGE COMPANY
Notes to Financial Statements
December 31, 2008 and 2007
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 using the straight-line method, which approximates the effective interest
method, as an adjustment to the yield on the loan.
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 Per Common Share
No adjustments were made to income for the purpose of calculating earnings per
share, as there were no potential dilutive shares outstanding.
Income Taxes
The Company elected to be taxed as a Real Estate Investment Trust (REIT).
Accordingly, the Company is not subject to Federal income tax to the extent of
distributions to its stockholders if the Company meets all the requirements
under the REIT provisions of the Internal Revenue Code.
In June 2006, the FASB issued Interpretation No. 48, `Accounting for Uncertainty
in Income Taxes - an interpretation of FASB Statement No. 109 (FIN 48)". FIN 48
clarifies the requirements of SFAS 109, "Accounting for Income Taxes", relating
to the recognition of income tax benefits. FIN 48 provides a two-step approach
to recognizing and measuring tax benefits when realization of the benefits is
uncertain. The first step is to determine whether the benefit meets the
more-likely-than-not condition for recognition and the second step is to
determine the amount to be recognized based on the cumulative probability that
exceeds 50%. Primarily due to the Company's tax status as a REIT, the adoption
of FIN 48 on January 1, 2008, had no material effect on the Company's financial
condition or results of operations.
Repurchase of Common Stock
Although our common shares are not redeemable by us, we may, at our complete
discretion, repurchase shares offered to us from time to time by our
shareholders. In such event, we may pay whatever price Church Loan Advisors,
Inc.("Advisor") to the Company, deems appropriate and reasonable, and any such
shares repurchased will be re-designated as "unissued," will no longer be
entitled to distribution of dividends and will cease to have voting rights.
Shares that may be purchased are not part of a publicly announced plan to
repurchase shares nor does the Company plan or anticipate any stock repurchase
plans.
F-11
AMERICAN CHURCH MORTGAGE COMPANY
Notes to Financial Statements
December 31, 2008 and 2007
Reclassifications
The Company made certain reclassifications to the balance sheet and statement of
operations for the year ended December 31, 2007, to conform to classifications
for the year ended December 31, 2008. Deferred income related to origination
fees of approximately $627,000 is reclassified to mortgage loans receivable in
the balance sheet at December 31, 2007. Amortization of loan costs and other
costs of approximately $210,000 are reclassified to interest expense in the
statement of operations for the year ended December 31, 2007. Other income of
approximately $15,000 was reclassified from interest and other income to other
income in the statement of operations for the year ended December 31, 2007.
Total stockholders' equity, net income, and cash flows are unchanged due to
these reclassifications.
2. FAIR VALUE MEASUREMENT
Effective January 1, 2008, the Company adopted Statement of Financial Accounting
Standard No. 157, "Fair Value Measurements" (SFAS 157), as it applies to our
financial instruments, and Statement of Financial Accounting Standard No. 159,
"The Fair Value Option for Financial Assets and Financial Liabilities -
Including an amendment of FASB Statement No. 115" (SFAS 159). SFAS 157 defines
fair value, outlines a framework for measuring fair value, and details the
required disclosures about fair value measurements. SFAS 159 permits companies
to irrevocably choose to measure certain financial instruments and other items
at fair value. SFAS 159 also establishes presentation and disclosure
requirements designed to facilitate comparison between entities that choose
different measurement attributes for similar types of assets and liabilities.
Under SFAS 157, fair value is defined as the price that would be received to
sell an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date in the principal or most
advantageous market. SFAS 157 establishes a hierarchy in determining the fair
value of an asset or liability. The fair value hierarchy has three levels of
inputs, both observable and unobservable. 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.
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, as
permitted by SFAS 159. No events occurred during the twelve months ended
December 31, 2008 that would require adjustment to the recognized balances of
assets or liabilities, which are recorded at fair value on a nonrecurring basis.
F-12
AMERICAN CHURCH MORTGAGE COMPANY
Notes to Financial Statements
December 31, 2008 and 2007
The following table summarizes the Company's financial instruments that were
measured at fair value on a recurring basis at December 31, 2008.
Fair Value
Measurement
Fair Value Level 3
Bond portfolio $11,878,937 $11,878,937
=========== ==========
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 discounted cash flow analysis on the
expected cash flows of the bonds. The analysis reflects the contractual terms of
the bonds, which are callable 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 beginning of the year $ 11,263,713
Purchases 1,372,355
Proceeds (457,131)
Provision for losses (300,000)
----------
Balance at end of the year $ 11,878,937
==========
3. MORTGAGE LOANS RECEIVABLE AND BOND PORTFOLIO
At December 31, 2008, the Company had first mortgage loans receivable totaling
$33,268,791. The loans bear interest ranging from 5.00% to 12.00% with a
weighted average of approximately 8.70% at December 31, 2008. The Company had
first mortgage loans receivable totaling $34,040,983 that bore interest ranging
from 7.50% to 12.00% with a weighted average of approximately 8.80% at December
31, 2007.
The Company has a portfolio of secured church bonds at December 31, 2008 and
2007, which are carried at fair value. The bonds pay either semi-annual or
quarterly interest ranging from 4.50% to 12.00%. The weighted average interest
rate on the bonds was approximately 7.94% and 8.14% at December 31, 2008 and
2007, respectively. Eight bond issues comprised 81% and 85% of the Company's
bond portfolio at December 31, 2008 and 2007, respectively. The Company has a
provision for losses of $400,000 and $100,000 at December 31, 2008 and 2007,
respectively, for one
F-13
AMERICAN CHURCH MORTGAGE COMPANY
Notes to Financial Statements
December 31, 2008 and 2007
bond series that is in default. This bond series is approximately 17% of the
bond portfolio at December 31, 2008 and 2007, respectively. The Company had
maturities and redemptions of bonds of approximately $457,000 and $721,000 in
2008 and 2007, respectively. The Company purchased approximately $1,372,000 and
$2,534,000 of bonds in 2008 and 2007, respectively.
The contractual maturity schedule for mortgage loans receivable and the bond
portfolio as of December 31, 2008, is as follows:
Mortgage Loans Bond Portfolio
2009 $ 603,680 $ 65,000
2010 1,094,057 175,000
2011 736,532 525,000
2012 813,334 351,000
2013 1,492,256 659,000
Thereafter 28,528,932 10,503,937
---------- ----------
33,268,791 12,278,937
Less loan loss and bond loss provisions (107,308) (400,000)
Less deferred origination income (597,446) -
------------ ----------
Totals $32,564,037 $11,878,937
========== ===========
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. The church subsequently commenced a Chapter
11 bankruptcy reorganization proceeding regarding the three properties that
secure the church 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 bonds is recorded by the Company. The Company has a
provision for losses of $400,000 and $100,000 for the bonds at December 31, 2008
and 2007, respectively, which effectively reduces the bonds to the fair value
amount management believes will be recovered.
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. Interest expense related to these certificates for the years ended
December 31, 2008 and 2007, respectively, is approximately $1,518,000 and
$1,657,000. The weighted average interest rate on the certificates was 6.86% and
7.34% for 2008 and 2007, 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 $1,004,000 and $1,318,000 in 2008 and 2007, respectively. The
secured investor certificates have certain financial and non-financial
covenants.
F-14
AMERICAN CHURCH MORTGAGE COMPANY
Notes to Financial Statements
December 31, 2008 and 2007
The estimated maturity schedule for the secured investor certificates at
December 31, 2008 is as follows:
Secured Investor
Certificates
--------------------
2009 $ 3,969,000
2010 1,151,000
2011 850,000
2012 1,167,000
2013 1,135,000
Thereafter 13,366,000
-----------
Totals $21,638,000
==========
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. Upon being declared effective by the SEC, 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 obtained an $8,000,000 line of credit with Beacon Bank replacing the
$15,000,000 revolving credit facility with KeyBank National Association
(KeyBank) until September 2010. Advances on the new 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 December 31, 2008, the interest rate on the facility is 5.00% and
we have an outstanding balance of $4,500,000. Additional expense was incurred of
approximately $179,000 when unamortized fees related to our terminated Key Bank
line of credit were recognized during 2008.
At December 31, 2007, the Company had a $15,000,000 line of credit with KeyBank.
This line of credit had carried interest at the LIBOR plus 1.875% with
reductions in the premium above LIBOR based on a financial ratio. At December
31, 2007, the outstanding balance on the line of credit was $3,350,000 with
interest charged at LIBOR plus 1.50%, which totaled 6.56%.
F-15
AMERICAN CHURCH MORTGAGE COMPANY
Notes to Financial Statements
December 31, 2008 and 2007
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, administrative services and personnel. The Advisor and the Company are
related through common ownership and common management. The Company paid the
Advisor management and origination fees of approximately $452,000 and $487,000
during 2008 and 2007, respectively. The Company repurchased approximately 22,000
common stock shares from American Investors Group, Inc. for approximately $5.25
per share in the twelve months ended December 31, 2008. American Investors
Group, Inc. is related to the Company through common ownership and common
management.
7. INCOME TAXES
As discussed in Note 1, a REIT is subject to taxation to the extent that taxable
income exceeds dividend distributions to shareholders. In order to maintain
status as a REIT, the Company is required to distribute at least 90% of its
taxable income. In 2008, the Company had pretax income of $50,431 and
distributions to shareholders in the form of dividends during the tax year of
$867,379. The expected tax expense to the Company, pre-dividends would have been
$17,147. In 2007, the Company had pretax income of $853,190 and distributions to
shareholders in the form of dividends during the tax year of $654,572. The
expected tax expense to the Company, pre-dividends, would have been $290,085 in
2007. The Company paid out 100% of taxable income in dividends in 2008 and 2007.
The following reconciles the income tax provision with the expected provision
obtained by applying statutory rates to pretax income:
2008 2007
---- ----
Expected tax expense $ 17,147 $290,085
Realized tax loss (134,666) (284,427)
Benefit of REIT distributions (149,179) (129,118)
Valuation allowance 266,698 63,460
-------- --------
Total provision included in operating expenses $ - ($ 60,000)
======== ========
The components of deferred income taxes are as follows:
2008 2007
---- ----
Loan origination fees $203,132 $213,036
Loan loss allowance 176,527 58,499
Real-estate impairment 238,206 215,997
Valuation allowance (617,865) (487,532)
-------- ------
Total deferred income tax $ - $ -
======== ======
F-16
AMERICAN CHURCH MORTGAGE COMPANY
Notes to Financial Statements
December 31, 2008 and 2007
The total deferred tax assets are as follows:
2008 2007
---- ----
Deferred tax assets $617,865 $487,532
Deferred tax asset valuation allowance (617,865) (487,532)
------- -------
Net deferred tax asset $ - $ -
======= ======
The change in the valuation allowance was approximately $203,000 and $63,000 for
2008 and 2007, respectively.
8. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of the Company's financial instruments, none of which
are held for trading purposes, are as follows:
December 31, 2008 December 31, 2007
----------------------------- --------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------- ---------- ---------- ------------
Cash and equivalents $ 271,373 $ 271,373 $ 285,118 $ 285,118
Accounts receivable 141,821 141,821 112,546 112,546
Interest receivable 154,466 154,466 151,105 151,105
Mortgage loans receivable 32,564,037 33,469,004 33,342,351 33,342,351
Bond portfolio 11,878,937 11,878,937 11,263,713 11,263,713
Secured investor certificates 21,638,000 23,341,297 22,831,000 22,831,000
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 twelve months ended December 31, 2008. The carrying value of the bond
portfolio is currently at fair value. The bonds were valued by comparing our
portfolio to similar instruments with like terms since our bonds are callable at
any time by the issuer at par and the bond portfolio yield is currently lower
than the interest rates on similar instruments. The fair value of the secured
investor certificates is currently greater than the carrying value due to higher
interest rates than current market rates.
F-17