UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Under Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the Quarterly Period Ended March 31, 2008
or
[ ] Transition Report Under Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the Transition Period from ------------to------------
Commission File Number 000-25919
American Church Mortgage Company
(Exact name of registrant as specified in its charter)
Minnesota 41-1793975
(State or other jurisdiction of
incorporation or organization) (I.R.S. Employer Identification No.)
10237 Yellow Circle Drive Minnetonka, MN 55343
(Address of principal executive offices) (Zip Code)
(952) 945-9455
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate by check mark whether the registrant 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
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding at May 12, 2008
------------------------------------------- ----------------------------
Common Stock, $0.01 par value per share 2,493,595 shares
AMERICAN CHURCH MORTGAGE COMPANY
INDEX Page
No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Balance Sheets.................................................................. 2
Condensed Statements of Operations ....................................................... 4
Statements of Stockholder's Equity.........................................................5
Condensed Statements of Cash Flows.........................................................6
Notes to Condensed Financial Statements ...................................................8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ......................................................15
Items 4 and 4T. Controls and Procedures............................................................19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.19
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds...............................19
Item 3. Defaults Upon Senior Securities...........................................................19
Item 4. Submission of Matters to a Vote of Security Holders.......................................19
Item 5. Other Information.........................................................................19
Item 6. Exhibits..................................................................................19
Signatures................................................................................20
AMERICAN CHURCH MORTGAGE COMPANY
Minnetonka, Minnesota
Financial Statements
March 31, 2008
AMERICAN CHURCH MORTGAGE COMPANY
Condensed Balance Sheets
---------------------------------------------------------------- ----------------------------- -- --------------------------------
ASSETS March 31, 2008 December 31, 2007
---------------------------------------------------------------- ----------------------------- -- --------------------------------
(Unaudited)
Current Assets
Cash and equivalents $ 378,237 $ 285,118
Accounts receivable 124,868 112,546
Interest receivable 153,478 151,105
Current maturities of mortgage loans receivable, net of
allowance of $85,001 at March 31, 2008 and
$72,056 at December 31, 2007 901,423 907,812
Current maturities of bond portfolio 44,000 41,000
Prepaid expenses 24,639 7,072
------------------- ----------------------
Total current assets 1,626,645 1,504,653
Mortgage Loans Receivable, net of current maturities 32,572,312 33,061,115
Real Estate Held for Sale 1,289,614 1,566,561
Deferred Secured Investor Certificates Offering Costs,
net of accumulated amortization of $899,235 at
March 31, 2008 and $871,437 at December 31, 2007 677,173 700,479
Deferred Line of Credit Costs, net of accumulated
amortization of $58,596 at March 31, 2008 and
$36,652 at December 31, 2007 205,334 227,278
Bond Portfolio, net of current maturities and allowance
of $100,000 at March 31, 2008 and December 31, 2007 11,831,755 11,222,713
------------------- ----------------------
Total assets $ 48,202,833 $ 48,282,799
=================== =====================
Notes to Unaudited Condensed Financial Statements are an integral part of this
Statement.
2
AMERICAN CHURCH MORTGAGE COMPANY
Condensed Balance Sheets
------------------------------------------------------------------------- ----------------------- -- -------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY March 31, 2008 December 31, 2007
------------------------------------------------------------------------- ----------------------- -- -------------------------
(Unaudited)
Current Liabilities
Current maturities of secured investor certificates $ 2,654,000 $ 2,197,000
Line of credit 3,500,000
3,350,000
Accounts payable 39,957
28,941
Accrued expenses -
18,022
Building funds payable -
50,000
Current maturities of deferred income 30,020
30,412
Dividends payable 249,360
124,680
----------------------- -------------------------
Total current liabilities 6,473,337
5,799,055
Deferred Income, net of current maturities 583,390 596,164
Secured Investor Certificates, Series A 5,397,000 6,008,000
Secured Investor Certificates, Series B 14,626,000 14,626,000
Stockholders' Equity
Common stock, par value $.01 per share
Authorized, 30,000,000 shares
Issued and outstanding, 2,493,595 at March 31, 2008
and December 31, 2007 24,936
24,936
Additional paid-in capital 22,927,644 22,927,644
Accumulated deficit (1,829,474) (1,699,000)
--------------------- -----------------------
Total stockholders' equity 21,123,106 21,253,580
--------------------- -----------------------
Total liabilities and equity $ 48,202,833 $ 48,282,799
===================== =======================
Notes to Unaudited Condensed Financial Statements are an integral part of this
Statement.
3
AMERICAN CHURCH MORTGAGE COMPANY
Condensed Statements of Operations
---------------------------------------------------------------------------------------------------------------------------------
Three Months Ended
March 31, 2008 March 31, 2007
------------------------------------------------------------------------ -------------------------- --- -------------------------
(Unaudited) (Unaudited)
Revenues
Interest income loans $ 720,292 $ 834,627
Interest income other 189,034 193,002
Capital gains realized 1,580 1,856
Origination income 13,166 39,105
---------------- -------------
Total revenues 924,072 1,068,590
Operating expenses
Professional fees 26,900 7,622
Provision for losses on mortgage loans receivable 12,945 -
Real estate held for sale impairment 93,000 40,000
Costs associated with real estate held for sale 61,704 18,498
Director fees 1,000 1,400
Advisory fees 96,730 106,404
Amortization offering and line of credit expense 49,742 50,840
Other 32,651 26,039
---------------- ------------
Total operating expenses 374,672 250,803
---------------- ------------
Operating Income 549,400 817,787
Other Expense
Interest expense 430,514 452,490
---------------- ------------
Net Income $ 118,886 $ 365,297
================ ============
Basic and Diluted Income Per Common Share $ 0.05 $ 0.15
================ ============
Weighted Average Common Shares
Outstanding - Basic and Diluted 2,493,595 2,493,595
================ =============
Dividends Declared $ 249,360 $ 405,210
================ ============
Notes to Unaudited Condensed Financial Statements are an integral part of this
Statement.
4
AMERICAN CHURCH MORTGAGE COMPANY
Statements of Stockholders' Equity
-------------------------------------------------------------------------------------------------------------------------------
Additional
Common Stock Paid-In Accumulated
Shares Amount Capital Deficit
-------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2007 2,493,595 $24,936 $22,927,644 $(1,699,000)
Net income 118,886
Dividends declared (249,360)
------------------------------------------------------------------
Balance, March 31, 2008 (unaudited) 2,493,595 $24,936 $22,927,644 $(1,829,474)
==================================================================
Notes to Financial Statements are an integral part of this Statement.
5
AMERICAN CHURCH MORTGAGE COMPANY
Condensed Statements of Cash Flows
-----------------------------------------------------------------------------------------------------------------------
For the Three Months Ended
March 31, 2008 March 31, 2007
-----------------------------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited)
Cash Flows from Operating Activities
Net income $ 118,886 $ 365,297
Adjustments to reconcile net income to net cash
from operating activities:
Impairment loss on real estate held for sale 93,000 40,000
Provision for losses on mortgage loans receivable 12,945 -
Amortization of deferred costs 49,742 50,840
Change in assets and liabilities
Accounts receivable (12,322) 79,032
Interest receivable (2,373) (7,631)
Prepaid expenses (17,567) (8,739)
Accounts payable 11,016 (11,971)
Accrued expenses (18,022) -
Deferred income (13,166) (9,911)
------------- -------------
Net cash from operating activities 222,139 496,917
Cash Flows from Investing Activities
Investment in mortgage loans (50,000) (2,276,993)
Collections of mortgage loans 485,663 3,415,059
Investments in bonds (621,825) (1,477,840)
Proceeds from bond portfolio 9,783 60,259
------------- -------------
Net cash used for investing activities (176,379) (279,515)
Cash Flows from Financing Activities
Proceeds from sale of property 180,532 -
Payments on line of credit, net 150,000 315,764
Payments on secured investor certificate maturities (154,000) (329,000)
Payments for deferred costs (4,492) (34)
Dividends paid (124,680) (397,418)
------------- -------------
Net cash (used for) from financing activities 47,360 (410,688)
------------- -------------
Net Increase (Decrease) in Cash and Equivalents 93,119 (193,286)
Cash and Equivalents - Beginning of Year 285,118 232,258
------------- -------------
Cash and Equivalents - End of Year $ 378,237 $ 38,972
============= =============
Notes to Unaudited Condensed Financial Statements are an integral part of this
Statement.
6
AMERICAN CHURCH MORTGAGE COMPANY
Condensed Statements of Cash Flows - Continued
---------------------------------------------------------- ------------------------------ -- -----------------------------
For the Three Months Ended
March 31, 2008 March 31, 2007
---------------------------------------------------------- ------------------------------ -- -----------------------------
(Unaudited) (Unaudited)
Supplemental Schedule of Noncash Financing and
Investing Activities
Dividends payable $ 249,360 $ 405,210
========================== ==========================
Reclassification of mortgage and accounts receivable to
real estate held for sale $ - $ 772,148
=========================== ==========================
Mortgage loans closed but not paid $ - $ 1,251,845
=========================== ==========================
Supplemental Cash Flow Information
Cash paid during the period for
Interest $ 448,536 $ 452,490
============================ =========================
Notes to Unaudited Condensed Financial Statements are an intergral part of this
Statement
7
AMERICAN CHURCH MORTGAGE COMPANY
Notes to Condensed Financial Statements - Unaudited
March 31, 2008
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited financial statements have been prepared in accordance
with the instructions for interim statements and, therefore, do not include all
information and disclosures necessary for fair presentation of results of
operations, financial position, and changes in cash flow in conformity with
generally accepted accounting principles. However, in the opinion of management,
such statements reflect all adjustments (which include only normal recurring
adjustments) necessary for fair presentation of financial position, results of
operations, and cash flows for the period presented.
The unaudited condensed financial statements of the Company should be read in
conjunction with its December 31, 2007 audited financial statements included in
the Company's Annual Report on Form 10-KSB, as filed with the Securities and
Exchange Commission for the year ended December 31, 2007. Operating results for
the periods presented are not necessarily indicative of the results that may be
expected for the year ended December 31, 2008.
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 allowance for mortgage loans, real estate held
for sale and the valuation of the bond portfolio. 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. At March 31, 2008, such investments were
$78,480. At December 31, 2007, such investments were $5,000. > The Company has
not experienced any losses in such accounts.
8
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 its bond portfolio as "available-for sale."
Available-for-sale bonds are carried at fair value. Although no ready public
market for these bonds exists, management believes the cost approximates fair
value, since the bonds are callable at any time by the issuer at par and the
bond portfolio yield is currently higher than interest rates on similar
instruments.
Allowance for Mortgage Loans Receivable
The Company records loans receivable at their estimated net realizable value,
which is the unpaid principal balance less the allowance for mortgage loans. The
Company's loan policy provides an allowance for estimated uncollectible loans
based on an evaluation of the current status of the loan portfolio. This policy
reserves for principal amounts outstanding on a particular loan if cumulative
interruptions occur in the normal payment schedule of a loan. The Company
reserves 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 non-performing loans that are in the foreclosure
process. At December 31, 2007, the Company reserved approximately $72,000 for
fourteen mortgage loans, of which four were three or more mortgage payments in
arrears. Three of the loans are in the foreclosure process, of which one has
declared bankruptcy. At March 31, 2008, the Company reserved approximately
$85,000 for fifteen mortgage loans, of which three are three or more mortgage
payments in arrears and are in the foreclosure process.
The total non-performing loans, which are loans that are in the foreclosure
process or are no longer performing, were approximately $1,007,000 and
$1,156,000 at March 31, 2008 and December 31, 2007, respectively.
Real Estate Held for Sale
Foreclosure was completed on a church located in Battle Creek, Michigan. The
church congregation disbanded and the church property is currently unoccupied.
The Company owns and has taken 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. The church
congregation is now meeting in a different location and the church property is
currently unoccupied. The Company owns and has taken possession of the church
and has listed the property for sale through 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
proceeds of approximately $182,000 from the sale of the property after closing
costs and realtor fees. The Company subsequently realized a tax deductible loss
on the property totaling approximately $221,000.
9
Foreclosure was completed 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 took possession of the church and listed the
property for sale through a local realtor.
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 who is currently in the process of obtaining a certificate of
occupancy. When the certificate of occupancy is obtained, the sale of the
property will be completed.
The Company recorded the real estate held for sale at fair value, which is net
of the expected expenses related to the sale of the real estate.
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 significantly before the end of estimated useful life.
Recoverability is assessed based on the carrying amount of the asset and fair
value, which is generally determined based on 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 not recoverable and exceeds fair value.
Revenue Recognition
Interest income on mortgage loans and the bond portfolio is recognized as
earned. Deferred income represents loan origination fees, which are recognized
over the life of the loan as an adjustment to the yield on the loan.
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
10
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 has
elected not to record any other assets or liabilities at fair value, as
permitted by SFAS 159. No events occurred during the first quarter 2008 which
would require adjustment to the recognized balances of assets or liabilities
which are recorded at fair value on a nonrecurring basis.
The following table summarizes the Company's financial instruments that were
measured at fair value on a recurring basis at March 31, 2008.
Fair Value
Measurement
Fair Value Level 3
Bond portfolio $11,875,755 $11,875,755
=========== ==========
We determine the fair value of the bond portfolio shown in the table above by
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 market-based inputs.
11
The change in level 3 assets measured at fair value on a recurring basis is
summarized as follows at March 31, 2008:
Bond Portfolio
--------------------
Beginning balance January 1, 2008 $11,263,713
Purchases 621,825
Proceeds (9,783)
Unrealized gains 1,230,000
Callability provision (1,230,000)
-----------
Ending balance March 31, 2008 $11,875,755
===========
3. MORTGAGE LOANS AND BOND PORTFOLIO
At March 31, 2008, the Company had first mortgage loans receivable totaling
$33,558,736. At December 31, 2007, the Company had first mortgage loans
receivable totaling $34,040,983. The loans bear interest ranging from 7.50% to
12.00% at March 31, 2008 and December 31, 2007.
The Company also had a portfolio of secured church bonds at March 31, 2008 and
December 31, 2007. The bonds pay either semi-annual or quarterly interest
ranging from 4.50% to 12.00%. The combined principal of $12,006,000 at March 31,
2008 is due at various maturity dates between June 15, 2008 and February 15,
2039.
The contractual maturity schedule for mortgage loans and the bond portfolio as
of March 31, 2008, is as follows:
Mortgage Loans Bond Portfolio
April 1, 2008 through March 31, 2009 $ 986,424 $ 44,000
April 1 through December 31, 2009 776,417 56,000
2010 1,279,277 175,000
2011 908,215 525,000
2012 983,213 351,000
Thereafter 28,625,190 10,855,000
---------- ----------
33,558,736 12,006,000
Less loan loss and bond reserves (85,001) (100,000)
Less discount from par (30,245)
------------ -----------
Totals $33,473,735 $11,875,755
========== ==========
The Company currently owns $2,035,000 First Mortgage Bonds issued by St. Agnes
Missionary Baptist Church. St. Agnes defaulted on its payment obligations to
bondholders. The church subsequently commenced a Chapter 11 bankruptcy
reorganization proceeding regarding three
12
properties in November 2007. 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 reserved $100,000 for the
bonds at March 31, 2008 and December 31, 2007.
4. SECURED INVESTOR CERTIFICATES
Secured investor certificates are collateralized by certain mortgage loans
receivable or secured church bonds of approximately the same value as the
certificates. The weighted average interest rate on the certificates was 6.73%
at March 31, 2008. The maturity schedule for the secured investor certificates
at March 31, 2008 is as follows:
Secured Investor
Certificates
--------------------
April 1, 2008 through March 31, 2009 $ 2,654,000
April 1 through December 31, 2009 3,336,000
2010 1,145,000
2011 680,000
2012 1,167,000
Thereafter 13,695,000
-----------
Totals $22,677,000
==========
Interest expense related to these certificates was approximately $383,000 and
$431,000 for the three months ended March 31, 2008 and 2007, respectively.
5. TRANSACTIONS WITH AFFILIATES
The Company has an Advisory Agreement with Church Loan Advisors, Inc.,
Minnetonka, Minnesota ("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 Advisor management and origination fees of
approximately $97,000 and $112,000 for the three months ended March 31, 2008 and
2007, respectively.
13
6. 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 at March 31, 2008 and December 31,
2007:
March 31, 2008 December 31, 2007
------------------------ ----------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------- ------------- ---------- ------------
Cash and equivalents $ 378,237 $ 378,237 $ 285,118 $ 285,118
Accounts receivable 124,868 124,868 112,546 112,546
Interest receivable 153,478 153,478 151,105 151,105
Mortgage loans receivable 33,473,735 36,337,915 33,968,927 33,968,927
Bond portfolio 11,875,755 11,875,755 11,263,713 11,263,713
Secured investor certificates 22,677,000 22,677,000 22,831,000 22,831,000
The fair value of the mortgage loan portfolio is greater than the carrying value
as the portfolio is currently yielding a higher rate of than similar mortgages
and terms for borrowers with similar credit quality.
The carrying value of the bond portfolio approximates amortized cost since our
bonds are callable at any time by the issuer at par and the bond portfolio yield
is currently higher than interest rates on similar instruments.
The carrying value of the secured investor certificates approximates fair value
because the interest rates at which the certificates have been sold have not
changed significantly.
7. LINE OF CREDIT
The Company has a $15 million revolving credit facility with KeyBank National
Association. There were balances of $3,500,000 and $3,350,000 outstanding at
March 31, 2008 and December 31, 2007 respectively. Interest is charged at the
LIBOR rate plus an applicable margin, which was 1.875% at March 31, 2008 which
totaled 5.00%. At both December 12, 2007 and April 30, 2008, the Company
obtained amendments to its non-performing assets ratio covenant allowing an
increase to this ratio, ultimately amending it through December 30, 2008. In
addition, the Company was out of compliance with the cash flow coverage ratio
covenant at March 31, 2008. The Company is in the process of having the cash
flow coverage ratio covenant waived or amended.
14
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
AMERICAN CHURCH MORTGAGE COMPANY
Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995
Certain statements contained in this section and elsewhere in this Form
10-Q constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Such forward-looking statements
involve a number of known and unknown risks, uncertainties and other factors
which may cause our actual results, performance or achievements to be materially
different from any future results, performance or achievements expressed or
implied by such forward-looking statements. Such factors include, but are not
limited to, (i) trends affecting our financial condition or results of
operations for our limited history; (ii) our business and growth strategies;
(iii) the mortgage loan industry and the status of religious organizations; (iv)
our financing plans; and other risks detailed in the Company's other periodic
reports filed with the Securities and Exchange Commission. The words "believe",
"expect", "anticipate", "may", "plan", "should", and similar expressions
identify forward-looking statements. Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of the date
the statements were made and are not guarantees of future performance.
Plan of Operation
We were founded in May 1994 and began a "best efforts" offering of our
common stock on July 11, 1995, and commenced active business operations on April
15, 1996 after completion of the "Minimum Amount" in our initial public
offering.
We have completed four public offerings of common stock, the last of which
also included debt securities. We completed a public offering of debt securities
on October 7, 2006. We sold $14,860,000 Series "B" secured investor certificates
of the $23,000,000 offered.
We currently have seventy-five first mortgage loans aggregating $33,558,736
in principal amount and a first mortgage bond portfolio with face values
aggregating $12,006,000. Funding of additional first mortgage loans and purchase
of first mortgage bonds issued by churches is expected to continue on an
on-going basis as more investable assets become available through (i) future
public offerings; (ii) prepayment and repayment at maturity of existing loans
and bonds; and (iii) borrowed funds.
Results of Operations
Net income for the Company's three month periods ended March 31, 2008 and 2007
were $118,886 and $365,297 on total revenues of $924,072 and $1,068,590,
respectively. Interest income earned on our portfolio of loans was $720,292 and
$834,627 for the three month periods ended March 31, 2008 and 2007,
respectively. As of March 31, 2008 the Company's loans receivable have interest
rates ranging from 7.50% to 12.00% with an average, principal-adjusted interest
rate of 8.80%. The Company's bond portfolio has an average current yield of
7.68% as of March 31, 2008. All loans we have made as of March 31, 2007 range in
interest rate charged to borrowers from 7.75% to 12.00%. As of March 31, 2007,
the average, principal-adjusted interest rate on the Company's portfolio of
loans was 8.92% and the Company's portfolio of bonds had an average current
yield of 7.67%. The decrease in interest income was largely due to the repayment
of mortgage loans without new loans issued and the decline in interest rates
15
throughout the later part of 2007. Interest expense was $430,514 and $452,490
for the three month periods ended March 31, 2008 and 2007, respectively. The
decrease in interest was due to the maturity of secured investor certificates
and the decline in the interest rate on our line of credit.
One loan paid off its mortgage indebtedness with us during the first
quarter of 2008. We did not fund any new loans during the first quarter of 2008
due to the lack of qualified borrowers. This reduced taxable income since no new
origination income was generated. There was not a material change in
nonperforming loans and we had no foreclosures occur during the first quarter of
2008. We sold one property we had listed for sale during the first quarter of
2008 and recorded an impairment of $93,000 for another property we own. The
impairment charge was due to a reduction in the listing price of one of our
properties we currently own and have listed for sale.
We currently own $2,035,000 First Mortgage Bonds issued by St. Agnes
Missionary Baptist Church. St. Agnes has defaulted on its payment obligation to
bondholders. The church subsequently declared Chapter Eleven (11) bankruptcy on
its properties in November 2007. The Company, along with all other bondholders,
has a superior lien over all other creditors. No accrual for interest from the
bonds is being recorded by the Company effective September 30, 2007.
The church has listed all three of its properties for sale for an aggregate
price of $19,166,668. The bondholders are currently owed $13,027,000 excluding
any accrued interest, fees or expenses. Herring Bank, Amarillo, Texas, is
trustee for the first mortgage bondholders. Herring Bank and its legal counsel
are monitoring the bankruptcy process and will advise the bondholders of the
church's re-organization plan once it is made available. The Company has
reserved $100,000 for the bonds at March 31, 2008. When additional information
regarding the Church's reorganization plan is provided, the Company will
determine whether an additional valuation adjustment for the bond investment
should be recorded.
There has been no significant change in our bond portfolio during the first
three months of 2008. St. Agnes Missionary Baptist Church has yet to submit a
viable reorganization plan to the Bankruptcy Court. However, St. Agnes has been
making maintenance payments to the trustee as agreed to with the Bankruptcy
Court. Because of these maintenance payments, a distribution to bondholders is
expected in the second quarter of 2008.
We have elected to operate as a real estate investment trust, therefore we
distribute to shareholders at least 90% of "Taxable Income." The dividends
declared and paid to shareholders for the quarter ended March 31, 2008 may
include origination fees even though they are not recognized in their entirety
for the period under GAAP. We had origination fees $29,194 for the three months
ended March 31, 2007. There were no origination fees for the three months ended
March 31, 2008.
Operating expenses for the three months ended March 31, 2008 increased to
approximately $375,000 from $251,000 at March 31, 2007. The change relates to an
increase in carrying costs associated with real estate held for sale of
approximately $43,000 and an additional impairment charge of $93,000 for real
estate held for sale.
Our Board of Directors declared dividends of $.10 for each share held of
record on March 31, 2008. The dividend, which was paid April 30, 2008,
represents a 4.00% annual rate of return on each share of common stock owned and
purchased for $10 per share. Our liabilities at March 31, 2008 are primarily
comprised of: dividends declared as of March 31, 2008 but not yet paid; accounts
payable; our line of credit balance; deferred income; and our secured investor
certificates.
16
Liquidity and Capital Resources
We generate revenue through implementation of our business plan of making
mortgage loans to churches and other non-profit religious organizations. Our
revenue is derived principally from interest income, and secondarily,
origination fees and renewal fees generated by mortgage loans we make. We also
earn income through interest on funds that are invested pending their use in
funding mortgage loans and on income generated on church bonds. Our principal
expenses are advisory fees, legal and accounting fees, and interest payments on
secured investor certificates.
Our future capital needs are expected to be met by (i) additional sale of
our shares and issuance of debt securities to the public (ii) prepayment,
repayment at maturity, and renewal of mortgage loans we make, and (iii) borrowed
funds. We believe that the "rolling" effect of mortgage loans maturing will
provide a supplemental source of capital to fund our business operations in
future years. Nevertheless, we believe that it may be desirable, if not
necessary, to sell additional shares of common stock and to issue debt
securities, in order to enhance our capacity to make mortgage loans on a
continuous basis. There can be no assurance we will be able to raise additional
capital on terms acceptable for such purposes.
On February 13, 2007, we obtained a $3,000,000 line of credit with Beacon
Bank, Shorewood Minnesota, which was paid off on July 26, 2007 with proceeds
from the revolving credit facility discussed below. Interest was charged at 1/2%
over the prime rate. The line of credit was collateralized by the mortgage
secured bonds we own. There is no outstanding balance on this line of credit as
of March 31, 2008. During the three-month period ended March 31, 2008 we did not
have any interest expense relating to this line of credit. During the
three-month period ended March 31, 2007, we had interest expense in the amount
of $21,659 relating to this line of credit.
On July 26, 2007, the Company entered into a three-year, adjustable rate,
$15 million revolving credit facility with KeyBank National Association.
Interest is charged at the LIBOR rate plus an applicable margin, which was
1.875% at March 31, 2008. The total interest rate was 5.00% at March 31, 2008.
The applicable margin is indexed based upon the Company's financial performance.
The Company borrowed $2,800,000 against the line on the closing date of the
loan. Proceeds were used to pay off the Company's line of credit with Beacon
Bank, redeem $1,956,000 of Series "A" secured investor certificates and to pay
costs associated with obtaining the KeyBank line of credit. We had an
outstanding balance of $3,500,000 on our line of credit as of March 31, 2008.
During the three-month period ended March 31, 2008, we had interest expense in
the amount of $47,556 relating to this line of credit.
At both December 12, 2007 and April 30, 2008, the Company obtained
amendments to its non-performing assets ratio covenant allowing an increase to
this ratio, ultimately amending it through December 30, 2008. See Exhibits 10.1
though 10.3 to this Form 10-Q. In addition, the Company was out of compliance
with the cash flow coverage ratio covenant at March 31, 2008. The Company is in
the process of having the cash flow coverage ratio covenant waived or amended.
During the three month period ended March 31, 2008, our total assets
decreased by $69,966 due to a decrease in mortgage loans receivable. Current
liabilities increased by $674,282 for the three month period ended March 31,
2008 due to increases in current maturities of our secured investor certificates
and our line of credit balance. Non-current liabilities decreased by $623,774
for the three month period ended March 31, 2008 due to the maturation of secured
investor certificates and a decrease in deferred income.
17
For the period ended March 31, 2008 cash from operating activities
decreased to $222,129 from $496,917 from the comparative period ended March 31,
2007, due to the decrease in interest income on mortgage loans and origination
fee income. In addition, the Company had increased costs associated with real
estate held for sale.
For the period ended March 31, 2008 cash used for investing activities
decreased to $51,691 from $279,515 from the comparative period ended March 31,
2007, due to a decrease in investments in mortgage loans and bonds.
For the period ended March 31, 2008 cash used for financing activities
decreased to $77,320 from $410,688 generated from financing activities for the
comparative period ended March 31, 2007, primarily due to decreases in payments
on our line of credit and secured investor certificate maturities.
Critical Accounting Estimates
Preparation of our financial statements requires estimates and judgments to
be made that affect the amounts of assets, liabilities, revenues and expenses
reported. Such decisions include the selection of the appropriate accounting
principles to be applied and the assumptions on which to base accounting
estimates. We evaluate these estimates based on assumptions we believe to be
reasonable under the circumstances.
The difficulty in applying these policies arises from the assumptions,
estimates and judgments that have to be made currently about matters that are
inherently uncertain, such as future economic conditions, operating results and
valuations, as well as management intentions. As the difficulty increases, the
level of precision decreases, meaning that actual results can and probably will
be different from those currently estimated.
Of our significant accounting policies, described in the notes to our
financial statements included herewith, we believe that the estimation of fair
value of our mortgage loans receivable, bond portfolio and real estate held for
sale involve a high degree of judgment. We estimate the fair value of our
mortgage loans receivable based on the average interest rate for special purpose
commercial mortgage rates extracted from the most recent edition of
RealtyRates.com. The carrying value of the bond portfolio approximates amortized
cost since our bonds are callable at any time by the issuer at par and the bond
portfolio yield is currently higher that interest rates on similar instruments.
We do consider the interest rate or the yield rate of a loan or bond in
estimating fair value. We do not consider the availability of a market for a
loan in estimating fair value. The value of real estate held for sale is based
on management's estimate, real estate appraisals and similar property market
comparisons.
Our loan loss policy results in reserves based on a percentage of the
principal amount outstanding on a loan if cumulative interruptions occur in the
normal payment schedule of a loan. The amount reserved under our loan loss
policy ranges from 1% to 5% of the outstanding principal amount of the loan,
depending on the number of payments that are delinquent. Our advisor reviews the
amount reserved on payments that are in arrears on an ongoing basis and may
increase the amount reserved if the advisor determines that the amount reserved
does not adequately reflect the amount that is in doubt of being collected.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
18
Items 4 and 4T. Controls and Procedures
Disclosure Controls and Procedures
An evaluation was carried out under the supervision and with the
participation of the Company's management, including the Chief Executive Officer
("CEO")/Chief Financial Officer ("CFO"), of the effectiveness of the Company's
disclosure controls and procedures as of the end of the quarter ended March 31,
2008. Based on that evaluation, the CEO/CFO concluded that the Company's
disclosure controls and procedures were not effective to provide reasonable
assurance that information required to be disclosed by the Company in reports
that it files or submits under the Securities and Exchange Commission is
recorded, processed, summarized and reported within the time periods specified
in Securities and Exchange Commission rules and forms and that information
required to be disclosed in reports that we file or submit under the Exchange
Act is accumulated and communicated to our management, including our CEO/CFO, to
allow timely decisions regarding required disclosure.
Changes In Internal Controls Over Financial Reporting
During the quarter ended March 31, 2008, there were no changes in the
Company's internal control over financial reporting that have materially
affected, or are reasonably likely to materially affect, its internal control
over financial reporting.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings.
--------------------------
None.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
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None.
Item 3. Defaults Upon Senior Securities.
-----------------------------------------
None.
Item 4. Submission of Matters to a Vote of Security Holders.
------------------------------------------------------------
No matters were submitted to a vote of security holders during the
quarter ended March 31, 2008.
Item 5. Other Information.
--------------------------
None.
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Item 6. Exhibits
Exhibit
Number Title of Document
10.1 Letter Amendment dated December 12, 2007 to the Revolving Credit Agreement
among the Company and KeyBank National Association and the other lenders,
dated as of July 18, 2007, as subsequently amended.
10.2 Letter Amendment dated April 30, 2008 to the Revolving Credit Agreement
among the Company and KeyBank National Association and the other lenders,
dated as of July 18, 2007, as subsequently amended.
10.3 Letter Amendment dated April 30, 2008 to the Revolving Credit Agreement
among the Company and KeyBank National Association and the other lenders,
dated as of July 18, 2007, as subsequently amended.
31.1 Certification of the Chief Executive Officer and Chief Financial Officer
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer and Chief Financial Officer
pursuant to Section 1350 as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused the report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: May 15, 2008
AMERICAN CHURCH MORTGAGE COMPANY
By: /s/ Philip J. Myers
------------------------------------
Philip J. Myers
Chief Executive Officer and
Chief Financial Officer
20