AMERICAN CHURCH MORTGAGE CO - Quarter Report: 2022 March (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended 03/31/2022

or

o  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ___________ to ___________

Commission file number 000-25919

AMERICAN CHURCH MORTGAGE COMPANY

(Exact Name of Registrant as Specified in its Charter)

(952) 945-9455

Registrant’s Telephone Number, Including Area Code

Securities registered pursuant to Section 12(b) of the Act:

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x No o

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes o No x

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.   Yes ☐    No ☐ 

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Explanatory Note

On May 2, 2022, the Company filed a Form 8-K with the Commission reporting that it had decided not to re-appoint its current public accounting firm. The Company is in the process of interviewing registered public accounting firms, but has not yet engaged a new firm. Accordingly, the financial statements included herein have not been reviewed by the Company’s registered accounting firm. The Company intends to engage a new registered public accounting firm in the near future and will provide further information once the financial statements included herein are reviewed.

The Company believes that the unaudited financial statements included herein have been prepared in accordance with accounting principles generally accepted in the United States of American for interim financial reporting and with the instructions to Form 10-Q and Regulations S-X.

AMERICAN CHURCH MORTGAGE COMPANY

Minnetonka, Minnesota

Unaudited Financial Statements

March 31, 2022

AMERICAN CHURCH MORTGAGE COMPANY

Notes to Unaudited Financial Statements

March 31, 2022

1. BASIS OF PRESENTATION

The accompanying unaudited interim financial statements and the notes thereto have been prepared in accordance with generally accepted accounting principals in the United States of America (“GAAP”). In the opinion of management, the accompanying unaudited interim financial statements contain all normal recurring adjustments necessary to present fairly the financial positions, results of operations, changes in equity and cash flows for the periods presented.

The accompanying unaudited financial statements and related notes should be read in conjunction with the audited financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, as filed with the Securities and Exchange Commission on March 29, 2022.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Business

American Church Mortgage Company, a Minnesota corporation, was incorporated on May 27, 1994. The Company is engaged primarily in the business of making mortgage loans to churches and other nonprofit religious organizations throughout the United States, on terms established for individual organizations.

Accounting Estimates

Management uses estimates and assumptions in preparing these financial statements in accordance with GAAP. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. Actual results could differ from those estimates. The most sensitive estimates relate to the realizability of the mortgage loans receivable, the valuation of the bond portfolio and the valuation of real estate held for sale. It is at least reasonably possible that these estimates could change in the near term and that the effect of the change, if any, may be material to the financial statements.

Risks and Uncertainties

The United States and world economies continue to suffer adverse effects from the COVID-19 virus pandemic (“COVID-19”). The impact of the pandemic to the Company has included and may continue to include disruptions or restrictions on employers and contracted agents’ ability to work, reduced demand for new loans and increased repurchase risk of loan or bond defaults. The future impact of the COVID-19 pandemic on the Company cannot be reasonably estimated at this time.

AMERICAN CHURCH MORTGAGE COMPANY

Notes to Unaudited Financial Statements

March 31, 2022

Concentration of Credit Risk

The Company's loans have been granted to churches and other non-profit religious organizations. The ability of the Company’s debtors to honor their contracts is dependent on member contributions and the involvement in the church or organization of its senior pastor.

Cash and Cash Equivalents

The Company considers all highly liquid debt instruments purchased with maturities of three months or less to be cash equivalents.

The Company maintains accounts primarily at two financial institutions. At times throughout the year, the Company’s cash and equivalents balances may exceed amounts insured by the Federal Deposit Insurance Corporation. Cash in money market funds is not federally insured. Management believes these financial institutions have strong credit ratings and that the credit risk related to these deposits is minimal. The Company has not experienced any losses in such accounts.

Bond Portfolio

Bonds that management has the intent to hold to maturity are classified as held to maturity and recorded at amortized cost. Amortization of premiums and accretion of discounts (if any) are recognized in interest income using the interest method over the estimated lives of the securities.

Declines in fair value of bonds that are deemed to be other than temporary, if applicable, are reflected in earnings as realized losses. In estimating other-than temporary impairment losses, management considered the length of time and the extent to which fair value has been less than cost, the financial condition and near-term prospects of the issuer, and the interest and the ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. Gains and losses on the sales of securities are recorded on the trade date and determined using the specific-identification method.

Allowance for Loan Losses on Mortgage Loans Receivable

The Company records mortgage loans receivable at estimated net realizable value, which is the unpaid principal balances of the mortgage loans receivable, less the allowance for loan losses on mortgage loans receivable and less deferred loan origination fees. The Company’s loan policy provides an allowance for estimated uncollectible loans based on an evaluation of the current status of the loan portfolio with application of reserve percentages to specific loans based on payment status. This policy reserves for principal amounts outstanding on a specific loan if cumulative interruptions occur in the normal payment schedule of the loan, therefore, the Company recognizes a provision for losses and an allowance for the outstanding principal amount of the loan in the Company’s portfolio if the amount is in doubt of

AMERICAN CHURCH MORTGAGE COMPANY

Notes to Unaudited Financial Statements

March 31, 2022

collection. Additionally, no interest income is recognized on impaired loans that are declared to be in default and are in the foreclosure process.

The Company will declare a loan to be in default and will place the loan on non-accrual status when the following thresholds have been met: (i) the borrower has missed three consecutive mortgage payments; (ii) the borrower has not communicated to the Company any legitimate reason for delinquency in its payments to the Company and has not arranged for the re-continuance of payments; (iii) lines of communication to the borrower have broken down such that any reasonable prospect of rehabilitating the loan and return of regular payments is gone.

The Company’s policies on payments received and interest accrued on non-accrual loans are as follows: The Company will accept payments on loans that are currently on non-accrual status when a borrower has communicated to us that they intend to meet their mortgage obligations. The accrual of interest on a loan is discontinued when the loan becomes 90 consecutive days delinquent or whenever management believes the borrower will be unable to make payments as they become due. The interest on these loans is subsequently accounted for on the cash basis or using the cost-recovery method until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current or restructured and future payments are reasonably assured. No interest income was recognized on non-accrual loans at March 31, 2022 and December 31, 2021.

The Company has an Advisory Agreement with Church Loan Advisors, Inc. (the “Advisor”). When a loan is declared in default according to the Company’s policy or deemed to be doubtful of collection, the loan committee of the Advisor will direct the staff to charge-off the uncollectable receivables.

Loans totaling approximately $2,353,000 and $2,368,000 exceeded 90 days past due but continued to accrue interest as of March 31, 2022 and December 31, 2021, respectively. The Company believes that continued interest accruals are appropriate because the loans are well secured, not deemed to be in technical default and the Company is actively pursuing collection of past due payments.

Real Estate Held for Sale

The Company records real estate held for sale at the estimated fair value, which is net of the expected expenses related to the sale of the real estate.  The fair value of our real estate held for sale, which represents the carrying value, totaled $328,996 for both March 31, 2022 and December 31, 2021.

Gain (Loss) on Real Estate Held For Sale

The Company records a gain or loss from real estate held for sale when control of the property transfers to the buyer, which generally occurs at the time of an executed deed. When the Company finances real estate held for sale to the buyer, the Company assesses whether the buyer is committed to perform their obligations under the contract and whether collectability of the transaction price is probable. Once these criteria are met, real estate held for sale is derecognized and the gain or loss on sale is recorded upon the transfer of control of the property to the buyer. In determining the gain or loss on the sale, the Company

AMERICAN CHURCH MORTGAGE COMPANY

Notes to Unaudited Financial Statements

March 31, 2022

adjusts the transaction prices and related gain (loss) on sale if a significant financing component is present.

Deferred Financing Costs

The Company defers the costs related to obtaining financing. These costs are amortized over the life of the financing using the straight line method, which approximates the effective interest method.

Income (Loss) Per Common Share

There were no dilutive shares for the periods ended March 31, 2022 and December 31, 2021.

Recent Accounting Pronouncements

In 2016 the FASB issued ASU 2016-13, “Financial Instruments-Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments.” ASU 2016-13 is intended to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit. For public entities, deemed small reporting companies, ASU 2016-13 is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Company has not yet fully evaluated the potential effects of adopting ASU 2016-13 on the Company’s results of operations, financial position or cash flows.

Income Taxes

The Company elected to be taxed as a Real Estate Investment Trust (REIT). Accordingly, the Company is not subject to Federal income tax to the extent of distributions to its shareholders if the Company meets all the requirements under the REIT provisions of the Internal Revenue Code.

The Company evaluated its recognition of income tax benefits using a two-step approach to recognizing and measuring tax benefits when realization of the benefits is uncertain. The first step is to determine whether the benefit meets the more-likely-than-not condition for recognition and the second step is to determine the amount to be recognized based on the cumulative probability that exceeds 50%. Primarily due to the Company’s tax status as a REIT, the Company does not have any significant tax uncertainties that would require recognition or disclosure.

Subsequent Events

The Company has evaluated events and transactions through May 16, 2022, the date the financial statements were available to be issued.

AMERICAN CHURCH MORTGAGE COMPANY

Notes to Unaudited Financial Statements

March 31, 2022

3. FAIR VALUE MEASUREMENT

Some assets and liabilities are measured at fair value on a recurring basis under GAAP. The Company has no such assets or liabilities that are measured at fair value on a recurring basis. Other assets and liabilities may be measured at fair value on a nonrecurring basis. Below is a description of the valuation methodology and significant inputs used for each asset and liability measured at fair value on a nonrecurring basis, as well as the classification of the asset or liability within the fair value hierarchy.

Bonds held to maturity

Securities held to maturity are not measured at fair value on a recurring basis. However, securities deemed other-than-temporarily impaired are measured at fair value. The fair value measurement of such securities is based on various assumptions market participants would use to value the securities, such as current interest rates, estimated credit and liquidity spreads, conditional default and loss severity rates, and available credit support. Since some of these assumptions are unobservable in the current market environment, the fair value measurement of other-than-temporarily impaired securities held to maturity is considered a Level 3 measurement.

Loans

Loans are not measured at fair value on a recurring basis. However, loans considered to be impaired may be measured at fair value on a nonrecurring basis. The fair value measurement of an impaired loan that is collateral dependent is based on the fair value of the underlying collateral. Independent appraisals are obtained that utilize one or more valuation methodologies - typically they will incorporate a comparable sales approach and an income approach. Management routinely evaluates the fair value measurements of independent appraisers and adjusts those valuations based on differences noted between actual selling prices of collateral and the most recent appraised value. Such adjustments are usually significant, which results in a Level 3 classification. All other impaired loan measurements are based on the present value of expected future cash flows discounted at the applicable effective interest rate.

Real estate held for sale

Real estate and other property acquired through or in lieu of loan foreclosure are not measured at fair value on a recurring basis. However, foreclosed assets are initially measured at fair value (less estimated costs to sell) when they are acquired and may also be measured at fair value (less estimated costs to sell) if they become subsequently impaired. The fair value measurement for each asset may be obtained from an independent appraiser or prepared internally. Fair value measurements obtained from independent appraisers generally utilize a market approach based on sales of comparable assets and/or an income approach. Such measurements are usually considered Level 2 measurements. However, management routinely evaluates fair value measurements of independent appraisers by comparing actual selling prices to the most recent appraisals. If management determines significant adjustments should be made to the independent appraisals based on these evaluations, these measurements are considered Level 3

AMERICAN CHURCH MORTGAGE COMPANY

Notes to Unaudited Financial Statements

March 31, 2022

measurements. Fair value measurements prepared internally are based on management's comparisons to sales of comparable assets, but include significant unobservable data and are therefore considered Level 3 measurements.

Information regarding the Fair Value of Assets and Liabilities measured at fair value on a nonrecurring basis as of March 31, 2022 and December 31, 2021 follows:

As of March 31, 2022, bonds held to maturity with a carrying value of $8,897,598 were written down to their fair value of $6,915,241 by recognizing an other than temporary impairment of $1,982,357. As of December 31, 2021, bonds held to maturity with a carrying value of $8,897,598 were written down to their fair value of $7,142,094 by recognizing an other than temporary impairment of $1,755,094.

As of March 31, 2022, loans with a carrying amount of $5,578,666 were considered impaired and were written down to their estimated fair value of $4,296,093 by recognizing a specific valuation allowance of $1,282,573. As of December 31, 2021, loans with a carrying amount of $5,983,404 were considered impaired and were written down to their estimated fair value of $4,496,970 by recognizing a specific valuation allowance of $1,486,434.

AMERICAN CHURCH MORTGAGE COMPANY

Notes to Unaudited Financial Statements

March 31, 2022

Real estate held for sale is recognized at fair value, less costs to sell. Impairment charges of $0 and $100,000 were recognized in earnings for the periods ended March 31, 2022 and December 31, 2021, respectively.

The following presents quantitative information about nonrecurring Level 3 fair value measurements as of March 31, 2022 and December 31, 2021:

The estimated fair values and carrying values of the Company’s financial instruments are as follows:

AMERICAN CHURCH MORTGAGE COMPANY

Notes to Unaudited Financial Statements

March 31, 2022

Limitations

The fair value of a financial instrument is the current amount that would be exchanged between market participants, other than in a forced liquidation. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company's various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. Consequently, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company.

Fair value estimates are made at a specific point in time based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company's entire holdings of a particular instrument. Because no market exists for a significant portion of the Company's financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters that could affect the estimates. Fair value estimates are based on existing balance-sheet financial instruments without attempting to estimate the value of anticipated future business.

4. MORTGAGE LOANS RECEIVABLE

At March 31, 2022, the Company had mortgage loans receivable totaling $14,905,125. The loans bear interest ranging from 0% to 10.25% with a weighted average of approximately 7.63% at March 31, 2022. At March 31, 2021, the Company had mortgage loans receivable totaling $17,151,407. The loans bear interest ranging from 0% to 10.25% with a weighted average of approximately 7.70% at March 31, 2021.

At March 31, 2022, the Company reserved $1,282,573 for eleven mortgage loans. Seven of these loans are three or more mortgage payments in arrears of which one is declared to be in default. The principal amount of these eleven loans totaled approximately $5,579,000 at March 31, 2022. At March 31, 2021, the Company reserved $1,501,095 for fourteen mortgage loans. Nine of these loans are three or more mortgage payments in arrears of which two are declared to be in default. The principal amount of these fourteen loans totaled approximately $6,445,000 at March 31, 2021.

AMERICAN CHURCH MORTGAGE COMPANY

Notes to Unaudited Financial Statements

March 31, 2022

A summary of transactions in the allowance for mortgage loans for three months ended March 31, 2022 and 2021 is as follows:

One loan was in the foreclosure process, had a principal balance of $543,822 and was considered impaired and written down to their estimated fair value of $0 as of March 31, 2022. As a result, the Company recognized a specific valuation allowance against these impaired loans totaling $543,822 as of March 31, 2022.

Loans that are in the foreclosure process or are declared to be in default, had a principal balance of $921,583 and were considered impaired and written down to their estimated fair value of $173,900 as of December 31, 2021. As a result, the Company recognized a specific valuation allowance against these impaired loans totaling $747,683 as of December 31, 2021.

The outbreak of COVID-19 has affected churches due to shelter-in-place directives which ceased or greatly curtailed social gatherings such as church worship services. The Company’s borrowers have experienced financial duress during the COVID-19 shelter in place restrictions, amplified by the financial setbacks for many of the church members who have lost their jobs, been furloughed, or had their incomes diminished. The Company provided some temporary relief by allowing its borrowers to either make interest only payments for a period of ninety days or forgo one monthly mortgage payment (forbearance). In 2020, the Company provided nine churches totaling approximately $2,552,000, in principal outstanding, ninety days interest only payments and five churches totaling approximately $2,119,000, in principal outstanding, one-month forbearance of their mortgage payments. As of March 31, 2022, all churches, except one, have returned to full monthly amortization payments. The one church totaling approximately $217,000 in principal outstanding, has remained on interest only payments. This relief will impact the Company’s revenue and the Company will experience declines in payments due from borrowers which will impact operating income and may potentially impact future distributions and the ability to make payments due on the Company’s certificates and dividends to its shareholders. The future impact of COVID-19 on the Company’s investments or operations cannot be reasonably

AMERICAN CHURCH MORTGAGE COMPANY

Notes to Unaudited Financial Statements

March 31, 2022

estimated at this time. The contractual maturity schedule for mortgage loans receivable as of March 31, 2022, is as follows:

The Company did not restructure any loans during the three month period ended March 31, 2022. A summary of loans restructured or modified as of March 31, 2022 and December 31, 2021 are shown below. All of the loans, except one, are currently performing under the terms of the modifications for their mortgage obligations.

Restructured and Modified Loans

AMERICAN CHURCH MORTGAGE COMPANY

Notes to Unaudited Financial Statements

March 31, 2022

5. BOND PORTFOLIO

The Company has a portfolio of secured church bonds at March 31, 2022 and December 31, 2021, which are carried at amortized cost. The bonds pay either semi-annual or quarterly interest ranging from 3.50% to 9.75%. The aggregate par value of secured church bonds equaled $16,964,483 at March 31, 2022 with a weighted average interest rate of 6.63% and $18,093,483 at December 31, 2021 with a weighted average interest rate of 6.77%. These bonds are due at various maturity dates through February 2047. The Company has recorded an aggregate other than temporary impairment of $1,982,357 and $1,755,504 as of March 31, 2022 and December 31, 2021, respectively. The Company had maturities and redemptions of bonds of approximately $1,129,000 and $842,000 at March 31, 2021 and December 31, 2021, respectively.

The contractual maturity schedule for the bond portfolio as of March 31, 2022, is as follows:

Total other than temporary impairment related to the bond portfolio was $1,982,357 and $1,755,504 at March 31, 2022 and December 31, 2021, respectively. The fair value of these securities was $6,915,241 and $7,142,094 at March 31, 2022 and December 31, 2021, respectively.

Below is a rollforward of the amount of other than temporary impairment related to credit loss that has been recognized in earnings during the periods ended March 31, 2022 and December 31, 2021:

 Temporary Impairment Losses

AMERICAN CHURCH MORTGAGE COMPANY

Notes to Unaudited Financial Statements

March 31, 2022

6. 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 6.15% and 6.12% at March 31, 2022 and December 31, 2021, respectively. Holders of the secured investor certificates may renew certificates at the current rates and terms upon maturity at the Company’s discretion. Renewals upon maturity are considered neither proceeds from nor issuance of secured investor certificates. Renewals totaled approximately $0 and $530,000 at March 31, 2022 and December 31, 2021, respectively. The secured investor certificates have certain financial and non-financial covenants identified in the respective series’ trust indentures.

The contractual maturity schedule for the secured investor certificates at March 31, 2022 is as follows:

The Company’s current certificate offering terminated November 6, 2020. As a result, no new secured investor certificates are being offered and instead the Company is financing loans and liquidity needs through loan and bond payments received.

7. TRANSACTIONS WITH AFFILIATES

The Company has an Advisory Agreement with Church Loan Advisors, Inc. (the “Advisor”). The Advisor is responsible for the day-to-day operations of the Company and provides office space and administrative services. The Advisor and the Company are related through common management. For its services, the Advisor is entitled to receive a management fee equal to 1.25% annually of the Company's Average Invested Assets, plus one-half of any origination fee charged to borrowers on mortgage loans made by the Company. A majority of the independent board members approve the Advisory Agreement on an annual basis. The Company paid the Advisor management and origination fees of approximately $70,000 and $268,000 for the periods ended March 31, 2022 and December 31, 2021, respectively. In addition, the Company paid to the Advisor rent totaling $7,500 for the period ended March 31, 2022. The rent is on a month-to month basis.

AMERICAN CHURCH MORTGAGE COMPANY

Notes to Unaudited Financial Statements

March 31, 2022

8. LINE OF CREDIT

On April 9, 2018, the Company entered into a Loan and Security Agreement (the “Loan Agreement”) with Alerus Financial, N.A., as lender (the “Lender”), and a Revolving Note (the “Note”) evidencing a $4,000,000 revolving loan, later amended to $3,000,000 (the “Revolving Loan”). The Lender agrees to make loans to the Company from time to time and after the date of the loan agreement and the Company may repay and re-borrow pursuant to the terms and conditions of the Revolving Loan as long as no borrowing causes that dollar limit to be exceeded and the Company is not otherwise in default on the Revolving Loan. The Revolving Loan is secured by a first priority security interest in substantially all of the Company’s assets other than collateral pledged to secure the Company’s secured investor certificates, both those currently issued and any potentially issued in the future. The Company borrowed against the line of credit and has an outstanding balance of $0 and $300,000 as of March 31, 2022 and December 31, 2021 respectively. The interest rate on the Revolving Loan is the prevailing Wall Street Journal U.S. Prime Rate (the Index) plus 1.00%. On January 19, 2022, the Revolving Loan was extended through April 19, 2022. The Company did not renew the line of credit on April 19, 2022.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995

Certain statements contained in this section and elsewhere in this Form 10-Q constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve a number of known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, but are not limited to, (i) trends affecting our financial condition or results of operations; (ii) our business and growth strategies; (iii) the mortgage loan industry and the financial status of religious organizations; (iv) our financing plans; and other risks detailed in the Company’s other periodic reports filed with the Securities and Exchange Commission. The words “believe”, “expect”, “anticipate”, “may”, “plan”, “should”, and similar expressions identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date the statements were made and are not guarantees of future performance.

A detailed statement of risks and uncertainties is contained in our reports to the SEC, including, in particular, our Annual Report on Form 10-K for the year ended December 31, 2021 and other public filings and disclosures.  Investors and shareholders are urged to read these documents carefully.

Plan of Operation

We were founded in May 1994 and commenced active business operations on April 15, 1996 after the completion of our initial public offering.

We currently have forty mortgage loans aggregating $14,905,125 in principal amount and a first mortgage bond portfolio with par values aggregating $16,964,483. Funding of additional first mortgage loans and purchase of first mortgage bonds issued by churches is expected to continue on an on-going basis as more investable assets become available through: (i) future sales of securities; (ii) prepayment and repayment at maturity of existing loans and bonds; and (iii) borrowed funds. These capital sources and interest received on loans and bonds provide general working capital to the Company.

Results of Operations

2022 Three Months Ended March 31, 2022 Compared to 2021 Three Months Ended March 31, 2021

Our net (loss) for the three months ended March 31, 2022 and 2021 was $(151,151) and $(104,589), respectively, on total interest and other income of approximately $566,000 and $599,000, respectively. Interest and other income is comprised of interest from loans, interest from bonds, amortization of bond discounts and amortization of loan origination fees. As of March 31, 2022, our loans receivable have interest rates ranging from 0% to 10.25%, with an average, principal-adjusted interest rate of 7.63%. Our bond portfolio has an average current yield of 6.63% as of March 31, 2022. As of March 31, 2021, the average, principal-adjusted interest rate on our portfolio of loans was 7.70% and our portfolio of bonds had an average current yield of 6.76%. The decrease in interest income was due to the scheduled repayment of mortgage loans and bonds.

Interest expense was approximately $361,000 and $414,000 for the three months ended March 31, 2022 and 2021, respectively. The decrease in interest expense was due to the increase in recognition of amortized offering costs paid on our Secured Investor Certificates outstanding. Net interest margin increased from 30.79% to 36.24% resulting primarily from an decrease in interest income of approximately 5.50%.

We follow a loan loss allowance policy on our portfolio of loans outstanding. This critical policy requires complex judgments and estimates. We record mortgage loans receivable at their estimated net realizable value, which is the unpaid principal balance less the allowance for mortgage loans. Our loan policy provides an allowance for estimated uncollectible loans based on an evaluation of the current status of the loan portfolio. This policy provides for principal amounts outstanding on a particular loan if cumulative interruptions occur in the normal payment schedule of a loan. Our policy will provide an allowance for the outstanding principal amount of a loan in our portfolio in the amount that is in doubt of being collected. Additionally, no interest income is recognized on impaired loans or loans that are in the foreclosure process.

We will declare a loan to be in default and will place the loan on non-accrual status when the following thresholds have been met: (i) the borrower has missed three consecutive mortgage payments; (ii) the borrower has not communicated to the Company any legitimate reason for delinquency in its payments to the Company and has not arranged for the re-continuance of payments; (iii) lines of communication to the borrower have broken down such that any reasonable prospect of rehabilitating the loan and the return to regular monthly mortgage payments is gone.

Our policies on payments received and interest accrued on non-accrual loans are as follows: (i) We will accept payments on loans that are currently on non-accrual status when a borrower has communicated to us that they intend to meet their mortgage obligations. A payment made on a non-accrual loan is considered a good faith deposit as to the intent to resume their mortgage payment obligation. This good faith deposit is credited back to interest first then principal as stated in the mortgage loan documentation. (ii) A letter outlining the re-payment terms or the restructure terms (if any) of the loan is provided to the borrower. This letter will be signed by the Senior Pastor and all board members of the borrower. This letter resumes the obligation to make payments on non-accrual loans. (iii) The borrower must meet all its payment obligations for the next 120 days without interruption in order to be removed from non-accrual status.

When a loan is declared in default according to our policy or deemed to be doubtful of collection, the loan committee of our Advisor will direct the staff to charge-off the uncollectable receivables.

Allowance for losses on mortgage loans receivable increased to $1,282,573 as of March 31, 2022 compared to $1,486,434 for the year ended December 31, 2021. We recorded an additional $203,861 provision for losses on loans as of March 31, 2022 compared to $7,099 as of March 31, 2021. At March 31, 2022, we provided approximately $1,283,000 for eleven mortgage loans. Seven are three or more mortgage payments in arrears of which one loan has been declared to be in default. At December 31, 2021, we provided approximately $1,486,000 for twelve mortgage loans, of which eight were three or more mortgage payments in arrears of which two were declared to be in default.

Our lending practices limit deployment of our capital to churches and other non-profit religious organizations. The total principal amount of our second mortgage loans is limited to 20% of our average invested assets. We currently have one second mortgage loans totaling approximately $11,000 in principal amount outstanding. We do not loan to any borrower who has been in operation for less than two years and the borrower must demonstrate they can service the debt outstanding for the prior three years based on historical financial statements. We do not loan money based on projections or pledge programs. The loan amount to any borrower cannot exceed 75% loan to appraised value. Typically, we do not loan over 70% loan to value except in extenuating circumstances. In addition, the borrower’s long-term debt (including the proposed loan) cannot exceed four times the borrower’s gross income for the previous twelve month period.

Historically, loans in our portfolio are outstanding for an average of seven years. Our borrowers are typically small independent churches with little or no borrowing history. Once a church establishes a

payment history with us, they look to refinance their loan with a local bank, credit union or other financial institution which is willing to provide financing since the borrower has established a payment history and have demonstrated they can meet their mortgage debt obligations.

Operating expenses for the three months ended March 31, 2022 increased to approximately $356,000 compared to $282,000 for the three months ended March 31, 2021. The increase was the result of an increase for additional losses on our bond portfolio.

Mortgage Loans and Bond Portfolio

No new loans were funded and no bonds were purchased during the three months ended March 31, 2022 and 2021, respectively.

We currently own $4,321,000 First Mortgage Bonds issued by Greater Travelers Rest (“GTR”) located in Decatur, Georgia. The total principal amount of First Mortgage Bonds issued by GTR is $17,390,000. We, along with all other bondholders, have a superior lien over all other creditors. The last correspondence to bondholders was January 22, 2021 in which the trustee agreed to deferment of sinking fund payments since the COVID-19 pandemic caused a significant decrease in giving from the Church membership. The agreement meant that the trustee would not declare an event of default under the terms of the trust indenture as a result of missed sinking fund payments. The trustee and the church entered into a payment plan to get the church current on their sinking fund payments in the first quarter of 2021. If the church keeps with the plan, starting in 2022, the pay-dates should be made on time to the bondholders. We have not been updated as to the status of the payment plan and no interest or principal due to us has been made in 2022.

We currently own $529,000 First Mortgage Bonds and $497,000 Second Mortgage Bonds issued by Agape Assembly Baptist Church located in Orlando, Florida. The total principal amount of First Mortgage Bonds issued by Agape is $7,200,000, and the total principal amount of Second Mortgage Bonds issued is $715,000. Agape defaulted on its payment obligations to bondholders in September 2010. The church subsequently commenced a Chapter 11 bankruptcy reorganization proceeding regarding the property that secures the First Mortgage Bonds in December 2010. In October 2014, the bondholders of Agape agreed to a modification in the terms of their bonds which resulted in the temporary resumption of both principal and interest payments to both the first and second mortgage bond holders. Both the First Mortgage Bonds and Second Mortgage Bonds were modified to a fully amortized fixed rate, quarterly interest payment of 6.25% with a new maturity date of September 2037 for all the issued and outstanding bonds. We, along with all other bondholders, have a superior lien over all other creditors. The Church subsequently defaulted on their modification agreement in 2016 and no interest payments were made to bondholders during the year ended December 31, 2021 or 2020. However, the trustee made a distribution to bondholders during 2017 of $18.75 per $1,000 bond as a repayment of principal only, effectively reducing the outstanding balance of each $1,000 bond to approximately $826. The trustee again initiated foreclosure action against the Church and prevailed in its pursuit to foreclose on the Church’s property on November 1, 2019. However, on the eve of the foreclosure sale, the Church again filed for bankruptcy protection. In October 2020, bondholders were asked by the trustee to accept or reject a plan of reorganization. The trustee is recommending bondholders accept the reorganization plan. We accepted the reorganization plan. Acceptance of the plan by bondholders could result in a return of approximately 67% of the original principal investment outstanding. As of December 31, 2021, we have not been updated as to the status of the reorganization plan.

We currently own $900,000 First Mortgage Bonds issued by Soul Reapers Worship Center International located in Raleigh, North Carolina. The total principal amount of First Mortgage Bonds issued by Soul Reapers is $1,920,000. The Church has failed to make payments as required under the terms of the Trust Indenture. As a Bondholder, we expected to receive interest and principal payment(s) on time and

according to the terms of the Bonds. We did not receive any quarterly interest payments from the issuer for the year ended December 31, 2021.

Real Estate Held for Sale

We record real estate held for sale at the estimated fair value, which is net of the expected expenses related to the sale of the real estate. We did not record any additional impairment on our real estate held for sale for the three month period ended March 31, 2021 and 2020, respectively.

Dividends

We have elected to operate as a real estate investment trust (REIT), therefore we are required, among other things, to distribute to shareholders at least 90% of “Taxable Income” in order to maintain our REIT status. The dividends declared and paid to shareholders may include cash from origination fees even though they are not recognized as income in their entirety for the period under generally accepted accounting principles in the United States. We did not earn any  origination fees for the three months ended March 31, 2022 and 2021, respectively.

We did not pay any dividends for the period ended March 31, 2022.

We paid a dividend of $.01 for each share held of record on April 28, 2021. The dividend, which was paid April 30, 2021, represents a 0.40% annual rate of return on each share of common stock owned, assuming a purchase price of $10 per share.

Liquidity and Capital Resources

We generate revenue through implementation of our business plan of making mortgage loans to, and acquiring first mortgage bonds issued by, churches and other non-profit religious organizations. Our revenue is derived principally from interest income, and secondarily through the origination fees and renewal fees generated by the mortgage loans we make. We also earn income through interest on funds that are invested pending their use in funding mortgage loans and on income generated on church bonds. Our principal recurring expenses are advisory fees, legal and accounting fees and interest payments on secured investor certificates. Our liabilities as of March 31, 2022 are primarily comprised of our secured investor certificates.

The Outbreak of the Novel Coronavirus (COVID-19) has Adversely Affected the Operations of Churches and Other Non-Profit Religious Organizations Operations in general. The outbreak of COVID-19 has reduced the ability of people to congregate and has adversely affected the operations of churches and other non-profit religious organizations in general. The actual and threatened spread of coronavirus globally or in the regions in which we operate, or future widespread outbreak of infectious or contagious disease, such as influenza, coronavirus, measles, mumps, zika virus, or similar viruses, can continue to adversely affect the operations of our borrowers in general.



The extent to which our business may be affected by the coronavirus will largely depend on future developments which we cannot accurately predict, and its impact on our borrowers,  including the duration of the outbreak, the continued spread and treatment of the coronavirus, and new information and developments that may emerge concerning the severity of the coronavirus and the actions to contain the coronavirus or treat its impact, among others. To the extent that churches and other non-profit religious organizations operations in the U.S. are materially and adversely affected by the coronavirus, our business and financial results could be materially and adversely impacted.

Our borrowers may experience severe financial duress during the COVID-19 shelter in place restrictions, amplified by the financial setbacks for many of the church members who have lost their jobs, been furloughed, or had their incomes diminished. We have provided some temporary relief by allowing borrower’s to either make interest only payments for a period of ninety days or forgo one monthly mortgage payment (forbearance). This relief will impact our revenue and we will experience declines in payments due from borrowers and missed bond payments on the bonds we own which will impact operating income and may potentially impact future distributions and the ability to make payments due on our certificates and dividends to our shareholders.

Our current funding sources are expected to provide adequate cash for our operations for the next twelve months. Future capital needs are expected to be met by: (i) the additional sale of securities; (ii) prepayment and repayment at maturity of mortgage loans we make; and (iii) bonds that mature or we sell from our bond portfolio. We believe that the “rolling” effect of mortgage loans maturing and bond repayments will provide a supplemental source of capital to fund our business operations in future years. We continually review the market for other sources of capital. There can be no assurance we will be able to raise additional capital on terms acceptable for such purposes.

During the three months ended March 31, 2022, total assets decreased by approximately $733,000 due to a decrease in our loan portfolio. Liabilities decreased by approximately $582,000 for the three months ended March 31, 2022, due to a decrease in our secured investor certificates outstanding and our line of credit outstanding.

For the three months ended March 31, 2022, net cash (used for) provided by operating activities decreased to approximately $(123,602) from $40,629 from the comparative period ended March 31, 2021, primarily due to losses on operations.

For the three months ended March 31, 2022, net cash provided by investing activities was approximately $1,608,000 compared to $1,155,000 from the comparative three months ended March 31, 2021, due to a decrease in collections from our mortgage loans.

For the three months ended March 31, 2022, net cash (used for) financing activities decreased to approximately $(602,000) from $(1,093,000) for the comparative three months ended March 31, 2021, primarily due to the pay-down on our line of credit.

Critical Accounting Estimates

Preparation of our financial statements requires estimates and judgments to be made that affect the amounts of assets, liabilities, revenues and expenses reported. Such decisions include the selection of the appropriate accounting principles to be applied and the assumptions on which to base accounting estimates. We evaluate these estimates based on assumptions we believe to be reasonable under the circumstances.

The difficulty in applying these policies arises from the assumptions, estimates and judgments that have to be made currently about matters that are inherently uncertain, such as future economic conditions, operating results and valuations as well as management intentions. As the difficulty increases, the level of precision decreases, meaning that actual results can and probably will be different from those currently estimated.

Management uses estimates and assumptions in preparing these financial statements in accordance with generally accepted accounting principles. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. Actual results could differ from those estimates. The most sensitive estimates relate to the realizability of the mortgage loans receivable and the valuation of the bond portfolio and real estate held

for sale. It is at least reasonably possible that these estimates could change in the near term and that the effect of the change, if any, may be material to the financial statements.

We estimate the value of real estate we hold pending re-sale based on a number of factors. We look at the current condition of the property as well as current market conditions in determining a fair value, which will determine the listing price of each property. Each property is valued based on its current listing price less any anticipated selling costs, including for example, realtor commissions. Since churches are single use facilities the listing price of the property may be lower than the total amount owed to us. The fair value of the real estate held for sale includes estimates of expenses related to the sale of the real estate.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

N/A

Items 4. Controls and Procedures

Disclosure Controls and Procedures

An evaluation was carried out under the supervision and with the participation of the Company’s management, including the principal executive officer and the principal accounting officer, of the effectiveness of the Company’s disclosure controls and procedures as of the end of the quarter ended March 31, 2022. Based on that evaluation, the principal executive officer and the principal accounting officer concluded that the Company’s disclosure controls and procedures were not effective to provide reasonable assurance that information required to be disclosed by the Company in reports that it files or submits under the Securities and Exchange Commission is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms and that information required to be disclosed in reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal accounting officer, to allow timely decisions regarding required disclosure. We have limited number of personnel performing finance and accounting functions. Were there a larger staff, it would be possible to provide for enhanced disclosure of financial reporting matters. Management is required to apply its judgement in evaluating the cost benefit relationship of possible controls and procedures. Management realizes this is a material weakness.

Changes in Internal Controls Over Financial Reporting

During the three months ended March 31, 2022, there were no changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.

PART II

OTHER INFORMATION

Item 1.  Legal Proceedings.

None.

Item 1A.  Risk Factors.

Not applicable.

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds.

Item 3. Defaults Upon Senior Securities. 

None.

Item 4. Mine Safety Disclosures.

Not Applicable

Item 5. Other Information.

None.

Item 6. Exhibits

Exhibit

Number Title of Document

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 16, 2022