AMERICAN CHURCH MORTGAGE : Management’s Discussion and Analysis of Financial Condition and Results of Operations. (form 10-Q)

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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, 2020 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-five mortgage loans aggregating $16,329,026 in principal
amount and a first mortgage bond portfolio with par values aggregating
$18,849,937. 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


2021 Six Months Ended June 30, 2021 Compared to 2020 Six Months Ended June 30,
2020

Our net loss for the six months ended June 30, 2021 and 2020 was $455,986 and
$62,142 respectively, on total interest and other income of approximately
$986,000 and $1,232,000, 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 June 30, 2021, our loans receivable
have interest rates ranging from 0% to 10.25%, with an average,
principal-adjusted interest rate of 7.65%. Our bond portfolio has an average
current yield of 6.76% as of June 30, 2021. As of June 30, 2020, the average,
principal-adjusted interest rate on our portfolio of loans was 7.69% and our
portfolio of bonds had an average current yield of 6.83%. The decrease in
interest income was due to the reduced interest income on our mortgage loans and
bonds.

Interest expense was approximately $822,000 and $902,000 for the six months
ended June 30, 2021 and 2020, respectively. The decrease in interest expense was
due to the decrease in the outstanding balance of our Secured Investor
Certificates. Net interest margin decreased from 26.77% to 16.69% resulting
primarily from an decrease in interest income of approximately 19.97%.



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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 $1,515,038 as of
June 30, 2021 compared to $1,493,996 as of December 31, 2020. We recorded
$21,042 provision for losses on loans during the period ended June 30, 2021
compared to $47,708 for the period ended June 30, 2020. At June 30, 2021, we
provided approximately $1,515,000 allowance for loan loss reserve for fourteen
mortgage loans. Nine are three or more mortgage payments in arrears of which two
loans are declared to be in default. At December 31, 2020, we provided
approximately $1,494,000 allowance for loan loss reserve for fourteen mortgage
loans, of which nine 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 three second mortgage loans totaling approximately $217,000 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.





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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 six months ended June 30, 2021 increased to
approximately $600,000 compared to $344,000 for the six months ended June 30,
2020
. The increase was the result of an increase for additional impairment on
our bond portfolio and real estate held for sale.

2021 Second Quarter Compared to 2020 Second Quarter

The Company had a net loss of approximately $351,000 for the three months ended
June 30, 2021 compared to a net loss of approximately $131,000 for the three
months ended June 30, 2020, on total interest and other income of approximately
$388,000 and $604,000, respectively. Interest expense was approximately $407,000
and $439,000 for the three months ended June 30, 2021 and 2020, respectively.
The decrease in net interest income from the prior three month period was
approximately $185,000.

Operating expenses for the three months ended June 30, 2021 increased to
approximately $318,000 compared to $232,000 at June 30, 2020. The increase in
operating expenses was due to an increase in other than temporary impairment on
our bond portfolio.

Mortgage Loans and Bond Portfolio

No new loans were funded and no bonds were purchased during the six months ended
June 30, 2021. Two new bridge loans were funded during the six months ended June
30, 2020
for approximately $737,000. A bridge loan typically has a maturity of
one year or less. We purchased $1,721,000 in bonds during the six months ended
June 30, 2020.

We currently own $4,321,000 First Mortgage Bonds issued by The Greater
Traveler’s Rest Baptist Church, Inc. (“GTR”) located in Decatur, Georgia. The
total principal amount of First Mortgage Bonds issued by GTR is $12,125,000. GTR
has defaulted on its interest and principal payments to bondholders. We, along
with all other bondholders have a superior lien over all other creditors. We
have not received any quarterly interest payments from the issuer for the period
ended June 30, 2021. The trustee has notified us they are working on a
“work-out” plan with the Church.

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 six month period ended June 30,
2021
and for the year ended December 31, 2020. However, the trustee made a
distribution to bondholders during 2017 of $18.54 per $1,000 bond as a repayment
of principal only, effectively reducing the outstanding balance of each $1,000
bond to approximately $826.



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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. The reorganization plan
has been accepted by a majority of the bondholders. However, the trustee has not
finalized the plan as of June 30, 2021.

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 have not received any quarterly
interest payments from the issuer for the six month period ended June 30, 2021
and for the year ended December 31, 2020.

We currently own $691,000 First Mortgage Bonds issued by North Carolina College
of Theology
(“NCCT”) located in Raleigh, North Carolina. The total principal
amount of First Mortgage Bonds issued by NCCT is $1,643,000. 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 have not received any quarterly interest
payments from the issuer for the six month period ended June 30, 2021 and for
the year ended December 31, 2020. The trustee has stated they have sold the
parsonage owned by the Church and are determining how to distribute the proceeds
to bondholders.




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 recorded an
additional $100,000 and $0 impairment on our real estate held for sale for the
six month period ended June 30, 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 accounting
principles generally accepted in the United States. We did not earn any
origination fees for the six months ended March 31, 2021 and 2020, respectively.

We did not pay any dividends to shareholders for the quarter ended June 30,
2021
. This is the first quarter in which we did not make a dividend payment
since we commenced active business operations on April 15, 1996. We paid 99
consecutive dividends prior to the second quarter ended June 30, 2021.

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



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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 June 30, 2021
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 six months ended June 30, 2021, total assets decreased by
approximately $2,534,000 due to a decrease in our loan portfolio. Liabilities
decreased by approximately $2,061,000 for the six months ended June 30, 2021,
due to a decrease in our secured investor certificates outstanding and our line
of credit outstanding.

For the six months ended June 30, 2021, net cash provided by operating
activities decreased to approximately $30,000 from $204,000 from the comparative
period ended June 30, 2020, primarily due to losses on operations.





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For the six months ended June 30, 2021, net cash provided by investing
activities was approximately $2,055,000 compared to $1,390,000 from the
comparative six months ended June 30, 2020, due to a increase in collections
from our mortgage loans.

For the six months ended June 30, 2021, net cash (used for) financing activities
increased to approximately $(2,110,000) from $(1,735,000) for the comparative
six months ended June 30, 2020, 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.

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