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PART
I
FORWARD
LOOKING STATEMENTS
In
connection with the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, readers of this document
and any document incorporated by reference herein, are advised that this document and documents incorporated by reference into this document
contain both statements of historical facts and forward-looking statements. Forward looking statements are subject to certain risks and
uncertainties, which could cause actual results to differ materially from those indicated by the forward-looking statements. Examples
of forward looking statements include, but are not limited to (i) projections of revenues, income or loss, earning or loss per share,
capital expenditures, dividends, capital structure and other financial items; (ii) statements of plans and objectives of ours or our
management or Board of Directors, including any public sale of our securities, or estimates or predictions of actions by borrowers, competitors
or regulatory authorities; (iii) statements of future economic performance; and (iv) statements of assumptions underlying other statements
and statements about our business.
This
document and documents incorporated by reference herein also identify important factors which could cause actual results to differ materially
from those indicated by forward looking statements. These risks and uncertainties include, among other things, interest rate fluctuations
as they affect the relative yield of our loan portfolio and our ability to compete in making loans to borrowers; payment default on loans
made or bonds purchased by us, which could adversely affect our ability to make distributions to our shareholders or payments due on
our secured investor certificates; the actions of competitors; the effects of government regulation; competition, risks related to uncertainty
and disruption in global economic markets as a result of COVID-19 (commonly referred to as the coronavirus) and other factors which are
described herein and/or in documents incorporated by reference herein, including the risks described in Item 1A.
The
cautionary statements made pursuant to the Private Litigation Securities Reform Act of 1995 above and elsewhere by us should not be construed
as exhaustive or as any admission regarding the adequacy of disclosures made by us prior to the effective date of such Act. Matters which
are the subject of forward-looking statements are beyond our ability to control and in many cases, we cannot predict what factors would
cause results to differ materially from those indicated by the forward-looking statements.
The outbreak of
the novel coronavirus (COVID-19) has adversely affected many industries in general and resulted in preventing the gathering of church
congregations which impacts the ability of churches and other non-profit religious organizations normal methods of worship causing a
decline in membership and tithings and offerings. The actual and threatened spread of COVID-19 globally or in the regions in which we
operate or future widespread outbreak of infectious or contagious disease, can continue to reduce the ability of persons to worship in
groups in general. The extent to which our business may be affected by the COVID-19 will largely depend on future developments which
we cannot accurately predict, and its impact on churches and other non-profit religious organizations, 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 organizations operations in the U.S. are materially and adversely affected by the COVID-19, business and financial
results of this industry, and thus our business and financial results, could be materially and adversely impacted.
We have experienced
declines in payments due from our borrowers and missed bond payments on the bonds owned by us. We have provided temporary deferrals of
monthly payments which may impact our future operating income and may potentially impact future distributions of dividends to our shareholders
and our ability to make payments due on our secured investor certificates.
General
We
are a Minnesota corporation incorporated on May 27, 1994. We operate as a Real Estate Investment Trust (“REIT”) and are engaged
in the business of making mortgage loans to churches and other non-profit religious organizations throughout the United States. The principal
amount of loans we offer ranges from $100,000 to $2,000,000. We may also invest up to 40% of our Average Invested Assets in mortgage
secured debt securities (bonds) issued by churches and other non-profit religious organizations. Between the date upon which we began
active business operations (April 15, 1996) and December 31, 2021, we have made 201 loans to 171 churches totaling $109,203,100, with
the average principal amount of such loans being approximately $543,000. Of the 201 loans we have made, 137 loans totaling $93,819,424
have been repaid early by the borrowing churches. We also own, as of December 31, 2021, approximately $18,093,000 principal amount of
Church Bonds (hereinafter defined). At no time have we paid a premium for any of the bonds in our portfolio. Subject to the supervision
of our Board of Directors, our day to day business operations are managed by Church Loan Advisors, Inc. (the “Advisor”),
which provides investment advisory
and
administrative services to us. The principals of the Advisor include principals of American Investors Group, Inc., (“American”)
a FINRA member broker-dealer, which has served as underwriter of the public offerings of our common stock, as well as our public offerings
of secured investor certificates. American withdrew its membership with FINRA effective July 31, 2020, citing COVID-19 as one of the
primary reasons affecting its future business to provide church loan financings.
The Company’s
Business Activities
Our
business is managed by the Advisor. We have no employees, but we do have two executive officers. The Advisor's affiliate, American was
engaged since 1987 in the business of underwriting first mortgage bonds for churches throughout the United States. In underwriting church
bonds, American reviewed financing proposals, analyzed prospective borrowers’ financial capability, and structured, marketed and
sold, mortgage-backed securities which are debt obligations (bonds) of such borrowers to the investing general public. Since its inception,
American had underwritten approximately 323 church bond financings, in which approximately $584,867,000 in first mortgage bonds and sold
to public investors. The average size of single church bond financings underwritten by American since its inception is approximately
$1,811,000.
In
the course of its business, American identified a demand from potential borrowers for smaller loans of $100,000 to $2,000,000. Because
of the regulatory, administrative expenses and complexity normally associated with the bond financing business, American determined that
the economic feasibility of bond financing diminished for financings under $1,000,000. As a result, we believe that many churches are
forced to either forego the project for which their financing request was made, fund their project from cash flow over a period of time
and at greater expense, or seek bank financing at terms that are not always favorable or available to them, due to the historic reluctance
of banks to lend to churches for other than economic reasons. Our objective is to provide a lending source to this segment of the industry
by capitalizing on the human resources and experience available at American and the Advisor, and taking advantage of the marketing, advertising
and general goodwill of American.
Financing
Business
Our
primary business is to make first mortgage loans in amounts ranging from $100,000 to $2,000,000, to churches and other non-profit religious
organizations, and selecting and investing in mortgage-secured debt instruments ("Church Bonds") issued by churches and other
non-profit religious organizations throughout the United States. All of our loans belong to one portfolio segment. We attempt to apply
our working capital (after adequate reserves determined by the Advisor) toward making mortgage loans and investing in Church Bonds. We
seek to enhance returns on investments on such loans by:
|
· |
offering terms of up to 30 years, generating the
highest yields possible under current market conditions; |
|
· |
seeking origination fees (i.e. "points")
from the borrower at the outset of a loan and upon any renewal of a loan; |
|
· |
making a limited amount of higher-interest rate
second mortgage loans to qualified borrowers; and |
|
· |
purchasing mortgage-secured debt securities having
various maturities issued by churches and other non-profit religious organizations. |
Our
policies limit the amount of second mortgage loans to 20% of the Company's Average Invested Assets (hereinafter defined) on the date
any second mortgage loan is closed and limit the amount of mortgage-secured debt securities to 40% of Average Invested Assets on the
date of their purchase.
“Average
Invested Assets” for any period is defined as the average of the aggregated book value of the assets of the corporation invested,
directly or indirectly, in loans (or interests in loans) secured by real estate, and first mortgage bonds, before reserves for depreciation
or bad debts or other similar non-cash reserves computed by taking the average of such values at the end of each calendar month during
such period.
All
other mortgage loans made by us (or Church Bonds purchased for investment) will be secured by a first mortgage (or deed of trust) lien
in favor of us. Although we attempt to make mortgage loans for various terms typically ranging from one to thirty years, we may determine
to emphasize longer-term fixed-rate loans in our discretion, in order to reduce the risk to us of downward interest rate fluctuations.
Our
lending and investing operations, including determination of a prospective borrower's or church bond issuer's financial credit worthiness,
are made on our behalf by the Advisor. Employees and agents of the Advisor conduct all aspects of our business, including (i) marketing
and advertising; (ii) communication with prospective borrowers; (iii) processing loan applications; (iv) closing the loans; (v) servicing
the loans; (vi) enforcing the terms of our loans; (vii) shareholder relations and (viii) administering our day-to-day business. For its
services, the Advisor is entitled to receive a management fee equal to 1.25%
annually
of the Company's Average Invested Assets, plus one-half of any origination fee charged to borrowers on mortgage loans we make. The management
fee is reduced to 1% on assets from $35 million to $50 million and to .75% on assets over $50 million. The Advisor’s management
fees are computed and payable monthly.
Current
First Mortgage Loan Terms
We
offer prospective borrowers a selection of loan types, which include a choice of fixed or variable rates of interest indexed to the prime
rate, the U.S. Treasury 10-Year Notes, or another generally recognized reference index, and having various terms to maturity, origination
fees and other terms and conditions. The terms of loans we offer may be changed by our Advisor as a result of such factors as (i) the
credit quality and experience of the borrowers; (ii) the terms of loans in our portfolio; (iii) competition from other lenders; (iv)
anticipated need to increase the overall yield on our mortgage loan portfolio; (v) local and national economic factors; and (vi) actual
experience in borrowers’ demand for the loans. We currently offer the loan types described in the table below. This table describes
certain material terms of loans available from us. The table does not purport to identify all possible terms, rates, and fees we may
offer. We may modify the terms identified below or offer loan terms different than those identified below at any time. Many loans are
individually negotiated and differ from the terms described below.
Loan
Type |
Interest
Rate (1) |
Origination
Fee (2) |
25/30
Year Term (3) |
Fixed
@ 8.75%/8.95% respectively |
3.5% |
20
Year Term (3) |
Variable
Annually @ Prime + 2.50% |
3.5% |
3
Year Renewable Term (4) |
Fixed
@ 8.25% |
3.0% |
Construction
1 Year Term |
Fixed
@ 9.00% |
2.0% |
|
(1) |
“Prime” means the prime rate of interest charged to
preferred customers, as published by a federally chartered bank chosen by us. We may also tie our offered interest rates to other
indices. |
|
(2) |
These are “target” fees and negotiation of these fees
with borrowers can occur. Origination fees are generally based on the original principal amount of the loan and are collected from
the borrower at the origination and renewal of loans, one-half of which is payable directly to our Advisor. |
|
(3) |
Fully amortized repayment term. Amortization terms may vary, as
may other loan terms, depending on individual loan negotiations and competitive forces. |
|
(4) |
Renewable term loans are repaid based on a 25-year amortization
schedule and are renewable at the conclusion of their initial term for additional like terms up to an aggregated maximum of 25 years.
We charge a fee of 1% upon the date of each renewal. If renewed by the borrower, the interest rate is adjusted upon renewal to Prime
plus a specified percentage “spread.” |
Mortgage Loan
Processing and Underwriting
Mortgage
loan applications are prepared and verified by our Advisor's personnel in our Loan Origination and Underwriting Department. Verification
procedures are designed to assure a borrower's qualification under our Financing Policies which are specifically identified herein and
include, among other things, obtaining:
|
· |
applications containing key information concerning
the prospective borrowers; |
|
· |
financial statements in accordance with our Financing
Policies; |
|
· |
corporate records and other organizational documents
of the borrower; |
|
· |
preliminary title report or commitment for mortgagee
title insurance; and |
|
· |
a real estate appraisal in accordance with the
Financing Policies. |
All
appraisals are prepared by independent third-party professionals who we approve based on their experience, reputation and education.
All financial statements are prepared by independent third-party professionals or a qualified accountant that we hire that is independent
of the borrower. Completed loan applications, together with a written summary are then presented to
our
Underwriting Committee. Our loan Underwriting Committee is comprised of the Advisor's President and Chief Financial Officer and Treasurer
and certain members of its staff. Our Advisor may arrange for the provision of mortgage title insurance and for the services of professional
independent third-party accountants and appraisers on behalf of borrowers in order to achieve pricing efficiencies on their behalf and
to assure the efficient delivery of title commitments, preliminary title reports and title policies, and financial statements and appraisals
that meet our underwriting criteria. Our Advisor may arrange for the direct payment for such professional services and for the direct
reimbursement to it of such expenditures by borrowers and prospective borrowers. Upon closing and funding of mortgage loans, an origination
fee based on the original principal amount of each loan may be charged, of which one-half is payable by the borrower to our Advisor,
and the other one-half to us.
Loan Commitments
Subsequent
to approval by our Underwriting Committee, and prior to funding a loan, we may issue a loan commitment to qualified applicants. A loan
commitment deposit may be required from the borrowing church to commence the loan preparation procedure. These deposits are directly
applied by the Advisor to engage accountants and appraisers to prepare their respective reports on the church. Commitments may indicate,
among other things, the loan amount, origination fees, closing costs, underwriting expenses (if any), funding conditions, approval expiration
dates and interest rate and other terms. Commitments generally set forth a "prevailing" interest rate that is subject to change
in accordance with market interest rate fluctuations until the final loan closing documents are prepared, at which time we commit to
a stated interest rate. In certain cases we may establish ("lock in") interest rate commitments up to sixty (60) days from the
commitment to closing; however, interest rate commitments beyond sixty days will not normally be issued unless we receive an appropriate
fee premium based upon our assessment of the risk associated with a longer period.
Loan Portfolio
Management
Our
portfolio of mortgage loans and Church Bonds is managed and serviced by our Advisor in accordance with the Advisory Agreement. The Advisor
is responsible for all aspects of our mortgage loan business, including closing and recording of mortgage loans; collecting payments
of principal and interest regularly and upon the maturity of a loan; enforcing loan payments and other lender's requirements; periodic
review of each mortgage loan file and determination of its reserve classification; and exercising our remedies in connection with any
defaulted or non-performing loans. Fees and costs of attorneys, insurance, bonds and other direct expenses incurred in connection with
the exercise of such remedies are our responsibility. We may, however, recoup these expenses from the borrower in the process of pursuing
our remedies. The Advisor will not receive any additional compensation for services rendered in connection with loan portfolio management
or exercising remedies on our behalf in the event of a loan default.
Loan Funding
and Bank Borrowing
Our
mortgage loans (and our purchases of Church Bonds) are funded with available cash.
We
have established a $4 million-dollar line of credit with a local bank, amended to $3,000,000, with a current outstanding balance of
$300,000 at December 31, 2021. In addition, we may borrow up to 300% of our shareholders’ equity (in the absence of a
satisfactory showing that a higher level of borrowing is appropriate; any excess in borrowing over such 300% level must be approved
by a majority of the Independent Directors and disclosed to shareholders in the next quarterly report along with justification for
such excess) to make loans regardless of our capacity to (i) sell our securities on a continuing basis, or to (ii) reposition assets
from the maturity or early repayment of mortgage loans in our secured investor certificates, minus reserves for operating expenses,
and bad-debt reserves, as determined by the Advisor. Cash resources available to us for lending purposes include, in addition to the
net proceeds from any future sales of our common stock, secured investor certificates (if any) or other debt securities, (i)
principal repayments from borrowers on loans made by us and (ii) funds borrowed under any line of credit arrangement.
Public Offerings
- Secured Investor Certificates
In
September 2017, we filed a registration statement with the Securities and Exchange Commission to offer $10,000,000 worth of Series E
secured investor certificates. The offering was declared effective by the SEC on November 6, 2017. The certificates were offered in multiples
of $1,000 with interest rates ranging from 4.00% to 6.50%, subject to changing market rates, and maturities from 5 to 15 years. The certificates
are collateralized by certain mortgage loans receivable and church bonds of approximately the same value. As of December 31, 2021, we
sold 3,738 Series E Secured Investor Certificates totaling $3,738,000. The offering expired on November 6, 2020.
In
July 2014, we filed a registration statement with the Securities and Exchange Commission to offer $10,000,000 worth of Series D secured
investor certificates. The offering was declared effective by the SEC on August 12, 2014. The offering was renewed with an effective
date of September 23, 2016. The certificates were offered in multiples of $1,000 with interest rates ranging from 4.00% to 6.50%, subject
to changing market rates, and maturities from 5 and 7 to 15 years. The certificates are collateralized by certain mortgage loans receivable
and church bonds of approximately the same value. As of December 31, 2021, approximately 7,797 Series D certificates had been issued
and were outstanding for $7,797,000. The offering terminated in August 2017.
Previously,
we offered Series A, Series B and Series C secured investor certificates, at various maturities and interest rates. The weighted average
interest rate on all outstanding certificates was 6.12% and 6.19% for the years ended December 31, 2021 and 2020, 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 of secured investor
certificates totaled approximately $530,000 and $1,007,000 for the years ended December 31, 2021 and 2020, respectively. There were no
Series A secured investor certificates outstanding as of December 31, 2021 and 2020. There were $4,766,500 and $6,022,500 representing
4,767 and 6,023 in outstanding Series B secured investor certificates as of December 31, 2021 and 2020, respectively and there were $5,977,000
and $6,127,000 representing 6,127 and 6,127 in outstanding Series C secured investor certificates at December 31, 2021 and 2020, respectively.
All secured investor certificates are collateralized by certain mortgage loans receivable or secured church bonds of approximately the
same stated value as the certificates. In addition, the secured investor certificates have certain financial and non-financial covenants,
as set forth in each Series’ respective trust indenture.
The Advisory
Agreement
We
have entered into a contract with the Advisor (the “Advisory Agreement”) under which the Advisor furnishes advice and recommendations
concerning our business affairs, provides administrative services to us and manages our day-to-day operations. We have no employees,
but we do have two executive officers. All our personnel needs are met through the personnel and expertise of the Advisor and its affiliates.
Among other things, the Advisor:
- serves as our mortgage loan underwriter and advisor in connection
with our primary business of making loans to churches;
|
· |
advises and selects Church Bonds to be purchased
and held for investment by us; |
|
· |
services all mortgage loans we make; |
|
· |
provides marketing and advertising and generates
loan leads directly and through its affiliates; |
|
· |
deals with regulatory agencies, borrowers, lenders,
banks, consultants, accountants, brokers, attorneys, appraisers, insurers and others; |
|
· |
supervises the preparation, filing and distribution
of tax returns and reports to governmental agencies and to shareholders and acts on our behalf in connection with shareholder relations;
|
|
· |
provides office space and personnel as required
for the performance of the foregoing services; and |
|
· |
as requested by us, makes reports to us of its
performance of the foregoing services and furnishes advice and recommendations with respect to other aspects of our business. |
In
performing its services under the Advisory Agreement, the Advisor may use facilities, personnel and support services of its affiliates.
Expenses such as legal and accounting fees, stock transfer agent, registrar and paying agent fees and proxy solicitation expenses are
direct expenses of ours and are not provided for by the Advisor as part of its services.
The
Advisory Agreement is renewable annually by us for one-year periods, subject to our determination, including a majority of the Independent
Directors, that the Advisor's performance has been satisfactory and that the compensation paid the Advisor has been reasonable. The Advisory
Agreement was last approved by the Board of Directors (including a majority of the Independent Directors) as of January 25, 2022. We
may terminate the Advisory Agreement with or without cause upon 60 days written notice to the Advisor. Upon termination of the Advisory
Agreement by either party, the Advisor may require us to change our name to a name that does not contain the word "American,"
"America" or the name of the Advisor or any approximation or
abbreviation
thereof, and that is sufficiently dissimilar to the word "America" or "American" or the name of the Advisor as to be
unlikely to cause confusion or identification with either the Advisor or any person or entity using the word "American" or "America"
in its name. Our Board of Directors shall determine that any successor Advisor possesses sufficient qualifications to perform the advisory
function for us and justify the compensation provided for in its contract with us.
Pursuant
to the Advisory Agreement, the Advisor is required to pay all of the expenses it incurs in providing services to us, including, but not
limited to, personnel expenses, rental and other office expenses, expenses of officers and employees of the Advisor, including travel
and all of its overhead and miscellaneous administrative expenses relating to performance of its functions under the Advisory Agreement.
We are required to pay all other expenses we incur in the daily operations of our business–such as the costs and expenses of reporting
to various governmental agencies and shareholders; the general conduct of our operations as a mortgage lender; fees and expenses of appraisers,
directors, auditors, outside legal counsel and transfer agents; directors and officers liability insurance premiums; unreimbursed costs
directly relating to closing of loan transactions; and costs relating to the enforcement of loan agreements and/or foreclosure proceedings.
In
the event that our Total Operating Expenses exceed in any calendar year the greater of (a) 2% of our Average Invested Assets or (b) 25%
of our net income, the Advisor is obligated to reimburse us, to the extent of its fees for such calendar year, for the amount by which
the aggregate annual operating expenses paid or incurred by us exceed the limitation. Total operating expenses as defined in the Advisory
Agreement exclude expenses of raising capital, interest payments, taxes, non-cash expenditures (including, but not limited to, depreciation,
amortization and bad debt reserves), incentive fees and property operation and disposition costs. The Independent Directors may, upon
a finding of unusual and non-recurring factors which they deem sufficient, determine that a higher level of expenses is justified in
any given year.
Our
bylaws provide that the Independent Directors are to determine at least annually the reasonableness of the compensation we pay to our
Advisor. The Advisory Agreement was renewed for a one-year period as of January 25, 2022 and the reasonableness of our Advisor’s
compensation was reviewed as of this date as well. Factors considered in reviewing the Advisory Fee include the size of the fees of the
Advisor in relation to the size, composition and profitability of our loan portfolio, the rates charged by other advisors performing
comparable services, the success of the Advisor in generating opportunities that meet our investment objectives, the amount of additional
revenues realized by the Advisor for other services performed for us, the quality and extent of service and advice furnished by the Advisor,
the quality of our investments in relation to investments generated by the Advisor for its own account, if any, and the performance of
our investments.
The
Advisory Agreement provides for indemnification by us of the Advisor and each of its directors, officers and employees against expense
or liability arising out of such person's activities in rendering services to us, provided that the conduct against which the claim is
made was determined by such person, in good faith, to be in our best interests and was not the result of negligence or misconduct.
Financing Policies
Our
business of mortgage lending to churches and other non-profit religious organizations is managed in accordance with and subject to the
policies, guidelines, restrictions and limitations identified herein (collectively, the "Financing Policy"). The intent of the
Financing Policy is to identify for our shareholders not only the general business in which we are involved, but the parameters of our
lending business. These policies may not be changed (except in certain immaterial respects by majority approval of the Board of Directors)
without the approval of a majority of the Independent Directors, and the holders of a majority of our outstanding shares at a duly held
meeting for that purpose:
|
(i) |
Loans made by us will be limited to churches and other non-profit
religious organizations and will be secured by mortgages. The total principal amount of all second mortgage loans that we fund is
limited to 20% of Average Invested Assets. All other loans will be first mortgage loans. |
|
(ii) |
The total principal amount of mortgage-secured debt securities
we purchase from churches and other non-profit religious organizations is limited to 40% of our Average Invested Assets. |
|
(iii) |
The loan amount cannot exceed 75% of the value of the real estate
and improvements securing each loan, such value being determined based on a written appraisal prepared by an appraiser acceptable
to the Advisor. On all loans, we will require a written appraisal certified by a member of the Appraisal Institute ("MAI"),
or a state-certified appraiser. |
|
(iv) |
An ALTA (American Land Title Association) or equivalent Mortgage
Title Policy must be furnished to us by the borrower insuring our mortgage interest. |
|
(v) |
The borrower's long-term debt (including the proposed loan) cannot
exceed four times their gross income for the previous twelve (12) months. |
|
(vi) |
The borrower must furnish us with financial statements (balance
sheet and income and expense statement) for its last three (3) complete fiscal years and current financial statements for the period
within ninety (90) days of the loan closing date. A borrower must have the last complete fiscal year financial statements reviewed
by a certified public accountant (CPA) engaged by the borrower and who is independent of the borrower. On loans in excess of $500,000
our Advisor may require the last complete fiscal year be audited by a CPA engaged by the borrower and who is independent of the borrower.
In lieu of the above requirement, we or our Advisor may employ a qualified accountant. The qualified accountant we employ would be
required to be independent of the borrower. Our employed qualified accountant would not be independent of us. Compiled financial
statements of the borrower are acceptable from our employed qualified accountant. Along with the compiled financial statements of
the borrower, our employed qualified accountant would perform partial and targeted review examination procedures for borrowers. On
loans in excess of $500,000, the Advisor may require partial and targeted audit examination procedures for borrowers. |
|
(vii) |
Borrowers in existence for less than three (3) fiscal years must
provide financial statements since their inception. No loan will be extended to a borrower in operation less than two (2) calendar
years absent express approval by our Board of Directors. |
|
(viii) |
The Advisor typically requires the borrower to arrange for automatic
electronic payment or drafting of monthly payments. |
|
(ix) |
The Advisor may require (i) key-man life insurance on the life
of the senior pastor of a church; (ii) personal guarantees of church members and/or affiliates; and (iii) other security enhancements
for our benefit. |
|
(x) |
The borrower must agree to provide to us annual reports (including
financial statements) within 120 days of each fiscal year end beginning with the fiscal year end next following the funding of the
loan. |
|
(xi) |
The Advisor may require the borrower to grant to us a security
interest in all personal property located and to be located upon the mortgaged premises (excluding property leased by the borrower). |
|
(xii) |
We require borrowers to maintain a general perils and liability
coverage insurance policy naming us as the loss-payee in connection with damage or destruction to the property of the borrower which
typically includes weather-related damage, fire, vandalism and theft. Our Advisor may require the borrower to provide flood, earthquake
and/or other special coverage. |
These Financing
Policies are in addition to the prohibited investments and activities identified below and which are set forth in our Bylaws.
Prohibited Investments
and Activities
Our
Bylaws impose certain prohibitions and restrictions on our investment practices and lending activities, including prohibitions against:
|
(i) |
Investing more than 10% of our total assets in unimproved real
property or mortgage loans on unimproved real property; |
|
(ii) |
Investing in commodities or commodity futures contracts other than
"interest rate futures" contracts intended only for hedging purposes; |
|
(iii) |
Investing in mortgage loans (including construction loans) on any
one property which in the aggregate with all other mortgage loans on the property would exceed 75% of the appraised value of the
property unless substantial justification exists because of the presence of other underwriting criteria; |
|
(iv) |
Investing in mortgage loans that are subordinate to any mortgage
or equity interest of the Advisor or the Directors or any of their affiliates; |
(v) Investing
in equity securities;
(vi) Engaging
in any short sales of securities or in trading, as distinguished from investment activities;
(vii) Issuing
redeemable equity securities;
(viii) Engaging
in underwriting or the agency distribution of securities issued by others;
|
(ix) |
Issuing options or warrants to purchase our shares at an exercise
price less than the fair market value of the shares on the date of the issuance or if the issuance thereof would exceed 10% in the
aggregate of our outstanding shares; |
|
(x) |
The aggregate borrowings of the corporation, secured and unsecured,
must be reasonable in relation to the Shareholders’ Equity of the corporation and must be reviewed by the Independent Directors
at least quarterly. The maximum amount of such borrowings cannot exceed 300% of shareholders’ equity. Any excess in borrowing
over such 300% level must be approved by a majority of Independent Directors and disclosed to shareholders in the next quarterly
report along with justification for such excess; |
|
(xi) |
Investing in real estate contracts of sale unless such contracts
are in recordable form and are appropriately recorded in the chain of title; |
|
(xii) |
Selling or leasing to the Advisor, a Director or any affiliate
thereof unless approved by a majority of our Directors (including a majority of our Independent Directors), who are not otherwise
interested in such transaction, as being fair and reasonable to us; |
|
(xiii) |
Acquiring property from any Advisor or Director, or any affiliate
thereof, unless a majority of our Directors (including a majority of our Independent Directors) who are not otherwise interested
in such transaction approve the transaction as being fair and reasonable and at a price to us which is no greater than the cost of
the asset to such Advisor, Director or any affiliate thereof, or if the price to us is in excess of such cost, that substantial justification
for such excess exists and such excess is reasonable. In no event shall the cost of such asset exceed its current appraised value; |
|
(xiv) |
Investing or making mortgage loans unless a mortgagee's or owner's
title insurance policy or commitment as to the priority of the mortgage or condition of title is obtained; or |
|
(xv) |
Issuing shares on a deferred payment basis or other similar arrangement. |
We
do not invest in the securities of other issuers for the purpose of exercising control, engage in the purchase and sale of investments
other than as described in this Report, offer securities in exchange for property unless deemed prudent by a majority of the Directors,
or make loans to other persons except in the ordinary course of our business as described herein.
We
will not make loans to or borrow from, or enter into any contract, joint venture or transaction with, any of our Directors or officers,
the Advisor or any affiliate of any of the foregoing unless a majority of our Directors, including a majority of our Independent Directors,
approves the transaction as fair and reasonable to us and the transaction is on terms and conditions no less favorable to us than those
available from unaffiliated third parties. Any investment by us in any property, mortgage or other real estate interest pursuant to a
transaction with the Advisor or any Directors or officers thereof will be based upon an appraisal of the underlying property from an
independent qualified appraiser selected by the Independent Directors and will not be made at a price greater than fair market value
as determined by such appraisal.
Under Performing
and Non-Performing Loans
As
of December 31, 2021, we had eight first mortgage loans totaling approximately $3,289,000 that are three or more monthly payments in
arrears. We may incur a loss if these borrowers are unable to bring their payments current and we are compelled to foreclose on their
properties. We may be unable to dispose of the foreclosed properties on terms that enable us to recoup our expenses and outstanding balances.
As
of December 31, 2021, we held title to one property located in Pine Bluff, Arkansas via deed in lieu of foreclosure, with an
outstanding balance totaling $237,760. The Church is still occupying this property and paying rent while trying to either sell the
building or obtain refinancing. We foreclosed on another property located in Atlanta, Georgia which we are currently owed $577,663
which amount includes legal fees and out of pocket costs. We have obtained title to the property but have not taken possession due
to court proceedings in which the previous owner has filed numerous appeals regarding our foreclosure.
As of December
31, 2020, we had nine first mortgage loans totaling approximately $3,384,000 that are three or more monthly payments in arrears. We may
incur a loss if these borrowers are unable to bring their payments current and we are compelled to foreclose on their properties. We
received full payment on one of these loans totaling approximately $45,000 in 2021. We also sold one of the properties which is expected
to close in the first quarter of 2022 for less than what we are owed. We may be unable to dispose of the foreclosed properties on terms
that enable us to recoup our expenses and outstanding balances.
Competition
The
business of making loans to churches and other non-profit religious organizations is highly competitive. We compete with a wide variety
of investors and other lenders, including banks, insurance companies, pension funds and fraternal organizations which may have investment
objectives similar to our own. A number of these competitors have greater financial resources, larger staffs and longer operating histories
than we do. We compete principally by limiting our business "niche" to lending to churches and other non-profit religious organizations,
offering loans with competitive and flexible terms, and emphasizing our expertise in the specialized industry segment of lending to churches
and other religious organizations. Our competitive “specialty” is in offering fixed-rate, long-term loans, which few of our
competitors make available to churches.
Employees
We
have no employees, but we have two executive officers: Philip J. Myers, our Chief Executive Officer and President, and Scott J. Marquis,
our Chief Financial Officer and Treasurer. Our daily operations and other material aspects of our business are managed by Church Loan
Advisors, Inc. (the “Advisor”) on a “turn-key” basis using employees of the Advisor and/or its Affiliates. At
present, certain officers and directors of the Advisor are providing services to us at no charge and which will not be reimbursed to
them. These services include, among others, legal and analytic services relating to the execution of our business plan, development and
preparation of reports to be filed under the Securities Exchange Act, and utilization of proprietary forms and documents utilized by
the Advisor in connection with our business operations.
Subject
to the supervision of the Board of Directors, our business is managed by the Advisor, which provides us investment advisory and administrative
services. Philip J. Myers, our Chief Executive Officer, President and a Director, is President of the Advisor and President of American
Investors Group, Inc., the underwriter of our past public offerings and the bond offerings in which we have purchased Church Bonds. The
Company utilizes two employees of the Advisor on a full-time basis and one member of its staff on a part-time or other basis. The Company
does not presently expect to directly employ anyone in the foreseeable future, since all of our administrative functions and operations
are contracted through the Advisor. However, legal, accounting and certain other services are provided to us by outside professionals
and paid by us directly.
Operations
Our
operations are currently located in the 3,000 square foot offices of the Advisor’s affiliate, Church Loan Advisors, Inc.,
10400 Yellow Circle Drive, Ste. 102, Minnetonka, Minnesota 55343. These facilities are being leased by Church Loan Advisors, Inc. on
our behalf. The lease expires November 30, 2022. We are charged $2,500 monthly for our use of these facilities, but are not charged
for our use of computers, copying services, telephones, facsimile machines, postage service, office supplies or employee services,
since these costs are covered by the advisory fee paid to the Advisor. However, we do pay postage service for costs associated with
the distribution of dividends and proxy materials to our shareholders.
Item 1A. Risk
Factors.
Risks Related
to Mortgage Lending
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 the novel coronavirus (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.
In
2020, we provided some temporary relief by allowing borrowers to either make interest only payments for a period of 90 days or forgo
one monthly mortgage payment (forbearance). We provided nine churches, totaling approximately $3,209,000 in principal outstanding, ninety
days interest only payments. We also provided five churches with a total of approximately $2,618,000 in principal outstanding, one-month
forbearance of its mortgage payments. As of December 31, 2021, all churches have returned to their regular or restructured monthly mortgage
payments.
A
Recession Could have a Material Adverse Effect on the Mortgage Lending Industry and Our Results of Operations. The performance
of the mortgage lending industry usually follows the general economy. During the recession of 2008 and 2009, mortgage lending
was reduced and borrowers’ ability to remain current on loans was severely strained, which had a significant effect on our results
of operations. A stall in the economic recovery or a resurgent recession could have a material adverse effect on the mortgage lending
and church bond industry and, thus, on our results of operations.
We Are Subject
to the Risks Generally Associated with Mortgage Lending. Mortgage lending involves various risks, many of which are unpredictable
and beyond our control and foresight. It is not possible to identify all potential risks associated with mortgage lending. Some of the
more common risks encountered may be summarized as follows:
·
low demand for mortgage loans
·
interest rate and real estate valuation fluctuations
·
changes in the level of consumer confidence
·
availability of credit-worthy borrowers
·
national and local economic conditions
·
demographic and population patterns
·
zoning regulations
·
taxes and tax law changes |
·
availability of alternative financing and competitive conditions
·
factors affecting specific borrowers
·
losses associated with default, foreclosure of a mortgage, and sale
of the mortgaged property
·
state and federal laws and regulations
·
bankruptcy or insolvency of a borrower
·
borrower’s misrepresentation(s) and/or fraud |
Losses
Associated with Default, Foreclosure of a Mortgage and Sale of Mortgaged Property Pose Additional Risks. We have experienced losses
associated with default, foreclosure of mortgages, and sales of mortgaged properties. The time frame to foreclose on a property varies
from state to state, and delays can occur due to backlog in court dockets; we have experienced delays from 12 to 48 months. Such delays
have and can cause the value of the mortgaged property to further deteriorate due to lack of maintenance. Theft and vandalism have also
occurred on certain of our foreclosed properties. Some borrowers have removed fixtures and furnishings including sound systems, chairs,
pulpits, appliances, mechanical and electrical systems prior to vacating the facility which further reduces the value of our collateral.
The properties also incur operating expenses pending their sale (resale marketing, property insurance, security, repairs and maintenance)
and these expenses could be substantial if we cannot readily dispose of the property. Expenses related to the foregoing and diminution
in value could prevent us from recovering the full value of a loan in the event of foreclosure, which shortfall would decrease the value
of assets held by the Company and could negatively impact the Company’s ability to pay interest on its outstanding secured investor
certificates or dividends to shareholders.
Real
Estate Taxes Resulting from a Foreclosure May Prevent Us from Recovering the Full Value of a Loan. If we foreclose on a mortgage
and take legal title to a church’s real estate, real estate taxes could be levied and assessed against the property since the property
would no longer be owned by a non-profit entity. These expenses would be our financial responsibility and could be substantial in relation
to our prior loan if we cannot readily dispose of the property. Such expenses could prevent us from recovering the full value of a loan
in the event of foreclosure, which shortfall would decrease the value of assets held by the Company.
Second
Mortgage Loans Pose Additional Risks. Our financing policies allow us to make second mortgage loans. The principal amount of such
loans may not exceed 20% of our Average Invested Assets. Second mortgage loans entail more risk than first mortgage loans, as foreclosure
of senior indebtedness or liens could require us to pay the senior debt or risk losing our mortgage or reduced collateral value may reduce
or eliminate our security.
Fixed
and Variable-Rate Debt Can Result in Yield Fluctuations. Fixed and variable-rate debt obligations carry certain risks. A general
rise in interest rates could make the yield on a particular mortgage loan lower than prevailing rates. This could negatively affect our
value and consequently the value of our shares and certificates. Neither we nor our Advisor can predict changes in interest rates. We
will attempt to reduce this risk by maintaining medium and longer-term mortgage loans and through offering adjustable rate loans to borrowers.
We do not intend to borrow funds or sell certificates if the cost of such borrowing exceeds the income we believe we can earn from lending
the funds. The current average holding period of our debt is approximately seven and a half years, which has mitigated this risk in yield
fluctuations.
The
Mortgage Banking Industry Is Highly Competitive. We compete with a wide variety of lenders, including banks, credit unions, insurance
companies, pension funds and fraternal organizations for mortgage loans. Many competitors have greater financial resources, larger staffs
and longer operating histories than we have, and thus may be a more attractive lender to potential borrowers. We intend to compete by
limiting our business “niche” to lending to churches and other non-profit religious organizations, offering loans with competitive
and flexible terms, and emphasizing our expertise in the specialized industry segment of lending to churches and other non-profit religious
organizations.
Fluctuations
in Interest Rates May Affect Our Ability to Generate New Loans. Prevailing market interest rates impact borrower decisions to obtain
new loans or to refinance existing loans, possibly having a negative effect upon our ability to originate mortgage loans. If interest
rates decrease and the economic advantages of refinancing mortgage loans increase, then prepayments of higher interest mortgage loans
in our portfolio would likely reduce our portfolio’s overall rate of return (yield).
We
Are Subject to the Risks Associated with Fluctuations in National and Local Economic Conditions. The mortgage lending industry is
subject to increased credit risks and foreclosure rates during economic downturns. In addition, because we provide mortgages to churches
and other religious organizations who generally receive financing through charitable contributions, our financial results are subject
to fluctuations based on a lack of consumer confidence or a severe or prolonged national or regional recession. As a result of these
and other circumstances, our potential borrowers may decide to defer or terminate plans for financing their properties. In addition,
during such economic times we may be unable to locate as many credit-worthy borrowers. In addition, we believe the risks associated with
our business are more severe during periods of economic slowdown or recession if these periods are accompanied by declining values in
real estate. For example, declining real estate values would likely reduce the level of new loan originations, since borrowers often
use increases in the value of their existing properties to support the purchase of or investment in additional properties. Borrowers
may also be less able to pay principal and interest on our loans if the real estate economy is weak, which could result in higher default
rates. Higher default rates could adversely affect the Company’s results of operations, which could negatively impact the Company’s
ability to pay interest on the certificates and dividends to shareholders. Further, declining real estate values significantly increase
the likelihood that we will incur losses in the event of default because the value of our collateral may be insufficient to cover our
basis in the investment.
The
Company Faces Certain Risks and Uncertainties Related to Financing and Liquidity, and These Volatilities Could Have an Impact on Its
Operations and Its Ability to Maintain its Long-term Capital Needs and/or Secure Additional Financing. The Company faces certain
risks and uncertainties, particularly during volatile market conditions. In addition, liquidity, during such time periods, can be tight
in all financial markets, including the debt and equity markets. These volatilities could have an impact on operations to the extent
that the Company experiences slower maturities or repayment of mortgage loans, illiquid markets for our bond portfolio, or a higher redemption
rate on our secured investor certificates than has been the case historically.
Our
Business May Be Adversely Affected if Our Borrowers Become Insolvent or Bankrupt. If any of our borrowers become insolvent or bankrupt,
the borrower’s mortgage payments will be delayed and may cease entirely. Because our borrowers are churches and other religious
organizations who generally receive financing through charitable contributions, if their members experience a decrease in pay or lose
their jobs and are unable to secure new ones, they may make fewer or no contributions to our borrowers, which could result in the borrower’s
inability to make mortgage payments or make them on time. In those situations, we may be forced to foreclose on the mortgage and take
legal title to the real estate and incur expenses related to the foreclosure and disposition of the property. Such increased expenses
paired with possible lower real estate values (having been reduced by the foregoing expenses) could adversely affect the Company’s
results of operations.
We
Have Fluctuating Earnings. As a mortgage lender, we make provision for losses relating to our loan portfolio and sometimes take impairment
charges due to our borrowers defaulting or declaring bankruptcy. Increases in the occurrence of such events results in greater fluctuation
of our earnings, which reduces our net income. Our earnings are also impacted by non-performing assets and the carrying cost of maintaining
such assets (taxes, insurance and maintenance). Inconsistent earnings could adversely affect the Company’s financial condition
and results of operations.
Risks Related
to Mortgage Lending to Churches
Churches
Rely on Member Contributions to Repay Our Loans. Churches typically rely on member contributions for their primary source of income.
As such, member contributions are the primary source used to repay our loans. The membership of a church or the per capita contributions
of its members may not increase or remain constant after a loan is funded. A decrease in a church’s income could result in its
temporary or continued inability to pay its obligation to us, which may affect our ability to pay dividends on our common stock or pay
interest or principal due on certificates. We have no control over the financial performance of a borrowing church after a loan is funded.
Churches
Depend Upon Their Senior Pastors. A church’s senior pastor usually plays an important role in the management, leadership and
continued viability of that church. A senior pastor’s absence, resignation or death could have a negative impact on a church’s
operations, and thus its continued ability to generate revenues sufficient to service its obligations to us.
The
Limited Use Nature of Church Facilities Can Limit the Resale Value of Our Mortgage Collateral. Our loans are secured principally
by first mortgages upon the real estate and improvements owned or to be owned by borrowing churches. Although we will require an appraisal
of the premises as a pre-condition to making a loan, the appraised value of the premises cannot be relied upon as being the actual amount
which might be obtained in the event we need to foreclose after a default by the borrower. The actual liquidation value of a church,
school or other institutional premises could be adversely affected by, among other factors: (i) its limited use nature; (ii) the availability
on the market of similar properties; (iii) the availability and cost of financing, rehabilitation or renovation to prospective buyers;
(iv) the length of time the seller is willing to hold the property on the market; or (v) the availability in the area of the mortgaged
property of congregations or other buyers willing to pay the fair value for a church facility. These factors may influence our decision
to restructure the terms of a non-performing loan rather than foreclose on a church property which may decrease the amount of the loan
we recover.
Expenses
of Foreclosure May Prevent Us from Recovering the Full Value of a Loan. If we foreclose on a mortgage and take legal title to a church’s
real estate, real estate taxes could be levied and assessed against the property until sold since the property would no longer be owned
by a non-profit entity. The property may also incur operating expenses pending its sale, such as resale marketing, property insurance,
utilities, security, repairs and maintenance. These expenses would be our financial responsibility and could be substantial in relation
to our prior loan if we cannot readily dispose of the property. Such expenses could prevent us from recovering the full value of a loan
in the event of foreclosure.
Risks Related
to Us
Our
Failure to Qualify as a Real Estate Investment Trust Could Reduce the Funds We Have Available For Investment. We operate as a real
estate investment trust (“REIT”). As a REIT, we are allowed a deduction for dividends paid to our shareholders in computing
our taxable income. Thus, only our shareholders are taxed on our taxable income that we distribute. This treatment substantially eliminates
the “double taxation” of earnings to which most corporations and their shareholders are subject. Qualification as a REIT
involves the application of highly technical and complex Internal Revenue Code provisions.
To
qualify and maintain our status as a REIT, we must meet certain share ownership, income, asset and distribution tests on a continuing
basis. No assurance can be given that we will satisfy these tests at all times. Further, the requirements for a REIT may substantially
affect day-to-day decision-making by our Advisor. Our Advisor may be forced to take action it would not otherwise take or refrain from
action which might otherwise be desirable in order to maintain our REIT status.
If
we fail to qualify as a REIT in any taxable year, then we would be subject to federal income tax on our taxable income at regular corporate
rates and not be allowed a deduction for distributions to shareholders. We would be disqualified from treatment as a REIT for the four
taxable years following the year of losing our REIT status. We intend to continue to operate as a REIT. However, future economic, market,
legal, tax or other consequences may cause our Board of Directors to revoke the REIT election. The payment of taxes resulting from our
disqualification as a REIT or revocation of REIT status would reduce the funds available for distribution to shareholders or for investment.
Consistent
with our qualification as a REIT for federal income tax purposes, we do not file state income tax returns in all states in which the
collateral securing our loans is located. Since our inception, no state has ever asserted a claim for income taxes on any amount of our
earnings or any aspect of our operations. Although we believe our position as it relates to state income taxes is appropriate, there
can be no assurance that in the future any state tax jurisdiction will not pursue payment of some amount of state income taxes.
Conflicts
of Interest Arise from Our Relationship with Our Advisor. The terms of transactions involving our formation and the formation of
our Advisor, and our contractual relationship with our Advisor, were not negotiated at arm’s-length. Our non-independent directors
and officers may have conflicts of interest in enforcing agreements between us and our Advisor. Future business arrangements and agreements
between us and our Advisor and their affiliates must be approved by our Board of Directors, including a majority of our Independent Directors.
Risks Related
to the Shares
Lack
of Liquidity and Inconsistent Public Market Price. Our common stock is not currently listed or traded on any exchange. “Pink
Sheet” price quotations for our stock under the symbol “ACMC” were made at certain isolated times during 2021 by other
broker-dealers at prices as low as $0.94 per share and as high as $1.68 per share. In addition, the market for REIT securities historically
has been less liquid than non-real estate types of publicly-traded equity securities. Because of such illiquidity and the fact that the
shares would be valued by market-makers (if a material market develops) based on market forces which consider various factors beyond
our control, there can be no assurance that the market value of the shares at any given time would be the same or higher than the public
purchase price of our shares. In addition, the market price, if a material market develops, could decline if the yields from other competitive
investments exceed the actual dividends paid by us on our shares.
There
Are Restrictions on Certain Transfers of Our Shares. Our Articles of Incorporation and Bylaws prohibit a transfer of shares to any
person who, as a result, would beneficially own shares in excess of 9.8% of the outstanding capital stock and allow us to redeem shares
held by any person in excess of 9.8% of the outstanding capital stock. These provisions may reduce market activity for the shares and
the opportunity for shareholders to receive a premium for their shares.
Fluctuations
in Interest Rates May Cause the Value of Our Shares to Fluctuate. Prevailing market interest rates impact borrower decisions to obtain
new loans or to refinance existing loans, possibly having a negative effect upon our ability to originate mortgage loans. Fluctuations
in interest rates may cause the value of the shares to fluctuate unpredictably. If interest rates increase and we are unable to deploy
funds into higher yielding mortgage loans, the dividends we pay may be less than other organizations which may have investment objectives
similar to our own.
Interest
Payments to Certificate Holders May Reduce Dividend Payments on Our Shares. We attempt to deploy our capital into new loans at rates
that provide a positive interest rate spread. This spread, however, may be materially and adversely affected by changes in prevailing
interest rates which would reduce our net income. If this occurs, we may not have sufficient net income after paying interest on the
certificates to maintain dividends to shareholders at the levels paid in the past or even to pay dividends at all. In addition, because
dividends are directly affected by the yields generated on the Company’s portfolio of loans and bonds, shareholders’ dividends
can be expected to fluctuate significantly with interest rates generally.
Risks Related
to the Indebtedness/Certificates
We
May Be Unable to Generate Sufficient Cash Flow to Service Our Debt Obligations. Our ability to make payments on our indebtedness
and to fund our operations depends on our ability to generate cash in the future. Our ability to generate future cash is subject to general
economic, industry, financial, competitive, operating, legislative, regulatory and other factors that are beyond our control. As such,
we cannot assure you that our business will generate sufficient cash flow from operations or that future borrowings will be available
to us under a credit arrangement in an amount sufficient to enable us to pay amounts due on our indebtedness or to fund our other liquidity
needs.
Our
ability to obtain additional financing, if needed, will depend on, among other things: (i) our financial condition at the time; (ii)
restrictions on outstanding indebtedness; and (iii) other factors, including the condition of the financial markets or the real estate
and real estate lending markets. If we do not generate sufficient cash flow from operations, and additional borrowings or proceeds of
asset sales are not available to us, we may not have sufficient cash to enable us to meet all of our obligations, which could affect
our tax status as a REIT.
We
May Incur More Indebtedness. We may incur additional indebtedness in the future. We may assign or pledge some of our mortgage-secured
promissory notes or other collateral in connection with incurring any additional indebtedness. Under our Bylaws, as amended, we may incur
indebtedness up to 300% of our shareholder’s equity, the level permitted under North American Securities Administrators Association
(“NASAA”) guidelines, in the absence of a satisfactory showing that a higher level of borrowing is appropriate; any excess
in borrowing over such 300% level must be approved by a majority of the Independent Directors and disclosed to shareholders in the next
quarterly report along with justification for such excess.
There
Are Potential Adverse Effects Associated with Lending Borrowed Funds. In the past, we have deployed the proceeds from the sale of
secured investor certificates into loans to, and bonds issued by, churches and other non-profit religious organizations. We have also
used a credit facility from time to time to fund loans and purchase bonds. Lending borrowed funds is subject to greater risks than in
unleveraged lending. The profit we realize from lending borrowed funds is largely determined by the difference, or “spread,”
between the interest rates we pay on the borrowed funds and the interest rates that our borrowers pay us. Our spread may be materially
and adversely affected by changes in prevailing interest rates. Furthermore, the financing costs associated with lending borrowed funds
could decrease the effective spread in lending borrowed funds, which could adversely affect our ability to pay interest on and repay
the certificates as they mature.
There
Is No Public Market for the Secured Investor Certificates. There is no market for the secured investor certificates. It is unlikely
that a market will develop. There are no current plans to list the secured investor certificates on any exchange or for a broker-dealer
to make a market in the secured investor certificates. In addition, the market for REIT securities historically has been less liquid
than the markets for other types of publicly-traded securities.
There
Is No Sinking Fund, Insurance or Guarantee Associated with the Secured Investor Certificates. We do not contribute funds to a separate
account, commonly known as a sinking fund, to repay principal or interest on the secured investor certificates upon maturity or default.
Our secured investor certificates are not certificates of deposit or similar obligations of, or guaranteed by, any depository institution.
Further, no governmental or other entity insures or guarantees payment on the secured investor certificates if we do not have enough
funds to make principal or interest payments. Therefore, holders of our secured investor certificates have to rely on our revenue from
operations, along with the security provided by the collateral for the secured investor certificates, for repayment of principal and
interest on them.
The
Collateral for the Secured Investor Certificates May Not Be Adequate If We Default. The secured investor certificates must at all
times be secured by mortgage-secured promissory notes and church bonds having an outstanding principal balance equal to at least 100%
of the outstanding principal balance of the secured investor certificates. If we default in the repayment of the secured investor certificates,
or another event of default occurs, the trustee will not be able to foreclose on the mortgages securing the promissory notes and bonds
in order to obtain funds to repay certificate holders. Rather, the trustee will need to look to the revenue stream associated with our
borrowers’ payments on or repayment of the promissory notes and bonds or revenue derived from sale of the promissory notes or bonds
to repay certificate holders. If the trustee chooses to rely on revenues received from our borrowers, certificate holders may face a
delay in payment on certificates in the event of default, as borrowers will repay their obligations to us in accordance with amortization
schedules associated with their promissory notes or bonds. If the trustee chooses to sell promissory notes or bonds in the event of our
default, the proceeds from the sales may not be sufficient to repay our obligations on all outstanding or defaulted secured investor
certificates.
The
Secured Investor Certificates Are Not Negotiable Instruments and Are Subject to Restrictions on Transfer. The secured investor certificates
are not negotiable debt instruments. Rights of record ownership of the secured investor certificates may be transferred only with our
Advisor’s prior written consent. Certificate holders are not able to freely transfer the secured investor certificates.
We
Are Obligated to Redeem Secured Investor Certificates Only In Limited Circumstances. Certificate holders have no right to require
us to prepay or redeem any certificate prior to its maturity date, except in the case of death or if we replace our current Advisor.
Further, even in the event of death, we will not be required to redeem secured investor certificates if we have redeemed at least $25,000
of principal amount of certificates for the benefit of estates during the calendar quarter. There is no present intention to redeem secured
investor certificates prior to maturity except in the case of death of a certificate holder.
We
May Not Have Sufficient Available Cash to Redeem Secured Investor Certificates If We Terminate Our Advisory Agreement with Our Current
Advisor. We will be required to offer to redeem all outstanding secured investor certificates if we terminate our advisory agreement
with Church Loan Advisors, Inc., our Advisor, for any reason. If the holders of a significant principal amount of secured investor certificates
request that we redeem their certificates, we may be required to sell a portion of our mortgage loan and church bond portfolio to satisfy
the redemption requests. Any such sale could be at a discount to the recorded value of the mortgage loans and bonds being sold. Further,
if we are unable to sell loans or church bonds in our portfolio, we may be unable to satisfy the redemption obligations.
The
Indenture Contains Limited Protection for Holders of Secured Investor Certificates. The indenture governing the secured investor
certificates contains only limited events of default other than our failure to pay principal and interest on the certificates on time.
Further, the indenture provides for only limited protection for holders of certificates upon a consolidation or merger between us and
another entity or the sale or transfer of all or substantially all of our assets. If we default in the repayment of the secured investor
certificates under the indenture, certificate holders will have to rely on the trustee to exercise any remedies on their behalf. Certificate
holders will not be able to seek remedies against us directly.
Risks Related
to Management
We
Are Dependent Upon Our Advisor. Our Advisor, Church Loan Advisors, Inc., has managed us since commencement of active business operations
in 1996 and selects our investments subject to general supervision by our Board of Directors and compliance with our lending policies.
We depend upon our Advisor and its personnel for most aspects of our business operations. Our success depends on the success of our Advisor
in locating borrowers and negotiating loans upon terms favorable to us. Among others, our Advisor performs the following services for
us:
·
mortgage loan marketing and procurement
·
bond portfolio selection and investment
·
mortgage loan underwriting
·
mortgage loan servicing
·
money management
·
developing and maintaining business relationships
·
maintaining “goodwill”
|
·
managing relationships with our accountants and attorneys
·
corporate management
·
bookkeeping
·
reporting to state, federal, tax and other regulatory authorities
·
reports to shareholders and shareholder relations
·
loan enforcement and collections |
Our
shareholders’ right to participate in management is generally limited to the election of directors. Certificate holders have no
right to participate in our management or the election of directors. Certificate holders must be willing to entrust our management to
our Advisor and our Board of Directors.
We
Have Conflicts of Interest with Our Advisor and Affiliates. Affiliations and conflicts of interests exist among our officers and
directors and the owner and officers and directors of our Advisor and affiliates. Our Advisor and affiliates are controlled by our Chief
Executive Officer and President, Philip J. Myers.
Our
Bylaws limit the amount of all commissions, mark-downs or mark-ups paid to American. Our business dealings with our Advisor and its affiliates
outside of the ordinary course of our activities are subject to approval by a majority of our Board of Directors, including a majority
of our Independent Directors.
Generally,
mortgage loans we originate are smaller than the bond financings originated by American. However, there may be circumstances where our
Advisor and American could recommend either type of financing to a prospective borrower. The decisions of our Advisor and American could
affect the credit quality of our portfolio.
Redemption
Obligations Relating to the Secured Investor Certificates May Affect Our Ability to Replace Our Advisor. We will be required to offer
to redeem all outstanding secured investor certificates if we terminate our Advisory Agreement with Church Loan Advisors, Inc. Our Independent
Directors are required to review and approve the advisory agreement with our Advisor on an annual basis. The redemption provision relating
to the secured investor certificates may have the effect of reducing our ability to replace our current Advisor.
Risks Related
to Environmental Laws
We
May Face Liability Under Environmental Laws. Under federal, state and local laws and regulations, a secured lender (like us) may
be liable, under certain limited circumstances, for the costs of removal or remediation of certain hazardous or toxic substances and
other costs (including government fines and injuries to persons and adjacent property). Liability may be imposed
whether or not the owner or lender knew of, or was responsible for, the presence of hazardous or toxic substances. The costs of remediation
or removal of hazardous or toxic substances, or of fines for personal or property damages, may be substantial and material to our business
operations. The presence of hazardous or toxic substances, or the failure to promptly remediate such substances, may adversely affect
our ability to resell real estate collateral after foreclosure or could cause us to forego foreclosure. This is a changing area of the
law. The courts have found both in favor and against lender liability in this area under various factual scenarios.
The
Collateral For Our Loans and Our Lenders May Be Subject to Environmental Claims. If there are environmental problems associated with
the real estate securing any of our loans, the associated remediation or removal requirements imposed by federal, state and local laws
could affect our ability to realize value on our collateral or our borrowers’ ability to repay their loans.
Item 1B. Unresolved
Staff Comments.
Not
applicable.
Item 2. Properties.
Our
operations are located in the leased offices of Church Loan Advisors, Inc. It is expected that for the foreseeable future our operations
will continue to be housed in these or similar leased premises along with the Advisor. We are directly charged for rent, but we do not
incur other costs relating to such leased space, because our Advisor includes these expenses in the Advisory Fee.
Real Estate
Held for Sale/Description of Properties Acquired through Foreclosure
As
of December 31, 2021, we owned two properties which we acquired through the foreclosure process. The first property, located in Atlanta,
Georgia had a carrying value of approximately $203,000. We have obtained title to the property but have not taken possession due to court
proceedings in which the previous owner has filed numerous appeals regarding our foreclosure. The second property we own is located in
Pine Bluff, Arkansas and was acquired via deed in lieu of foreclosure and is available for sale. However, it is currently not listed
as we have allowed the church to either obtain financing from another source or list the property for sale. The Church is paying rent
while trying to either sell the building or obtain refinancing. We received $10,500 in rental payments from the Church for the year ended
December 31, 2021. This property is being carried at the fair value which is approximately $126,000 as of December 31, 2021. The situation
with respect to each property is reviewed periodically. The general competitive conditions surrounding the potential sale of our properties
are tied, in large part, to the fact that they are special-use properties with variable zoning restrictions. We principally lend to churches,
which are commonly exempt from zoning restrictions. However, while a church property may be exempt from zoning restrictions, if it is
located in a residential area, it still may only be used as a church, thereby limiting the pool of potential buyers. On the other hand,
a church or other property that is zoned for commercial use generally experiences higher demand, as potential buyers can convert the
property to their own business use. As such, our properties located in residential areas typically experience less demand than those
zoned for commercial use. Both the Pine Bluff, Arkansas and Atlanta, Georgia properties are in a residential area.
Item 3. Legal
Proceedings.
There
are presently no legal actions against us, pending or threatened.
Item 4. Mine
Safety Disclosures
Not
applicable.
PART II
|
Item 5. |
Market for Registrant’s Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities. |
Outstanding
Securities
As
of December 31, 2021, 1,676,598 shares of our common stock and $22,278,500 in aggregate principal amount of secured investor certificates
were issued and outstanding.
Lack of Liquidity
and Absence of Public Market Price.
There
is virtually no market for our common shares. It is not expected that a material market for the shares will develop any time soon. In
addition, the market for REIT securities historically has been less liquid than non-real estate types of publicly-traded equity securities.
Because of such illiquidity and the fact that the shares would be valued by market-makers (if a market develops) based on market forces
which consider various factors beyond our control, there can be no assurance that the market value of the shares would reflect the value
of our assets or business and no assurance that at any given time would be the same or higher than the public purchase price of our shares.
In addition, the market price, if a market develops, could decline if the yields from other competitive investments exceed the actual
dividends paid by us on our shares. Our common stock is not currently listed or traded on any exchange or market.
Our
Common Stock, $.01 par value per share, occasionally trades on the over-the-counter market Pink Sheets under the symbol “ACMC.PK”.
The following table sets forth the high bid quotation and the low bid quotation as quoted by the Pink Sheets in 2021 and 2020. Such over-the-counter
market quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual
transactions. We did not purchase or sell any common stock shares in 2021.
|
High |
Low |
Calendar Year 2021 |
|
|
First Quarter |
$1.68 |
$0.94 |
Second Quarter |
$1.64 |
$1.24 |
Third Quarter |
$1.50 |
$1.20 |
Fourth Quarter |
$1.30 |
$1.01 |
|
|
|
Calendar Year 2020 |
|
|
First Quarter |
$2.40 |
$1.40 |
Second Quarter |
$1.95 |
$1.51 |
Third Quarter |
$1.70 |
$0.93 |
Fourth Quarter |
$1.12 |
$0.53 |
Holders
of Our Common Shares
As
of December 31, 2021, we had 423 record holders of our common stock, $.01 par value per share (excluding shareholders for whom shares
are held in a “nominee” or “street” name).
We
paid dividends on our common stock for the fiscal years ended December 31, 2021 and 2020 as follows:
For
Quarter Ended: |
Dollar
Amount Distributed
Per
Share: |
Annualized
Yield Per $10
Share
Represented: |
|
2021 |
2020 |
2021 |
2020 |
March
31 |
$.010 |
$.040 |
0.40% |
1.60% |
June
30 |
$0.00 |
$.010 |
0.00% |
0.40% |
September
30 |
$0.00 |
$.020 |
0.00% |
0.80% |
December
31 |
$0.00 |
$.010 |
0.00% |
0.40% |
Totals: |
$.010 |
$.080 |
0.40% |
0.80% |
As
a Real Estate Investment Trust, we make regular quarterly distributions to shareholders. The amount of distributions to our shareholders
must equal at least 90% of our “real estate investment trust taxable income” in order for us to retain REIT status. Shareholder
distributions are estimated for our first three quarters of each fiscal year and adjusted annually based upon our final year-end financial
report. Cash available for distribution to our shareholders is derived primarily from the interest portion of monthly mortgage payments
we receive from churches borrowing money from us, from origination and other fees paid to us by borrowers in connection with loans we
make, interest income from mortgage-backed securities issued by churches and other non-profit religious organizations purchased and held
by us for investment purposes, and earnings on any permitted temporary investments made by us. All dividends are paid by us at the discretion
of the Board of Directors and will depend upon our earnings and financial condition, maintenance of REIT status, funds available for
distribution, results of operations, economic conditions, and such other factors as our Board of Directors deems relevant.
From
time to time we offer the sale of shares of our common stock or secured investor certificates, the proceeds of which are typically used
to fund loans to be made by us. Until we have fully invested such funds into loans, the relative yield generated by sales of our shares,
and thus, dividends (if any) to shareholders, could be less than expected. We seek to address this issue by (i) collecting from borrowers
an origination fee at the time a loan is made, (ii) timing our lending activities to coincide as much as possible with sales of our securities,
and (iii) investing our un-deployed capital in permitted temporary investments that offer the highest yields together with safety and
liquidity. However, there can be no assurance that these strategies will improve current yields to our shareholders. In order to qualify
for the beneficial tax treatment afforded real estate investment trusts by the Internal Revenue Code, we are required to pay dividends
to holders of our shares in annual amounts which are equal to at least 90% of our “real estate investment trust taxable income.”
For the fiscal year ended December 31, 2021, we distributed 100% of our taxable income to our shareholders in the form of quarterly dividends.
We intend to continue distributing virtually all of such income to our shareholders on a quarterly basis, subject to (i) limitations
imposed by applicable state law, and (ii) the factors identified above. The portion of any dividend that exceeds our earnings and profits
will be considered a return of capital and will not currently be subject to federal income tax to the extent that such dividends do not
exceed a shareholder's basis in their shares. 100% of the dividends paid to shareholders for the tax year 2021 were non-dividend distributions
due to the realized (carry-forward) loss totaling approximately $2,574,000 in 2021. We expect dividends paid in 2022 to be 100% non-dividend
distributions due to the realized (carry-forward) loss totaling approximately $3,272,000.
Funds
available to us from the repayment of principal (whether at maturity or otherwise) of loans made by us, or from sale or other disposition
of any properties or any of our other investments, may be reinvested in additional loans to churches, invested in mortgage-backed securities
issued by churches or other non-profit organizations, or in permitted temporary investments, rather than distributed to the shareholders.
We can pass through the capital gain character of any income generated by computing its net capital gains and designating a like amount
of our distribution to our shareholders as “capital gain dividends.” The distribution requirement to maintain qualification
as a real estate investment trust does not require distribution of net capital gains, if generated. However, if we decide to distribute
any such gains, undistributed net capital gains (if any) will be taxable to us. The Board of Directors, including a majority of our Independent
Directors, will determine whether and to what extent the proceeds of any disposition of property will be distributed to our shareholders.
Equity Compensation
Plans
We
do not have any equity compensation plans under which equity securities of the Company are authorized for issuance.
Item 6. [Reserved]
Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations.
The
following discussion regarding our financial statements should be read in conjunction with the financial statements and notes thereto
included in this Annual Report beginning at page F-1 and our forward-looking statement disclosure at the beginning of Part I to this
Annual Report.
Financial
Condition
Our
total assets decreased from $35,574,723 at December 31, 2020 to $30,697,781 at December 31, 2021. The primary reason for the decrease
in total assets from December 31, 2020 through December 31, 2021 was a decrease in our mortgage loans and bond portfolio receivables.
Shareholders’ equity decreased from $10,085,327 at December 31, 2020 to $8,773,360 at December 31, 2021. This was primarily due
to a net loss of ($1,295,201) and dividends declared and paid totaling $16,766. Our primary liabilities at December 31, 2021 and 2020
were our secured investor certificates, which were $22,278,500 and $23,916,500, respectively. We anticipate that funds from maturing
loans and bonds will equal or exceed obligations due on our certificates after 2021. To the extent necessary, we will seek short-term
financing or a new working capital facility, including our line of credit with a local bank, to meet any short-term cash requirements.
Comparison of the Fiscal Years ended
December 31, 2021 and 2020
The following table shows the results
of our operations for fiscal 2021 and 2020:
| |
For the Year Ended December 31, |
| |
| |
|
Statement of Operations Data | |
| 2021 | | |
| 2020 | |
| |
| | | |
| | |
Interest and other income | |
$ | 1,917,145 | | |
$ | 2,543,507 | |
Interest expense | |
| 1,591,372 | | |
| 1,776,427 | |
Net interest income | |
| 325,773 | | |
| 777,080 | |
Total provision (credit) for losses on mortgage loans | |
| (3,242 | ) | |
| 64,509 | |
Net interest income after provision for mortgage loans | |
| 329,015 | | |
| 712,571 | |
Operating expenses | |
| 1,624,216 | | |
| 838,430 | |
Net (loss) | |
$ | (1,295,201 | ) | |
$ | (125,859 | ) |
Basic and diluted (loss) income per share | |
$ | (0.77 | ) | |
$ | (0.08 | ) |
Results of Operations
Since
we began active business operations on April 15, 1996, we have paid 100 consecutive quarterly dividend payments to shareholders through
March 31, 2021. These dividend payments have resulted in an average annual return of 4.991% to shareholders who purchased shares at $10
per share in our public offerings of stock. Each loan funded during the quarter generates origination income of which one-half is due
and payable to shareholders as taxable income even though origination income is not recognized in its entirety for the period under accounting
principles generally accepted in the United States of America (“GAAP”). The other one-half of any origination income generated
is due to our Advisor. We anticipate distributing all of our taxable income in the form of dividends to our shareholders in the foreseeable
future to maintain our REIT status and to provide income to our shareholders.
Net
(loss) for our year ended December 31, 2021 was $(1,295,201) on total interest and other income of $1,917,145 compared to net (loss)
of $(125,859) on total interest and other income of $2,543,507 for the year ended December 31, 2020. The decrease in net income was
primarily due to the decrease in size of loans outstanding and interest income received from our loan portfolio and non-accrual bonds, an
increase in other operating expenses and other than temporary impairment on our bond portfolio.
Net
interest income earned on our portfolio of loans was $325,773 for the year ended December 31, 2021, compared to $777,080 for
December 31, 2020. The decrease in net interest income was due to the decrease in loans outstanding in our loan portfolio and
non-accrual bonds.
Our
operating expenses for our fiscal year ended December 31, 2021 were $1,624,216 compared to $838,430 for our year ended December 31, 2020.
The increase in operating expenses was primarily a result of an increase in other than temporary impairment on our bond portfolio.
Our
Board of Directors declared dividends of $.010 for each share of record on April 28, 2021. Based on the quarter ended March 31, 2021
and assuming a share purchase price of $10.00, the dividends paid represented a 0.40% annual yield in 2021. 100% of the dividends paid
to shareholders for the tax year 2021 were non-dividend distributions due to the realized (carry-
forward)
loss of approximately $2,574,000. We expect dividends paid in 2022 to be 100% non-dividend distributions due to the realized (carry-forward)
losses totaling $3,272,000 for the period ended December 31, 2022.
We
choose to distribute income from ongoing operations in the form of dividends to shareholders. As a Real Estate Investment Trust we are
required to distribute up to 90% of our taxable income. The table below reflects taxable income, net income from operations, dividend
distributions and the effect of the distributions to shareholders for the periods ended December 31, 2021 and 2020. Any amount distributed
to shareholders in excess of income from ongoing operations is deemed to be return of principal which results in a reduction of our shareholder
equity.
|
|
December
31, 2021 |
|
December
31, 2020 |
|
|
|
|
|
Net Taxable (loss) Income |
|
$ |
(1,295,201 |
) |
|
$ |
18,484 |
|
Net (Loss) Income From Operations (EBITA) |
|
$ |
(112,926 |
) |
|
$ |
125,317 |
|
Total Dividend Distributions |
|
$ |
16,766 |
|
|
$ |
134,176 |
|
Principal Distribution |
|
$ |
16,766 |
|
|
$ |
8,859 |
|
Number of Shares Outstanding |
|
|
1,676,598 |
|
|
|
1,676,598 |
|
Amount of Principal Distributed per Share |
|
$ |
0.01 |
|
|
$ |
0.00 |
|
Liquidity and
Capital Resources
Our
revenue is derived principally from interest income, and secondarily, from origination fees and renewal fees generated by mortgage loans
that we make. We also earn income through interest on funds that are invested pending their use in funding mortgage loans or distributions
of dividends to our shareholders, and on income generated on church bonds we may purchase and own. We generate revenue through (i) permitted
temporary investments of cash, and (ii) making mortgage loans to churches and other non-profit religious organizations. Our principal
expenses are interest on our secured investor certificates, advisory fees, legal and auditing fees, communications costs with our shareholders,
and the expenses of our transfer agent and registrar.
Our
loan portfolio consists primarily of long-term fixed rate loans. Historically, loans in our portfolio are outstanding for an average
of approximately seven and a half years. Our borrowers are typically small independent churches with little or no borrowing history.
Once a church establishes a payment history with us, they often look to re-finance their loan with a local bank, credit union or other
financial institution that is willing to provide financing since the borrower has established a payment history and has demonstrated
they can meet their mortgage debt obligations.
Currently,
our performing bond portfolio comprises 38% of our assets under management. The total principal amount of mortgage- secured debt securities
we purchase from churches and other non-profit religious organizations is limited to 40% of our Average Invested Assets. Excluded from
this ratio of 40% for the year ended December 31, 2021 are bonds issued of which we hold 100% of the total bonds outstanding. The total
principal amount outstanding is approximately $18,093,000 as of December 31, 2021 and was approximately $18,299,000 as of December 31,
2020. We earned approximately $651,000 on our bond portfolio in 2021 and approximately $1,011,000 in 2020.
In
addition, we are able to borrow funds in an amount up to 300% of shareholder’s equity (in the absence of a satisfactory showing
that a higher level of borrowing is appropriate; any excess in borrowing over such 300% level must be approved by a majority of the Independent
Directors and disclosed to shareholders in the next quarterly report along with justification for such excess) in order to increase our
lending capacity.
In
September 2017, we filed a registration statement with the Securities and Exchange Commission to offer $10,000,000 worth of Series E
secured investor certificates. The offering was declared effective by the SEC on November 6, 2017. We sold 3,738 Series E secured investor
certificates for a total of $3,738,000 for as of December 31, 2021. The offering terminated November 6, 2020.
In
July 2014, we filed a registration statement with the Securities and Exchange Commission to offer $10,000,000 worth of Series D secured
investor certificates. The offering was declared effective by the SEC on August 12, 2014. The offering was renewed with an effective
date of September 23, 2016. The certificates were offered in multiples of $1,000 with interest rates ranging from 4.00% to 6.50%, subject
to changing market rates, and maturities from 5 and 7 to 15 years. The certificates are collateralized by certain mortgage loans receivable
and church bonds of approximately the same value. As of December 31, 2021, approximately 7,797 Series D certificates had been issued
and were outstanding for $7,797,000. The offering terminated in August 2017.
The
table below shows the principal amount of loans and bonds to be paid during 2022 and the number of secured investor certificates
maturing in 2022. We may need to obtain additional funds from other sources to meet our certificate maturity obligations. One source
is the potential sale of bonds in our portfolio. In addition, at December 31, 2021 we held $114,798 in cash and cash equivalents and
currently have a $4,000,000, modified to $3,000,000, working line of credit with a local bank of which $2,700,000 was available to
us for the year ended December 31, 2021. This facility was extended and expires April 19, 2022.
|
|
|
Fiscal Year
2022 |
|
|
|
|
|
|
Contractual maturity schedule
mortgage loans |
|
$ |
779,884 |
|
Contractual maturity
schedule bond portfolio |
|
|
257,000 |
|
Total |
|
$ |
1,036,884 |
|
|
|
|
|
|
Contractual maturity
schedule secured investor certificates |
|
|
1,042,000 |
|
Holders
of our secured investor certificates may renew certificates at the current rates and terms upon maturity at our discretion. Renewals
upon maturity are considered neither proceeds from nor issuance of secured investor certificates. Renewals totaled $530,000
and $1,007,250 during 2021 and 2020, respectively. These renewals represent 45% and 28% of the maturing certificates for the period ended
December 31, 2021 and 2020, respectively. We believe that renewals we offer to maturing certificate holders will reduce the amount of
cash needed to pay maturing certificates in fiscal year 2022.
Loan Loss Reserve
Policy
We
follow a loan loss reserve 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 reserves for principal amounts outstanding on a particular loan if cumulative interruptions occur
in the normal payment schedule of a loan. Our policy will reserve for the outstanding principal amount of a loan in our portfolio if
the amount is in doubt of being collected. 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: (i) The Company will accept payments
on loans that are currently on non-accrual status when a borrower has communicated to us that they intend to meet their mortgage obligations.
A payment made on a non-accrual loan is considered a good faith deposit as to the intent to resume their mortgage payment obligation.
This good faith deposit is credited back to interest first then principal as stated in the mortgage loan documentation. (ii) A letter
outlining the re-payment terms or the restructure terms (if any) of the loan is provided to the borrower. This letter will be signed
by the Senior Pastor and all board members of the borrower. This letter resumes the obligation to make payments on non-accrual loans.
(iii) The borrower must meet all its payment obligations for the next 120 days without interruption in order to be removed from non-accrual
status.
When
a loan is declared in default according to the Company’s policy or deemed to be doubtful of collection, the loan committee of the
Advisor to the Company will direct the staff to charge-off uncollectable receivables.
At
December 31, 2021, we reserved $1,486,434 against twelve mortgage loans, of which eight churches were three or more mortgage payments
in arrears and two of the Churches are declared to be in default. At December 31, 2020, we reserved $1,493,996 against fourteen mortgage
loans, of which nine churches were three or more mortgage payments in arrears, two were declared to be in default.
The
total value of impaired loans, which are loans that are in the foreclosure process or are declared to be in default, was approximately
$174,000 and $38,000 at December 31, 2021 and 2020, respectively. We believe that the total amount of non-performing loans is adequately
secured by the underlying collateral and the allowance for mortgage loans.
Of
the eight loans which were three or more payments in arrears, the first impaired loan has an outstanding balance of $543,822. This loan
has been declared in default. The church is located in Detroit, Michigan and is located in an area suffering from urban blight and high
crime. This church is located in a commercial area. Therefore, the facility can be converted and used other than as a church. We have
reserved against the total outstanding amount of this loan since we have determined that there is little to no value left to recover
with regards to the collateral of the property.
The
second impaired loan has an outstanding balance of $256,623. The church is located in Raleigh, North Carolina. The church has missed
eight mortgage payments since the loan was re-structured in June 2008, the church has missed two payments in 2021. We are working with
the church to bring its payments current.
The
third impaired loan has an outstanding balance of $294,275. The church is located in Seagoville, Texas. The church has missed seven payments
since the loan was funded in August 2006. However, the church did not miss any payments in 2021. We are working with the church to bring
its payments current.
The
fourth impaired loan has an outstanding balance of $681,749. The church is located in Dallas, Texas. The church has missed six payments
since the loan was funded in September 2008. The church missed one payment in 2021. We are working with the church to bring its payments
current. This is a commercial property.
The
fifth impaired loan has an outstanding balance of $700,191. The church is located in Richmond Hills, Texas. The church has missed numerous
payments since the loan was funded in November 2004. However, the church has been making regular payments which are being applied to
the arrearage. We are continually working with the church to bring its payments current.
The sixth impaired
loan has an outstanding balance of $213,218. The church is located in Kirbyville, Texas. The church has missed three payments since the
loan was funded in June 2003. However, the church did not miss any payments in 2021. We are working with the church to bring its payments
current.
The
seventh impaired loan has an outstanding balance of $221,683. The church is located in Leslie, Georgia. The Church’s loan was restructured
in 2018 and the Church has not missed any mortgage payments since the restructure.
The eighth
impaired loan has an outstanding balance of $377,761. The church is located in Waterbury, Connecticut. The church is no longer meeting
in its current location and the building has fallen into disrepair. The Church has a purchase agreement signed to sell the building for
$185,000. We expect the sale to close in the first quarter of 2022. This is a commercial property.
We
presently expect our allowance for mortgage loans to be adequate to cover all losses incurred and probable. Listed below is our current
loan loss reserve policy:
Incident |
Percentage
of Loan Reserved |
Status
of Loan |
1. |
None |
Loan
is current, no interruption in payments during history of the loan, (“interruption” means receipt by us more than 30
days after scheduled payment date). |
2. |
None |
Loan
current, previous interruptions experienced, but none in the last six month period. Applies to restructured loans or loans
given forbearance. |
3. |
None |
Loan
current, previous interruptions experienced, but none in the last 90 day period. |
4. |
1.00% |
Loan
serviced regularly, but 2 or 3 payments cumulative in arrears. Delinquency notice has been sent. |
5. |
5.00% |
Loan
serviced regularly, but 4 or 5 payments cumulative in arrears. Repayment plan requested. |
6. |
10.00% |
Loan
is declared to be in default. Legal counsel engaged to begin foreclosure. Additional accrual of overdue payments
and penalties ceased. |
7. |
The
greater of: (i) accumulated reserve during default period equal to principal loan balance in excess of 65% of original collateral
value; or (ii) 1% of the remaining principal balance each quarter during which the default remains in effect. |
Foreclosure
proceeding underway. Accrual of all overdue interest and principal payments including penalties to be expensed. Reserve
amount dependent on value of collateral. All expenses related to enforcing loan agreements are expensed. |
The
Company’s Advisor, on an ongoing basis, reviews reserve amounts under the policy stated above and determines the need, if any,
to reserve amounts in excess of its current policy. Any additional reserve amounts will be equal to or greater than its current reserve
policy. Allowance for mortgage loans are calculated on the remaining principal balance on the date of calculation and recorded on a quarterly
basis.
Our
borrowers are typically small independent churches with little or no borrowing history. Small independent churches have limited resources
to pay missed mortgage payments. We continually monitor these missed payments and determine on a case by case basis if a restructure
of the current loan terms will help the church recover from its payment issues or by communication with the church, or lack thereof,
if we should foreclose on the property. We did not see a substantial increase in delinquent payments in 2020. However, we can provide
no assurance that delinquent loan payments will be paid or a restructure of the loan will result in the borrowing church meeting their
payment obligations.
The
Novel Coronavirus (COVID-19) has recently affected global markets, supply chains, employees of companies, and the communities of our
borrowers. Specific to us, COVID-19 may impact various parts of our 2022 operations and financial results including potential reduced
revenue caused by new public health mandates including shelter in place orders, material supply chain interruption, economic hardships
effecting our borrowers and effects on our workforce. Management believes we are taking appropriate actions to mitigate the negative
impact. However, the full impact of COVID-19 is unknown and cannot be reasonably estimated as the date of this report.
Our
loan loss reserve policy requires removal of a borrower from accrual status if the borrowing church misses three payments over a twenty-four
month period.
Bond Loss Policy
Other
than the temporary impairment, the impairment on bonds is estimated by management and is determined by reviewing: (i) payment history,
(ii) our experience with defaulted bond issues, (iii) the issuer’s payment history as well as (iv) historical trends.
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, 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.
We have an aggregate
other than temporary impairment of $1,755,504 and $834,226 for our bond portfolio at December 31, 2021 and 2020, respectively, which
effectively reduces the bonds to the fair value amount we believe will be recovered.
Critical Accounting
Policies and Estimates
Preparation
of our financial statements requires estimates and judgments to be made that affect the amounts of assets, liabilities, revenues and
expenses reported. Such decisions include the selection of the appropriate accounting principles to be applied and the assumptions on
which to base accounting estimates. We evaluate these estimates based on assumptions we believe to be reasonable under the circumstances.
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 generally
accepted in the United States. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure
of contingent assets and liabilities, and the reported revenues and expenses. Actual results could differ from those estimates. The most
sensitive estimates relate to the realizability of the mortgage loans receivable and the valuation of the bond portfolio and real estate
held for sale. It is at least reasonably possible that these estimates could change in the near term and that the effect of the change,
if any, may be material to the financial statements.
We
estimate the value of real estate we hold pending re-sale based on a number of factors. We look at the current condition of the property
as well as current market conditions in determining a fair value, which will determine the listing price of each property. Each property
is valued based on its current listing price less any anticipated selling costs, including for example, realtor commissions. Since churches
are single use facilities the listing price of the property may be lower than the total amount owed to us. Attorney fees, taxes, utilities
along with real estate commission fees will also reduce the amount we collect from the sale of a property we have acquired through foreclosure.
The fair value of the real estate held for sale includes estimates of expenses related to the sale of the real estate.
Off Balance Sheet Arrangements
We
have no off-balance sheet arrangements, that have or are reasonably likely to have a current or future effect that is material to investors
on our financial condition, revenues or expenses, results of operations, liquidity, capital resources or capital expenditures.
Item 7A. Quantitative
and Qualitative Disclosures about Market Risk.
As
a smaller reporting company, as defined in Rule 12b-2 of the Securities Exchange Act of 1934 (the “Exchange Act”), we are
not required to provide the information required by this item.
Item 8. Financial
Statements and Supplementary Data.
Financial
Statements required by this item can be found at pages F-1 through F-20 of this Form 10-K and are deemed incorporated herein by reference.
Item 9. Changes
in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls
and Procedures.
Evaluation of Disclosure Controls
and Procedures
We maintain a set
of disclosure controls and procedures, as defined in Section 13a-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange
Act”), that are designed to ensure that information required to be disclosed by us in the reports filed by us under the Securities
Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods
specified in the SEC’s rules and forms. We carried out an evaluation, under the supervision and with the participation of our Chief
Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures
pursuant to Rule 13a-15(b) of the Exchange Act.
Based on that evaluation,
our Chief Executive Officer and Chief Financial Officer concluded that the Company did not maintain effective internal control over financial
reporting due to a material weakness in the internal controls over financial reporting for impaired loans and debt securities valuations.
In addition our disclosure controls and procedures are not effective as a result of limited resources such that financial information
required to be disclosed in our Securities and Exchange Commission (“SEC”) reports (i) is recorded, processed, summarized
and reported within the time periods specified in SEC rules and forms; and (ii) is accumulated and communicated to our management, including
our Chief Executive Officer and Chief Financial Officer as appropriate to allow timely decisions regarding required disclosure.
With respect to
impaired loan and debt securities valuations, the documentation and process supporting the valuations, including the stale nature of
appraisals, with respect to our current church properties, was determined to be a material weakness. In addition, the Company has
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 judgment in evaluating the cost benefit relationship
of possible controls and procedures. Management recognizes this is a material weakness.
Management’s Report on Internal
Control Over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined
in Exchange Act Rule 13a-15(f). Internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. Internal control over financial reporting includes those policies and procedures
that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions
of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of the financial statements
in accordance with generally accepted accounting principles, and that receipts and expenditures are being made only with proper authorizations;
and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our
assets that could have a material effect on the financial statements.
Because
of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of
any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may deteriorate.
Our
management, under the supervision of and with the participation of the Chief Executive Officer and Chief Financial Officer, assessed
the effectiveness of our internal control over financial reporting as of December 31, 2021 based on criteria for effective control
over financial reporting set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in “Internal
Control—Integrated Framework.” Based on this assessment, our management concluded that, as of the Evaluation Date, we
did not maintain effective internal control over financial reporting as a result of the material weakness described above. We continue
to evaluate internal control improvements, particularly related to financial reporting for ongoing changes to our operations and segregation
of duties, to provide greater segregation and improve overall internal control.
Internal
control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent
limitations. Internal control over financial reporting is a process that involves human diligence and is subject to lapses in judgment
or breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper
management override. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely
basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting
process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.
This
Annual Report does not include an attestation report of our registered public accounting firm regarding internal control over financial
reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to rules of the
Securities and Exchange Commission that permit us to provide only management’s report in this Annual Report.
Changes in Internal
Control over Financial Reporting
There
were no changes in our internal control over financial reporting, that occurred during the last fiscal quarter of the period covered
by this report that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.
Item 9B. Other
Information.
None.
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors
American Church Mortgage Company
Minnetonka, Minnesota
Opinion on the Financial Statements
We have audited the accompanying balance sheets of American Church
Mortgage Company (the "Company") as of December 31, 2021 and 2020, the related statements of operations, stockholders’
equity, and cash flows for each of the years in the two-year period ended December 31, 2021, and the related notes (collectively referred
to as the financial statements). In our opinion, except for the effects of the adjustments, if any, as might have been determined to be
necessary had we been able to examine evidence regarding the valuation of impaired bonds, as described below, the financial statements
referred to above present fairly, in all material respects, the financial position of American Church Mortgage Company as of December
31, 2021 and 2020, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31,
2021, in conformity with accounting principles generally accepted in the United States.
We were not able to obtain sufficient valuation evidence of the Company’s
impaired bond portfolio stated at $7,142,094 at December 31, 2021, or its impairment charge of $940,021, which is included in net loss
for the year then ended as described in Note 5 to the financial statements; nor were we able to satisfy ourselves as to the carrying value
of impaired bonds or impairment by other auditing procedures.
Basis for Opinion
These financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these financial statements based on our audits. We are a public accounting
firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect
to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange
Commission and the PCAOB.
Except as discussed above, we conducted our audits in accordance with
the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we
engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding
of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal
control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material
misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures
included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included
evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation
of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from
the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and
that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging,
subjective, or complex judgments. This communication of critical audit matters does not alter in any way our opinion on the financial
statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical
audit matters or on the accounts or disclosures to which they relate.
Allowance for Loan Losses on Mortgage Loans Receivable
As discussed in Note 2 to the financial statements, the Company’s
loan policy calls for an allowance for estimated uncollectible loans based on an evaluation of the current status of the loan portfolio.
As of December 31, 2021, the outbreak of the novel coronavirus has adversely affected many industries generally and specifically has prevented
or inhibited the in-person gathering of church congregations which impacts the ability of churches and other non-profit religious organizations
normal methods of worship, potentially causing a decline in church membership and corresponding member offerings.
We identified the assessment of the mortgage loans receivable valuation
as of December 31, 2021 as a critical audit matter. The impact the coronavirus had on the valuation of the mortgage receivable loan portfolio
included a high degree of audit effort and auditor judgment. The allowance for loan loss totaled $1,486,434 as of December 31, 2021 and
was determined using the Company’s loan policy to reserve against loans that have cumulative interruptions in the normal payment
schedule.
The following are the primary procedures we performed to address this
critical audit matter:
| · | We tested the completeness and accuracy of the data used by management in
calculating the allowance for loan losses. |
| · | We tested the payment history for a selection of loans within the loan portfolio
in conjunction with our evaluation of problem loans. |
Other-Than-Temporary Impairment on Bond Portfolio
As discussed in Note 2 to the financial statements, the Company estimates
other-than temporary impairment losses on the bond portfolio. Management considers 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 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.
As of December 31, 2021, the outbreak of the novel coronavirus has adversely
affected many industries generally and specifically has prevented or inhibited the in-person gathering of church congregations which impacts
the ability of churches and other non-profit religious organizations normal methods of worship, potentially causing a decline in church
membership and corresponding member offerings. Several bond issuers experienced an adverse financial impact, resulting in interrupted
interest payments.
We identified the valuation of other-than-temporary impairment on the bond
portfolio as of December 31, 2021 as a critical audit matter. The impact the coronavirus had on the valuation of the other-than-temporary
on bond securities included a high degree of audit effort and auditor judgment. The other-than-temporary impairment totaled $1,755,504
as of December 31, 2021 and was determined using the Company’s bond policy to reserve against bonds that had interruptions in the
normal payment schedule.
The following are the primary procedures we performed to address this critical
audit matter:
- We obtained correspondence from the bonds’ Trustee, regarding
the status of the bond issuances.
- We performed look-back testing to determine how accurate management
is in estimating other-than-temporary impairment on bonds that were redeemed during the year ended December 31, 2021.
- We obtained management’s written assessment regarding the status
of impaired bond issues.
As discussed above, we were not able to obtain sufficient valuation evidence
of the Company’s impaired bond portfolio stated at $7,142,094 at December 31, 2021, or its impairment charge of $940,021, which
is included in net loss for the year then ended as described in Note 5 to the financial statements; nor were we able to satisfy ourselves
as to the carrying value of the impaired bonds or impairment by other auditing procedures.
We have served as the Company’s auditor since 2019.
March 29, 2022
Minneapolis, Minnesota
AMERICAN CHURCH MORTGAGE COMPANY |
Balance Sheets |
|
|
|
|
|
As of December 31, |
ASSETS | |
| 2021 | | |
| 2020 | |
| |
| (unaudited) | | |
| | |
| |
| | | |
| | |
Assets | |
| | | |
| | |
Cash and cash equivalents | |
$ | 114,798 | | |
$ | 87,702 | |
Accounts receivable | |
| 79,887 | | |
| 101,532 | |
Interest receivable | |
| 89,280 | | |
| 242,019 | |
Prepaid expenses | |
| 2,317 | | |
| 7,796 | |
| |
| | | |
| | |
Mortgage Loans Receivable, net of allowance for loan loss of $1,486,434 and $1,493,996 and deferred origination fees | |
| | | |
| | |
of $152,717 and
$198,816 at December 31, 2021 and 2020,
respectively | |
| 13,774,525 | | |
| 16,605,967 | |
| |
| | | |
| | |
Bond Portfolio | |
| 16,337,525 | | |
| 18,100,711 | |
| |
| | | |
| | |
Real Estate Held for Sale | |
| 328,996 | | |
| 428,996 | |
Total Assets | |
$ | 30,697,781 | | |
$ | 35,574,723 | |
| |
| | | |
| | |
| |
| | | |
| | |
Notes to Financial Statements are an integral part of this Statement. | | |
AMERICAN CHURCH MORTGAGE COMPANY |
Balance Sheets |
|
|
|
|
|
As of December 31, |
| |
| | | |
| | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | |
| 2021 | | |
| 2020 | |
| |
| | | |
| | |
Liabilities | |
| | | |
| | |
Accounts payable | |
$ | 137 | | |
$ | 14,400 | |
Management fee payable | |
| 21,530 | | |
| 22,908 | |
Line of credit | |
| 300,000 | | |
| 2,288,000 | |
Dividends payable | |
| — | | |
| 16,766 | |
| |
| | | |
| | |
Secured Investor Certificates, Series B | |
| 4,766,500 | | |
| 6,022,500 | |
Secured Investor Certificates, Series C | |
| 5,977,000 | | |
| 6,127,000 | |
Secured Investor Certificates, Series D | |
| 7,797,000 | | |
| 8,029,000 | |
Secured Investor Certificates, Series E | |
| 3,738,000 | | |
| 3,738,000 | |
| |
| | | |
| | |
(Less) Deferred Offering Costs, net of accumulated amortization | |
| | | |
| | |
of $804,620
and $1,066,068 at Decembr
31, 2021 and | |
| | | |
| | |
December 31, 2020, respectively | |
| (675,746 | ) | |
| (769,178 | ) |
Total liabilities | |
| 21,924,421 | | |
| 25,489,396 | |
| |
| | | |
| | |
Stockholders’ Equity | |
| | | |
| | |
Common stock, par value $.01 per share | |
| | | |
| | |
authorized, 30,000,000 shares, | |
| | | |
| | |
issued and outstanding, 1,676,598
shares at December 31, 2021 and December 31, 2020 | |
| 16,766 | | |
| 16,766 | |
Additional paid-in capital | |
| 19,111,060 | | |
| 19,111,060 | |
Accumulated deficit | |
| (10,354,466 | ) | |
| (9,042,499 | ) |
Total stockholders’ equity | |
| 8,773,360 | | |
| 10,085,327 | |
| |
| | | |
| | |
Total liabilities and stockholders' equity | |
$ | 30,697,781 | | |
$ | 35,574,723 | |
| |
| | | |
| | |
| |
| | | |
| | |
Notes to Financial Statements are an integral part of this Statement. |
AMERICAN CHURCH MORTGAGE COMPANY |
|
|
|
|
Statements of Operations |
|
|
|
|
|
Years Ended December 31, |
|
2021 |
|
2020 |
|
|
|
|
|
|
|
|
Interest and Loan Fee Income |
$ 1,917,145 |
|
$ 2,543,507 |
|
|
|
|
Interest Expense |
1,591,372 |
|
1,766,427 |
|
|
|
|
Net Interest Income |
325,773 |
|
777,080 |
|
|
|
|
Provision credit for losses on mortgage loans receivable |
(3,242 |
) |
64,509 |
|
|
|
|
Net Interest Income after Provision for Mortgage Loans |
329,015 |
|
712,571 |
|
|
|
|
Operating Expenses |
|
|
|
Other than temporary impairment on bond portfolio |
940,021 |
|
176,226 |
Net loss on redemption of bond portfolio |
98,164 |
|
- |
Impairment on real estate held for sale |
100,000 |
|
134,808 |
Other operating expenses |
486,031 |
|
527,396 |
|
1,624,216 |
|
838,430 |
|
|
|
|
Net (Loss) |
(1,295,201) |
|
(125,859) |
|
|
|
|
Basic and Diluted (Loss) Per Share |
$ (0.77) |
|
$ (0.08) |
|
|
|
|
Dividends Declared Per Share |
$ 0.01 |
|
$ 0.08 |
|
|
|
|
Weighted Average Common Shares Outstanding - |
|
|
|
Basic and Diluted |
1,676,896 |
|
1,676,896 |
|
|
|
|
|
|
|
|
Notes to Financial Statements are an integral part of this Statement. |
AMERICAN CHURCH MORTGAGE COMPANY |
| |
| |
| |
| |
| |
|
Statements of Stockholders’ Equity |
Years Ended December 31, 2021 and 2020 |
| |
| |
| |
| |
| |
|
| |
| |
| |
| |
| |
|
| |
| |
| |
Additional | |
| |
|
| |
Common Stock | |
Paid-In | |
Accumulated | |
|
| |
Shares | |
Amount | |
Capital | |
Deficit | |
Totals |
| |
| |
| |
| |
| |
|
Balance, December 31, 2019 | |
| 1,677,798 | | |
$ | 16,778 | | |
$ | 19,113,458 | | |
$ | (8,782,464 | ) | |
$ | 10,347,772 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Re-purchase 1,200 shares | |
| (1,200 | ) | |
$ | (12 | ) | |
$ | (2,398 | ) | |
| | | |
| (2,410 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Net (loss) | |
| — | | |
| — | | |
| — | | |
| (125,859 | ) | |
| (125,859 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Dividends declared | |
| — | | |
| — | | |
| — | | |
| (134,176 | ) | |
| (134,176 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Balance, December 31, 2020 | |
| 1,676,598 | | |
| 16,766 | | |
| 19,111,060 | | |
| (9,042,499 | ) | |
| 10,085,327 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Net (loss) | |
| — | | |
| — | | |
| — | | |
| (1,295,201 | ) | |
| (1,295,201 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Dividends declared | |
| — | | |
| — | | |
| — | | |
| (16,766 | ) | |
| (16,766 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Balance, December 31, 2021 | |
| 1,676,598 | | |
$ | 16,766 | | |
$ | 19,111,060 | | |
$ | (10,354,466 | ) | |
$ | 8,773,360 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Notes to Financial Statements are an integral part of this Statement. | | | |
| | |
AMERICAN CHURCH MORTGAGE COMPANY |
|
|
|
|
Statements of Cash Flows |
|
|
|
|
|
Years Ended December 31, |
|
2021 |
|
2020 |
|
|
|
|
Cash Flows from Operating Activities |
|
|
|
Net (loss) |
$ (1,295,201) |
|
$ (125,859) |
Adjustments to reconcile net (loss) income to net cash |
|
|
|
from operating activities: |
|
|
|
Net loss on sales and impairment on real estate held for sale |
100,000 |
|
134,808 |
Loss on redemption of bonds |
98,164 |
|
- |
Provision (credit) for losses on mortgage loans |
(3,242) |
|
64,509 |
Other than temporary impairment on bond portfolio |
940,021 |
|
176,226 |
Accretion of loan origination fees |
(46,099) |
|
(79,818) |
Amortization of deferred offering costs |
93,432 |
|
109,257 |
Change in assets and liabilities |
|
|
|
Accounts receivable |
21,645 |
|
24,007 |
Interest receivable |
152,739 |
|
(56,829) |
Prepaid expenses |
5,479 |
|
5,325 |
Accounts payable |
(14,263) |
|
2,089 |
Management fee payable |
(1,378) |
|
(4,347) |
Net cash provided by operating activities |
(51,297) |
|
249,368 |
|
|
|
|
Cash Flows from Investing Activities |
|
|
|
Net decrease in loans |
2,910,783 |
|
4,126,400 |
Investment in bonds |
- |
|
(2,472,000) |
Proceeds from redemption, payoffs and maturities of bonds |
724,548 |
|
251,000 |
Proceeds from real estate held for sale |
- |
|
87,594 |
Net cash provided by investing activities |
(3,635,331) |
|
1,922,994 |
|
|
|
|
Cash Flows from Financing Activities |
|
|
|
Net (decrease) in secured investor certificates |
(1,638,000) |
|
(2,933,500) |
Payments for deferred costs |
- |
|
(12,902) |
Net change in line of credit |
(1,988,000) |
|
843,000 |
Dividends paid |
(33,532) |
|
(243,245) |
Net cash (used for) financing activities |
(3,659,532) |
|
(2,346,647) |
|
|
|
|
Net Increase (Decrease) in Cash and Cash Equivalents |
27,096 |
|
(104,285) |
|
|
|
|
Cash and Cash Equivalents - Beginning of Year |
87,702 |
|
191,987 |
|
|
|
|
Cash and Cash Equivalents - End of Year |
$ 114,798 |
|
$ 87,702 |
|
|
|
|
Notes to Financial Statements are an integral part of this Statement. |
AMERICAN CHURCH MORTGAGE COMPANY |
|
|
|
|
Statements of Cash Flows - Continued |
|
|
|
|
|
Years Ended December 31, |
|
2021 |
|
2020 |
|
|
|
|
Supplemental Cash Flow Information |
|
|
|
|
|
|
|
Interest paid |
$ 1,497,940 |
|
$ 1,657,169 |
|
|
|
|
Noncash Financing Activities |
|
|
|
|
|
|
|
Renewal of secured investor certificates |
$ 530,000 |
|
$ 1,007,250 |
|
|
|
|
|
|
|
|
Notes to Financial Statements are an integral part of this Statement. |
|
|
AMERICAN CHURCH MORTGAGE COMPANY
Notes to Financial Statements
December 31, 2021 and 2020
1. BASIS OF PRESENTATION
The accompanying audited financial statements of American
Church Mortgage Company, (the “Company”) were prepared in accordance with instructions for Form 10-K and Regulation S-X and
include information or footnotes necessary for a complete presentation of financial condition, results of operations, changes in equity
and cash flows in conformity with accounting principles generally accepted in the United States of America (“GAAP”).
In the opinion of management, all adjustments necessary
for a fair presentation of the financial statements have been included.
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 Financial Statements
December 31, 2021 and 2020
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 collection. Additionally, no interest income is recognized
on impaired loans that are declared to be in default and are in the foreclosure process.
AMERICAN CHURCH MORTGAGE COMPANY
Notes to Financial Statements
December 31, 2021 and 2020
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
for the periods ended December 31, 2021 and 2020.
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 $2,368,000 and $2,795,000
exceeded 90 days past due but continued to accrue interest as of December 31, 2021 and December 31, 2020, 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 and $428,996 as of December 31, 2021 and December 31, 2020, respectively.
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 Financial Statements
December 31, 2021 and 2020
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
December 31, 2021 and 2020.
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 March 29, 2022, the date the financial statements were available to be issued.
AMERICAN CHURCH MORTGAGE COMPANY
Notes to Financial Statements
December 31, 2021 and 2020
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 obtained from 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 Financial Statements
December 31, 2021 and 2020
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 December 31, 2021 and December 31, 2020 follows:
| |
Nonrecurring Fair Value at December 31, 2021 |
Assets: | |
Quoted Prices in Active Markets for Identical Instruments Level 1 | |
Significant Other Observable Inputs Level 2 | |
Significant Unobservable Inputs Level 3 | |
Total |
Bond portfolio | |
$ | — | | |
$ | — | | |
$ | 7,142,094 | | |
$ | 7,142,094 | |
Impaired loans | |
$ | — | | |
$ | — | | |
$ | 4,496,970 | | |
$ | 4,496,970 | |
Real estate held for sale | |
$ | — | | |
$ | — | | |
$ | 328,996 | | |
$ | 328,996 | |
| |
| | | |
| | | |
| | | |
| | |
| |
Nonrecurring Fair Value at December 31, 2020 |
Assets: | |
Quoted Prices in Active Markets for Identical Instruments Level 1 | |
Significant Other Observable Inputs Level 2 | |
Significant Unobservable Inputs Level 3 | |
Total |
Bond portfolio | |
$ | — | | |
$ | — | | |
$ | 4,650,372 | | |
$ | 4,650,372 | |
Impaired loans | |
$ | — | | |
$ | — | | |
$ | 5,004,424 | | |
$ | 5,004,424 | |
Real estate held for sale | |
$ | — | | |
$ | — | | |
$ | 428,996 | | |
$ | 428,996 | |
| |
| | | |
| | | |
| | | |
| | |
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 $1,755,504. As of December 31, 2020, bonds held to maturity with a carrying value of $5,484,988 were written down to their fair value
of $4,650,372 by recognizing an other than temporary impairment of $834,226.
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. As of December 31, 2020, loans with a carrying amount of $6,498,421 were considered impaired and were
written down to their estimated fair value of $5,004,424 by recognizing a specific valuation allowance of $1,493,996.
AMERICAN CHURCH MORTGAGE COMPANY
Notes to Financial Statements
December 31, 2021 and 2020
Real estate held for sale is recognized at fair value,
less costs to sell. Impairment charges of $100,000 and $134,808 were recognized in earnings for the years ended December 31, 2021 and
December 31, 2020, respectively.
The following presents quantitative information about nonrecurring Level
3 fair value measurements as of December 31, 2021 and December 31, 2020:
|
Fair Value |
Valuation Technique |
Significant Unobservable Inputs(s) |
Range/Weighted |
|
|
|
|
|
December 31, 2021 |
|
|
|
|
Bond Portfolio |
$7,142,094 |
Market or Income Approach |
Discount to Appraised Values |
10-50% |
Impaired Loans |
$4,496,970 |
Market or Income Approach |
Discount to Appraised Values |
10-100% |
Real Estate Held for Sale |
$328,996 |
Market or Income Approach |
Discount to Appraised Values |
10-20% |
|
|
|
|
|
December 31, 2020 |
|
|
|
|
Bond Portfolio |
$4,650,372 |
Market or Income Approach |
Discount to Appraised Values |
10-20% |
Impaired Loans |
$5,004,424 |
Market or Income Approach |
Discount to Appraised Values |
10-100% |
Real Estate Held for Sale |
$428,996 |
Market or Income Approach |
Discount to Appraised Values |
10-20% |
The
Estimated Fair Values and Carrying Values of the Company’s financial instruments are as follows:
| |
Level 1 | |
Level 2 | |
Level 3 | |
Carrying Value at December 31, 2021 |
Cash and equivalents | |
$ | 114,798 | | |
$ | — | | |
$ | — | | |
$ | 114,798 | |
Accounts receivable | |
| 79,887 | | |
| — | | |
| — | | |
| 79,887 | |
Interest receivable | |
| 89,280 | | |
| — | | |
| — | | |
| 89,280 | |
Mortgage loans receivable | |
| — | | |
| — | | |
| 13,744,525 | | |
| 13,744,525 | |
Bond portfolio | |
| — | | |
| — | | |
| 16,337,978 | | |
| 16,337,978 | |
Line of credit | |
| 300,000 | | |
| — | | |
| — | | |
| 300,000 | |
Secured investor certificates | |
| — | | |
| 22,278,500 | | |
| — | | |
| 22,278,500 | |
| |
Level 1 | |
Level 2 | |
Level 3 | |
Carrying Value at December 31, 2020 |
Cash and equivalents | |
$ | 87,702 | | |
$ | — | | |
$ | — | | |
$ | 87,702 | |
Accounts receivable | |
| 101,532 | | |
| — | | |
| — | | |
| 101,532 | |
Interest receivable | |
| 242,019 | | |
| — | | |
| — | | |
| 242,019 | |
Mortgage loans receivable | |
| — | | |
| — | | |
| 16,605,967 | | |
| 16,605,967 | |
Bond portfolio | |
| — | | |
| — | | |
| 18,100,711 | | |
| 18,100,711 | |
Line of credit | |
| 2,288,000 | | |
| — | | |
| — | | |
| 2,288,000 | |
Secured investor certificates | |
| — | | |
| 23,916,500 | | |
| — | | |
| 23,916,500 | |
AMERICAN CHURCH MORTGAGE COMPANY
Notes to Financial Statements
December 31, 2021 and 2020
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 on balance-sheet financial instruments without attempting to estimate the value of anticipated future business.
4. MORTGAGE LOANS RECEIVABLE
At December 31, 2021, the Company had mortgage loans
receivable totaling $15,383,676. The loans bear interest ranging from 0% to 10.25% with a weighted average of approximately 7.45% at December
31, 2021. At December 31, 2020, the Company had mortgage loans receivable totaling $18,298,779. The loans bear interest ranging from 0%
to 10.25% with a weighted average of approximately 7.68% at December 31, 2020.
At December 31, 2021, the Company reserved $1,486,434
for twelve mortgage loans. Eight 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 twelve loans totaled approximately $5,983,000
at December 31, 2021. At December 31, 2020, the Company reserved $1,493,996
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 $6,498,000 at December 31, 2020.
AMERICAN CHURCH MORTGAGE COMPANY
Notes to Financial Statements
December 31, 2021 and 2020
A summary of transactions in the Allowance for Mortgage
Loans for years ended December 31, 2021 and 2020 is as follows:
Twelve Months Ended |
|
Balance at December 31, 2020 |
$ 1,493,996 |
Provision (credit) for loan
losses |
(3,242) |
Charge-offs |
(4,320) |
Balance at December 31, 2021 |
$ 1,486,434 |
Twelve Months Ended |
|
Balance at December 31, 2019 |
$ 1,429,487 |
Provisions for loan losses |
64,509 |
Balance at December 31, 2020 |
$ 1,493,996 |
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.
Loans that are in the foreclosure process or are declared
to be in default, had a principal balance of $588,787 and were considered impaired and written down to their estimated fair value of $37,771
as of December 31, 2020. As a result, the Company recognized a specific valuation allowance against these impaired loans totaling $551,016
as of December 31, 2020.
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 has 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). 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 December 31, 2021, 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
AMERICAN CHURCH MORTGAGE COMPANY
Notes to Financial Statements
December 31, 2021 and 2020
impact of COVID-19
on the Company’s investments or operations cannot be reasonably estimated at this time. The
contractual Maturity Schedule for Mortgage Loans Receivable as of December 31, 2021, is as follows:
|
Mortgage Loans |
|
|
2022 |
$ 779,884 |
2023 |
607,505 |
2024 |
1,595,826 |
2025 |
1,107,088 |
2026 |
1,034,196 |
Thereafter |
10,259,177 |
Subtotal |
15,383,676 |
Less loan loss |
(1,486,434) |
Less deferred origination fees |
(152,717) |
Total |
$13,744,255 |
The Company did not restructure any loans during the
year ended December 31, 2021 and restructured one loan during the year ended December 31, 2020. A summary of loans re-structured or modified
for the year ended December 31, 2021 and 2020 are shown below. All of the loans, except one, are currently performing under the terms
of the modifications for their mortgage obligations. This loan is a first mortgage loan with an outstanding balance of $377,761. The Church
is no longer holding services due to COVID-19 and has agreed to list the building for sale. This loan has been declared to be in default.
Restructured Loans
|
December
31, 2021 |
|
|
|
|
|
|
Type of Loan |
Number of Loans |
Original Principal Balance |
Original Average Interest Rate |
Unpaid Principal Balance |
Modified Average Interest Rate |
Mortgage Loans |
6 |
$4,196,544 |
8.101% |
$3,415,692 |
6.431% |
|
December 31, 2020 |
|
|
|
|
|
|
Type of Loan |
Number of Loans |
Original Principal Balance |
Original Average Interest Rate |
Unpaid Principal Balance |
Modified Average Interest Rate |
Mortgage Loans |
7 |
$4,696,544 |
8.127% |
$3,523,123 |
6.466% |
|
|
|
|
|
|
AMERICAN CHURCH MORTGAGE COMPANY
Notes to Financial Statements
December 31, 2021 and 2020
5.
BOND PORTFOLIO
The Company has a portfolio of secured church bonds
at December 31, 2021 and 2020, 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 $18,093,483
at December 31, 2021 with a weighted average interest rate of 6.77% and $18,934,937
at December 31, 2020 with a weighted average interest rate of 6.70%. These bonds are due at various maturity dates through February
2047. The Company has recorded an aggregate other than temporary impairment of $1,755,504
and $834,226 as of December 31, 2021 and December
31, 2020, respectively. The Company had maturities and redemptions of bonds of approximately $842,000
and $251,000 for the years ended December 31, 2021 and December 31, 2020, respectively.
The contractual
maturity schedule for the bond portfolio as of December 31, 2021, is as follows:
Maturity Schedule Bond Portfolio
|
Bond Portfolio |
|
|
2022 |
$ 257,000 |
2023 |
130,000 |
2024 |
455,000 |
2025 |
260,000 |
2026 |
631,000 |
Thereafter |
16,360,483 |
Subtotal |
18,093,483 |
Less other than temporary impairment on bond portfolio |
(1,755,504) |
Totals |
$16,337,978 |
Total other than
temporary impairment related to the bond portfolio was $1,755,504 and $834,226 as of December 31, 2021 and December 31, 2020, respectively.
The fair value of these securities was $7,142,094 and $4,650,372 as of December 30, 2021 and December 31, 2020, 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 year ended December 31, 2021 and 2020:
Temporary Impairment Bond Portfolio
| |
December 31, 2021 | |
December 31, 2020 |
| |
| |
|
Beginning Balance | |
$ | 834,226 | | |
$ | 658,000 | |
Additions to other than temporary impairment | |
| 940,021 | | |
| 176,226 | |
Credit loss realized from redemption of securities | |
| (18,743 | ) | |
| — | |
Ending Balance | |
$ | 1,755,504 | | |
$ | 834,226 | |
AMERICAN CHURCH MORTGAGE COMPANY
Notes to Financial Statements
December 31, 2021 and 2020
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 6.12% and 6.19% for the years ended December 31, 2021 and 2020, 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 $530,000 and $1,007,000
for the years ended December 31, 2021 and 2020, respectively. The secured investor certificates have certain financial and non-financial
covenants identified in the respective series’ trust indentures.
The estimated Maturity Schedule for the Secured Investor
Certificates at December 31, 2021 is as follows:
2022 |
$ 1,042,000 |
|
2023 |
3,404,000 |
|
2024 |
1,433,000 |
|
2025 |
1,202,000 |
|
2026 |
747,000 |
|
Thereafter |
14,450,500 |
|
Subtotal |
$22,278,500 |
|
Less deferred offering costs |
(675,746) |
|
Totals |
$21,602,754 |
|
The Company’s current certificate offering terminated
November 6, 2020. As a result, no new secured investor certificates are not being offered and instead the Company is financing loan requests
and liquidity needs through loan and bond payments received and its line of credit.
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 $268,000 and $284,000 for years ended
December 31, 2021 and 2020, respectively. In addition, the Company paid to the Advisor rent totaling $30,000 for December 31, 2021. The rent is on a month-to month basis.
AMERICAN CHURCH MORTGAGE COMPANY
Notes to Financial Statements
December 31, 2021 and 2020
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 $300,000
and $2,288,000 for the years December
31, 2021 and 2020, 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.
9.
INCOME TAXES
As discussed in Note 1, a REIT is subject to taxation
to the extent that taxable income exceeds dividend distributions to shareholders. In order to maintain status as a REIT, the Company is
required to distribute at least 90% of its taxable income. In 2021, the Company had pretax loss of $(1,295,201) and distributions to shareholders
in the form of dividends during the tax year of $16,766. In 2020, the Company had pretax loss of $(125,859) and distributions to shareholders
in the form of dividends during the tax year of $134,176. The Company paid out 100% of taxable income in dividends in 2021 and 2020.
The Company has federal and Minnesota net operating
loss carryforwards of $2,574,000. The federal losses start to expire in 2034 and the Minnesota losses start to expire in 2029. The carrying
amounts of some assets differ for tax basis than book basis. At December 31, 2021 and 2020, the cumulative tax basis in the Company’s
assets and liabilities exceeded book basis by approximately $1,985,000 and $1,934,000, respectively. The Company has no deferred tax assets
or liabilities on its balance sheet.
American Church Mortgage (CE) (USOTC:ACMC)
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