1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited financial statements have been prepared in accordance
with the instructions for interim statements and, therefore, do not include all
information and disclosures necessary for a fair presentation of results of
operations, financial position, and changes in cash flow in conformity with
generally accepted accounting principles. However, in the opinion of management,
such statements reflect all adjustments (which include only normal recurring
adjustments) necessary for a fair presentation of financial position, results of
operations, and cash flows for the period presented.
The unaudited financial statements of the Company should be read in conjunction
with its December 31, 2006 audited financial statements included in the
Company's Annual Report on Form 10-KSB, as filed with the Securities and
Exchange Commission for the year ended December 31, 2006.
Nature of Business
American Church Mortgage Company, a Minnesota corporation, was incorporated on
May 27, 1994. The Company was organized to engage primarily in the business of
making mortgage loans to churches and other nonprofit religious organizations
throughout the United States, on terms that it establishes for individual
organizations.
Accounting Estimates
Management uses estimates and assumptions in preparing these financial
statements in accordance with generally accepted accounting principles. Those
estimates and assumptions affect the reported amounts of assets and liabilities,
the disclosure of contingent assets and liabilities, and the reported revenues
and expenses. Actual results could differ from those estimates. The most
sensitive estimates relate to the allowance for mortgage loans, real estate held
for sale and the valuation of the bond portfolio. It is at least reasonably
possible that these estimates could change in the near term and that the effect
of the change, if any, may be material to the financial statements.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents.
The Company maintains its accounts primarily at three financial institutions. At
times throughout the year, the Company's cash and equivalents balances may
exceed amounts insured by the Federal Deposit Insurance Corporation. Cash in
money market funds is not Federally insured. At September 30, 2007, such
investments were $69,957. At December 31, 2006, such investments were $15,403.
The Company has not experienced any losses in such accounts.
Bond Portfolio
The Company accounts for its bond portfolio under Financial Accounting Standards
No. 115, "Accounting for Certain Investments in Debt and Equity Securities."
The Company classified its bond portfolio as "available-for-sale".
Available-for-sale bonds are carried at fair value. Although no ready public
market for these bonds exists, management believes that their cost approximates
their fair value, since the bonds are callable at any time by the Issuer at par.
During the nine month period ended September 30, 2007, the Company bought
$2,208,000 of bonds at or below par.
Allowance for Mortgage Loans Receivable
The Company records its loans at their estimated net realizable value. The
Company's loan policy provides an allowance for estimated uncollectible loans
based on its evaluation of the current status of its loan portfolio. This policy
reserves for principal amounts outstanding on a particular loan if cumulative
interruptions occur in the normal payment schedule of a loan. The Company policy
will reserve for the outstanding principal amount of a loan in the Company's
portfolio if the amount is in doubt of being collected. Additionally, no
interest income is recognized on impaired loans. At December 31, 2006, the
Company reserved $97,262 for twelve mortgage loans of which one was four
mortgage payments in arrears and was in the process of being foreclosed. At
September 30, 2007, the Company reserved $72,056 for eleven mortgage loans of
which three are three or more payments in arrears, two of which are in the
process of being foreclosed.
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Real Estate Held for Sale
Foreclosure was completed on a church located in Battle Creek, Michigan. The
church congregation disbanded and the church property is currently unoccupied.
The Company owns and has taken possession of the church and has listed the
property for sale through a local realtor.
Foreclosure was also completed on a church located in Tyler, Texas. The church
congregation is now meeting in a different location and the church property is
currently unoccupied. The Company owns and has taken possession of the church
and has listed the property for sale through a local realtor.
A deed in lieu of foreclosure was received from a church located in Cleveland,
Ohio. The Company owns and has taken possession of the church and has listed the
property for sale through our local attorney.
Foreclosure was completed on a church located in Dayton, Ohio. The Company owns
and has taken possession of the church's property. The property is secured and
has been listed for sale through a local realtor.
Foreclosure was completed on a church located in Dallas, Texas. The Company owns
and has taken possession of the church's property. The property is secured and
is being prepared to be sold.
Foreclosure was completed on a church located in Cincinnati, Ohio. The Company
owns and has taken possession of the church's property. The property is secured
and is being prepared to be sold.
The Company has recorded the real-estate held for sale at fair value which is
net of the expected expenses related to the sale of the real-estate.
On April 24, 2007, the Company sold its property in Coupland, Texas.
Deferred Offering Costs
Deferred equity offering costs are charged to stockholders' equity when equity
subscriptions are received. Deferred secured investor certificate costs are
amortized over the term of the certificates using the straight-line method which
approximates the effective interest method.
Deferred Line of Credit Costs
On July 26, 2007, the Company entered into a three-year, adjustable rate, $15
million revolving credit facility with KeyBank National Association. Costs
incurred with respect to obtaining the line of credit are being amortized over a
three-year period using the straight- line method.
Revenue Recognition
Interest income on mortgage loans and the bond portfolio is recognized as
earned.
Deferred income represents loan origination fees which are recognized over the
life of the loan as an adjustment to the yield on the loan.
Income Taxes
Income taxes are provided for the tax effects of transactions reported in the
financial statements and consist of taxes currently due plus deferred taxes
related primarily to differences in recognition of income from loan origination
fees for financial and income tax reporting.
The Company has elected to be taxed as a Real Estate Investment Trust (REIT).
Accordingly, the Company will not be subject to Federal income tax to the extent
of distributions to its stockholders if the Company meets all the requirements
under the REIT provisions of the Internal Revenue Code.
Income Per Common Share
No adjustments were made to income for the purpose of calculating earnings per
share.
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Newly Issued Pronouncements
The Company has considered the accounting pronouncements issued after December
2006 and has determined that none of these pronouncements will have a material
impact on its financial statements.
Repurchase of Common Stock
Although our common shares are not redeemable by us, we may at our complete
discretion repurchase shares offered to us from time to time by our
stockholders. In such event, we may pay whatever price the Advisor deems
appropriate and reasonable, and any such shares repurchased will be
re-designated as "unissued," will no longer be entitled to distribution of
dividends and will cease to have voting rights. Shares that may be purchased are
not part of a publicly announced plan to repurchase shares nor does the Company
plan or anticipate any stock repurchase plans.
2. MORTGAGE LOANS AND BOND PORTFOLIO
At September 30, 2007, the Company had mortgage loans receivable totaling
$31,754,290. The loans bear interest ranging from 7.95% to 12.00%. The Company
also had a portfolio of secured church bonds at September 30, 2007 which are
carried at amortized cost. The bonds pay either semi-annual or quarterly
interest ranging from 4.50% to 12.00%. The combined principal of $11,634,790 at
September 30, 2007 is due at various maturity dates between December 15, 2007
and November 1, 2036.
The maturity schedule for mortgage loans and bonds receivable as of September
30, 2007 is as follows:
Mortgage Loans Bond Portfolio
From September 30, 2007 to September 30, 2008 $ 740,698 $ 48,000
From October 1, 2008 to December 31, 2008 182,475 15,000
2009 771,759 47,000
2010 843,395 316,000
2011 921,716 727,000
2012 980,274 507,000
Thereafter 27,313,973 9,974,790
---------- -----------
31,754,290 11,634,790
Less loan loss reserve (72,056)
Less discounts from par (29,825)
----------- ----------
Totals $31,682,234 $ 11,604,965
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3. SECURED INVESTOR CERTIFICATES
Secured investor certificates are composed of Series A and Series B
certificates. They are debt securities with essentially identical terms,
differing only in the maturity dates of the certificates and the interest rates
paid on them. The certificates are collateralized by certain mortgage loans
receivable of approximately the same value as the certificates. Additionally,
the Company incurred deferred offering costs related to the debt offering. The
maturity schedule for the secured investor certificates at September 30, 2007 is
as follows:
Investor Saver
Certificates
From September 30, 2007 to September 30, 2008 $ 2,146,000
From October 1, 2008 to December 31, 2008 591,000
2009 3,992,000
2010 1,145,000
2011 658,000
2012 937,000
Thereafter 13,618,000
----------
$23,087,000
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Interest expense related to these certificates for the nine months ended
September 30, 2007 was $1,266,142.
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On July 2, 2007, the Company entered into a First Supplemental Indenture with
Herring Bank which amended the April 26, 2002 Indenture entered into between the
Company and the bank. The amendment, approved by a majority of the Series A
Secured Investor Certificate Holders, covenants that the Company's long term
liabilities will not exceed three hundred percent (300%) of the Company's
shareholders' equity and the Company's collateral coverage ratio be reduced to
100%. In addition, the Company redeemed $1,956,000 of the Series A Secured
Investor Certificates Holders who provided their consent but requested
redemption.
4. TRANSACTIONS WITH AFFILIATES
The Company has an Advisory Agreement with Church Loan Advisors, Inc.,
Minnetonka, Minnesota ("Advisor"). The Advisor is responsible for the day-to-day
operations of the Company and provides office space, administrative services and
personnel.
Under the terms of the Advisory Agreement, the Company pays the Advisor an
annual base management fee of 1.25 percent of average invested assets (generally
defined as the average of the aggregate book value of the assets invested in
securities and equity interests in and loans secured by real estate) up to $35
million, 1.00 percent of assets from $35 million to $50 million, and 0.75
percent on assets in excess of $50 million, which is payable on a monthly basis.
The Advisor will generally receive one-half of the origination fees paid by a
mortgage loan borrower in connection with a mortgage loan made or renewed by the
Company. The Company paid Advisor management fees of approximately $313,000 for
the nine month period ended September 30, 2007. In addition, the Company owed
the Advisor $4,515 as of December 31, 2006 and $31,798 as of September 30, 2007.
The Advisor and the Company are related through common ownership and common
management.
5. PUBLIC OFFERINGS OF THE COMPANY
In July 2004, the Company filed a Registration Statement with the Securities and
Exchange Commission for a second public offering of debt securities, which the
Securities and Exchange Commission declared effective October 7, 2004. The
Company concluded the offering on October 7, 2006. The Company offered
$23,000,000 principal amount of its Series B secured investor certificates.
Certificates could be purchased in any multiple of $1,000. We sold $14,860,000
of secured investor certificates during the offering.
6. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of the Company's financial instruments, none of which
are held for trading purposes, are as follows:
September 30, 2007 December 31, 2006
------------------------------ ---------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------- ------------ ---------- -----------
Cash and equivalents $ 262,168 $ 262,168 $ 232,258 $ 232,258
Accounts receivable 177,856 177,856 136,709 136,709
Interest receivable 140,557 140,557 164,923 164,923
Mortgage loans receivable 31,682,234 31,682,234 37,852,736 37,852,736
Bond portfolio 11,604,965 11,604,965 9,550,697 9,550,697
Line of credit 1,800,000 1,800,000 1,166,000 1,166,000
Secured investor certificates 23,087,000 23,087,000 26,638,000 26,638,000
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The carrying value of cash and equivalents and line of credit approximates fair
value. The carrying value of the mortgage loans receivable approximates fair
value because of the substantial turnover and activity in this portfolio. The
carrying value of the bond portfolio approximates its amortized cost since our
bonds are callable at any time by the issuer at par. The carrying value of the
secured investor certificates approximates fair value because the interest rates
at which the certificates have been sold have not changed significantly in the
past year.
7. LINE OF CREDIT
The Company obtained a $1,000,000 line of credit with its bank on July 22, 1999
which was increased to $2,000,000 on March 18, 2002 and increased to $3,000,000
on February 13, 2007, subject to certain borrowing base limitations, through
August 1, 2007. Interest was charged at 1/2% over the prime rate. The line of
credit was paid off on July 26, 2007 by the KeyBank facility discussed below,
leaving no balance outstanding at September 30, 2007. There was interest expense
in the amount of $41,047 related to the line of credit for September 30, 2007.
On July 26, 2007, the Company entered into a three-year, adjustable rate, $15
million revolving credit facility with KeyBank National Association. There was a
balance of $1,800,000 outstanding at September 30, 2007. Interest is charged at
the LIBOR rate plus an applicable margin which was one and one half percent at
September 30, 2007. The total interest rate was 6.63% at September 30, 2007. The
applicable margin is indexed based upon the Company's financial performance.
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The Credit Agreement contains customary affirmative and negative covenants. The
financial covenants include borrowing base restrictions, a maximum indebtedness
to assets ratio, a minimum cash flow coverage ratio, a minimum tangible net
worth ratio, and a maximum non-performing assets ratio. The creation of
indebtedness outside the credit facility, creation of liens, making of certain
investments, sale of assets, and incurrence of debt are all either limited or
require prior approval from KeyBank or the lenders under the Credit Agreement.
The Credit Agreement also contains customary events of default such as
nonpayment, bankruptcy, and change in control, which if they occur may
constitute an event of default. Additionally, under certain circumstances, total
availability under the credit facility can be increased to $25 million. The
revolving credit facility is secured by a first priority security interest in
substantially all of the Company's assets other than collateral pledged to
secure the Company's Series "A" and Series "B" secured investor certificates.
8. SUBSEQUENT EVENT
The Company currently owns $2,035,000 First Mortgage Bonds issued by St. Agnes
Missionary Baptist Church. St. Agnes has defaulted on its payment obligation to
bondholders. The Church subsequently declared Chapter eleven ("11") bankruptcy
on its properties in November 2007. The Company along with all other bondholders
has a superior lien over all other creditors. No accrual for interest from the
bonds is being recorded by the Company effective September 30, 2007.
The Church has listed all three of their properties for sale price for and
aggregate price of $19,166,668. The bondholders are currently owed $13,027,000
excluding any accrued interest, fees or expenses. Herring Bank, Amarillo Texas,
is trustee for the first mortgage bondholders. Herring Bank and its legal
counsel are monitoring the bankruptcy process and will advise the bondholders of
the Church's re-organization plans once it is made available. The Company is not
able to calculate a reserve amount for its bonds until further evidence
regarding the value of the Church's properties and the disposition of the
bankruptcy are provided to Herring Bank, its legal counsel and bondholders. Once
additional information regarding the Church's re-organization plan and valuation
of its properties is provided, the Company will determine whether a valuation
adjustment for the bond investment should be recorded. The Company anticipates
such information may be available for the fourth quarter of 2007.
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