AMERICAN CHURCH MORTGAGE COMPANY
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Balance Sheets
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ASSETS
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September 30, 2016
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December 31, 2015
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(Unaudited)
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|
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Current Assets
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|
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Cash and equivalents
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$ 4,483,963
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$ 4,377,110
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Accounts receivable
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220,116
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189,609
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Interest receivable
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172,526
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172,169
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Current maturities of mortgage loans receivable, net of
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allowance of $41,075 and $57,663 and deferred
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origination fees of $21,150 and $23,406 at September
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30, 2016 and December 31, 2015, respectively
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731,949
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1,134,157
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Current maturities of bond portfolio
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104,000
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84,000
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Prepaid expenses
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4,156
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19,904
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Total current assets
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5,716,710
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5,976,949
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Mortgage Loans Receivable
, net of current maturities,
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allowance of $1,245,714 and $1,147,170 and deferred
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origination fees of $323,644 and $311,923 at September
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30, 2016 and December 31, 2015, respectively
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22,483,059
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22,680,542
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Bond Portfolio,
net of current maturities
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11,115,616
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10,429,428
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Real Estate Held for Sale
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340,872
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697,422
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Deferred Offering Costs
,
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net of accumulated amortization of $1,071,323 and $974,991
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at September 30, 2016 and December 31, 2015, respectively
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842,915
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861,810
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Total Assets
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$ 40,499,172
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$ 40,646,151
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Notes to Unaudited Financial Statements are an integral part of this Statement.
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AMERICAN CHURCH MORTGAGE COMPANY
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Balance Sheets
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LIABILITIES AND STOCKHOLDERS’ EQUITY
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September 30, 2016
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December 31, 2015
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(Unaudited)
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Current Liabilities
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Current maturities of secured investor certificates
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$ 4,005,000
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$ 3,120,000
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Accounts payable
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22,844
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29,417
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Dividends payable
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100,668
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|
125,836
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Total current liabilities
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4,128,512
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3,275,253
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Deposit on real estate held for sale
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-
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-
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Secured Investor Certificates, Series B,
net of current maturities
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11,147,000
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13,074,000
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Secured Investor Certificates, Series C,
net of current maturities
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6,765,000
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6,723,000
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Secured Investor Certificates, Series D
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6,840,000
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5,329,000
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Total liabilities
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28,880,512
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28,401,253
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Stockholders’ Equity
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Common stock, par value $.01 per share
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Authorized, 30,000,000 shares
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Issued and outstanding, 1,677,798 shares at
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September 30, 2016 and December 31, 2015, respectively
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16,778
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16,778
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Additional paid-in capital
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19,113,458
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19,113,458
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Accumulated deficit
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(7,511,576)
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(6,885,338)
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Total stockholders’ equity
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11,618,660
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12,244,898
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Total liabilities and stockholders' equity
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$ 40,499,172
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$ 40,646,151
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Notes to Unaudited Financial Statements are an integral part of this Statement.
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AMERICAN CHURCH MORTGAGE COMPANY
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Statements of Operations
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For the Nine Months Ended
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September 30, 2016
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September 30, 2015
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(Unaudited)
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(Unaudited)
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Interest and Other Income
|
$ 1,989,106
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$ 2,254,675
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Interest Expense
|
1,518,067
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1,493,017
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Net Interest Income
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471,039
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761,658
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Provision for losses on mortgage loans receivable
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161,312
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142,120
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Provision for losses on bond portfolio
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180,000
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-
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341,312
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142,120
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Net Interest Income after Provision for Mortgage Losses
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129,727
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619,538
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Operating Expenses
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453,961
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472,406
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Operating (Loss) Income
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(324,234)
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|
147,132
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Other Income
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-
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4,053
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Net (Loss) Income
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$ (324,234)
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$ 151,185
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Basic and Diluted (Loss) Income Per Share
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$ (0.19)
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|
$ 0.09
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Dividends Declared Per Share
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$ 0.06
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$ 0.18
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Weighted Average Common Shares Outstanding -
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Basic and Diluted
|
1,677,798
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|
1,677,798
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Notes to Unaudited Financial Statements are an integral part of this Statement.
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AMERICAN CHURCH MORTGAGE COMPANY
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Statements of Operations
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For the Three Months Ended
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September 30, 2016
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September 30, 2015
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(Unaudited)
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(Unaudited)
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Interest and Other Income
|
$ 650,876
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|
$ 728,782
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Interest Expense
|
512,411
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|
503,441
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Net Interest Income
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138,465
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|
225,341
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Provision for losses on mortgage loans receivable
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16,836
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|
46,108
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Provision for losses on bond portfolio
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60,000
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-
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76,836
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46,108
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Net Interest Income after Provision for Mortgage Losses
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61,629
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179,233
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Operating Expenses
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111,724
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|
154,616
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Operating (Loss) Income
|
(50,095)
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|
24,617
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Other Income
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-
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-
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Net (Loss) Income
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$ (50,095)
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|
$ 24,617
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Basic and Diluted (Loss) Income Per Share
|
$ (0.03)
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|
$ 0.01
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Dividends Declared Per Share
|
$ 0.06
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|
$ 0.04
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Weighted Average Common Shares Outstanding -
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Basic and Diluted
|
1,677,798
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|
1,677,798
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Notes to Unaudited Financial Statements are an integral part of this Statement.
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AMERICAN CHURCH MORTGAGE COMPANY
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Statements of Cash Flows
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For the Nine Months Ended
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September 30, 2016
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September 30, 2015
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(Unaudited)
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(Unaudited)
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Cash Flows from Operating Activities
|
|
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Net (loss) income
|
$ (324,234)
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|
$ 150,185
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Adjustments to reconcile net income to net cash
|
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|
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from operating activities:
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Impairment on real estate held for sale
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(62,043)
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|
103,623
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Provision for losses on mortgage loans receivable
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161,312
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|
142,120
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Provision for losses on bond portfolio
|
180,000
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-
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Amortization of loan origination discounts
|
9,450
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(141,773)
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Amortization of deferred costs
|
96,332
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97,695
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Change in assets and liabilities
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Accounts receivable
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(30,507)
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|
54,144
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Interest receivable
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(357)
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|
(34,009)
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Prepaid expenses
|
15,748
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(2,817)
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Accounts payable
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(43,131)
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|
50,831
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Net cash provided by operating activities
|
2,570
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|
419,999
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Cash Flows from Investing Activities
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Investment in mortgage loans
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(697,447)
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(1,242,335)
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Collections of mortgage loans
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1,581,527
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4,470,581
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Investment in bonds
|
(965,000)
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(1,406,053)
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Proceeds from bonds
|
78,812
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|
142,275
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Net cash (used for) provided by investing activities
|
(2,108)
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|
1,964,468
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Cash Flows from Financing Activities
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|
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Proceeds from secured investor certificates
|
996,000
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|
1,593,000
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Payments on secured investor certificate maturities
|
(485,000)
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|
(1,034,000)
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Payments for deferred costs
|
(77,437)
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|
(104,192)
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Dividends paid
|
(327,172)
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|
(402,672)
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Net cash provided by financing activities
|
106,391
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|
52,136
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|
|
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Net Increase in Cash and Equivalents
|
106,853
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|
2,436,603
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|
|
|
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Cash and Equivalents
- Beginning of Period
|
4,377,110
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|
3,767,102
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|
|
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Cash and Equivalents
- End of Period
|
$ 4,483,963
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|
$ 6,203,705
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|
|
|
|
Notes to Unaudited Financial Statements are an integral part of this Statement.
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AMERICAN CHURCH MORTGAGE COMPANY
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|
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Statements of Cash Flows - Continued
|
|
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For the Nine Months Ended
|
|
September 30, 2016
|
|
September 30, 2015
|
|
(Unaudited)
|
|
(Unaudited)
|
Supplemental Cash Flow Information
|
|
|
|
|
|
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Dividends payable
|
$ 100,668
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|
$ 67,112
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|
|
|
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Interest paid
|
$ 1,421,735
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|
$ 1,395,322
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|
|
|
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Non-cash investing activity:
|
|
|
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Real estate held for sale financed through
|
|
|
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mortgage loans receivable
|
$ 340,872
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|
$ -
|
|
|
|
|
Notes to Unaudited Financial Statements are an integral part of this Statement.
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AMERICAN CHURCH MORTGAGE COMPANY
Notes to Financial Statements - Unaudited
September 30, 2016
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited financial statements
have been prepared in accordance with the instructions for interim statements and, therefore, do not include all information and
disclosures necessary for fair presentation of results of operations, financial position, and changes in cash flow in conformity
with generally accepted accounting principles. However, in the opinion of management, such statements reflect all adjustments (which
include only normal recurring adjustments) necessary for fair presentation of financial position, results of operations, and cash
flows for the period presented.
The unaudited financial statements of the Company
should be read in conjunction with the December 31, 2015 audited financial statements included in the Company’s Annual Report
on Form 10-K, as filed with the Securities and Exchange Commission for the year ended December 31, 2015. Operating results for
the periods presented are not necessarily indicative of the results that may be expected for the year ending December 31, 2016.
Nature of Business
American Church Mortgage Company, a Minnesota
corporation, was incorporated on May 27, 1994. The Company was organized to engage primarily in the business of making mortgage
loans to churches and other nonprofit religious organizations throughout the United States, on terms established for individual
organizations.
Accounting Estimates
Management uses estimates and assumptions in
preparing these financial statements in accordance with accounting principles generally accepted in the United States of America.
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 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.
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.
AMERICAN CHURCH MORTGAGE COMPANY
Notes to Financial Statements - Unaudited
September 30, 2016
Cash and Equivalents
The Company considers all highly liquid debt
instruments purchased with maturities of three months or less to be cash equivalents.
The Company maintains accounts primarily at
two financial institutions. At times throughout the year, the Company’s cash and equivalents balances may exceed amounts
insured by the Federal Deposit Insurance Corporation. Cash in money market funds is not federally insured. The Company had $1,169,528
and $2,233,533 in money market fund accounts at September 30, 2016 and December 31, 2015, respectively. The Company has not experienced
any losses in such accounts.
Bond Portfolio
The Company accounts for the bond portfolio
under the Accounting Standards Codification (ASC) 320. The Company classifies the bond portfolio as “available-for-sale”
and measures the portfolio at fair value. While the bonds are generally held until contractual maturity, the Company classifies
them as available-for-sale as the bonds may be used to repay secured investor certificates or provide additional liquidity or working
capital in the short term. The Company has classified $104,000 and $84,000 in bonds as current assets as of September 30, 2016
and December 31, 2015, respectively, based on management’s estimates for liquidity requirements and contractual maturities
of certain bonds maturing in 2017 and 2016, respectively.
Allowance for 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 mortgage loans. The Company’s loan loss policy provides an allowance for estimated uncollectible loans based on an evaluation
of the current status of the loan portfolio. This policy provides for principal amounts outstanding on a particular loan if cumulative
interruptions occur in the normal payment schedule of a loan; therefore, the Company recognizes a provision for losses and an allowance
for the outstanding principal amount of a loan in the Company’s portfolio if the amount is in doubt of collection. Additionally,
no additional interest income is recognized on impaired loans that are declared to be in default and are in the foreclosure process.
At September 30, 2016, the Company provided $1,286,789 for seventeen mortgage loans, of which seven totaling approximately $3,460,000
are three or more mortgage payments in arrears, three loans totaling $1,225,659 are declared to be in default and two loans totaling
$623,648 are in the foreclosure process. At December 31, 2015, the Company provided $1,205,000 for eighteen mortgage loans, of
which eight totaling approximately $3,724,000 were three or more mortgage payments in arrears, two loans totaling approximately
$1,004,000 were declared to be in default and three loans totaling approximately $775,000 were in the foreclosure process.
AMERICAN CHURCH MORTGAGE COMPANY
Notes to Financial Statements - Unaudited
September 30, 2016
A summary of transactions in the allowance
for credit losses for the nine months ended September 30, 2016 is as follows:
Balance at December 31, 2015
|
|
$
|
1,204,833
|
|
Provision for additional losses
|
|
|
161,312
|
|
Reclassified to real estate held for sale
|
|
|
(29,806
|
)
|
Charge-offs
|
|
|
(49,550
|
)
|
Balance at September 30, 2016
|
|
$
|
1,286,789
|
|
The total impaired loans, which are loans that
are in the foreclosure process or are declared to be in default, were approximately $1,849,000 and $1,779,000 at September 30,
2016 and December 31, 2015, respectively, which the Company believes are adequately secured by the underlying collateral and the
allowance for mortgage loans. Approximately $652,000 and $581,000 of the Company’s allowance for mortgage loans was allocated
to impaired loans at September 30, 2016 and December 31, 2015, respectively.
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 the uncollectable receivables.
Loans totaling approximately $3,460,000 and
$3,724,000 exceeded 90 days past due but continued to accrue interest at September 30, 2016 and December 31, 2015, respectively.
The Company believes that the loans are well secured, not deemed to be in default and the Company is actively pursuing collection
of past due payments.
AMERICAN CHURCH MORTGAGE COMPANY
Notes to Financial Statements - Unaudited
September 30, 2016
Real Estate Held for Sale
As of September 30, 2016, the Company had two
properties acquired through foreclosure, and one via deed in lieu of foreclosure, with outstanding loan balances totaling approximately
$618,000. The Company has listed the properties for sale through local realtors except for the property for which we received a
deed in lieu of foreclosure. The Church is still occupying this property and paying rent while trying to either sell the building
or obtain refinancing. Each property is valued based on its current listing price less any anticipated selling costs, including,
for example, realtor commissions. 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, is approximately $341,000 as of September 30, 2016 after an impairment of approximately $277,000.
The Company sold one property acquired through
foreclosure for approximately $32,000 during the nine months ended September 30, 2016.
Carrying Value of Long-Lived Assets
The Company tests long-lived assets or asset
groups for recoverability when events or changes in circumstances indicate that the carrying amount may not be recoverable. Circumstances
which could trigger a review include, but are not limited to: significant decreases in the market price of the asset; significant
adverse changes in the business climate or legal factors; accumulation of costs significantly in excess of the amount originally
expected for the acquisition or construction of the asset; current period cash flow or operating losses combined with a history
of losses or a forecast of continuing losses associated with the use of the asset; and current expectation that the asset will
more likely than not be sold or disposed of significantly before the end of the estimated useful life.
Recoverability is assessed based on the carrying
amount of the asset compared to the sum of the undiscounted cash flows expected to result from the use and the eventual disposal
of the asset, as well as specific appraisal in certain instances. An allowance for losses is recognized when the carrying amount
is deemed not recoverable and exceeds fair value as determined through various valuation techniques including, but not limited
to, discounted cash flow models, quoted market values, and third party independent appraisals.
Revenue Recognition
Interest income on mortgage loans receivable
and the bond portfolio is recognized as earned. Other income included with interest represents cash received for loan origination
fees, which are recognized over the life of the loan as an adjustment to the yield on the loan.
AMERICAN CHURCH MORTGAGE COMPANY
Notes to Financial Statements - Unaudited
September 30, 2016
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
No adjustments were made to income for the
purpose of calculating earnings (loss) per share, as there were no potential dilutive shares outstanding.
2. FAIR VALUE MEASUREMENTS
The Company measures certain financial instruments
at fair value in our balance sheets. The fair value of these instruments is based on valuations that include inputs that can be
classified within one of the three levels of a hierarchy. Level 1 inputs include quoted market prices in an active market for identical
assets or liabilities. Level 2 inputs are market data, other than Level 1, that are observable either directly or indirectly. Level
2 inputs include quoted market prices for similar assets or liabilities, quoted market prices in an inactive market, and other
observable information that can be corroborated by market data. Level 3 inputs are unobservable and corroborated by little or no
market data.
Except for the bond portfolio, which is required
by authoritative accounting guidance to be recorded at fair value in our Balance Sheets, the Company elected not to record any
other financial assets or liabilities at fair value on a recurring basis. We recorded an aggregate allowance for losses on our
Agape bonds (see Note 3), which totaled $380,000 and $200,000 for the periods ended September 30, 2016 and December 31, 2015, respectively.
The following table summarizes the Company’s financial
instruments that were measured at fair value on a recurring basis:
|
|
Fair Value
Measurement
|
September 30, 2016
|
Fair Value
|
Level 3
|
|
|
|
Bond portfolio
|
$11,219,616
|
$11,219,616
|
|
|
Fair Value
Measurement
|
December 31, 2015
|
Fair Value
|
Level 3
|
|
|
|
Bond portfolio
|
$
10,513,428
|
$
10,513,428
|
We determine the fair value of the bond portfolio
shown in the table above by comparing it with similar instruments in inactive markets. The analysis reflects the contractual terms
of the bonds, which are callable at par by the issuer at any time, and the anticipated cash flows of the bonds, and uses
AMERICAN CHURCH MORTGAGE COMPANY
Notes to Financial Statements - Unaudited
September 30, 2016
observable
and unobservable market-based inputs. Unobservable inputs include our internal credit rating and selection of similar bonds for
valuation.
The change in Level 3 assets measured at fair value
on a recurring basis is summarized as follows:
|
|
|
Bond Portfolio
|
|
|
|
|
|
|
Balance at December 31, 2015
|
|
$
|
10,513,428
|
|
Purchases
|
|
|
965,000
|
|
Proceeds
|
|
|
(78,812
|
)
|
Additional Bond Fund Reserve
|
|
|
(180,000
|
)
|
Balance at September 30, 2016
|
|
$
|
11,219,616
|
|
Real estate held for sale and impaired loans
are recorded at fair value on a nonrecurring basis. The fair value of real estate held for sale was based upon the listed sales
price less expected selling costs, which is a Level 3 input. The resulting impairment charges were $48,979 and $193,104 for the
periods ended September 30, 2016 and December 31, 2015, respectively. A reduction in impairment charges of approximately $62,000
occurred due to the sale of one property held for sale during the nine months ended September 30, 2016.
The following table summarizes the Company’s financial
instruments that were measured at fair value on a nonrecurring basis:
|
|
September 30, 2016
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Fair Value at
September 30,
2016
|
Impaired Loans
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,184,625
|
|
|
$
|
1,184,625
|
|
Real estate held for resale
|
|
|
—
|
|
|
|
—
|
|
|
|
340,872
|
|
|
|
340,872
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,525,497
|
|
|
$
|
1,525,497
|
|
|
|
December 31, 2015
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Fair Value at December 31,
2015
|
Impaired Loans
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,197,302
|
|
|
$
|
1,197,302
|
|
Real estate held for resale
|
|
|
—
|
|
|
|
—
|
|
|
|
697,422
|
|
|
|
697,422
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,894,724
|
|
|
$
|
1,894,724
|
|
AMERICAN CHURCH MORTGAGE COMPANY
Notes to Financial Statements - Unaudited
September 30, 2016
The change in Level 3 assets measured at fair value
on a nonrecurring basis is summarized as follows:
|
|
|
|
|
|
|
|
Impaired Loans
|
|
|
|
Real Estate Held for Sale
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2015
|
|
$
|
1,197,302
|
|
|
$
|
697,422
|
|
Additions/Acquisitions
|
|
|
221,683
|
|
|
|
134,173
|
|
Dispositions/Proceeds
|
|
|
(134,173
|
)
|
|
|
(471,550
|
)
|
Provision for other than temporary losses
|
|
|
(100,187
|
)
|
|
|
(19,173
|
)
|
Balance at September 30, 2016
|
|
$
|
1,184,625
|
|
|
$
|
340,872
|
|
3. MORTGAGE LOANS RECEIVABLE AND BOND PORTFOLIO
At September 30, 2016, the Company had mortgage
loans receivable totaling $24,879,522. The loans bear interest ranging from 0% to 10.25% with a weighted average of approximately
8.27% at September 30, 2016. The Company had mortgage loans receivable totaling $25,354,876 that bore interest ranging from 1.00%
to 10.25% with a weighted average of approximately 8.35% at December 31, 2015.
The Company has a portfolio of secured church
bonds at September 30, 2016 and December 31, 2015, which are carried at fair value. The bonds pay either semi-annual or quarterly
interest ranging from 2.50% to 9.75%. The aggregate value of secured church bonds equaled approximately $11,600,000 at September
30, 2016 with a weighted average interest rate of 6.73% and approximately $10,713,000 at December 31, 2015 with a weighted average
interest rate of 6.92%. These bonds are due at various maturity dates through May 2046.
The contractual
maturity schedule for mortgage loans receivable and the bond portfolio as of September 30, 2016, is as follows:
|
Mortgage Loans
|
Bond Portfolio
|
|
|
|
October 1, 2016 through September 30, 2017
|
$ 794,175
|
$ 104,000
|
October 1, 2017 through December 31, 2017
|
2,380,015
|
41,000
|
2018
|
1,340,662
|
139,000
|
2019
|
1,355,748
|
144,000
|
2020
|
1,380,671
|
156,000
|
Thereafter
|
17,595,321
|
11,015,616
|
|
24,846,591
|
11,599,616
|
Less loan loss and bond loss allowances
|
(1,286,789)
|
(380,000)
|
Less deferred origination income
|
(344,794
)
|
______-__
|
Totals
|
$
23,215,008
|
$
11,219,616
|
AMERICAN CHURCH MORTGAGE COMPANY
Notes to Financial Statements - Unaudited
September 30, 2016
The Company currently owns $627,000 First Mortgage
Bonds and $487,000 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. Agape is
currently performing under a loan modification agreement. In October 2013, in excess of 80% of the bondholders of Agape agreed
to a modification in the terms of their bonds which has resulted in the 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 have been 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. Agape has missed two quarterly interest payments to all bondholders for the nine month period ended September 30, 2016.
A principal distribution of approximately $20,000 was made during the quarter ended September 30, 2016 reducing the principal balance
outstanding. The Company, along with all other bondholders, has a superior lien over all other creditors. The Company has an aggregate
allowance for losses of $380,000 and $200,000 for the First and Second Mortgage Bonds both at September 30, 2016 and December 31,
2015, which effectively reduces the bonds to the fair value amount management believes will be recovered.
4. SECURED INVESTOR CERTIFICATES
Secured investor certificates are collateralized
by certain mortgage loans receivable or secured church bonds of approximately the same value as the certificates. The weighted
average interest rate on the certificates was 6.66% and 6.44% at September 30, 2016 and December 31, 2015, 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 $231,000 and $356,000 for the three months ended September 30, 2016 and 2015, 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 September 30, 2016 is as follows:
|
|
|
October 1, 2016 through September 30, 2017
|
$ 4,005,000
|
|
October 1, 2017 through December 31, 2017
|
463,000
|
|
2018
|
4,116,000
|
|
2019
|
2,333,000
|
|
2020
|
4,058,000
|
|
Thereafter
|
13,782,000
|
|
|
|
|
Totals
|
$
28,757,000
|
|
AMERICAN CHURCH MORTGAGE COMPANY
Notes to Financial Statements - Unaudited
September 30, 2016
5. 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 ownership and common
management. A majority of the independent board members approve the advisory agreement on an annual basis. The Company paid the
Advisor management fees of approximately $78,000 and $80,000 for the three months ended September 30, 2016 and 2015, respectively
and management fees of approximately $238,000 and $265,000 for the nine months ended September 30, 2016 and 2015, respectively.
6. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company is required to disclose the fair
value information about financial instruments, where it is practicable to estimate that value. Because assumptions used in these
valuation techniques are inherently subjective in nature, the estimated fair values cannot always be substantiated by comparison
to independent market quotes and, in many cases, the estimated fair values could not necessarily be realized in an immediate sale
or settlement of the instrument.
The fair value estimates presented herein are
based on relevant information available to management as of September 30, 2016 and December 31, 2015, respectively. Management
is not aware of any factors that would significantly affect these estimated fair value amounts. As these reporting requirements
exclude certain financial instruments and all non-financial instruments, the aggregate fair value amounts presented herein do not
represent management’s estimate of the underlying value of the Company.
The estimated fair values of the Company’s
financial instruments, none of which are held for trading purposes, are as follows:
|
|
September 30, 2016
|
|
December 31, 2015
|
|
|
Carrying
|
|
Fair
|
|
Carrying
|
|
Fair
|
|
|
Amount
|
|
Value
|
|
Amount
|
|
Value
|
|
|
|
|
|
|
|
|
|
Cash and equivalents
|
|
$
|
4,483,963
|
|
|
$
|
4,483,963
|
|
|
$
|
4,377,110
|
|
|
$
|
4,377,110
|
|
Accounts receivable
|
|
|
220,116
|
|
|
|
220,116
|
|
|
|
189,609
|
|
|
|
189,609
|
|
Interest receivable
|
|
|
172,526
|
|
|
|
172,526
|
|
|
|
172,169
|
|
|
|
172,169
|
|
Mortgage loans receivable
|
|
|
24,879,552
|
|
|
|
30,214,164
|
|
|
|
25,354,876
|
|
|
|
29,054,399
|
|
Bond portfolio
|
|
|
11,599,616
|
|
|
|
11,599,616
|
|
|
|
10,713,428
|
|
|
|
10,713,428
|
|
Secured investor certificates
|
|
|
28,757,000
|
|
|
|
40,614,165
|
|
|
|
28,246,000
|
|
|
|
36,995,152
|
|
AMERICAN CHURCH MORTGAGE COMPANY
Notes to Financial Statements - Unaudited
September 30, 2016
The following methods and assumptions were
used by the Company to estimate the fair value of each class of financial instrument for which it is practicable to estimate that
value:
Cash and equivalents
Due to their short-term nature, the carrying
amount of cash and cash equivalents approximates fair value.
Accounts receivable
The carrying amount of accounts receivable
approximates fair value.
Interest receivable
The carrying amount of interest receivable
approximates fair value.
Mortgage loans receivable
The fair value of the mortgage loans receivable
is currently greater than the carrying value as the portfolio is currently yielding a higher rate than similar mortgages with similar
terms for borrowers with similar credit quality.
Bond portfolio
We determine the fair value of the bond portfolio
shown in the table above by comparing with similar instruments in inactive markets. The analysis reflects the contractual terms
of the bonds, which are callable at par by the issuer at any time, and the anticipated cash flows of the bonds and uses observable
and unobservable market-based inputs. Unobservable inputs include our internal credit rating and selection of similar bonds for
valuation.
Secured investor certificates
The fair value of the secured investor certificates
is currently greater than the carrying value due to higher interest rates than current market rates.
Item 2. Management’s Discussion and Analysis of Financial
Condition and Results of Operations
.
Safe Harbor Statement Under the Private
Securities Litigation Reform Act of 1995
Certain statements contained in this section
and elsewhere in this Form 10-Q constitute
“forward-looking statements”
within the meaning of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements involve a number of known and unknown risks, uncertainties and other
factors which may cause our actual results, performance or achievements to be materially different from any future results, performance
or achievements expressed or implied by such forward-looking statements. Such factors include, but are not limited to, (i) trends
affecting our financial condition or results of operations; (ii) our business and operating strategies; (iii) the mortgage loan
industry and the financial status of religious organizations; (iv) our financing plans; and other risks detailed in the Company’s
other periodic reports filed with the Securities and Exchange Commission. The words
“believe”, “expect”,
“anticipate”, “may”, “plan”, “should”,
and similar expressions identify forward-looking
statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date
the statements were made and are not guarantees of future performance.
A detailed statement of risks and uncertainties
is contained in our reports to the SEC, including, in particular, our Annual Report on Form 10-K for the year ended December 31,
2015 and other public filings and disclosures. Investors and shareholders are urged to read these documents carefully.
Plan of Operation
We were founded in May 1994 and commenced active
business operations on April 15, 1996 after the completion of our initial public offering. We operate as a real estate investment
trust.
We currently have sixty-one first mortgage
loans aggregating $24,837,700 in principal amount, two second mortgage loans totaling $58,891 in principal amount and a first mortgage
bond portfolio with par values aggregating $11,599,616. Funding of additional first mortgage loans and purchase of first mortgage
bonds issued by churches is expected to continue on an on-going basis as more investable assets become available through: (i) future
sales of securities; (ii) prepayment and repayment at maturity of existing loans and bonds; and (iii) borrowed funds. These capital
sources and interest received on loans and bonds provide general working capital to the Company.
Results of Operations
Fiscal 2016 Nine Months Compared to Fiscal
2015 Nine Months
Our net (loss) income for the nine months ended
September 30, 2016 and 2015 was approximately $(324,000) and $150,000, respectively, on total interest and other income of approximately
$1,989,000 and $2,255,000, respectively. Interest and other income is comprised of interest from loans, interest from bonds, amortization
of bond discounts and amortization of loan origination fees. As of September 30, 2016, our loans receivable have interest rates
ranging from 0% to 10.25%, with an average, principal-adjusted interest rate of 8.27%. Our bond portfolio has an average current
yield of 6.73% as of September 30, 2016. As of September 30, 2015, the average, principal-adjusted interest rate on our portfolio
of loans was 8.36% and our portfolio of bonds had an average current yield of 6.93%. The decrease in interest income was due to
the scheduled repayment of mortgage loans and the maturation and redemption of some of the bonds in our portfolio.
Interest expense was approximately $1,518,000
and $1,493,000 for the nine months ended September 30, 2016 and 2015, respectively. The increase in interest expense was due to
the sale and issuance of our secured investor certificates. Net interest margin decreased from 33.78% to 23.68% resulting primarily
from an decrease in interest and other income of approximately 11.78% and an increase in interest expense of approximately 1.68%.
We follow a loan loss allowance policy on our
portfolio of loans outstanding. This critical policy requires complex judgments and estimates. We record mortgage loans receivable
at their estimated net realizable value, which is the unpaid principal balance less the allowance for mortgage loans. Our loan
policy provides an allowance for estimated uncollectible loans based on an evaluation of the current status of the loan portfolio.
This policy provides for principal amounts outstanding on a particular loan if cumulative interruptions occur in the normal payment
schedule of a loan. Our policy will provide 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 loans declared to be in default or loans that are in
the foreclosure process.
We will declare a loan to be in default and
will place the loan on non-accrual status when the following thresholds have been met: (i) the borrower has missed three consecutive
mortgage payments; (ii) the borrower has not communicated to the Company any legitimate reason for delinquency in its payments
to the Company and has not arranged for the re-continuance of payments; (iii) lines of communication to the borrower have broken
down such that any reasonable prospect of rehabilitating the loan and return of regular payments is gone.
Our policies on payments received and interest
accrued on non-accrual loans are as follows: (i) We will accept payments on loans that are currently on non-accrual status when
a borrower has communicated to us that they intend to meet their mortgage obligations. A payment made on a non-accrual loan is
considered a good faith deposit as to the intent to resume their mortgage payment obligation. This good faith deposit is credited
back to interest first then principal as stated in the mortgage loan documentation. (ii) A letter outlining the re-payment terms
or the restructure terms (if any) of the loan is provided to the borrower. This letter will be signed by the Senior Pastor and
all board members of the borrower. This letter resumes the obligation to make payments on non-accrual loans. (iii) The borrower
must meet all its payment obligations for the next 120 days without interruption in order to be removed from non-accrual status.
When a loan is declared in default according
to our policy or deemed to be doubtful of collection, the loan committee of our Advisor will direct the staff to charge-off the
uncollectable receivables.
Allowance for losses on mortgage loans receivable
increased during the nine months ended September 30, 2016 as we recorded additional provisions against the mortgage loans. We recorded
an additional provision for losses on loans during the nine months ended September 30, 2016 of approximately $161,000 compared
to approximately $142,000 for the nine months ended September 30, 2015. At September 30, 2016, we provided approximately $1,286,789
for seventeen mortgage loans, of which seven are three or more mortgage payments in arrears, three loans have been declared to
be in default and two are in the foreclosure process. At December 31, 2015, we provided approximately $1,205,000 for eighteen mortgage
loans, of which eight were three or more mortgage payments in arrears, two loans have been declared to be in default and two were
in the foreclosure process.
Our lending practices limit
deployment of our capital to churches and other non-profit religious organizations. The total principal amount of our second mortgage
loans is limited to 20% of our average invested assets. We currently have two second mortgage loans totaling approximately $59,000
in principal amount outstanding. We do not loan to any borrower who has been in operation for less than
two years and the borrower
must demonstrate they can service the debt outstanding for the prior three years based on historical financial statements. We do
not loan money based on projections or pledge programs. The loan amount to any borrower cannot exceed 75% loan to appraised value.
Typically, we do not loan over 70% loan to value except in extenuating circumstances. In addition, the borrower’s long-term
debt (including the proposed loan) cannot exceed four times the borrower’s gross income for the previous twelve month period.
Historically, loans in our
portfolio are outstanding for an average of six years. Our borrowers are typically small independent churches with little or no
borrowing history. Once a church establishes a payment history with us, they look to refinance their loan with a local bank, credit
union or other financial institution which is willing to provide financing since the borrower has established a payment history
and has demonstrated they can meet their mortgage debt obligations.
Operating expenses for the nine months ended
September 30, 2016 decreased to approximately $454,000 compared to $473,000 at September 30, 2015. The decrease is primarily the
result of reduced real estate impairment reserve in 2016.
Fiscal 2016 Third Quarter Compared to Fiscal
2015 Third Quarter
The Company had a net loss of approximately
$(50,000) for the three months ended September 30, 2016 and had net income of approximately $25,000 for the three months ended
September 30, 2015, on total interest and other income of approximately $651,000 and $729,000, respectively. Interest expense was
approximately $512,000 and $503,000 for the three months ended September 30, 2016 and 2015, respectively. The decrease in net interest
income was approximately $87,000. In addition, the Company experienced an increase in provisions for losses on its bond portfolio
of approximately $60,000 for the three month periods ended September 30, 2016.
Operating expenses for the three months ended
September 30, 2016 decreased to approximately $112,000 compared to $155,000 at September 30, 2015. The decrease in operating expenses
is due to decreases in monthly bank charges and legal fees and costs associated with real estate held for sale.
Mortgage Loans and Bond Portfolio
Three new loans were funded during the nine
months ended September 30, 2016. Two of the loans were provided seller financing by us on real estate we held for sale totaling
approximately $380,000. The third loan was additional funding to a current loan in the amount of $200,000. In addition, two loans
totaling approximately $307,000 paid off during the nine months ended September 30, 2016.
We currently own $627,000 First Mortgage Bonds
and $487,000 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. Agape is currently performing
under a loan modification agreement. In October 2013, in excess of 80% of the bondholders of Agape agreed to a modification in
the terms of their bonds which has resulted in the 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 have been 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. Agape
has missed three quarterly interest payments to all bondholders for the nine month period ended September 30, 2106. We, along with
all other bondholders, have a superior lien over
all other creditors. We have an aggregate allowance for losses of $380,000 and
$200,000 for the First and Second Mortgage Bonds at September 30, 2016 and December 31, 2015, respectively, which effectively reduces
the bonds to the fair value amount management believes will be recovered.
Real Estate Held For Sale
We record real estate held for sale at the
estimated fair value, which is net of the expected expenses related to the sale of the real estate. We recorded an additional impairment
on our real estate held for sale of approximately $19,000 and $104,000 for the nine month period ended September 30, 2016 and 2015,
respectively. This additional impairment was to properly reflect the value of two of our properties we believe we will recover
in a sale.
Dividends
We have elected to operate as a real estate
investment trust (REIT), therefore we are required, among other things, to distribute to shareholders at least 90% of “Taxable
Income” in order to maintain our REIT status. The dividends declared and paid to shareholders may include cash from origination
fees even though they are not recognized as income in their entirety for the period under generally accepted accounting principles
in the United States. We earned approximately $6,000 and $0 in origination fees for the nine months ended September 30, 2016 and
2015, respectively.
Our Board of Directors declared a dividend
of $.06 for each share held of record on May 1, 2016. The dividend, which was paid May 3, 2016, represents a 2.40% annual rate
of return on each share of common stock owned, assuming a purchase price of $10 per share.
Our Board of Directors declared a dividend
of $.06 for each share held of record on July 30, 2016. The dividend, which was paid August 1, 2016, represents a 2.40% annual
rate of return on each share of common stock owned, assuming a purchase price of $10 per share.
Our Board of Directors declared a dividend
of $.06 for each share held of record on September 28, 2016. The dividend, which was paid October 31, 2016, represents a 2.40%
annual rate of return on each share of common stock owned, assuming a purchase price of $10 per share.
Liquidity and Capital Resources
We generate revenue through implementation
of our business plan of making mortgage loans to, and acquiring first mortgage bonds issued by, churches and other non-profit religious
organizations. Our revenue is derived principally from interest income, and secondarily through the origination fees and renewal
fees generated by the mortgage loans we make. We also earn income through interest on funds that are invested pending their use
in funding mortgage loans and on income generated on church bonds. Our principal recurring expenses are advisory fees, legal and
accounting fees and interest payments on secured investor certificates. Our current liabilities at September 30, 2016 are primarily
comprised of current maturities of our secured investor certificates.
Our future capital needs are expected to be
met by: (i) the additional sale of securities; (ii) prepayment and repayment at maturity of mortgage loans we make; (iii) borrowed
funds; and (iv) bonds that mature or we sell from our bond portfolio. We believe that the “rolling” effect of mortgage
loans maturing and bond repayments will provide a supplemental source of capital to fund our business operations in future years.
Nevertheless, we believe that it may be desirable, if not necessary, to sell additional securities in
order to enhance our capacity
to make mortgage loans on a continuous basis. There can be no assurance we will be able to raise additional capital on terms acceptable
for such purposes.
In July 2014, we filed with the Securities
and Exchange Commission a registration statement to offer $10,000,000 worth of Series D Secured Investor Certificates to qualified
investors. The offering was declared effective August 12, 2014. At September 30, 2016, approximately $5,045,000 has been collected
from the issuance of 5,045 Series D certificates (less underwriting fees). The proceeds are being used to fund new mortgage loans
and pay down maturing certificates. We may also use proceeds from the sale of secured investor certificates to pay dividends, if
needed.
During the nine months ended September 30,
2016, total assets decreased by approximately $147,000 due to a decrease in loans outstanding which was offset by an increase in
cash. Current liabilities increased by approximately $853,000 for the nine months ended September 30, 2016 due to an increase in
current maturities of our secured investor certificates. Non-current liabilities increased by $479,000 for the nine months ended
September 30, 2016 due to an increase of secured investor certificates outstanding.
For the nine months ended September 30, 2016,
net cash provided by operating activities decreased to approximately $3,000 from $420,000 from the comparative period ended September
30, 2015, primarily due to an increase in our provision for losses on our bond portfolio.
For the nine months ended September 30, 2016,
net cash (used for) provided by investing activities was approximately $(2,000) compared to cash provided by investing activities
of approximately $1,964,000 from the comparative nine months ended September 30, 2015. This decrease was due to an decrease in
collections from mortgage loans of approximately $2,889,000.
For the nine months ended September 30, 2016,
net cash provided by financing activities increased to approximately $106,000 from $52,000 for the comparative nine months ended
September 30, 2015, primarily due to an decrease in issuance of our secured investor certificates which was offset by a decrease
in payments on our secured investor certificates.
Critical Accounting Estimates
Preparation of our financial statements requires
estimates and judgments to be made that affect the amounts of assets, liabilities, revenues and expenses reported. Such decisions
include the selection of the appropriate accounting principles to be applied and the assumptions on which to base accounting estimates.
We evaluate these estimates based on assumptions we believe to be reasonable under the circumstances.
The difficulty in applying these policies arises
from the assumptions, estimates and judgments that have to be made currently about matters that are inherently uncertain, such
as future economic conditions, operating results and valuations as well as management intentions. As the difficulty increases,
the level of precision decreases, meaning that actual results can and probably will be different from those currently estimated.
Management uses estimates and assumptions in
preparing these financial statements in accordance with generally accepted accounting principles. Those estimates and assumptions
affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues
and expenses. Actual results could differ from those estimates. The most sensitive estimates relate to the realizability of the
mortgage loans receivable and the valuation of the bond portfolio and real estate held for sale. It is at least reasonably possible
that these estimates could change in the near term and that the effect of the change, if any, may be material to the financial
statements.
We estimate the value of real estate we hold
pending re-sale based on a number of factors. We look at the current condition of the property as well as current market conditions
in determining a fair value, which will determine the listing price of each property. Each property is valued based on its current
listing price less any anticipated selling costs, including for example, realtor commissions. Since churches are single use facilities
the listing price of the property may be lower than the total amount owed to us. 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 do not have any off-balance sheet arrangements.