Indicate by check mark whether
the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging
growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting
company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
If an emerging growth company,
indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial
accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether
the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control
over financial reporting under Section 404(b) of the Sarbanes-Oxley Act by the registered public accounting firm that prepared or issued
its audit report. ☐
State the aggregate market
value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity
was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently
completed second fiscal quarter. $2,388,738.
Indicate the number of shares outstanding of each of
the issuer’s classes of common stock, as of the latest practicable date.
Our Class A Common Stock, $.01 par value
per share, has traded on the over-the-counter market Pink Sheets at certain isolated times under the symbol “ACMC.PK”
Portions of the Company’s Proxy Statement to
be delivered to its shareholders in connection with the Company’s 2021 Annual Meeting of shareholders, which the Company plans to
file with the Securities and Exchange Commission within 120 days of the end of the fiscal year covered by this report, are incorporated
by reference in Part III of this report (Items 10, 11, 12, 13 and 14).
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, 2020, 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, 130 loans totaling $76,789,805
have been repaid early by the borrowing churches. We also own, as of December 31, 2020, approximately $18,935,000 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 reason 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 has
been 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:
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offering terms of up to 30 years, generating the highest yields possible
under current market conditions;
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seeking origination fees (i.e. "points") from the borrower at
the outset of a loan and upon any renewal of a loan;
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making a limited amount of higher-interest rate second mortgage loans to
qualified borrowers; and
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purchasing mortgage-secured debt securities having various maturities issued
by churches and other non-profit religious organizations.
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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
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Interest Rate (1)
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Origination Fee (2)
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25/30 Year Term (3)
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Fixed @ 8.75%/8.95% respectively
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3.5%
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20 Year Term (3)
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Variable Annually @ Prime + 2.50%
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3.5%
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3 Year Renewable Term (4)
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Fixed @ 8.25%
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3.0%
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Construction 1 Year Term
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Fixed @ 9.00%
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2.0%
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(1)
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“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.
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(2)
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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.
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(3)
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Fully amortized repayment term. Amortization terms may vary, as may other loan terms, depending on individual
loan negotiations and competitive forces.
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(4)
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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.”
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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:
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applications containing key information concerning the prospective borrowers;
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financial statements in accordance with our Financing Policies;
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corporate records and other organizational documents of the borrower;
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preliminary title report or commitment for mortgagee title insurance; and
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a real estate appraisal in accordance with the Financing Policies.
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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 with a current outstanding balance of $2,288,000 at December 31, 2020. 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, 2020, we have 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, 2020, approximately 8,029 Series D certificates had been issued and were outstanding for $8,029,000. 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 6.19% and 6.33% for the years ended December 31, 2020 and 2019, 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 $1,007,000 and $793,000 for the years ended December 31, 2020 and 2019, respectively. There were no Series A secured
investor certificates outstanding as of December 31, 2020 and 2019. There were $6,022,500 and $8,855,000 representing 6,023 and 8,855
in outstanding Series B secured investor certificates as of December 31, 2020 and 2019, respectively and there were $6,127,000 and $6,324,000
representing 6,127 and 6,324 in outstanding Series C secured investor certificates at December 31, 2020 and 2019, 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:
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serves as our mortgage loan underwriter and advisor in connection with our primary business
of making loans to churches;
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advises and selects Church Bonds to be purchased and held for investment
by us;
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services all mortgage loans we make;
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provides marketing and advertising and generates loan leads directly and
through its affiliates;
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deals with regulatory agencies, borrowers, lenders, banks, consultants,
accountants, brokers, attorneys, appraisers, insurers and others;
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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;
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provides office space and personnel as required for the performance of the
foregoing services; and
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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.
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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 20, 2021. 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 20, 2021 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:
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(i)
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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.
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(ii)
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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.
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(iii)
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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.
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(iv)
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An ALTA (American Land Title Association) or equivalent Mortgage Title Policy must be furnished to us
by the borrower insuring our mortgage interest.
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(v)
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The borrower's long-term debt (including the proposed loan) cannot exceed four times their gross income
for the previous twelve (12) months.
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(vi)
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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.
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(vii)
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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.
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(viii)
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The Advisor typically requires the borrower to arrange for automatic electronic payment or drafting of
monthly payments.
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(ix)
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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.
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(x)
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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.
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(xi)
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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).
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(xii)
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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.
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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:
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(i)
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Investing more than 10% of our total assets in unimproved real property or mortgage loans on unimproved
real property;
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(ii)
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Investing in commodities or commodity futures contracts other than "interest rate futures" contracts
intended only for hedging purposes;
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(iii)
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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;
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(iv)
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Investing in mortgage loans that are subordinate to any mortgage or equity interest of the Advisor or
the Directors or any of their affiliates;
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(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;
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(ix)
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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;
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(x)
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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;
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(xi)
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Investing in real estate contracts of sale unless such contracts are in recordable form and are appropriately
recorded in the chain of title;
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(xii)
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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;
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(xiii)
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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;
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(xiv)
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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
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(xv)
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Issuing shares on a deferred payment basis or other similar arrangement.
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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, 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 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, 2020, we held
title to one property located in Pine Bluff, Arkansas via deed in lieu of foreclosure, with an outstanding loan 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
$551,062. 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, 2019, we had
ten first mortgage loans totaling approximately $4,074,000 that were three or more monthly payments in arrears. In addition, we held title
to one property located in Bethel, Ohio through a 2018 foreclosure process with an outstanding balance of $114,632. We subsequently sold
this property in 2020 for $87,594 after realtor fees and closing costs.
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, 2021. We are charged $2,500 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, 2020, all churches, except four, have returned to full monthly amortized payments. These four churches totaling approximately
$758,000, in principal outstanding, have remained on interest only payments due to continual shelter-in-place or restrictions on gathering
by either local or state government agencies.
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
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·
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
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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 2020 by other broker-dealers at prices as
low as $0.53 per share and as high as $2.40 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, 2020, we owned
two properties which we acquired through the foreclosure process. The first property, located in Atlanta, Georgia had a carrying value
of approximately $433,000. 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 approximately $15,000 in rental payments from the Church for the year ended December 31, 2020.
This property is being carried at the fair value which is approximately $226,000 as of December 31, 2020. 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.
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.
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 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 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 Company has not experienced a material adverse impact
to the financial statements. Future potential impacts to the Company may 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.
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 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 costs. Bonds not classified as held to maturity are classified as available
for sale and are carried at fair value, with unrealized gains and losses reported in other comprehensive income. 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.
Bonds transferred from the available for sale category
to the held to maturity category are recorded at fair value at the date of transfer. During 2020, the Company reclassified approximately
$18,101,000 of bonds available for sale to bonds held to maturity. These bonds were transferred at fair value, which became the costs
basis for the bonds held to maturity. There were no unrealized gains or losses at the time of transfer of bonds from available for sale
to held to maturity.
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. 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 total principal amount of these fourteen loans totaled approximately $6,498 ,000 at December
31, 2020. At December 31, 2019, the Company reserved $1,429,487 for fourteen mortgage loans. Ten of these loans were three or more mortgage
payments in arrears of which three were declared to be in default. The total principal amount of these fourteen loans totaled approximately
$5,987 ,000 at December 31, 2019.
A summary of transactions in the allowance for mortgage
loans for the years ended December 31, 2020 and 2019 is as follows:
Balance at December 31, 2019
|
$ 1,429,487
|
Provisions for loan losses
|
64,509
|
Loan charge-offs
|
-
|
Balance at December 31, 2020
|
$ 1,493,996
|
Balance at December 31, 2018
|
$ 1,672,003
|
Provisions for loan losses
|
87,727
|
Loan charge-offs
|
(330,243)
|
Balance at December 31, 2019
|
$ 1,429,487
|
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.
Loans that are in the foreclosure process or are declared
to be in default, had a principal balance of $810,470 and were considered impaired and written down to their estimated fair value of $255,797
as of December 31, 2019. As a result, the Company recognized a specific valuation allowance against these impaired loans totaling $554,673
as of December 31, 2019.
The outbreak of COVID-19 has affected churches due
to shelter-in-place directives which has 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 borrower’s 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 $3,209,000, in principal outstanding, ninety days interest
only payments and five churches totaling approximately $2,618,000, in principal outstanding, one-month forbearance of its mortgage payments.
As of December 31, 2020, all churches, except four, have returned to full monthly amortization payments. These four churches totaling
approximately $758,000, in principal outstanding, have remained on interest only payments. This relief will impact the Company’s
revenue and the Company will experience declines in payments due from borrowers and missed bond payments on the bonds owned by the Company
which will impact operating income and may potentially impact future distributions and the ability to make payments due on the Company’s
certificates and dividends to its shareholders. The future impact of COVID-19 on the Company’s investments or operations cannot
be reasonably estimated at this time.
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 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 years ended December 31, 2020 and 2019, respectively.
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 that exceed 90 days past due but continue to
accrue interest had a principal balance of $2,795,175 and $3,263,492 for the years ended December 31, 2020 and 2019, respectively. These
loans were considered impaired and written down to their estimated fair value of $2,218,773 and $2,716,445 as of December 31, 2020 and
2019, respectively. As a result, the Company recognized a specific valuation allowance against these impaired loans totaling $576,442
and $547,053 for the years ended December 31, 2020 and 2019, 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 $428,996 and $651,398 for the years ended December 31, 2020 and 2019, respectively.
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 impairment loss 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 per the terms of the specific asset. 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.
Gain (Losses) 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 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 years ended
December 31, 2020 and 2019, respectively.
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 smaller reporting companies, such as the Company, 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 31, 2021, the date the financial statements were available to be issued, and no subsequent events have occurred.
3. FAIR VALUE MEASUREMENT
Some assets and liabilities, such as securities available
for sale, are measured at fair value on a recurring basis under accounting principles generally accepted in the United States. Other assets
and liabilities, such as impaired loans, may be measured at fair value on a nonrecurring basis.
Following is a description of the valuation methodology
and significant inputs used for each asset and liability measured at fair value on a recurring or nonrecurring basis, as well as the classification
of the asset or liability within the fair value hierarchy.
Bonds available for sale
Securities available for sale may be classified as
Level 1, Level 2, or Level 3 measurements within the fair value hierarchy. Level 1 securities include debt securities traded on a national
exchange. The fair value measurement of a Level 1 security is based on the quoted price of the security. Level 2 securities include U.S.
government and agency securities, obligations of states and political subdivisions, corporate debt securities, and mortgage related securities.
The fair value measurement of a Level 2 security is obtained from an independent pricing service and is based on recent sales of similar
securities and other observable market data. Level 3 securities include church bonds that are not traded in a market. The fair value measurements
of Level 3 securities are determined by management. Fair values are calculated using discounted cash flow models that incorporate various
assumptions, including expected cash flows and market credit spreads. When comparable sales are available, these are used to validate
the models used. Other available industry data, such as information regarding defaults and deferrals, are incorporated into the expected
cash flows.
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 an independent firm and is based on a valuation model that incorporates 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 (see Note 1) 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 and, thus, are not fair value measurements.
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 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 recurring basis as of December 31, 2019 follows:
|
|
Recurring Fair Value at December 31, 2019
|
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 available for sale
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
16,055,937
|
|
|
$
|
16,055,937
|
|
Information regarding the fair value of assets and liabilities
measured at fair value on a nonrecurring basis as of December 31, 2020 and 2019 follows:
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonrecurring Fair Value at December 31, 2019
|
Assets:
|
|
Quoted Prices in Active Markets for Identical Instruments
Level 1
|
|
Significant Other Observable Inputs
Level 2
|
|
Significant Unobservable Inputs
Level 3
|
|
Total
|
Impaired loans
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4,557,326
|
|
|
$
|
4,557,326
|
|
Real estate held for sale
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
651,398
|
|
|
$
|
651,398
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During 2020, bonds held to maturity with a carrying
value of $5,484,988 were written down to their fair value of $4,650,372 since this impairment was deemed to be other than temporary. As
a result, an impairment charge of $834,226 was included in earnings for the year ended December 31, 2020.
During 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. During 2019, loans with a carrying amount of $5,986,813 were considered impaired and were written down to their estimated
fair value of $4,557,326 by recognizing a specific valuation allowance of $1,429,487.
Real estate held for sale is recognized at fair value,
less costs to sell. Impairment charge of $118,232 and $10,617 were recognized in earnings for the years ended December 31, 2020 and 2019,
respectively.
The following presents quantitative information about nonrecurring Level
3 fair value measurements at December 31, 2020 and 2019:
|
Fair Value
|
Valuation Technique
|
Significant Unobservable Inputs(s)
|
Range/Weighted
|
|
|
|
|
|
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
|
10-20%
|
Real Estate Held for Sale
|
$428,996
|
Market or Income Approach
|
Discount to Appraised Values
|
10-20%
|
|
|
|
|
|
December 31, 2019
|
|
|
|
|
Impaired Loans
|
$4,557,326
|
Market or Income Approach
|
Discount to Appraised Values
|
10-20%
|
Real Estate Held for Sale
|
$651,398
|
Market or Income Approach
|
Discount to Appraised Values
|
10-20%
|
The carrying value and estimated fair values of the
Company’s financial instruments are as follows:
|
|
December 31, 2020
|
|
|
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
|
|
Totals
|
|
$
|
2,719,253
|
|
|
$
|
23,916,500
|
|
|
$
|
34,706,678
|
|
|
$
|
61,342,431
|
|
|
|
December 31, 2019
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Carrying Value
at December 31, 2019
|
Cash and equivalents
|
|
$
|
191,987
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
191,987
|
|
Accounts receivable
|
|
|
125,539
|
|
|
|
—
|
|
|
|
—
|
|
|
|
125,539
|
|
Interest receivable
|
|
|
185,190
|
|
|
|
—
|
|
|
|
—
|
|
|
|
185,190
|
|
Mortgage loans receivable
|
|
|
—
|
|
|
|
—
|
|
|
|
20,717,058
|
|
|
|
20,717,058
|
|
Bond portfolio
|
|
|
—
|
|
|
|
—
|
|
|
|
16,055,937
|
|
|
|
16,055,937
|
|
Line of credit
|
|
|
1,445,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,445,000
|
|
Secured investor certificates
|
|
|
—
|
|
|
|
26,850,000
|
|
|
|
—
|
|
|
|
26,850,000
|
|
Totals
|
|
$
|
1,947,716
|
|
|
$
|
26,850,000
|
|
|
$
|
38,481,114
|
|
|
$
|
67,278,830
|
|
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. Deposits
with no stated maturities are defined as having a fair value equivalent to the amount payable on demand. This prohibits adjusting fair
value derived from retaining those deposits for an expected future period of time. This component, commonly referred to as a deposit
base
intangible, is neither considered in the above amounts nor is it recorded as an intangible asset on the balance sheet. In addition, the
tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates
and have not been considered in the estimates.
4. MORTGAGE LOANS RECEIVABLE AND BOND PORTFOLIO
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, 2019, the Company had mortgage loans receivable totaling $22,425,178. The loans bear interest ranging from 0%
to 10.25% with a weighted average of approximately 7.86% at December 31, 2019.
The Company has a portfolio of secured church bonds
at December 31, 2020 and 2019, 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 $18,934,937 at December 31, 2020 with a weighted average interest
rate of 6.70% and $16,713,937 at December 31, 2019 with a weighted average interest rate of 6.43%. These bonds are due at various maturity
dates through February 2047. The Company has recorded an aggregate other than temporary impairment of $834,226 and $658,000 for the years
ended December 31, 2020 and 2019, respectively primarily for the First Mortgage Bonds issued by Agape Assembly Baptist Church and Soul
Reapers Worship Center. These bond series in the aggregate constitute approximately 10.17% and 6.13% of the bond portfolio at December
31, 2020 and 2019, respectively. The Company had maturities and redemptions of bonds of approximately $251,000 and $1,137,000 for the
years ended December 31, 2020 and 2019, respectively.
The contractual
maturity schedule for mortgage loans receivable and the bond portfolio as of December 31, 2020, is as follows:
|
Mortgage Loans
|
Bond Portfolio
|
|
|
|
2021
|
$ 825,073
|
$ 283,000
|
2022
|
1,060,158
|
144,000
|
2023
|
735,480
|
275,000
|
2024
|
1,735,211
|
471,000
|
2025
|
1,258,901
|
261,000
|
Thereafter
|
12,683,956
|
17,630,937
|
|
18,298,779
|
18,934,937
|
Less loan loss and other than temporary impairment on bonds allowance
|
(1,493,996)
|
(834,226)
|
Less deferred origination fees
|
(198,816)
|
___-____
|
Totals
|
$16,605,967
|
$18,100,711
|
The Company currently owns $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. The Company, along with all other bondholders, has 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
$18.54 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. The Company accepted the reorganization plan. Acceptance of the plan by
bondholders could result in a return of approximately 67% of the original principal investment outstanding. The reorganization plan
has been accepted by a majority of the bondholders. However, the trustee has not finalized the plan as of December 31, 2020.
The Company currently owns $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, the Company expected to receive interest and principal payment(s) on time and according to the terms of the Bonds. The
Company has not received any quarterly interest payments from the issuer for the year ended December 31, 2020.
The Company did restructure one loan during the year
ended December 31, 2020 and none for the year ended December 31, 2019, respectively. A summary of loans restructured or modified as of
December 31, 2020 and 2019 are shown below. All of the loans shown, except one, are currently performing under the terms of the modifications
for their mortgage obligations. The non-performing loan is a second mortgage loan with a current unpaid principal balance of approximately
$45,000. This loan has been declared to be in default.
|
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
|
8.193%
|
$3,523,123
|
6.059%
|
|
December 31, 2019
|
|
|
|
|
|
|
Type of Loan
|
Number of Loans
|
Original Principal Balance
|
Original Average Interest Rate
|
Unpaid Principal Balance
|
Modified Average Interest Rate
|
Mortgage Loans
|
6
|
$4,100,544
|
7.892%
|
$3,185,720
|
5.58%
|
|
|
|
|
|
|
5. 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 6.19% and 6.33% for the years ended December 31, 2020 and 2019, 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 $1,007,000 and $793,000
for the years ended December 31, 2020 and 2019, 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, 2020 is as follows:
2021
|
$ 2,168,000
|
|
2022
|
1,042,000
|
|
2023
|
3,404,000
|
|
2024
|
1,396,000
|
|
2025
|
1,093,000
|
|
Thereafter
|
14,813,500
|
|
|
$23,916,500
|
|
Less deferred offering costs
|
(769,178)
|
|
Totals
|
$23,146,782
|
|
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.
6. 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 $284,000 and $323,000 for years ended
December 31, 2020 and 2019, respectively.
7. 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 (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 $2,288,000 and $1,145,000
for the years December 31, 2020 and 2019, respectively. The interest rate on the Note is the prevailing London Interbank Offering Rate
(LIBOR) plus 2.70%. On January 20, 2021, the revolving loan was extended through January 19, 2022.
8. 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 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. In 2019, the Company had pretax income of $57,786 and distributions to shareholders
in the form of dividends during the tax year of $486,562. The Company paid out 100% of taxable income in dividends in 2020 and 2019.
The Company has federal and Minnesota net operating
loss carryforwards of approximately $2,600,000. 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, 2020 and 2019, the cumulative tax basis
in the Company’s assets and liabilities exceeded book basis by approximately $1,934,000 and $1,960,000, respectively. The Company
has no deferred tax assets or liabilities on its balance sheet.