Notes to Financial Statements - Unaudited
March 31, 2016
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited financial statements
have been prepared in accordance with the instructions for interim statements and, therefore, do not include all information and
disclosures necessary for fair presentation of results of operations, financial position, and changes in cash flow in conformity
with generally accepted accounting principles. However, in the opinion of management, such statements reflect all adjustments (which
include only normal recurring adjustments) necessary for fair presentation of financial position, results of operations, and cash
flows for the period presented.
The unaudited financial statements of the Company
should be read in conjunction with the December 31, 2015 audited financial statements included in the Company’s Annual Report
on Form 10-K, as filed with the Securities and Exchange Commission for the year ended December 31, 2015. Operating results for
the periods presented are not necessarily indicative of the results that may be expected for the year ending December 31, 2016.
Nature of Business
American Church Mortgage Company, a Minnesota
corporation, was incorporated on May 27, 1994. The Company was organized to engage primarily in the business of making mortgage
loans to churches and other nonprofit religious organizations throughout the United States, on terms established for individual
organizations.
Accounting Estimates
Management uses estimates and assumptions in
preparing these financial statements in accordance with accounting principles generally accepted in the United States of America.
Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and
liabilities, and the reported revenues and expenses. Actual results could differ from those estimates. The most sensitive estimates
relate to the realizability of the mortgage loans receivable, the valuation of the bond portfolio and real estate held for sale.
It is at least reasonably possible that these estimates could change in the near term and that the effect of the change, if any,
may be material to the financial statements.
Concentration of Credit Risk
The Company's loans have been granted to churches and other non-profit
religious organizations. The ability of the Company’s debtors to honor their contracts is dependent on member contributions
and the involvement in the church or organization of its senior pastor.
AMERICAN CHURCH MORTGAGE COMPANY
Notes to Financial Statements - Unaudited
March 31, 2016
Cash and Equivalents
The Company considers all highly liquid debt
instruments purchased with maturities of three months or less to be cash equivalents.
The Company maintains accounts primarily at
two financial institutions. At times throughout the year, the Company’s cash and equivalents balances may exceed amounts
insured by the Federal Deposit Insurance Corporation. Cash in money market funds is not federally insured. The Company had $2,345,016
and $2,233,533 in money market fund accounts at March 31, 2016 and December 31, 2015, respectively. The Company has not experienced
any losses in such accounts.
Bond Portfolio
The Company accounts for the bond portfolio
under the Accounting Standards Codification (ASC) 320. The Company classifies the bond portfolio as “available-for-sale”
and measures the portfolio at fair value. While the bonds are generally held until contractual maturity, the Company classifies
them as available-for-sale as the bonds may be used to repay secured investor certificates or provide additional liquidity or working
capital in the short term. The Company has classified $63,000 and $84,000 in bonds as current assets as of March 31, 2016 and December
31, 2015, respectively, based on management’s estimates for liquidity requirements and contractual maturities of certain
bonds maturing in 2017 and 2016, respectively.
Allowance for Mortgage Loans Receivable
The Company records mortgage loans receivable
at estimated net realizable value, which is the unpaid principal balances of the mortgage loans receivable, less the allowance
for mortgage loans. The Company’s loan loss policy provides an allowance for estimated uncollectible loans based on an evaluation
of the current status of the loan portfolio. This policy provides for principal amounts outstanding on a particular loan if cumulative
interruptions occur in the normal payment schedule of a loan; therefore, the Company recognizes a provision for losses and an allowance
for the outstanding principal amount of a loan in the Company’s portfolio if the amount is in doubt of collection. Additionally,
no additional interest income is recognized on impaired loans that are declared to be in default and are in the foreclosure process.
At March 31, 2016, the Company provided $1,209,026 for seventeen mortgage loans, of which eight totaling approximately $3,494,000
are three or more mortgage payments in arrears, two loans totaling approximately $1,226,000 are declared to be in default and two
loans totaling approximately $611,000 are in the foreclosure process. At December 31, 2015, the Company provided $1,205,000 for
eighteen mortgage loans, of which eight totaling approximately $3,724,000 were three or more mortgage payments in arrears, two
loans totaling approximately $1,004,000 were declared to be in default and three loans totaling approximately $775,000 were in
the foreclosure process.
AMERICAN CHURCH MORTGAGE COMPANY
Notes to Financial Statements - Unaudited
March 31, 2016
A summary of transactions in the allowance
for credit losses for the three months ended March 31, 2016 is as follows:
Balance at December 31, 2015
|
|
$
|
1,204,833
|
|
Provision for additional losses
|
|
|
52,099
|
|
Reclassified to real estate held for sale
|
|
|
(29,806
|
)
|
Charge-offs
|
|
|
(18,100
|
)
|
Balance at March 31, 2016
|
|
$
|
1,209,026
|
|
The total impaired loans, which are loans that
are in the foreclosure process or are declared to be in default, were approximately $1,837,000 and $1,779,000 at March 31, 2016
and December 31, 2015, respectively, which the Company believes are adequately secured by the underlying collateral and the allowance
for mortgage loans. Approximately $579,000 and $581,000 of the Company’s allowance for mortgage loans was allocated to impaired
loans at March 31, 2016 and December 31, 2015, respectively.
The Company will declare a loan to be in default
and will place the loan on non-accrual status when the following thresholds have been met: (i) the borrower has missed three consecutive
mortgage payments; (ii) the borrower has not communicated to the Company any legitimate reason for delinquency in its payments
to the Company and has not arranged for the re-continuance of payments; (iii) lines of communication to the borrower have broken
down such that any reasonable prospect of rehabilitating the loan and return of regular payments is gone.
The Company’s policies on payments received
and interest accrued on non-accrual loans are as follows: (i) The Company will accept payments on loans that are currently on non-accrual
status when a borrower has communicated to us that they intend to meet their mortgage obligations. A payment made on a non-accrual
loan is considered a good faith deposit as to the intent to resume their mortgage payment obligation. This good faith deposit is
credited back to interest first then principal as stated in the mortgage loan documentation. (ii) A letter outlining the re-payment
terms or the restructure terms (if any) of the loan is provided to the borrower. This letter will be signed by the Senior Pastor
and all board members of the borrower. This letter resumes the obligation to make payments on non-accrual loans. (iii) The borrower
must meet all its payment obligations for the next 120 days without interruption in order to be removed from non-accrual status.
When a loan is declared in default according
to the Company’s policy or deemed to be doubtful of collection, the loan committee of the Advisor to the Company will direct
the staff to charge-off the uncollectable receivables.
Loans totaling approximately $3,494,000 and
$3,724,000 exceeded 90 days past due but continued to accrue interest at March 31, 2016 and December 31, 2015, respectively. The
Company believes that the loans are well secured, not deemed to be in default and the Company is actively pursuing collection of
past due payments.
AMERICAN CHURCH MORTGAGE COMPANY
Notes to Financial Statements - Unaudited
March 31, 2016
Real Estate Held for Sale
As of March 31, 2016, the Company had three
properties acquired through foreclosure, and one via deed in lieu of foreclosure, with outstanding loan balances totaling approximately
$763,000. The Company has listed the properties for sale through local realtors except for the property for which we received a
deed in lieu of foreclosure. The Church is still occupying this property and paying rent while trying to either sell the building
or obtain refinancing. Each property is valued based on its current listing price less any anticipated selling costs, including,
for example, realtor commissions. The Company records real estate held for sale at the estimated fair value, which is net of the
expected expenses related to the sale of the real estate. The fair value of our real estate held for sale, which represents the
carrying value, is approximately $405,000 as of March 31, 2016 after an impairment of approximately $358,000. There was an additional
impairment of approximately $19,000 for one property that was acquired through foreclosure during the quarter ended March 31, 2015.
The Company sold two properties during the
quarter ended March 31, 2016. The two properties were sold for approximately $380,000. The Company provided seller financing to
the borrower’s. The Company realized an additional loss of approximately $52,000 on both properties as of March 31, 2016.
Carrying Value of Long-Lived Assets
The Company tests long-lived assets or asset
groups for recoverability when events or changes in circumstances indicate that the carrying amount may not be recoverable. Circumstances
which could trigger a review include, but are not limited to: significant decreases in the market price of the asset; significant
adverse changes in the business climate or legal factors; accumulation of costs significantly in excess of the amount originally
expected for the acquisition or construction of the asset; current period cash flow or operating losses combined with a history
of losses or a forecast of continuing losses associated with the use of the asset; and current expectation that the asset will
more likely than not be sold or disposed of significantly before the end of the estimated useful life.
Recoverability is assessed based on the carrying
amount of the asset compared to the sum of the undiscounted cash flows expected to result from the use and the eventual disposal
of the asset, as well as specific appraisal in certain instances. An allowance for losses is recognized when the carrying amount
is deemed not recoverable and exceeds fair value as determined through various valuation techniques including, but not limited
to, discounted cash flow models, quoted market values, and third party independent appraisals.
Revenue Recognition
Interest income on mortgage loans receivable
and the bond portfolio is recognized as earned. Other income included with interest represents cash received for loan origination
fees, which are recognized over the life of the loan as an adjustment to the yield on the loan.
AMERICAN CHURCH MORTGAGE COMPANY
Notes to Financial Statements - Unaudited
March 31, 2016
Deferred Financing Costs
The Company defers the costs related to obtaining
financing. These costs are amortized over the life of the financing using the straight line method, which approximates the effective
interest method.
Income (Loss) Per Common Share
No adjustments were made to income for the
purpose of calculating earnings (loss) per share, as there were no potential dilutive shares outstanding.
2. FAIR VALUE MEASUREMENTS
The Company measures certain financial instruments
at fair value in our balance sheets. The fair value of these instruments is based on valuations that include inputs that can be
classified within one of the three levels of a hierarchy. Level 1 inputs include quoted market prices in an active market for identical
assets or liabilities. Level 2 inputs are market data, other than Level 1, that are observable either directly or indirectly. Level
2 inputs include quoted market prices for similar assets or liabilities, quoted market prices in an inactive market, and other
observable information that can be corroborated by market data. Level 3 inputs are unobservable and corroborated by little or no
market data.
Except for the bond portfolio, which is required
by authoritative accounting guidance to be recorded at fair value in our Balance Sheets, the Company elected not to record any
other financial assets or liabilities at fair value on a recurring basis. We recorded an aggregate allowance for losses on our
Agape bonds (see Note 3), which totaled $260,000 and $200,000 for the periods ended March 31, 2016 and December 31, 2015, respectively.
The following table summarizes the Company’s financial
instruments that were measured at fair value on a recurring basis:
|
|
|
|
|
|
|
Fair Value
Measurement
|
|
March 31, 2016
|
|
|
Fair Value
|
|
|
|
Level 3
|
|
|
|
|
|
|
|
|
|
|
Bond portfolio
|
|
$
|
10,413,428
|
|
|
$
|
10,413,428
|
|
|
|
|
|
|
|
|
Fair Value
Measurement
|
|
December 31, 2015
|
|
|
Fair Value
|
|
|
|
Level 3
|
|
|
|
|
|
|
|
|
|
|
Bond portfolio
|
|
$
|
10,513,428
|
|
|
$
|
10,513,428
|
|
We determine the fair value of the bond portfolio
shown in the table above by comparing it with similar instruments in inactive markets. The analysis reflects the contractual terms
of the bonds, which
AMERICAN CHURCH MORTGAGE COMPANY
Notes to Financial Statements - Unaudited
March 31, 2016
are callable at par by the issuer at any time, and the anticipated cash flows of the bonds, and uses observable
and unobservable market-based inputs. Unobservable inputs include our internal credit rating and selection of similar bonds for
valuation.
The change in Level 3 assets measured at fair value
on a recurring basis is summarized as follows:
|
|
|
Bond Portfolio
|
|
|
|
|
|
|
Balance at December 31, 2015
|
|
$
|
10,513,428
|
|
Proceeds
|
|
|
(40,000
|
)
|
Additional Bond Fund Reserve
|
|
|
(60,000
|
)
|
Balance at March 31, 2015
|
|
$
|
10,413,428
|
|
Real estate held for sale and impaired loans
are recorded at fair value on a nonrecurring basis. The fair value of real estate held for sale was based upon the listed sales
price less expected selling costs, which is a Level 3 input. The resulting impairment charges were $19,173 and $193,104 for the
periods ended March 31, 2016 and December 31, 2015, respectively.
The following table summarizes the Company’s financial
instruments that were measured at fair value on a nonrecurring basis:
|
|
March 31, 2016
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Fair Value at March 31,
2016
|
Impaired Loans
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,257,771
|
|
|
$
|
1,257,771
|
|
Real estate held for resale
|
|
|
—
|
|
|
|
—
|
|
|
|
404,322
|
|
|
|
404,322
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,662,093
|
|
|
$
|
1,662,093
|
|
|
|
December 31, 2015
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Fair Value at December 31,
2015
|
Impaired Loans
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,197,302
|
|
|
$
|
1,197,302
|
|
Real estate held for resale
|
|
|
—
|
|
|
|
—
|
|
|
|
697,422
|
|
|
|
697,422
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,894,724
|
|
|
$
|
1,894,724
|
|
AMERICAN CHURCH MORTGAGE COMPANY
Notes to Financial Statements - Unaudited
March 31, 2016
The change in Level 3 assets measured at fair
value on a nonrecurring basis is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Impaired Loans
|
|
|
|
Real Estate Held for Sale
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2015
|
|
$
|
1,197,302
|
|
|
$
|
697,422
|
|
Additions/Acquisitions
|
|
|
221,683
|
|
|
|
134,173
|
|
Dispositions/Proceeds
|
|
|
(134,173
|
)
|
|
|
(408,100
|
)
|
Provision for other than temporary losses
|
|
|
(27,041
|
)
|
|
|
(19,173
|
)
|
Balance at March 31, 2016
|
|
$
|
1,257,771
|
|
|
$
|
404,322
|
|
3. MORTGAGE LOANS RECEIVABLE AND BOND PORTFOLIO
At March 31, 2016, the Company had mortgage
loans receivable totaling $25,520,239. The loans bear interest ranging from 0% to 10.25% with a weighted average of approximately
8.28% at March 31, 2016. The Company had mortgage loans receivable totaling $25,354,876 that bore interest ranging from 1.00% to
10.25% with a weighted average of approximately 8.35% at December 31, 2015.
The Company has a portfolio of secured church
bonds at March 31, 2016 and December 31, 2015, which are carried at fair value. The bonds pay either semi-annual or quarterly interest
ranging from 2.50% to 9.55%. The aggregate value of secured church bonds equaled approximately $10,673,000 at March 31, 2016 with
a weighted average interest rate of 6.79% and approximately $10,713,000 at December 31, 2015 with a weighted average interest rate
of 6.92%. These bonds are due at various maturity dates through April 2040.
The contractual
maturity schedule for mortgage loans receivable and the bond portfolio as of March 31, 2016, is as follows:
|
Mortgage Loans
|
Bond Portfolio
|
|
|
|
April 1, 2016 through March 31, 2017
|
$ 1,197,796
|
$ 64,000
|
April 1, 2017 through December 31, 2017
|
2,668,013
|
92,000
|
2018
|
1,377,619
|
131,000
|
2019
|
1,044,283
|
135,000
|
2020
|
1,401,704
|
146,000
|
Thereafter
|
17,830,824
|
10,105,428
|
|
25,520,239
|
10,673,428
|
Less loan loss and bond loss allowances
|
(1,209,026)
|
(260,000)
|
Less deferred origination income
|
(341,344
)
|
______-__
|
Totals
|
$
23,969,869
|
$
10,413,428
|
AMERICAN CHURCH MORTGAGE COMPANY
Notes to Financial Statements - Unaudited
March 31, 2016
The Company currently owns $637,000 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. Agape is
currently performing under a loan modification agreement. In October 2013, in excess of 80% of the bondholders of Agape agreed
to a modification in the terms of their bonds which has resulted in the resumption of both principal and interest payments to both
the first and second mortgage bond holders. Both the First Mortgage Bonds and Second Mortgage Bonds have been modified to a fully
amortized fixed rate, quarterly interest payment of 6.25% with a new maturity date of September 2037 for all the issued and outstanding
bonds. The Company, along with all other bondholders, has a superior lien over all other creditors. The Company has an aggregate
allowance for losses of $260,000 and $200,000 for the First and Second Mortgage Bonds both at March 31, 2016 and December 31, 2015,
which effectively reduces the bonds to the fair value amount management believes will be recovered.
4. SECURED INVESTOR CERTIFICATES
Secured investor certificates are collateralized
by certain mortgage loans receivable or secured church bonds of approximately the same value as the certificates. The weighted
average interest rate on the certificates was 6.57% and 6.44% at March 31, 2015 and December 31, 2015, respectively. Holders of
the secured investor certificates may renew certificates at the current rates and terms upon maturity at the Company’s discretion.
Renewals upon maturity are considered neither proceeds from nor issuance of secured investor certificates. Renewals totaled approximately
$50,000 and $148,000 for the three months ended March 31, 2016 and 2015, respectively. The secured investor certificates have certain
financial and non-financial covenants identified in the respective series’ trust indentures.
The estimated maturity schedule for the secured
investor certificates at March 31, 2016 is as follows:
|
|
|
April 1, 2016 through March 31, 2017
|
$ 4,492,000
|
|
April 1, 2017 through December 31, 2017
|
1,332,000
|
|
2018
|
4,116,000
|
|
2019
|
2,333,000
|
|
2020
|
4,058,000
|
|
Thereafter
|
12,380,000
|
|
|
|
|
Totals
|
$
28,711,000
|
|
5. TRANSACTIONS WITH AFFILIATES
The Company has an Advisory Agreement with
Church Loan Advisors, Inc. (the “Advisor”). The Advisor is responsible for the day-to-day operations of the Company
and provides office space and
AMERICAN CHURCH MORTGAGE COMPANY
Notes to Financial Statements - Unaudited
March 31, 2016
administrative services. The Advisor and the Company are related through common ownership and common
management. A majority of the independent board members approve the advisory agreement on an annual basis. The Company paid the
Advisor management fees of approximately $81,000 and $94,000 during the three months ended March 31, 2016 and 2015, respectively.
6. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company is required to disclose the fair
value information about financial instruments, where it is practicable to estimate that value. Because assumptions used in these
valuation techniques are inherently subjective in nature, the estimated fair values cannot always be substantiated by comparison
to independent market quotes and, in many cases, the estimated fair values could not necessarily be realized in an immediate sale
or settlement of the instrument.
The fair value estimates presented herein are
based on relevant information available to management as of March 31, 2016 and December 31, 2015, respectively. Management is not
aware of any factors that would significantly affect these estimated fair value amounts. As these reporting requirements exclude
certain financial instruments and all non-financial instruments, the aggregate fair value amounts presented herein do not represent
management’s estimate of the underlying value of the Company.
The estimated fair values of the Company’s
financial instruments, none of which are held for trading purposes, are as follows:
|
March 31, 2016
|
December 31, 2015
|
|
Carrying
|
Fair
|
Carrying
|
Fair
|
|
Amount
|
Value
|
Amount
|
Value
|
|
|
|
|
|
Cash and equivalents
|
$ 4,861,399
|
$ 4,861,399
|
$ 4,377,110
|
$ 4,377,110
|
Accounts receivable
|
197,865
|
197,865
|
189,609
|
189,609
|
Interest receivable
|
167,919
|
167,919
|
172,169
|
172,169
|
Mortgage loans receivable
|
23,969,869
|
31,261,113
|
23,814,699
|
29,054,399
|
Bond portfolio
|
10,413,428
|
10,413,428
|
10,513,428
|
10,513,428
|
Secured investor certificates
|
28,711,000
|
37,537,145
|
28,246,000
|
36,995,152
|
The following methods and assumptions were
used by the Company to estimate the fair value of each class of financial instrument for which it is practicable to estimate that
value:
Cash and equivalents
Due to their short-term nature, the carrying
amount of cash and cash equivalents approximates fair value.
AMERICAN CHURCH MORTGAGE COMPANY
Notes to Financial Statements - Unaudited
March 31, 2016
Accounts receivable
The carrying amount of accounts receivable
approximates fair value.
Interest receivable
The carrying amount of interest receivable
approximates fair value.
Mortgage loans receivable
The fair value of the mortgage loans receivable
is currently greater than the carrying value as the portfolio is currently yielding a higher rate than similar mortgages with similar
terms for borrowers with similar credit quality.
Bond portfolio
We determine the fair value of the bond portfolio
shown in the table above by comparing with similar instruments in inactive markets. The analysis reflects the contractual terms
of the bonds, which are callable at par by the issuer at any time, and the anticipated cash flows of the bonds and uses observable
and unobservable market-based inputs. Unobservable inputs include our internal credit rating and selection of similar bonds for
valuation.
Secured investor certificates
The fair value of the secured investor certificates
is currently greater than the carrying value due to higher interest rates than current market rates.