[WINTHROP & WEINSTINE LOGO]
March 9, 2009 Karen V. Bertulli
(612) 604-6604
kbertulli@winthrop.com
VIA EDGAR (W/OUT ENCLOSURES) AND FEDERAL EXPRESS
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Securities and Exchange Commission
100 F Street, N.E.
Mail Stop 4561
Washington, DC 20549
Attention: Ms. Cicely Lamothe
RE: AMERICAN CHURCH MORTGAGE COMPANY
AMENDMENT NO. 1 TO REGISTRATION STATEMENT ON FORM S-11
FILED JANUARY 27, 2009
FILE NO. 333-154831
Ladies and Gentlemen:
On behalf of American Church Mortgage Company (the "Company"), a Minnesota
corporation, we are responding to the comments presented in the letter from Ms.
Cicely Lamothe dated February 13, 2009. For the Staff's convenience, our
Response is preceded by the related Staff Comment. In addition, and for ease of
reference, we have included with the mailed, hardcopy of the letter, 4
blacklined copies of Amendment No. 2 filed today, marked to show the changes to
Amendment No. 1 to the Registration Statement on Form S-11 filed January 27,
2009.
USE OF PROCEEDS, PAGE 18
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COMMENT 1. WE NOTE YOUR RESPONSE TO COMMENT 14 IN OUR LETTER
DATED JANUARY 12, 2009. PLEASE INCLUDE SIMILAR DISCLOSURE
IN YOUR "USE OF PROCEEDS" SECTION.
RESPONSE 1. The issuer has revised footnote 5 of the table in the
"Use of Proceeds" section to read as follows:
"The principal purpose of this offering is to raise
capital to allow us to make mortgage loans to churches
and/or to other non-profits and to purchase mortgage
bonds issued by churches. We presently expect to use all
of the net proceeds for this purpose, regardless of the
amount of proceeds raised in this offering. Because it is
possible that it may take time to invest the proceeds in
this manner, however, we would in that case invest the
net proceeds in permitted temporary investments and may
use some portion for working capital purposes including,
but not limited to: paying down our line of credit,
redeeming our equity securities and repaying maturing
certificates. Our line of credit has an adjustable
interest rate that at September 30, 2008 was 5.0% on the
$4.2 million outstanding. The Series A and Series B
Secured Investor Certificates bear interest at rates
ranging from 4.50% to 7.50% and have maturities ranging
from 3 months years to 12 years. However, we will use no
more than 15% of the gross proceeds of this offering to
pay interest on certificates and repay principal to
certificate holders."
March 9, 2009
Securities and Exchange Commission
Page 2 of 6
LOAN LOSS RESERVE POLICY, PAGE 30
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COMMENT 2. WE NOTE ON PAGE F-22 THAT YOU DISCLOSED THE AMOUNT
RESERVED AS OF SEPTEMBER 30, 2008. PLEASE UPDATE THIS
SECTION WITH THE SEPTEMBER 30, 2008 INFORMATION REGARDING
YOUR LOAN LOSS RESERVE POLICY AND THE AMOUNT RESERVED.
RESPONSE 2. The issuer has revised the first paragraph of the
"Loan Loss Reserve" discussion in "Management's
Discussion and Analysis of Financial Condition and
Results of Operations" to read as follows:
"We follow a loan loss reserve policy on our portfolio of
loans outstanding. This critical policy requires complex
judgments and the need to make estimates of future
events, which may or may not materialize as planned. We
record mortgage loans receivable at their estimated net
realizable value, which is the unpaid principal balance
less the allowance for mortgage loans. Our loan policy
provides an allowance for estimated uncollectible loans
based on an evaluation of the current status of the loan
portfolio. This policy reserves for principal amounts
outstanding on a particular loan if cumulative
interruptions occur in the normal payment schedule of a
loan. Our policy will reserve for the outstanding
principal amount of a loan in our portfolio if the amount
is in doubt of being collected. Additionally, no interest
income is recognized on non-performing loans that are in
the foreclosure process. At December 31, 2007, we
reserved $72,056 against fourteen mortgage loans, of
which four churches were three or more mortgage payments
in arrears. At September 30, 2008, we reserved
approximately $71,000 for eleven mortgage loans, of which
five churches are three or more mortgage payments in
arrears and one church is in the foreclosure process.
The total value of non-performing loans, which are loans
that are in the foreclosure process or are no longer
performing, was approximately $238,000 and $1,156,000 at
September 30, 2008 and December 31, 2007, respectively.
We believe that the total amount of non-performing loans
is adequately secured by the underlying collateral."
March 9, 2009
Securities and Exchange Commission
Page 3 of 6
REAL ESTATE HELD FOR SALE/DESCRIPTION OF PROPERTY ACQUIRED THROUGH FORECLOSURE,
PAGE 47
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COMMENT 3. WE NOTE YOUR RESPONSE TO COMMENT 25 IN OUR LETTER DATED
JANUARY 12, 2009. PLEASE ALSO INCLUDE A DESCRIPTION OF
THE GENERAL COMPETITIVE CONDITIONS SURROUNDING THE
POTENTIAL SALE OF THESE PROPERTIES.
RESPONSE 3. The issuer has revised the "Real Estate Held for
Sale/Description of Property Acquired through
Foreclosure" section as requested. Due to the length of
the revisions, please see the enclosed, blacklined copy
of Amendment No. 2.
FINANCIAL STATEMENTS AND NOTES
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YEAR ENDED DECEMBER 31, 2007
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STATEMENTS OF OPERATIONS, PAGE F-4
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COMMENT 4. IN YOUR RESPONSE TO COMMENT 37 IN OUR LETTER DATED
JANUARY 12, 2009, WE NOTE YOU PROPOSE TO CLASSIFY
INTEREST EXPENSE INCURRED TO MAKE LOANS WITHIN OPERATING
INCOME PROSPECTIVELY. GIVEN THIS AMOUNT IS MATERIAL,
PLEASE REVISE YOUR FILING ACCORDINGLY TO RECLASS THE
INTEREST EXPENSE WITHIN OPERATING INCOME. FURTHER, SINCE
YOU ARE A FINANCE COMPANY TELL US WHAT CONSIDERATION WAS
GIVEN TO INCLUDING A PRESENTATION OF NET INTEREST INCOME
/ MARGIN IN YOUR STATEMENT OF OPERATIONS.
RESPONSE 4. The issuer has changed the presentation so that interest
expense is subtracted from interest income resulting in
the presentation of net interest income. The issuer has
included this presentation with its registration
statement and has amended its previous filings to
reflect this change. While this change moves interest
expense on the statement of operations, it does not
change the reported interest expense, net income or cash
flows for the periods reported nor does it have an
effect on stockholders' equity.
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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REVENUE RECOGNITION, PAGE F-10
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COMMENT 5. WE HAVE READ YOUR RESPONSE TO COMMENT 40 IN OUR LETTER
DATED JANUARY 12, 2009. IN FUTURE FILINGS, PLEASE REVISE
YOUR PRESENTATION OF UNAMORTIZED LOAN ORIGINATION FEES
TO BE IN LINE WITH THE GUIDANCE OUTLINED IN PARAGRAPH 21
OF SFAS 91.
March 9, 2009
Securities and Exchange Commission
Page 4 of 6
RESPONSE 5. The issuer will report the unamortized loan origination
fees as a reduction of the related mortgages in future
filings.
PERIOD ENDED SEPTEMBER 30, 2008
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NOTE 2 - FAIR VALUE MEASUREMENT, PAGES F-23 - F-24
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COMMENT 6. WE HAVE READ YOUR RESPONSE TO COMMENT 42 IN OUR LETTER
DATED JANUARY 12, 2009. IN FUTURE FILINGS, PLEASE REVISE
YOUR DISCLOSURES TO CLEARLY INDICATE WHEN YOUR VALUATION
TECHNIQUES UTILIZE UNOBSERVABLE INPUTS. IN ADDITION, IN
LINE WITH PARAGRAPH 32 OF SFAS 157, PLEASE DISCLOSE
INFORMATION THAT ENABLES USERS OF YOUR FINANCIAL
STATEMENTS TO ASSESS THE UNOBSERVABLE INPUTS USED TO
DEVELOP THE FAIR VALUE OF YOUR BOND PORTFOLIO.
RESPONSE 6. After discussions with the Staff and further analysis of
the issuer's method to determine fair value of these
bonds, as guided by SFAS 157, the issuer now believes
these bonds are level 2 under the fair value hierarchy.
The primary method to determine fair value is to compare
similar assets in inactive markets. To determine what
similar assets to select, the issuer does perform its
own internal credit rating of its bonds and then selects
similar assets, which the issuer believes have a like
credit rating. This internal development of a credit
rating is the only unobservable input in the
determination of fair value. The issuer's belief is that
the primary determinant of fair value is the current
quote of the similar assets which would indicate level
2.
In addition, when the issuer selects similar assets to
compare, it does select assets with similar callability
features as its holdings. By selecting similar
callability features, those compared assets' fair value
has upside limits due to the control the bond issuer has
to call the instrument if the value gets too high. The
Company will revise its disclosure in future filings for
the fair value measurements of these bonds to disclose
them as level 2 since the primary factors in the fair
value assessment are the comparison of similar assets in
inactive markets.
COMMENT 7. WE HAVE CONSIDERED YOUR RESPONSE TO COMMENT 43 IN OUR
LETTER DATED JANUARY 12, 2009. PLEASE CLARIFY HOW YOU
CONSIDERED THE CALLABILITY PROVISION IN YOUR
DETERMINATION OF THE FAIR VALUE OF THE BOND PORTFOLIO.
IF THE CALLABILITY PROVISION HAS ALREADY BEEN FACTORED
INTO YOUR FAIR VALUE CALCULATION AND THUS THE
DETERMINATION OF THE UNREALIZED GAINS ON YOUR BOND
PORTFOLIO, PLEASE TELL US YOUR BASIS IN GAAP FOR FURTHER
ADJUSTING YOUR UNREALIZED GAINS FOR THE CALLABILITY
PROVISION. LASTLY, IF YOU BELIEVE THE FAIR VALUE
RECORDED FOR THESE ASSETS IS NOT RECOVERABLE, EXPLAIN
HOW THIS WAS CONSIDERED IN YOUR IMPAIRMENT ANALYSIS.
March 9, 2009
Securities and Exchange Commission
Page 5 of 6
RESPONSE 7. The callability feature has been factored into the
determination of fair value as discussed in Response 6,
but it had been shown separately for clarity in the
notes to the financial statements. The callability
provision of the issuer's bonds, whereby the issuer of
the bonds can call the bonds at par at any time, limits
potential increases in the bonds fair value when market
rates are less than the rates the issuer's bonds yield.
Conversely, when market rates are higher than the rates
on the issuer's bonds, the fair value of the bonds can
and would be less than the par value. The Company will
revise its disclosure in future filings. The Company
believes the fair value of the bonds is recoverable.
NOTE 3 - MORTGAGE LOANS AND BOND PORTFOLIO, PAGE 13
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OUTSTANDING INDEBTEDNESS
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COMMENT 8. IN OUR PREVIOUS COMMENT 44 IN OUR LETTER DATED JANUARY
12, 2009, WE ASKED HOW YOU DETERMINED THE RESERVE OF
$300,000 WAS ADEQUATE TO COVER YOUR POTENTIAL EXPOSURE.
WE NOTE THE SALES PRICE OF THE PROPERTIES SERVING AS
COLLATERAL FOR THE BONDS, BUT WE REMAIN UNCLEAR HOW YOU
USED THAT INFORMATION TO DETERMINE THE $300,000 RESERVE
FOR YOUR BONDS. PLEASE ADVISE.
RESPONSE 8. The Company reviews the adequacy of the reserve for the
bonds as conditions with the underlying property and
bond issuer change and based on current estimates of the
timing and sale price of the property. The Company
recorded a reserve of approximately 5% once the bond
issuer fell behind in payments and foreclosure
proceedings began. The owner of the property and issuer
of the bonds has significant equity in the property. The
owner was making reduced payments on the bonds, which
are being kept in escrow, prior to having the property
foreclosed upon that more than covered the interest due.
The bonds were previously in the foreclosure process,
but have since been foreclosed upon by the trustee.
The Company reserved an additional amount which raised
the total to approximately 15% of the face value of the
bonds. The Company determined the additional reserve was
necessary, despite significant collateral of the
underlying the bonds, based on a number of factors. The
trustee received offers for the purchase of the
properties at a discount to par value, but these offers
have not yet resulted in definitive purchase agreements.
The offers have given the issuer an indication that the
market value of the properties was less than the face
value of the bonds. The previous owner had been paying
rent that covered the interest charges on the bond, but
has since stopped. In addition, the Company's experience
with the condition of properties that have been
foreclosed upon is that additional maintenance is
required that has been deferred during the foreclosure
process. The reserve reflects the delay in selling the
properties despite the significant underlying collateral
that exists. Along with this, as the credit markets in
general have deteriorated, the Company has taken the
additional reserve to reflect the timing of what it
believes will be collected. The credit markets have not
improved since September 30, 2008 and the Company has
recorded an additional reserve subsequent to that date.
March 9, 2009
Securities and Exchange Commission
Page 6 of 6
PART II - INFORMATION NOT REQUIRED IN PROSPECTUS, PAGE II-1
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INDEX TO EXHIBITS
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TAX OPINION
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COMMENT 9. WE NOTE YOUR RESPONSE TO COMMENT 35 OF OUR LETTER DATED
JANUARY 12, 2009 AND WE REISSUE OUR PRIOR COMMENT. WE
NOTE THAT THE COMPANY INTENDS TO QUALIFY AS A REIT:
THUS, THE TAX CONSEQUENCES WOULD BE MATERIAL TO THE
TRANSACTION FOR WHICH THE REGISTRATION STATEMENT IS
BEING FILED AND A TAX OPINION WOULD BE REQUIRED. SEE
ITEM 601(B)(8) OF REGULATION S-K. PLEASE ADVISE COUNSEL
THAT THE TAX OPINION SHOULD SPECIFY THE TAXABLE YEAR AND
OPINE ON WHETHER THE COMPANY HAS BEEN ORGANIZED IN
CONFORMITY WITH THE REQUIREMENTS FOR QUALIFICATION AND
TAXATION AS A REIT. THE OPINION SHOULD ALSO OPINE ON
WHETHER THE PROPOSED METHOD OF OPERATION AS DESCRIBED IN
THE PROSPECTUS WILL CONTINUE TO ENABLE THE COMPANY TO
MEET THE REQUIREMENTS FOR QUALIFICATION AND TAXATION AS
A REIT UNDER THE CODE. PLEASE REVISE THE TAX OPINION OR
THE FEDERAL TAX CONSEQUENCES SECTION OF THE PROSPECTUS
ACCORDINGLY. IF THE COMPANY CHOOSES TO INCLUDE THE
OPINION IN THE PROSPECTUS, PLEASE REVISE THE PROSPECTUS
TO STATE SPECIFICALLY THAT THE DISCUSSION IN THE TAX
CONSEQUENCES SECTION IS COUNSEL'S OPINION.
RESPONSE 9. Further to Comment 9, we have included a revised tax
opinion. Please see Exhibit 8 to Amendment No. 2.
If you have any questions in connection with the filing, please contact the
undersigned at (612) 604-6604.
Very truly yours,
WINTHROP & WEINSTINE, P.A.
/s/ Karen V. Bertulli
Karen V. Bertulli
4318668v5
cc: Philip J. Myers (American Church Mortgage Company)