UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________________________
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE PERIOD ENDED June 30, 1996
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 33-27664
CML CHURCH MORTGAGE, INC.
(Exact name of registrant as specified in its charter)
Wisconsin02-0430692(State or other jurisdiction(IRS Employer
Identification No.)of incorporation or organization)
6 Loudon Road, Concord, New Hampshire03302-0858(Address of
principal executive offices)(Zip Code)
(603) 224-2373
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if
changed since last report)
Indicate by check mark whether the registrant (1) had filed
all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12
months (or for such shorter period that the registrant was
required to file such reports),
and (2) has been subject to such filing requirements for the
past 90 days.
Yes ______ No _____
X
Indicate number of shares outstanding of each of the
issuer's classes of common stock
as of the latest practicable date.
At June 30, 1996 there were 52 shares of Common Stock, $1.00
par value, outstanding.
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
CML CHURCH MORTGAGE, INC.
Balance Sheets
June 30, 1996 and December 31, 1995
Assets June
30, December 31,
1996
1995
Unaudited
Cash $ 1,765 32,460
Cash and cash equivalents, held by trustee 232,115 117,430
Total cash and cash equivalents 233,880 149,890
Mortgage loans, held by trustee 2,521,525 2,988,001
Other real estate owned 720,000 720,000
Prepaid interest 36,146 61,004
Accrued interest receivable 23,463 27,460
Deferred issuance costs 71,521 86,462
$ 3,606,535 4,032,817
Liabilities and Stockholder's Equity
Mortgage-backed senior bonds $ 3,333,160 3,711,160
Mortgage-backed subordinated bonds 204,100 204,100
Accrued interest payable 32,349 41,850
Residual interests 30,180 39,527
Other liabilities 4,981 3,720
Total liabilities 3,604,770 4,000,357
Stockholder's Equity:
Common stock, par value $1.00 per share;
56,000 shares authorized; 1,000 shares issued;
52 shares outstanding 1,000 1,000
Additional paid-in capital 24,000 24,000
Retained earnings 7,765 7,460
Total 32,765 32,460
Less cost of 948 shares reacquired and
held in treasury (31,000)
Total stockholder's equity 1,765 32,460
$ 3,606,535 4,032,817
See accompanying notes to financial statements.
CML CHURCH MORTGAGE, INC.
Statements of Income
(Unaudited)
For the Three
Months Ended
June
30,
1996
1995
Revenues:
Interest on mortgage loans $ 79,899 111,074
Reduction of residual interest 9,039
Reinvestment earnings on cash and cash equivalents
held by trustee 1,984 2,010
Other interest income 83 247
Total revenues $ 91,005 113,331
Expenses:
Interest 82,678 63,357
Loan servicing fees 4,691 5,817
Amortization of deferred issuance costs 8,921 29,471
Income attributable to residual interests 5,320
Reversal of mortgage-backed senior bond reduction 1,798
Other expenses (5,356) 7,321
Total expenses 90,934 113,084
Net income $ 71 247
See accompanying notes to financial statements.
CML CHURCH MORTGAGE, INC.
Statements of Income
(Unaudited)
For the Six
Months Ended
June 30,
1996
1996
1995
Revenues:
Interest on mortgage loans $ 164,581 243,477
Reduction of residual interest 9,347
Reduction of mortgage-backed senior bonds 293,299
Reinvestment earnings on cash and cash equivalents
held by trustee 4,340 5,020
Other interest income 317 481
Total revenues 178,585 542,277
Expenses:
Interest 129,767 179,699
Provision for losses on other real estate owned 270,000
Loan servicing fees 9,556 12,398
Amortization of deferred issuance costs 14,941 48,319
Income attributable to residual interests 11,375
Reversal of mortgage-backed senior bond reduction 1,798
Other expenses 24,016 18,207
Total expenses 178,280 541,796
Net income $ 305 481
See accompanying notes to financial statements.
CML CHURCH MORTGAGE, INC.
Statements of Cash Flows
(Unaudited)
For the Six
Months Ended
June
30,
1996
1995
Cash flows from operating activities:
Net income $ 305 481
Adjustments to reconcile net income to net cash
provided by <used in> operating activities:
Amortization of deferred issuance costs 14,941 48,319
Income attributable to residual interests 11,375
Reduction of mortgage-backed senior bonds (293,299)
Reversal of mortgage-backed senior bond reduction 1,798
Provision for losses on other real estate owned
270,000
Decrease in prepaid interest 24,858
Reduction of residual interest (9,347)
Decrease in accrued interest receivable 3,997 17,569
<Decrease> in accrued interest payable (9,501) (143,007)
Increase in other liabilities
1,261
Net cash provided by <used in>
operating activities 26,514 (86,764)
Cash flows from investing activities:
Principal payments on mortgage loans 466,476 1,730,466
Net cash provided by investing activities 466,476
1,730,466
Cash flows from financing activities:
Principal payments on mortgage-backed senior bonds (378,000)
(1,787,547)
Payment to redeem stock (31,000)
Net cash used in financing activities (409,000)
(1,787,547)
Net increase (decrease) in cash and cash equivalents 83,990
(143,845)
Cash and cash equivalents, beginning of period 149,890 326,157
Cash and cash equivalents, end of period $ 233,880 $ 182,312
See accompanying notes to financial statements.
CML CHURCH MORTGAGE, INC.
Notes to Financial Statements (Unaudited)
June 30, 1996
(1) Basis of Presentation
The financial statements included herein have been prepared without
audit by CML Church
Mortgage, Inc. ("the Company"). Certain information and footnote
disclosures normally
included in financial statements prepared in accordance with generally
accepted
accounting principles have been condensed or omitted pursuant to rules
and regulations
of the Securities and Exchange Commission, although the Company
believes that the
disclosures are adequate to make the information presented not
misleading. It is
suggested that these condensed financial statements be read in
conjunction with the
financial statements and the notes thereto included in the Company's
latest annual report
on form 10K. On January 1, 1995 the Company adopted Financial
Accounting Standards Board
Statement No. 114, Accounting by Creditors for Impairment of a Loan,
which requires that
creditors value all loans for which it is probable that the creditor
will be unable to
collect certain amounts due according to the terms of the loan
agreement at the present
value of expected future cash flows, discounted at the loan's effective
interest rate,
or observable market price of the impaired loan or the fair value of
the collateral if
the loan is collateral dependent. Management believes that loan
carrying values and loan
loss reserves provided in this 10-Q Filing comply with the requirements
of this
Statement.
(2) Potential Problem Loans
The Company is closely monitoring two mortgage loans collateralized by
first liens on
church buildings and related properties with unpaid principal balances
of $2,123,476 at
June 30, 1996. Management is concerned with the borrowers' ongoing
ability to meet debt
service requirements. For each of these two loans, management
presently believes that
the principal balances and accrued interest, if any, should be fully
recoverable in the
event of default, based on the most recent appraisal values.
One of the churches with a recorded principal balance of $1,328,356
has entered into an
arrangement whereby the Company drafts $8,300 weekly from the church's
account. The
church has maintained the weekly draft arrangement.
With respect to the other loan with a recorded balance of $795,120, the
church has not
made its payment when due on the first of the month. Instead, the
church has been
drafted weekly and completed the monthly payment on or before the 10th
of the month in
which it has been due.
In assessing the recoverability of the loans, management evaluates
information concerning
the borrowers' financial condition and obtains updates of appraisals as
considered
necessary. Prior to December 31, 1995, management had established a
$100,000 general
allowance for loan losses which specifically related to the loans
collateralizing the
Series 1 Senior Bonds. At December 31, 1995 the allowance was reversed
due to the
significant reduction in mortgage loan balances since the $100,000
estimate was
calculated. The one mortgage loan remaining in the Series 1 pool was
assessed for
recoverability, and management determined that no specific loan loss is
necessary for
that loan.
(3) Mortgage Loans, Held by Trustee
The Mortgage loans, which serve as collateral for the mortgage-backed
senior and
subordinated bonds, consist of fixed interest rate real estate loans
evidenced by
promissory notes secured by mortgages or similar security interests
which create a first
lien on church buildings and related properties. The church buildings
and properties
securing the loans were located in twelve different states across the
United States. All
of the mortgage loans contain provisions prohibiting prepayment during
periods ranging
from approximately 36 months to 48 months from the date acquired by the
Company. The
mortgage loans, when originated, generally had loan-to-value ratios
ranging between 23%
and 65%. The ability and willingness of these borrowers to honor their
repayment
commitments is generally dependent upon the financial condition of the
church obligated
as mortgagor, which, in turn, depends on the contributions received from
members of the
congregation.
(4) Other Real Estate Owned
On December 28, 1993, the Company accepted a deed-in-lieu of
foreclosure on a church
property securing a loan with an outstanding principal balance of
$1,749,203. The
property is located near the south central section of Los Angeles,
California. As a
result of an appraisal received by the Company in November 1993,
management recorded a
write-down of $534,203 in order to value the property at fair market
value less estimated
cost to sell. This write-down was treated as a direct reduction of the
Series 1
Subordinated Bonds in the amount of $128,873, the residual interest in
the amount of
$294,462 and the Series 1 Senior Bonds in the amount of $110,868. In
1994, management
recorded a second write-down of $124,921. This write-down was treated
as a direct
reduction of the Series 1 Senior Bonds. In February 1996, the Company
received an offer
to purchase the property for $720,000 (net of estimated costs to sell).
As such, an
additional write-down of $360,000 was made in the 1995 financial
statements to record the
value of the property at the current value.
The title of the property has been transferred to a related entity
under the control of
the Company's parent, CML. The Company, however, has retained an
assignment in all cash
proceeds generated by the property. Consequently, the Company is
accounting for the
property as other real estate owned.
(5) Mortgage-backed Senior Bonds
The following is a summary of the Series 1 Senior Bonds. The interest
rate, stated
maturity and original principal amounts of these bonds, all dated
August 1, 1989, and the
outstanding principal amounts at June 30, 1996 follows:
Outstanding
Original Principal
Interest Stated Principal Amounts
Rate Maturity Amounts 6/30/96
9.00 2/10/1994 $ 262,000 $ 97,608
9.10 8/10/1994 277,000 103,196
9.10 2/10/1995 329,000 122,569
9.10 8/10/1995 348,000 129,648
9.25 2/10/1996 406,000 151,255
9.25 8/10/1996 430,000 160,197
9.25 2/10/1997 493,000 183,667
9.75 8/10/2001 5,506,000 1,948,809
$8,051,000 $2,896,949
The above maturity schedule does not reflect the write-downs of Series
1 Senior bonds
totaling $595,789 which were recorded by the Company through June 30,
1996 (see notes 3
and 4). Management of the Company believes that if these write-downs
are realized as a
result of losses on the sale of other real estate owned or foregone
interest income on
nonperforming mortgage loans, the bondholders would incur losses on a
pro-rata share of
their investment in relation to the total outstanding senior bonds.
The following is a summary of the Series 2 Senior Bonds. The interest
rate, stated
maturity and original principal amounts of these bonds, all dated April
1, 1990 and the
outstanding principal amount at June 30, 1996 follows:
Outstanding
Original Principal
Interest Stated Principal Amounts
Rate Maturity Amounts 6/30/96
9.75 10/10/1996 291,000 44,000
9.75 4/10/1997 308,000 44,000
9.85 10/10/1997 362,000 58,000
9.85 4/10/1998 382,000 58,000
10.50 4/10/2003 5,359,000 828,000
$6,702,000 $1,032,000
Interest on senior bonds is payable semiannually. The amount to be
paid bondholders on
each payment date is limited, however, to the funds available in the
interest payment
account.
The stated maturities are the dates on which the senior bonds will be
fully paid,
assuming no prepayments are received on the mortgage loans that serve
as collateral. The
actual maturities of the senior bonds will be shortened by prepayments
on the mortgage
loans and by any senior bond calls.
As a result of defaults on the mortgage loans collateralizing the
Series 1 Senior Bonds,
the bonds are no longer subject to scheduled or mandatory redemption.
Mandatory
redemptions may not be reinstated until either (a) such default is
cured or (b) the
aggregate amount of the principal account plus the aggregate
outstanding principal amount
of mortgage loans securing the bonds as to which no default in payment
of principal or
interest has occurred and which has not been cured exceeds the
outstanding principal
amount of the bonds, and the amount on deposit in the interest payment
account plus
interest payable on the outstanding principal amount of such
nondefaulting mortgage loans
(assuming no prepayments of principal) is at least equal to the
interest payable on the
outstanding principal amount of the bonds as may be reduced from time
to time by
redemption.
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of
Operations.
Second Quarter 1996 vs. Second Quarter 1995
Revenues for the second quarter of 1996 include interest income of
$37,532 and $42,367
from mortgages backing the unrated Series 1 bonds and unrated Series 2
bonds,
respectively. The corresponding revenues for the second quarter of
1995 include interest
income of $62,504 and $48,570 from mortgages backing the unrated Series
1 bonds and
unrated Series 2 bonds, respectively. The lower income for 1996 is
attributed to the
lower principal balances of mortgages outstanding due to mortgage
amortization and
mortgage loan principal prepayments. These prepayments result in lower
net income
because the profit produced by the differences in the interest rate
collected on the
church mortgage loans and the rate paid to bondholders decreases as
mortgage loans are
prepaid.
Bond redemptions totaled $378,000 and $1,153,803 during the second
quarter of 1996 and
1995, respectively.
First Six Months 1996 vs. First Six Months 1995
Revenues for the first six months of 1996 include interest income of
$76,063 and $88,518
from mortgages backing the unrated Series 1 bonds and unrated Series 2
bonds,
respectively. The corresponding revenues for the first six months of
1995 include
interest income of $145,233 and $98,244 from mortgages backing the
unrated Series 1 bonds
and unrated Series 2 bonds, respectively. The lower income for 1996 is
attributed to the
lower principal balances of mortgages outstanding due to mortgage
amortization and
mortgage loan principal prepayments. These prepayments result in lower
net income
because the profit produced by the differences in the interest rate
collected on the
church mortgage loans and the rate paid to bondholders decreases as
mortgage loans are
prepaid.
Bond redemptions totaled $378,000 and $1,787,547 during the first six
months of 1996 and
1995, respectively.
As of April 1, 1994 the lockout period for mortgage loan prepayment had
expired for all
mortgage loans in the Series 2 pool. Because the interest rate on the
mortgage loans in
the pool is higher than prevailing rates for similar loans, prepayments
on principal on
the mortgage loans are likely to occur. Five mortgage loans with
outstanding balances
totalling $4,245,404 had been prepaid as of June 30, 1994; in the first
week of July 1994
another loan with an outstanding balance of $928,325 was prepaid.
These proceeds from
prepayment were used to make a $2,726,000 principal payment on senior
mortgage-backed
bonds outstanding at April 10, 1994 and a $2,362,000 principal payment
on senior
mortgage-backed bonds outstanding at July 10, 1994. In November 1994
another loan with
an outstanding balance of $569,041 was prepaid; these proceeds were
used to prepay
senior mortgage-backed bonds. Although $5,742,770 of prepayments had
been received
through December 31, 1994, no assurance can be given as to the rate of
prepayments of the
mortgage loans pledged as security for the bonds, and therefore no
assurance can be given
as to the amount and timing of redemptions of bonds or the time that
any particular bond
will remain outstanding prior to its stated maturity.
On December 28, 1993, the Company accepted a deed-in-lieu of
foreclosure on a church
property securing a loan with an outstanding principal balance of
$1,749,203. The
property is located near the south central section of Los Angeles,
California, the scene
of civil unrest on April 29, 1992 and an earthquake on January 17,
1994. As a result of
an appraisal received by the Company in November 1993, management
recorded a write-down
of $534,203 at December 31, 1993 in order to value the property at fair
market value less
estimated cost to sell; in 1994 management recorded a second write-down
of $124,921; in
the first quarter of 1995 management recorded a third write-down of
$270,000; in the
fourth quarter of 1995 management recorded a fourth write-down of
$90,000, based on a
number of factors including an offer for the sale of the property
described below.
On July 14, 1995 the Tenant, which had defaulted on certain lease
obligations, was
evicted to provide for better property maintenance and availability for
marketing. While
the building is unoccupied, management has hired a property management
firm to monitor
the property daily.
The company received an offer for the sale of the property in the
amount of $800,000 in
March 1996. A Purchase and Sale contract was under negotiation. The
company had hired
local legal counsel to prepare documentation for the proposed sale.
The offer terminated
on April 15, 1996 due to the inability of the offering party to gain
consensus with
respect to the transaction of its Board Members, according to the
broker who procured the
potential buyer.
There have been three incidents of substantial vandalism and theft of
property at the
church property since the third week in February 1996. The extent of
the damage is
currently being appraised by the insurance company who issued a policy
covering the
property. The company has been informed that an estimate of the damage
and adjuster's
opinion will be forthcoming. Additionally, the property is in need of
roof and fire
alarm repairs, and the company is maintaining a fund-on-deposit in an
interest bearing
account, which had exceeded the estimates of costs provided by
contractors to complete
the known needed repairs before the vandalism incidents. As of April
15, 1996, a new
commercial broker has been retained for a one year period to market the
property.
The Company is closely monitoring two mortgage loans collateralized by
first liens on
church buildings and related property with unpaid principal balances of
$2,123,476 at
June 30, 1996. Management is concerned with the borrowers' ongoing
ability to meet debt
service requirements. For each of these two loans, management
presently believes that
the principal balances and accrued interest, if any, should be fully
recoverable in the
event of default, based on the most recent appraisal values. The
property with a
carrying value of $1,328,356 was appraised on December 20, 1994; the
property with a
carrying value of $795,120 was appraised on March 4, 1996.
One of the churches with a recorded principal balance of $1,328,356 has
entered into an
arrangement whereby the Company drafts $8,300 weekly from the church's
account. The
church has maintained the weekly draft arrangement.
With respect to the other loan with a recorded balance of $795,120, the
church has not
made its payment when due on the first of the month. Instead, the
church has been
drafted weekly and completed the monthly payment on or before the 10th
of the month in
which it has been due.
In assessing the recoverability of the loans, management evaluates
information concerning
the borrowers' financial condition and obtains updates of appraisals as
considered
necessary. Prior to December 31, 1995, management had established a
$100,000 general
allowance for loan losses which was specifically related to the loans
collateralizing the
Series 1 Senior Bonds. At December 31, 1995 the allowance was reversed
due to the
significant reduction in mortgage loan balances since the $100,000
estimate was
calculated. The one mortgage loan remaining in the Series 1 pool was
assessed for
recoverability, and management determined that no specific loan loss in
necessary for
that loan.
Liquidity and Capital Resources
The Company has no fixed assets or any commitments outstanding to
purchase or lease any
fixed assets.
Each series of mortgage-backed bonds was structured in a manner such
that principal and
interest payments received from the related mortgage loans would be
sufficient to fund
all interest and principal payments on the bonds in addition to all
other expenses of the
Company. Interest income from mortgages backing the Series 1 bonds has
been reduced
since December 31, 1993 due to foregone interest income of a nonaccrual
mortgage loan
transferred to real estate owned coupled with yield losses due to
mortgage loan
prepayments. Because of these matters, the Company did not make
$170,562 of principal
payments scheduled for February 10, 1994 to holders of 9% Unrated
Series 1 senior bonds,
and $180,327 of principal payments scheduled for August 10, 1994 to
holders of 9.10%
Unrated Series 1 senior bonds. On August 10, 1994, $42,829 of interest
due was not paid
as scheduled, and on February 10, 1995 an additional $122,569 of
principal payments and
$2,839 of interest due was not paid as scheduled. On August 10, 1995,
an additional
$129,647 of principal payments and $49,745 of interest due was not paid
as scheduled. On
February 10, 1996 an additional $151,255 of principal payments and
$120,808 of interest
due was not paid as scheduled. These shortfalls of interest income
received were not
anticipated in cash flow projections at the time the pool was formed.
Additionally, no
assurance can be given as to the rate of prepayment of the mortgage
loans or the amount
of foregone interest income from loans in default which may occur in
the future. The
bonds are non-recourse bonds, and the holders of the bonds may not look
to the Company
or the Servicer, but may only look to the pool of mortgage loans and
other assets
securing the bonds for payment of principal and interest thereon. No
mortgage loans
securing any other series or bonds will be available to satisfy claims
of holders of the
bonds.
On May 7, 1996, the directors of CML Church Mortgage, Inc. consented to
the adoption of
the following votes effective as of April 30, 1996, and in accordance
with the bylaws of
this Corporation, unanimously consented to the adoption of the
following resolutions:
BE IT RESOLVED,
The corporation shall purchase from Christian Mutual Life Insurance
Company (CML) Nine
Hundred Forty-eight (948) shares of the Corporation's stock presently
owned by CML for
a consideration of THIRTY-ONE THOUSAND DOLLARS ($31,000.00) and such
repurchased shares
shall become treasury shares of the Corporation.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
As discussed in the Liquidity and Capital Resources Section of Item 2
-- Management's
Discussion and Analysis of Financial Condition and Results of
Operations, interest income
from mortgages backing the Series 1 bonds has been reduced since
December 31, 1993 due
to foregone interest income of a nonaccrual mortgage loan transferred
to real estate
owned coupled with yield losses due to mortgage loan prepayments.
Because of these
matters, the Company did not make $170,562 of principal payments
scheduled for February
10, 1994 to holders of 9% Unrated Series 1 senior bonds, $180,327 of
principal payments
scheduled for August 10, 1994 to holders of 9.10% Unrated Series 1
senior bonds and
$122,569 of principal payments scheduled for February 10, 1995 to
holders of 9.10%
Unrated Series 1 senior bonds, $129,647 of principal payments scheduled
for August 10,
1995 to holders of 9.10% Unrated Series 1 senior bonds, and $151,255 of
principal
payments scheduled for February 10, 1996 to holders of 9.25% Unrated
Series 1 senior
bonds. On August 10, 1994, $42,829 of interest due was not paid as
scheduled, and on
February 10, 1995 an additional $2,839 of interest due was not paid as
scheduled. On
August 10, 1995, an additional $49,745 of interest due was not paid as
scheduled. On
February 10, 1996, an additional $120,808 of interest due was not paid
as scheduled.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
The servicer CML has signed a letter of intent and is negotiating the
final terms of an
agreement with a life insurance company domesticated in Texas which
will effect (1) a
change in control of CML to the Texas life insurance company, and (2) a
change in CML's
management. That transaction is conditioned upon and subject to the
approvals of, among
others, CML's policyholders and insurance regulators. If the
transaction occurs as
contemplated, the Texas life insurance company would own all
outstanding shares of CML
Church Mortgage, Inc.
Item 6. Exhibits and Reports on Form 8-K
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly
caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Date CML CHURCH
MORTGAGE, INC.
By:
July 16, 1996 Roy S. McCandless,
President
By:
July 16, 1996 Steven J. Skinner,
Vice President
By:
July 16, 1996 Fred L. Potter,
Treasurer
