UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________________________
FORM 10-Q
(Mark one)
(x) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE PERIOD ENDED September 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)
Wisconsin 02-0430692
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
6 Loudon Road, Concord, New Hampshire 03302-1858
(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 __x___ No ____
Indicate number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
At September 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
September 30, 1996 and December 31, 1995
Assets September 30, December 31,
1996 1995
Unaudited
Cash $ 1,776 $ 32,460
Cash and cash equivalents, held by trustee 286,092 117,430
Total cash and cash equivalents 287,868 149,890
Mortgage loans, held by trustee 2,459,446 2,988,001
Other real estate owned 675,000 720,000
Prepaid interest 78,025 61,004
Accrued interest receivable 22,689 27,460
Deferred issuance costs 70,181 86,462
$ 3,593,209 $ 4,032,817
Liabilities and Stockholder's Equity
Mortgage-backed senior bonds $ 3,288,160 $ 3,711,160
Mortgage-backed subordinated bonds 204,100 204,100
Accrued interest payable 64,698 41,850
Residual interests 31,088 39,527
Other liabilities 3,387 3,720
Total liabilities 3,591,433 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 7,776 7,460
Total 32,776 32,460
Less cost of 948 shares reacquired and
held in treasury (31,000)
Total stockholder's equity 1,776 32,460
$ 3,593,209 $ 4,032,817
See accompanying notes to the financial statements.
CML CHURCH MORTGAGE, INC.
Statements of Income
(Unaudited)
For the Three Months Ended
September 30,
1996 1995
Revenues:
Interest on mortgage loans $ 71,275 $ 99,584
Reduction of residual interest (908)
Reduction of mortgage-backed senior bonds 45,000 1,885
Reinvestment earnings on cash and cash equivalents
held by trustee 2,747 2,239
Other interest income 11 235
Total revenues $ 118,125 $ 103,943
Expenses:
Interest 60,980 67,707
Provision for losses on other real estate owned 45,000
Loan servicing fees 4,381 5,410
Amortization of deferred issuance costs 1,340 5,062
Income attributable to residual interests (2,942)
Reversal of mortgage-backed senior bond reduction (1,798)
Other expenses 6,413 30,326
Total expenses 118,114 103,765
Net income $ 11 $ 178
See accompanying notes to the financial statements.
CML CHURCH MORTGAGE, INC.
Statements of Income
(Unaudited)
For the Nine Months Ended
September 30,
1996 1995
Revenues:
Interest on mortgage loans $ 235,856 $ 343,061
Reduction of residual interest 8,439
Reduction of mortgage-backed senior bonds 45,000 295,184
Reinvestment earnings on cash and cash equivalents
held by trustee 7,087 7,259
Other interest income 328 716
Total revenues $ 296,710 $ 646,220
Expenses:
Interest 190,747 247,406
Provision for losses on other real estate owned 45,000 270,000
Loan servicing fees 13,937 17,808
Amortization of deferred issuance costs 16,281 53,381
Income attributable to residual interests 8,433
Other expenses 30,429 48,533
Total expenses 296,394 645,561
Net income $ 316 $ 659
See accompanying notes to the financial statements.
CML CHURCH MORTGAGE, INC.
Statements of Cash Flows
(Unaudited)
For the Nine Months Ended
September 30,
1996 1995
Cash flows from operating activities:
Net income $ 316 $ 659
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Amortization of deferred issuance costs 16,281 53,381
Income attibutable to residual interests 8,433
Reduction of mortgage-backed senior bonds (45,000) (295,184)
Provision for losses on other real estate owned 45,000 270,000
(Increase) in prepaid interest (17,021)
Reduction of residual interest (8,439)
Decrease in accrued interest receivable 4,771 17,680
Increase (decrease) in accrued interest payable 22,848 (184,464)
(Decrease) in other liabilities (333)
Net cash provided by (used in)
operating activities 18,423 (129,495)
Cash flows from investing activities:
Principal payments on mortgage loans 528,555 1,801,103
Net cash provided by investing activities 528,555 1,801,103
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 137,978 (115,939)
Cash and cash equivalents, beginning of period 149,890 326,157
Cash and cash equivalents, end of period $ 287,868 $ 210,218
See accompanying notes to financial statements.
CML CHURCH MORTGAGE, INC.
Notes to Financial Statements (Unaudited)
September 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 $2,070,191 at September 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 $1,288,860 has
entered into an arrangement whereby the Company drafts $6,464 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 $781,331, 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 30th 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.
In October 1996 the company received an offer for the sale of the property
"as is" for $520,000. Additionally, two settlements totalling $207,190
were made covering three incidents of substantial vandalism and theft of
property at the church property since the third week of February 1996.
As a result of these transactions, an additional $45,000 write-down was
recorded in the third quarter of 1996. The new carrying value of $675,000
reflects (1) the "as is" offer price of $520,000 less estimated cost to
sell of approximately $52,000 and (2) the $207,190 settlement
amounts for repairs which will not be required if the property is sold "as is".
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 September
30, 1996 follows:
Outstanding
Original Principal
Interest Stated Principal Amounts
Rate Maturity Amounts 9/30/96
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 $640,789 which were recorded by the Company through
September 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 September 30,
1996 follows:
Outstanding
Original Principal
Interest Stated Principal Amounts
Rate Maturity Amounts 9/30/96
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.
Third Quarter 1996 vs. Third Quarter 1995
Revenues for the third quarter of 1996 include interest income of $36,470
and $34,805 from mortgages backing the unrated Series 1 bonds and unrated
Series 2 bonds, respectively. The corresponding revenues for the third quarter
of 1995 include interest income of $51,268 and $48,316 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 $0 and $0 during the third quarter of 1996 and
1995, respectively.
First Nine Months 1996 vs. First Nine Months 1995
Revenues for the first nine months of 1996 include interest income of
$112,533 and $123,323 from mortgages backing the unrated Series 1
bonds and unrated Series 2 bonds, respectively. The corresponding revenues for
the first nine months of 1995 include interest income of $196,501 and
$146,560 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 nine
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 the prevailing
rates for similar loans, prepayments on principal on the mortgage loans
are likely to occur. Five mortgage loans with outstanding balances
totaling $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; in the third quarter of 1996,
management recorded a fifth write-down of $45,000, 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.
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 has been appraised by the insurance company who issued
a policy covering the property. The insurance company issuing this
policy has made two settlements covering the three incidents
totaling $207,190.30. $177,655.08 was received on September 4, 1996 and
$29,535.22 on October 28, 1996. 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
has received an offer for the sale of the property "as is" for $520,000.
A Purchase and Sale Agreement is currently being negotiated for a cash sale
prior to year ending 1996.
The Company is closely monitoring two mortgage loans collateralized by
first liens on church buildings and related property with unpaid
principal balances of $2,070,191 at September 30, 1996. Management is
concerned with the borrower's 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 $1,288,860 was appraised on
December 20, 1994; the property with a carrying value of $781,331 was
appraised on March 4, 1996.
One of the churches with a recorded principal balance of $1,288,860 has
entered into an arrangement whereby the Company drafts $6,464 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 $781,331, the
church has not made its payments when due on the first of the month.
Instead, the church has been drafted weekly and completed the monthly payment
on or before the 30th 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 is necessary for that loan.
Liquidity and Capital Resources
The Company has no fixed assets nor 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. On August 10, 1996 an additional $160,197 of principal payments and
$67,962 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, $151,255 of principal payments scheduled for February
10, 1996 to holders of 9.25% Unrated Series 1 senior bonds, and
$160,197 of principal payments scheduled for August 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. On August 10, 1996, an additional
$67,962 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 transaction described in the Other Information section of the
previous 10-Q Filing occurred on September 10, 1996. The servicer CML
has entered into an agreement with a life insurance company domesticated in
Texas which produces (1) a change in control of CML to the Texas life
insurance company and (2) a change in CML's management. The Texas
life insurance company now owns 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.
November 13, 1996 By:
Jane Sy,
President
November 13, 1996 By:
Charlesa Hooper, Secretary
