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, 1997
( ) 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)
2727 Allen Parkway, Houston Texas 77019-2115
(Address of principal executive offices) (Zip Code)
(713) 529-0045
(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, 1997 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, 1997 and December 31, 1996
Assets September 30, December 31,
1997 1996
Unaudited
Cash $ 1,385 $ 1,787
Cash and cash equivalents, held by truste 620,750 147,989
Total cash and cash equivalents 622,135 149,776
Mortgage loans, held by trustee 1,713,105 2,389,007
Receivable from sale of ORE 376,334
Prepaid interest 90,755 56,137
Accrued interest receivable 18,057 14,350
Deferred issuance costs 50,888 59,672
$ 2,484,940 $ 3,045,276
Liabilities and Stockholder's Equity
Mortgage-backed senior bonds $ 2,193,051 $ 2,789,624
Mortgage-backed subordinated bonds 204,100 204,100
Accrued interest payable 58,939 31,277
Residual interests 37,465 15,101
Other liabilities 3,387
Total liabilities 2,493,555 3,043,489
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 7,385 7,787
Total 32,379 32,787
Less cost of 948 shares reacquired and
held in treasury (31,000) (31,000)
Total stockholder's equity 1,385 1,787
$ 2,494,940 $ 3,045,276
See accompanying notes to the financial statements.
CML CHURCH MORTGAGE, INC.
Statements of Income
(Unaudited)
For the Three Months Ended
September 30,
1997 1996
Revenues:
Interest on mortgage loans $ 85,275 $ 71,275
Reduction of residual interest (24,491) (908)
Reduction of mortgage-backed senior bonds --- 45,000
Reinvestment earnings on cash and cash equivalents
held by trustee 4,459 2,747
Other interest income 6 11
Total revenues $ 65,249 $ 118,125
Expenses:
Interest 50,183 60,980
Provision for losses on other real estate owned --- 45,000
Loan servicing fees 6,741 4,381
Amortization of deferred issuance costs 4,685 1,340
Other expenses 3,634 6,413
Total expenses 65,243 118,114
Net income $ 6 $ 11
See accompanying notes to the financial statements.
CML CHURCH MORTGAGE, INC.
Statements of Income
(Unaudited)
For the Nine Months Ended
September 30
1997 1996
Revenues:
Interest on mortgage loans $ 203,812 $ 235,856
Reduction of residual interest (23,366) 8,439
Reduction of mortgage-backed senior bonds --- 45,000
Reinvestment earnings on cash and cash equivalents
held by trustee 9,430 7,087
Other interest income 25 328
Total revenues $ 189,901 $ 296,710
Expenses:
Interest 161,384 190,747
Provision for losses on other real estate owned --- 45,000
Loan servicing fees 13,007 13,937
Amortization of deferred issuance costs 8,784 16,281
Other expenses 7,129 30,429
Total expenses 190,304 296,394
Net income $ (403) $ 316
See accompanying notes to the financial statements.
CML CHURCH MORTGAGE, INC.
Statements of Cash Flows
(Unaudited)
For the Nine Months Ended
September 30,
1997 1996
Cash flows from operating activities:
Net income $ (403) $ 305
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Amortization of deferred issuance costs 8,784 16,281
Reduction of mortgage-backed senior bonds --- (45,000)
Provision for losses on other real estate owned --- 45,000
Decrease in receivable from sale of ORE 376,334 ---
(Increase) decrease in prepaid interest (34,618) (17,021)
Reduction of residual interest 22,364 (8,439)
Decrease (increase) in accrued int receivable (3,707) 4,771
Increase (decrease) in accrued interest payable 27,662 22,848
(Decrease) increase in other liabilities (3,386) (333)
Net cash provided by (used in)
operating activities 393,030 18,423
Cash flows from investing activities:
Principal payments on mortgage lo0ans 675,902 528,555
Net cash provided by investing activities 675,902 528,555
Cash flows from financing activities:
Principal payments on mortgage-backed senior bonds (596,573) (378,000)
Payment to redeem stock ---- (31,000)
Net cash used in financing activities (596,573) (409,000)
Net increase (decrease) in cash and cash equivalents 472,359 137,978
Cash and cash equivalents, beginning of period 149,776 149,890
Cash and cash equivalents, end of period $ 622,135 $ 287,868
See accompanying notes to financial statements.
CML CHURCH MORTGAGE, INC.
Notes to Financial Statements (Unaudited)
September 30, 1997
(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
There are no problem loans at the current time.
(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.
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
$108,112, 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. This offer was never
finalized.
In October 1996 the company received another offer for the sale of the
property "as is" for $520,000. Additionally, two settlements totaling $207,190
were received covering three incidents of substantial vandalism and theft of
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". An environmental inspection revealed asbestos
that was exposed by the vandalism incidents. The cost of the asbestos removal
was estimated at $150,000 further reducing the offer price to approximately
$370,000. As a result, an additional $123,666 write-down was recorded at
December 31, 1996.
The property was sold "as is" on December 30, 1996, for approximately
$370,000 and funds were received in January 1997. The write-down recorded at
December 31, 1996 was adjusted to $90,000 due to an over estimation of selling
expenses.
(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, 1997
follows:
Outstanding
Original Principal
Interest Stated Principal Amounts
Rate Maturity Amounts 09/30/97
9.00 2/10/1994 $ 262,000 $ 67,651
9.10 8/10/1994 277,000 71,524
9.10 2/10/1995 329,000 84,951
9.10 8/10/1995 348,000 89,857
9.25 2/10/1996 406,000 104,833
9.25 8/10/1996 430,000 111,030
9.25 2/10/1997 493,000 127,298
9.75 8/10/2001 5,506,000 1,350,697
$ 8,051,000 $2,007,841
The above maturity schedule does not reflect the write-downs of Series 1
Senior Bonds totaling $730,790 which were recorded by the Company through
September 30, 1997 (see note 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, 1997
follows:
Outstanding
Original Principal
Interest Stated Principal Amounts
Rate Maturity Amounts 09/30/97
9.85 10/10/1997 362,000 58,000
9.85 4/10/1998 382,000 58,000
10.50 4/10/2003 5,359,000 800,000
$ 6,103,000 $ 916,000
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.
Item 2-Management's Disc & Analysis of Finan Condition & Results of Operations.
Third Quarter 1997 vs. Third Quarter 1996
Revenues for the third quarter of 1997 include interest income of $26,327
and $23,857 from mortgages backing the unrated Series 1 bonds and unrated
Series 2 bonds, respectively. The corresponding 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 lower
income for 1997 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 $88,958 and $0 during the third quarter of 1997
and 1996, respectively.
First Nine Months 1997 vs. First Nine Months 1996
Revenues for the first nine months of 1997 include interest income of
$88,899 and $72,485 from mortgages backing the unrated Series 1 bonds and
unrated Series 2 bonds, respectively. The corresponding 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 lower income for 1997 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 $596,573 and $378,000 during the first nine months
of 1997 and 1996, 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.
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
$108,112, 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 totaling $207,190 were
made covering three incidents of substantial vandalism and theft of 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." An environmental inspection revealed asbestos
that was exposed by the vandalism incidents. The cost of the asbestos removal
was estimated at $150,000 further reducing the offer price to approximately
$370,000. As a result an additional $123,666 write-down was recorded at
December 31, 1996.
The property was sold "as is" on December 30, 1996, for $370,000 and the
funds were received in January 1997. The write-down recorded at December 31,
1996 was adjusted to $90,000 due to an over estimation of selling expenses.
The Company has been closely monitoring one mortgage loan collateralized by
a first lien on church buildings and related properties with an unpaid
principal balances of $262,868 at September 30, 1997. Management has been
concerned with the borrowers' ongoing ability to meet debt service requirements.
The church is currently conducting a bond issuance to refinance the
mortgage. The payment of $300,000 has brought payments current through August
1 and reduced the principal to $262,868. Additional payments through November
1 have reduced the principal to $157,562. It is anticipated that this loan
will be paid off prior to year ending 1997.
In assessing the recoverability of loans, management evaluates information
concerning the borrowers' financial condition and obtains updates of appraisals
as considered necessary. 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. As discussed in Management's
Discussion and Analysis of Financial Condition and Results of Operations 1997
vs. 1996 interest income from mortgages backing the Series 1 bonds declined 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 $88,715 of principal
payments scheduled for February 10, 1995 to holders of 9.10% unrated Series 1
senior bonds, $93,839 of principal payments scheduled for August 10, 1995 to
holders of 9.10% unrated Series 1 senior bonds, $109,478 of principal payments
scheduled for February 10, 1996 and $115,950 of principal payments scheduled
for August 10, 1996 to holders of 9.10% unrated Series 1 senior bonds. On
February 10, 1997, an additional $132,937 of principal payments was not paid as
scheduled to the holders of 9.10% unrated Series 1 senior bonds. 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
$70,648 of principal payments scheduled for February 10, 1994 to holders of 9%
unrated Series 1 senior bonds, $74,693 of principal payments scheduled for
August 10, 1994 to holders of 9.10% unrated Series 1 senior bonds and $88,715
of principal payments scheduled for February 10, 1995 to holders of 9.10%
unrated Series 1 senior bonds, $93,838 of principal payments scheduled for
August 10, 1995 to holders of 9.10% unrated Series 1 senior bonds, $109,478 of
principal payments scheduled for February 10, 1996 to holders of 9.25% unrated
Series 1 senior bonds, $115,950 of principal payments scheduled for August 10,
1996 to holders of 9.25% unrated Series 1 senior bonds and $132,937 of
principal payments scheduled for February 10, 1997 to holders of 9.25% unrated
Series 1 senior bonds.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
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 21, 1997 By: Daniel George
Daniel George, President
November 21, 1997 By: Mary Lou Rainey
Mary Lou Rainey, Secretary
