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 June 30, 1998
( ) 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 June 30, 1998 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, 1998 and December 31, 1997
Assets June 30, December 31,
1998 1997
Unaudited
Cash $ 1,403 $ 1,391
Cash and cash equivalents, held by trustee 155,435 123,900
Total cash and cash equivalents 156,838 125,291
Mortgage loans, held by trustee 1,309,431 1,535,004
Prepaid interest 79,541 70,429
Accrued interest receivable 12,488 14,537
Deferred issuance costs 24,048 30,522
Total assets $ 1,582,346 $ 1,775,783
Liabilities and Stockholder's Equity
Mortgage-backed senior bonds $ 1,342,741 $ 1,532,738
Mortgage-backed subordinated bonds 204,100 204,100
Accrued interest payable 8,932 12,168
Residual interests 25,170 25,386
Total liabilities $ 1,580,943 $ 1,774,392
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 7,403 7,391
Subtotal 32,403 32,391
Less cost of 948 shares reacquired and
held in treasury (31,000) (31,000)
Total stockholder's equity 1,403 1,391
Total liabilities and stockholder's equity $ 1,582,346 $ 1,775,783
See accompanying notes to the financial statements.
CML CHURCH MORTGAGE, INC.
Statements of Income
(Unaudited)
For the Three Months Ended
June 30,
1998 1997
Revenues:
Interest on mortgage loans $ 38,179 $ 58,439
Reduction of residual interest 342 (451)
Reinvestment earnings on cash and cash equivalents
held by trustee 1,330 1,264
Other interest income 6 7
Total revenues $ 39,857 $ 59,259
Expenses:
Interest 29,587 53,931
Loan servicing fees 5,961 (565)
Amortization of deferred issuance costs 3,112 4,568
Other expenses 1,191 1,745
Total expenses 39,851 59,679
Net income (loss) $ 6 $ (420)
See accompanying notes to the financial statements.
CML CHURCH MORTGAGE, INC.
Statements of Income
(Unaudited)
For the Six Months Ended
June 30,
1998 1997
Revenues:
Interest on mortgage loans $ 78,992 $ 118,537
Reduction of residual interest 216 1,126
Reinvestment earnings on cash and cash equivalents
held by trustee 3,078 4,970
Other interest income 13 18
Total revenues $ 82,299 $ 124,651
Expenses:
Interest 59,214 111,200
Loan servicing fees 12,600 6,266
Amortization of deferred issuance costs 6,473 4,099
Other expenses 4,000 3,495
Total expenses 82,287 125,060
Net income (loss) $ 12 $ (409)
See accompanying notes to the financial statements.
CML CHURCH MORTGAGE, INC.
Statements of Cash Flows
(Unaudited)
For the Six Months Ended
June 30,
1998 1997
Cash flows from operating activities:
Net income (loss) $ 12 $ (409)
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Amortization of deferred issuance costs 6,473 4,099
Decrease in receivable from sale of ORE --- 376,334
(Increase) decrease in prepaid interest (9,112) 2,467
Reduction of residual interest (216) (2,127)
Decrease (incr) in accrued interest receivable 2,049 59
Increase (decr) in accrued interest payable (3,235) (1,808)
(Decrease) increase in other liabilities --- (3,387)
Net cash provided by (used in)
operating activities (4,029) 375,228
Cash flows from investing activities:
Principal payments on mortgage loans 225,574 126,922
Net cash provided by investing activities 225,574 126,922
Cash flows from financing activities:
Principal payments on mtg-backed sr bonds (189,998) (507,613)
Net cash used in financing activities (189,998) (507,613)
Net increase (decrease) in cash and cash equivalents 31,547 (5,463)
Cash and cash equivalents, beginning of period 125,291 149,776
Cash and cash equivalents, end of period 156,838 144,313
See accompanying notes to financial statements.
CML CHURCH MORTGAGE, INC.
Notes to Financial Statements (Unaudited)
June 30, 1998
(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 Loan
The Company is closely monitoring one loan with a balance of $954,838 at
June 30, 1998. Payments are current due to draws from the loan payment
account. This account requires six (6) months of payments at all times.
Weekly drafts in the amount of $6,787 to replenish the loan payment account
have not been completed for twelve (12) of the drafts since September 1997.
The borrower will attempt to make up this short-fall in the loan payment
account beginning April 1998. Weekly drafts of $6,787 were not completed on
March 12, March 26, June 4 and June 11, 1998. No drafts have been completed
since June 25, 1998. All other weekly drafts have been completed. None of
the missed drafts have been replaced to date. Payment remains current due
to draws from the loan payment account.
(3) Mortgage Loans, Held by Trustee
The mortgage loans, which serve as collateral for the mortgage-backed senior
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 43% 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. Approximately 73% of
the remaining balance receivable is due from one congregation.
(4) Other Real Estate Owned
On December 28, 1993, the Company accepted a deed-in-lieu of foreclosure on
a church property 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. 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 early January 1997. Additional funds
amounting to $37,353 were received in January 1997 due to an over estimation
of selling expenses at December 31, 1996; therefore, the write-down at
December 31, 1996 was adjusted to $90,000.
(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, 1998
follows:
Outstanding
Original Principal
Interest Stated Principal Amounts
Rate Maturity Amounts 06/30/98
9.00 2/10/1994 $ 262,000 $ 64,046
9.10 8/10/1994 277,000 67,713
9.10 2/10/1995 329,000 80,424
9.10 8/10/1995 348,000 85,068
9.25 2/10/1996 406,000 99,247
9.25 8/10/1996 430,000 105,113
9.25 2/10/1997 493,000 120,514
9.75 8/10/2001 5,506,000 1,278,718
$ 8,051,000 $1,900,843
The above maturity schedule does not reflect the write-downs of Series 1
Senior Bonds totaling $727,103 which were recorded by the Company through
June 30, 1998 (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 June 30, 1998 follows:
Outstanding
Original Principal
Interest Stated Principal Amounts
Rate Maturity Amounts 06/30/98
10.50 4/10/2003 $5,359,000 $169,000
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 Discussion and Analysis of Financial Condition and
Results of Operations.
Second Quarter 1998 vs. Second Quarter 1997
Revenues for the second quarter of 1998 include interest income of $27,240
and $10,940 from mortgages backing the unrated Series 1 bonds and unrated
Series 2 bonds, respectively. The corresponding revenues for the second
quarter of 1997 include interest income of $29,895 and $24,039 from mortgages
backing the unrated Series 1 bonds and unrated Series 2 bonds, respectively.
The lower income for 1998 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 $83,000 and $38,333 during the second quarter of
1998 and 1997, respectively.
First Six Months 1998 vs. First Six Months 1997
Revenues for the first six months of 1998 include interest income of
$55,969 and $23,022 from mortgages backing the unrated Series 1 bonds and
unrated Series 2 bonds, respectively. The corresponding revenues for the
first six months of 1997 include interest income of $62,572 and $48,629 from
mortgages backing the unrated Series 1 bonds and unrated Series 2 bonds,
respectively. The lower income for 1998 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 $189,998 and $507,615 during the first six months
of 1998 and 1997, 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. 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
$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 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 the receipt of additional funds in
January 1997 amounting to $37,353 relating to an over estimation of selling
expenses.
The Company has been closely monitoring one mortgage loan with a balance
of $954,838 at June 30, 1998. Payments are current due to draws from the
loan payment account. This account requires six (6) months of payments at
all times. Weekly drafts in the amount of $6,787 to replenish the loan
payment account have not been completed for twelve (12) of the drafts since
September 1997. The borrower will attempt to make up this short-fall in the
loan payment account beginning in April 1998. Weekly drafts of $6,787 were
not completed on March 12, March 26, June 4 and June 11, 1998. No drafts have
been completed since June 25, 1998. All other weekly drafts have been
completed. None of the missed drafts have been replaced to date. Payment
remains current due to draws from the loan payment account.
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 1998
vs. 1997 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 $80,424 of principal
payments scheduled for February 10, 1995 to holders of 9.10% unrated Series 1
senior bonds, $85,069 of principal payments scheduled for August 10, 1995 to
holders of 9.10% unrated Series 1 senior bonds, $99,247 of principal payments
scheduled for February 10, 1996 and $105,114 of principal payments scheduled
for August 10, 1996 to holders of 9.25% unrated Series 1 senior bonds. On
February 10, 1997, an additional $120,514 of principal payments was not paid
as scheduled to the holders of 9.25% 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 the 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 morgage 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.
Year 2000 Compliance
By the end of 1999, the Company expects that its various administrative
systems will have the capability to process transactions dated beyond 1999.
The costs to complete the Company's efforts to modify or replace such systems
are not expected to be material.
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 $64,046 of principal payments scheduled for February 10,
1994 to holders of 9% unrated Series 1 senior bonds, $67,713 of principal
payments scheduled for August 10, 1994 to holders of 9.10% unrated Series 1
senior bonds and $80,424 of principal payments scheduled for February 10,
1995 to holders of 9.10% unrated Series 1 senior bonds, $85,069 of principal
payments scheduled for August 10, 1995 to holders of 9.10% unrated Series 1
senior bonds, $99,247 of principal payments scheduled for February 10, 1996
to holders of 9.25% unrated Series 1 senior bonds, $105,114 of principal
payments scheduled for August 10, 1996 to holders of 9.25% unrated Series 1
senior bonds and $120,514 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.
August 12, 1998 By: /s/ Daniel George
Daniel George, President
August 12, 1998 By: /s/ Mary Lou Rainey
Mary Lou Rainey, Secretary
