Attached files
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EX-32 - CHURCH LOANS 10-Q - CHURCH LOANS & INVESTMENTS TRUST | f200909_ex32.htm |
EX-13.2 - CHURCH LOANS 10-Q - CHURCH LOANS & INVESTMENTS TRUST | f200909_ex13z2.htm |
EX-13.1 - CHURCH LOANS 10-Q - CHURCH LOANS & INVESTMENTS TRUST | f200909_ex13z1.htm |
United States | |||||||||||
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Washington, D.C. 20549 | |||||||||||
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FORM 10-Q | |||||||||||
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x | QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2009 | ||||||||||
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£ | TRANSITION REPORT UNDER SECTION 13 OR 15[d] OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________ to ________. | ||||||||||
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Commission File No. 0-8117 | |||||||||||
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CHURCH LOANS & INVESTMENTS TRUST | ® | ||||||||||
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(Exact name of registrant as specified in its charter) | |||||||||||
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Texas |
| 75-6030254 | |||||||||
(State or other jurisdiction of |
| (IRS Employer | |||||||||
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5305 W Interstate 40, Amarillo, Texas |
| 79106-4759 | |||||||||
(Address of principal executive office) |
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(806) 358-3666 | |||||||||||
(Issuers telephone number including area code) | |||||||||||
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Not Applicable | |||||||||||
(Former name, former address and former fiscal year, if changed since last report) | |||||||||||
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Indicate by check mark whether the registrant (1) has 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 £ | |||||||||||
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Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No £ | |||||||||||
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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one): | |||||||||||
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| Large accelerated filer £ |
| Accelerated filer £ | ||||||||
| Non-accelerated filer £ |
| Smaller reporting company x | ||||||||
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Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes £ No x | |||||||||||
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Class |
| Outstanding at October 21, 2009 | |||||||||
Shares of beneficial interest, |
| 10,217,094 |
CHURCH LOANS & INVESTMENTS TRUST FORM 10-Q For the Quarter Ended September 30, 2009 | |||||||
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INDEX | |||||||
Page | |||||||
Part I. | Financial Information | ||||||
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| Item 1. | Financial Statements: | |||||
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| a) | Condensed Consolidated Balance Sheets (Unaudited) September 30, 2009 and | 1 | ||||
| b) | 2 | |||||
| c) | 3 | |||||
| d) | Notes to Condensed Consolidated Financial Statements (Unaudited) | 4 | ||||
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| Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations | 6 | ||||
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| Item 3. | 18 | |||||
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| Item 4T. | 20 | |||||
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Part II. | Other Information |
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| Item 1. | 20 | |||||
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| Item 2. | 20 | |||||
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| Item 3. | 20 | |||||
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| Item 4. | 20 | |||||
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| Item 5. | 20 | |||||
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| Item 6. | 20 | |||||
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21 | |||||||
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22 |
PART I. FINANCIAL INFORMATION | ||||||||
Item 1. Financial Statements | ||||||||
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CHURCH LOANS & INVESTMENTS TRUST | ||||||||
(A Real Estate Investment Trust) | ||||||||
Condensed Consolidated Balance Sheets (Unaudited) | ||||||||
September 30, 2009 and March 31, 2009 | ||||||||
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ASSETS | ||||||||
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| September 30, |
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| March 31, |
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CASH AND CASH EQUIVALENTS |
| $ | 22,356 |
| $ | 115,694 |
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RECEIVABLES |
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Mortgage loans and church bonds performing |
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| 60,717,222 |
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| 55,512,158 |
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Interim construction loans performing |
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| 17,498,510 |
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| 16,686,014 |
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Nonperforming mortgage loans, church bonds and interim construction loans |
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| 7,943,706 |
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| 6,747,480 |
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Less: Allowance for credit losses |
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| (1,965,760) |
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| (1,626,760) |
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| 84,193,678 |
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| 77,318,892 |
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Accrued interest receivable |
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| 628,965 |
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| 577,413 |
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Notes receivable |
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| 1,000 |
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| 1,000 |
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Net receivables |
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| 84,823,643 |
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| 77,897,305 |
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PROPERTY AND EQUIPMENT, net |
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| 214,243 |
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| 214,932 |
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OTHER ASSETS |
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| 148,515 |
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| 87,644 |
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TOTAL ASSETS |
| $ | 85,208,757 |
| $ | 78,315,575 |
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LIABILITIES AND SHAREHOLDERS EQUITY | ||||||||
LIABILITIES |
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Notes payable and line of credit: |
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Related parties |
| $ | 12,561,726 |
| $ | 12,601,983 |
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Other |
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| 40,372,488 |
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| 34,276,153 |
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| 52,934,214 |
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| 46,878,136 |
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Accrued interest payable |
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| 104,805 |
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| 95,349 |
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Other |
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| 325,446 |
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| 241,360 |
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Total liabilities |
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| 53,364,465 |
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| 47,214,845 |
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SHAREHOLDERS EQUITY |
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Shares of beneficial interest, no par value; authorized shares unlimited, 10,223,690 shares issued |
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| 29,762,291 |
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| 29,762,291 |
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Undistributed net income |
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| 2,098,491 |
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| 1,354,929 |
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Treasury shares, at cost (6,596 shares) |
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| (16,490) |
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| (16,490) |
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Total shareholders equity |
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| 31,844,292 |
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| 31,100,730 |
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TOTAL LIABILITIES AND SHAREHOLDERS EQUITY |
| $ | 85,208,757 |
| $ | 78,315,575 |
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These condensed consolidated financial statements should be read only in connection |
-1-
CHURCH LOANS & INVESTMENTS TRUST |
(A Real Estate Investment Trust) |
Condensed Consolidated Statements of Income (Unaudited) |
Three-month and Six-month periods ended September 30, 2009 and 2008 |
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| Three-month periods |
| Six-month periods |
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| 2009 |
| 2008 |
| 2009 |
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| 2008 |
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INTEREST AND FEE INCOME: |
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Interest income | $ | 1,439,118 | $ | 1,346,908 | $ | 2,906,726 |
| $ | 2,919,340 |
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Fee income |
| 199,003 |
| 121,526 |
| 313,959 |
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| 233,978 |
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Interest and fee income |
| 1,638,121 |
| 1,468,434 |
| 3,220,685 |
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| 3,153,318 |
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INTEREST EXPENSE |
| 462,538 |
| 354,600 |
| 901,398 |
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| 716,456 |
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Net interest income |
| 1,175,583 |
| 1,113,834 |
| 2,319,287 |
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| 2,436,862 |
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PROVISION FOR CREDIT LOSSES |
| 289,000 |
| 95,000 |
| 339,200 |
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| 95,000 |
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Net interest income less provision for |
| 886,583 |
| 1,018,834 |
| 1,980,287 |
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| 2,341,862 |
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OTHER INCOME |
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Gain on sale of other real estate owned |
| 525 |
| - |
| 1,050 |
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| - |
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Other |
| 12,100 |
| 12,240 |
| 30,759 |
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| 19,126 |
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Other income |
| 12,625 |
| 12,240 |
| 31,809 |
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| 19,126 |
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OTHER OPERATING EXPENSES |
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General and administrative |
| 364,551 |
| 238,601 |
| 611,108 |
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| 523,558 |
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Board of Trust Managers fees |
| 25,500 |
| 18,800 |
| 44,400 |
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| 37,800 |
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Total other operating expenses |
| 390,051 |
| 257,401 |
| 655,508 |
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| 561,358 |
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NET INCOME | $ | 509,157 | $ | 773,673 | $ | 1,356,588 |
| $ | 1,799,630 |
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NET INCOME PER SHARE | $ | .05 | $ | .08 | $ | .13 |
| $ | .18 |
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DIVIDENDS PER SHARE | $ | - | $ | - | $ | .06 |
| $ | .07 |
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These consolidated financial statements should be read only in connection |
-2-
-3-
CHURCH LOANS & INVESTMENTS TRUST
(A Real Estate Investment Trust)
Notes to Condensed Consolidated Financial Statements (Unaudited)
NOTE 1 GENERAL
See Summary of Significant Accounting Policies in the Trusts Annual Report on Form 10-K for a summary of the Trusts significant accounting policies.
The unaudited condensed consolidated financial statements included herein were prepared from the books of the Trust in accordance with accounting principles generally accepted in the United States and reflect all adjustments (consisting of normal recurring accruals) which are, in the opinion of management, necessary to a fair statement of the results of operations and financial position for the interim periods. Such financial statements generally conform to the presentation reflected in the Trusts Annual Report to Shareholders. The current interim period reported herein is included in the fiscal year subject to independent audit at the end of that year and is not necessarily an indication of the expected results for the fiscal year.
The consolidated financial statements include the accounts of Church Loans & Investments Trust and its wholly-owned subsidiary, ChurchLoans.com, LLC. All intercompany balances and transactions have been eliminated.
NOTE 2 - WEIGHTED AVERAGE INTEREST RATES
Weighted average interest rates and net interest rate margins at September 30, 2009 and 2008, were as follows:
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| Mortgage loan and |
| Total |
| Net interest rate |
September 30, 2009 |
| 7.32% |
| 3.73% |
| 3.59% |
September 30, 2008 |
| 8.17% |
| 3.84% |
| 4.33% |
NOTE 3 - CONTRACTUAL MATURITIES
Scheduled principal payments on mortgage loans, church bonds and interim construction loans and indebtedness (including notes payable) outstanding at September 30, 2009, for the five twelve-month periods subsequent to September 30, 2009, follow:
Twelve-month period ending |
| Mortgage loans, church bonds |
| Total | ||
2010 |
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| $ 23,644,029 |
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| $ 31,780,000 |
2011 |
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| 2,928,015 |
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| 21,154,214 |
2012 |
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| 3,091,726 |
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| - |
2013 |
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| 3,007,422 |
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| - |
2014 |
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| 2,875,325 |
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| - |
NOTE 4 - MORTGAGE LOANS, CHURCH BONDS AND INTERIM CONSTRUCTION LOANS
Mortgage loans, church bonds and interim construction loans on which the accrual of interest had been discontinued amounted to $7,989,906 and $6,823,492 at September 30, 2009 and 2008, respectively. If interest on these mortgage loans, church bonds and interim construction loans had been accrued as earned, interest and fees on loans in the accompanying condensed consolidated statements of income would have been increased by approximately $696,000 and $313,000 for the six-month periods ended September 30, 2009 and 2008, respectively. Interest income actually recognized on such loans during 2009 and 2008 was approximately $53,000 and $177,000, respectively. In addition, impaired loans were approximately $15,117,000 and $12,710,000 at September 30, 2009 and March 31, 2009, respectively.
-4-
CHURCH LOANS & INVESTMENTS TRUST
(A Real Estate Investment Trust)
Notes to Condensed Consolidated Financial Statements (Unaudited)
NOTE 5 ACCOUNTING PRONOUNCEMENTS
In May 2009, the FASB issued guidance on managements assessment of subsequent events. This guidance is directed specifically to management, since management is responsible for preparing an entitys financial statements. The guidance clarifies that management must evaluate, as of each reporting period, events or transactions that occur after the balance sheet date through the date that the financial statements are issued. The guidance is effective prospectively for interim and annual financial periods ending after June 15, 2009, and the Company has adopted the provisions for its reporting period ending September 30, 2009. The adoption of this new guidance did not have a material impact on the Companys financial condition or results of operations. Management has evaluated subsequent events up through the date of the filing of this report with the SEC.
In July 2009, the FASB issued guidance providing for the FASB Accounting Standards Codification (the Codification) to become the single official source of authoritative GAAP. The Codification did not change GAAP but reorganizes the literature. Adoption of the new guidance did not materially impact the Companys financial statements.
NOTE 6 LEGAL CONTINGENCIES
Various legal claims arise from time to time in the normal course of business which, in the opinion of management, will have no material effect on the Trust's financial statements.
This information is an integral part of the accompanying condensed consolidated financial statements.
-5-
Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
FORWARD-LOOKING STATEMENTS DISCLOSURE
This Annual Report includes forward-looking statements within the meaning of the Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical fact made in this discussion are forward-looking, which can be identified by the use of forward-looking terminology such as may, will, expect, anticipate, estimate, believe, continue or other similar words. The forward-looking statements are based upon managements current plans and expectations and are subject to risks and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements, including:
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| Competition in the business of making loans to churches; |
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| A decline in general economic conditions; |
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| A decline in real estate values affecting the value of the collateral securing our loans; |
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| A rise in interest rates resulting in higher cost of funds to us prior to the re-pricing of the loans owing to us; |
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| Our inability to borrow funds and at reasonable rates of interest; |
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| General risks of lending; |
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| Change in federal or state laws affecting our operations; |
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| Loss of critical management; and |
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| Other risks. |
These risks and uncertainties are not intended to be exhaustive and should be read in conjunction with other cautionary statements made in this Annual Report.
Critical Accounting Policies
Our accounting and reporting policies are in accordance with accounting principles generally accepted in the United States of America. Our significant accounting policies are described in the notes to the financial statements in our Annual Report on Form 10-K. Certain accounting policies require management to make significant estimates and assumptions, which have a material impact on the carrying value of certain assets and liabilities, and we consider these to be critical accounting policies. The estimates and assumptions used are based on historical experience, as well as other factors, which management believes to be reasonable under the circumstances. Actual results could differ significantly from these estimates and assumptions, which could have a material impact on the carrying value of assets and liabilities at the balance sheet dates and results of operations for the reporting periods.
We believe that the following critical accounting policies require the most significant estimates and assumptions that are particularly susceptible to a significant change in the preparation of our financial statements.
Revenue Recognition. We accrue interest income as it is earned. All past due loans are reviewed monthly by management and the Audit Committee. A past due loan is evaluated based upon the payment history, opinion of the ultimate collectibility of the principal and interest and other experience factors. The accrual of interest is generally discontinued on loans and church bonds more than 60 days past due unless the credit is well secured and in the process of collection. In all cases, loans and bonds are placed on nonaccrual or charged-off at an earlier date, if collection of principal or interest is considered doubtful.
Once a loan is placed on non-accrual, the loan will be classified as either cash basis or capital recovery. A loan is typically classified as cash basis if the Audit Committee believes, based upon several factors, that there is a strong likelihood that the principal of the loan will be recovered, but is concerned that not all of the interest will be recovered. If a loan is classified as cash basis, then interest payments received will be applied to interest income. A loan is typically classified as capital recovery if the Audit Committee believes, based upon several factors, that there is a strong likelihood that we may not be able to recover all of the principal balance of the loan. In the event that a loan is classified as capital recovery, then payments received are applied to principal first and then to interest.
The actual decision to place a loan on non-accrual and the classification of the loan as either cash basis or capital recovery is made by the Audit Committee with input from management.
-6-
Non-accrual status loans are returned to an accrual status when in the opinion of the Audit Committee, based upon input from management, such is warranted based upon the passing of a sufficient time period during which the principal and interest have become current and remain current and, therefore, the loan, both principal and interest, is anticipated to be fully collectible.
Allowance for Credit Losses. The Audit Committee reviews the allowance for credit losses at the end of each quarter. The provision for losses is based on an amount that is adequate, in the opinion of the Audit Committee, based upon input from management, to absorb losses inherent in the existing portfolio. The evaluation, which includes a review of all loans on which full collection may not be reasonably assumed, considers among other factors, general economic conditions, the fair market value or estimated net realizable value of the underlying collateral securing the loan, past experience, trends in loan delinquency and other factors that warrant recognition in providing for an adequate allowance to absorb inherent losses. The evaluation by the Audit Committee includes a review of a quarterly grading methodology performed by management on all past-due loans. The Audit Committee, based upon its evaluation and review, then makes a recommendation to the full Board of Trust Managers as to the recommended amount of the credit loss reserve. The Board of Trust Managers, based upon the recommendation of the Audit Committee, establishes the amount of the allowance for credit losses and any adjustments to such allowance.
Other Real Estate Owned. Other real estate owned (OREO) represents property acquired as a result of a foreclosure of a mortgage note(s) held by Church Loans. OREO is recorded at estimated fair value less cost to sell at date of foreclosure, establishing a new cost basis. After foreclosure, OREO is carried at the lower of the carrying amount or estimated fair value minus estimated cost to sell. Impairment losses are charged to operations. Costs of the foreclosure, insurance and other costs associated with carrying the property are expensed.
Management has discussed our critical accounting policies and the development, selection and disclosure of the estimates and alternatives with the Audit Committee of the Board of Trust Managers and obtained their approval of the applicable disclosures contained in this report.
Overview
Church Loans was founded in May of 1959 and was organized to assist churches with the financing of purchases and construction of church facilities. Church Loans has also made loans for the financing of assisted living centers. Although we were originally organized under the corporate structure, we reorganized in 1963 as a real estate investment trust in order to take advantage of the favorable provisions of the federal tax law applicable to real estate investment trusts.
Our loan portfolio consists primarily of loans to churches and is comprised of both permanent loans and interim construction loans. Although, we have purchased existing loans from other lenders, our primary operating strategy is to originate, either through mortgage loan brokers, church bond broker-dealers or directly to churches, mortgage loans secured by a first mortgage against a churchs buildings and related facilities. We rarely, if ever, sell a loan and, therefore, we intend to hold our loan portfolio to maturity. Our underwriting standards normally include compiled, reviewed or audited financial statements depending on the size of the loan, a fair market value appraisal prepared by an independent appraiser, a first mortgage on the property of the church insured by a title insurance policy issued by a national title company, applicable fire and extended casualty insurance on the collateral and such other requirements as determined by management on a case by case basis. Also, as part of our due diligence, management normally makes, prior to funding, an onsite inspection of the property that is to secure the loan.
Originally, our Declaration of Trust required a debt-to-value ratio of not greater than 66 2/3%. However, at our annual meeting of shareholders held on July 16, 2004, the shareholders approved an Amended and Restated Declaration of Trust and Bylaws that raised the debt-to-value ratio to 85% unless substantial justification exists because of the presence of other underwriting criteria. Most of our present loans were made based upon the prior 66 2/3% debt-to-value ratio.
As a real estate investment trust, we are required by Section 857 of the Internal Revenue Code, as amended, to distribute not less than 90% of our taxable net income to our shareholders. Dividends are based on taxable income which varies from net income reported in the financial statements because of temporary differences (differences between the tax basis of an asset or liability and its reported amount in the financial statements that will result in taxable or deductible amounts in future years). Future dividends may be more or less than the net income reported in the financial statements because of variances in these temporary differences.
-7-
Management continues to pursue quality new loans, both interim and permanent. We continue to receive many inquiries for loans. However, many of those inquiries over the past 12 months have not met our underwriting standards. Presently, we are seeing less competition for these loans by banks and, in fact, it appears that some banks are attempting to liquidate their holdings of church loans that the banks acquired over the past few years.
Our interim loans come primarily from two sources. One source is churches that are issuing church bond offerings on a best efforts basis. Over the years, we have had many referrals from broker dealers who assist churches in bond offerings. These referrals resulted in a good source of interim loans or what is commonly referred to as bridge loans pursuant to which we provided the church with the funds to acquire a property, re-finance existing debt or start construction until the funds from the bond offering were available.
The other source of interim loans are loans for which we have agreed to make the permanent loan but are treating and carrying the loans as interim loans during the construction phase. Once construction is finished, then the loan is converted to a permanent amortized loan and then carried and treated as a permanent loan. Permanent loans have slightly increased as some interim loans have moved into permanent status by design. Also, more of the loans that we have recently made have been acquisitions rather than construction and, therefore, never were treated as interim loans. We would anticipate that with the current economic realities that the acquisition of existing church properties may be more affordable than construction of new properties and, therefore, this may be a continuing trend.
For the six-month period ended September 30, 2009, loan applications and inquiries have been steady. Contributing to our steady flow of loan requests may be the fact that some banks and other lenders have moved away from this type of lending as a result of the present economic conditions. It appears that the present economic environment and the possible restriction on the ability of banks and some other lenders to make real estate loans is providing us an opportunity to acquire additional loans. The increase in our portfolio of loans during the six-month period ended September 30, 2009 is consistent with these events. In fact, we purchased one loan with an outstanding principal balance of $4,218,017 on September 25, 2009.
We have been able to maintain our necessary funding. With the increase loan demand, we may attempt to obtain additional financing in order to take advantage of the present opportunity. However, there is no assurance that we will be able to obtain additional financing. Furthermore, Master Note balances have decreased from $22,784,638 as of September 30, 2008 to $21,154,214 as of September 30, 2009 (a decrease of 7%). We believe that the Master Notes will continue to be a dependable source of financing.
We have seen an increase in defaulted loans in our portfolio during the six-month period ended September 30, 2009 as compared to the six-month period ended September 30, 2008. We anticipate that if churches experience a decrease in contributions, then churches will first cut programs. We anticipate that only in the most dire situations will a church not make its mortgage payment and risk losing its property especially considering the equity that most of our borrowers have in their property due to the more conservative lending criteria that we have historically used. We will continue to closely monitor our past due loans and take action as is necessary.
Results of Operations --- Six-month period ended September 30, 2009 as compared to the six-month period ended September 30, 2008
Our revenues are derived from interest income and fees earned on loans as well as, to a lesser degree, interest earned on church bonds and short-term investments. During the six-month period ended September 30, 2009, interest income and fees increased by $67,367 (2%) over the six-month period ended September 30, 2008.
The increase in interest income and fees for the six-month period ended September 30, 2009, as compared to the six-month period ended September 30, 2008 was primarily attributable to an increase in performing mortgage loans and interim loans and an increase in fees.
The components of our interest income and fees during the six-month period ended September 30, 2009 as compared to the six-month period ended September 30, 2008 are as follows:
-8-
Table 1 Interest Income and Fees
| For the Six-month |
| For the Six-month |
| Increase | |||||||||
|
| |||||||||||||
Mortgage loans | $2,289,748 |
| $2,326,644 |
| $(36,896) |
| ||||||||
|
|
|
|
|
|
| ||||||||
Interim loans | 585,676 |
| 515,238 |
| 70,438 |
| ||||||||
|
|
|
|
|
|
| ||||||||
Commitment fees | 313,959 |
| 233,978 |
| 79,981 |
| ||||||||
|
|
|
|
|
|
| ||||||||
Other income and fees | 31,302 |
| 77,458 |
| (46,156) |
| ||||||||
|
|
|
|
|
|
| ||||||||
Total | $3,220,685 |
| $3,153,318 |
| $67,367 |
|
Total interest income on mortgage loans and interim loans decreased slightly during the six-month period ended September 30, 2009 as compared to the six-month period ended September 30, 2008. The increase in interest income on interim loans of $70,438 was offset by a decrease of $36,896 in interest income on mortgage loans. Also contributing to the decrease in interest income was a decrease in other income and fees of $46,156. Other income and fees include interest income on church bonds, discount income on mortgage loans, late charges and miscellaneous income. The decrease in interest income on mortgage loans is due to the decrease in the rate of interest on such mortgage loans.
The rate of interest on our portfolio of mortgage loans and church bonds was 8.06% as of September 30, 2008 as compared to 7.45% as of September 30, 2009, a decrease of 61 basis points.
Our portfolio of performing mortgage loans increased from $50,908,224 as of September 30, 2008 to $60,717,222 as of September 30, 2009, an increase of $9,808,998 or 19%.
Our total loan portfolio increased during the six-month period ended September 30, 2009 as compared to the six-month period ended September 30, 2008. The following table compares our portfolio of loans, net of mortgage discounts and deferred commitment fees, as of September 30, 2009 to September 30, 2008:
Table 2 Mortgage Loans, Church Bonds and Interim Loans as of September 30, 2009 and 2008
|
| Type of Loan | 09/30/09 | 09/30/08 | Increase (Decrease) |
|
|
|
|
|
|
|
|
|
| Total Mortgage Loans and Church Bonds | $65,107,128 | $54,131,716 | $ 10,975,412 |
|
|
|
|
|
|
|
|
|
| Total interim loans | 21,052,310 | 12,898,794 | 8,153,516 |
|
|
|
|
|
|
|
|
|
| Total loan portfolio | $86,159,438 | $67,030,510 | $19,128,928 |
|
|
| Performing Loans | 09/30/09 | 09/30/08 | Increase (Decrease) |
|
|
|
|
|
|
|
|
|
| Performing Mortgage Loans and Church Bonds | $60,717,222 | $50,908,224 | $ 9,808,998 |
|
|
|
|
|
|
|
|
|
| Performing Interim Loans | 17,498,510 | 9,298,794 | 8,199,716 |
|
|
|
|
|
|
|
|
|
| Total Performing Loans | $78,215,732 | $60,207,018 | $18,008,714 |
|
-9-
|
| Non-Performing Loans | 09/30/09 | 09/30/08 | Increase (Decrease) |
|
|
|
|
|
|
|
|
|
| Non-Performing Mortgage Loans and Church Bonds | $4,389,906 | $3,223,492 | $ 1,116,414 |
|
|
|
|
|
|
|
|
|
| Non-Performing Interim Loans | 3,553,800 | 3,600,000 | (46,200) |
|
|
|
|
|
|
|
|
|
| Total Non-Performing Loans | $7,943,706 | $6,823,492 | $1,120,214 |
|
Non-performing or non-accrual loans as defined by Church Loans are loans that have been classified as either cash basis or capital recovery (see explanation under Revenue Recognition under Critical Accounting Policies above).
Our loan portfolio increased in each of the six months during the six-month period ended September 30, 2009 as compared to each of the six months during the six-month period ended September 30, 2008. Table 3 below sets forth the month ending values of our loan portfolio, net of mortgage discounts and deferred commitment fees, for each of the six months during the six-month period ended September 30, 2009 and September 30, 2008, respectively:
Table 3 Month-End Portfolio Values
|
|
|
| Month |
| 2009 |
|
| 2008 |
|
| Difference |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| April |
| $79,971,159 |
|
| $67,469,937 |
|
| $12,501,222 |
|
|
|
|
|
|
|
| May |
| 80,350,919 |
|
| 67,605,082 |
|
| 12,745,837 |
|
|
|
|
|
|
|
| June |
| 80,612,450 |
|
| 66,936,845 |
|
| 13,675,605 |
|
|
|
|
|
|
|
| July |
| 83,047,373 |
|
| 67,442,859 |
|
| 15,604,514 |
|
|
|
|
|
|
|
| August |
| 83,132,467 |
|
| 67,615,745 |
|
| 15,516,722 |
|
|
|
|
|
|
|
| September |
| 86,159,438 |
|
| 67,030,510 |
|
| 19,128,928 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Monthly Average: |
| $82,212,301 |
|
| $67,350,163 |
|
| $14,862,138 |
|
|
|
|
Non-performing loans, church bonds and interim loans increased from $6,823,492 as of September 30, 2008 to $7,943,706 as of September 30, 2009, an increase of $1,120,214. The accrual of interest on these loans has been discontinued. If interest on these mortgage loans, church bonds and interim loans had been accrued as earned, interest and fees on loans would have been increased by approximately $696,000 and $313,000 for the six-month periods ended September 30, 2009 and 2008, respectively. Interest income actually recognized on such loans during the six-month period ended September 30, 2009 and 2008 was approximately $53,000 and $177,000, respectively.
We have seen an increase in loans that are in default in the six-month period ended September 30, 2009. Specific information on loans that are in default as of September 30, 2009 is included in Table 4 and Table 5 below.
Following is a table that provides the principal balance outstanding, maturity date, interest rate, collateral appraised value and collateral fair value on each of our permanent and interim loans designated as either in default or non-performing. We consider a permanent loan as in default if any required payment of principal or interest is more than 60 days past due and an interim loan is considered as in default if any required payment of principal or interest is more than 90 days past due. Non-performing loans are defined as loans that have been classified as either cash basis or capital recovery (see explanation under Revenue Recognition under Critical Accounting Policies above). Managements practice, in reviewing and grading the loan portfolio, is to first compare the present outstanding loan value to the original appraised value. If the loan to value ratio on a particular loan is 50% or less, then management does not normally make a further investigation of fair value on the particular collateral. However, if the loan to value ratio is greater than 50%, then management does determine, to the best of managements ability, managements opinion of the fair value of the collateral securing the loan. Therefore, fair value is included for loans for which the loan to value ratio, based on the appraised value, is in excess of 50%. Management assumes that for loans with a loan to value ratio, based on appraised value, of 50% or less that the fair value exceeds the outstanding loan balance.
-10-
Table 4 Information on Loans in Default or Non-Performing as of September 30, 2009
Loan | Principal Outstanding | Maturity | Rate | Appraised Value of Collateral(1) | Estimated Fair Value of Collateral |
|
|
|
|
|
|
Greater Life, Baltimore, MD | $ 7,326 | 11/01/2007 | 10.50% | $ 76,000 | N/A |
|
|
|
|
|
|
Holy Trinity, Brooklyn, NY | 468,989 | 03/01/2026 | 9.50% | 1,800,000 | N/A |
|
|
|
|
|
|
Rhema Word, Chicago, IL (2) | 1,280,812 | 07/01/2025 | 9.50% | 1,850,000 | 2,250,000 |
|
|
|
|
|
|
Spiritual Light, Detroit, MI | 73,105 | 11/01/2014 | 9.75% | 185,000 | N/A |
|
|
|
|
|
|
Global Christian, Richmond, CA (3) | 226,432 | 01/01/2014 | 9.50% | 640,000 | N/A |
|
|
|
|
|
|
Right Spirit, Spanish Fort, AL (4) | 83,810 | 05/01/2014 | 9.25% | 274,000 | N/A |
|
|
|
|
|
|
Cathedral of Faith, Tampa, FL | 741,402 | 09/01/2024 | 6.75% | 2,018,000 | N/A |
|
|
|
|
|
|
Biltmore Group, West Monroe, LA (5) | 1,053,800 | 06/01/2004 | 7.50% | 1,213,000 | 1, 200,000 |
|
|
|
|
|
|
Love Temple, Memphis, TN (6) | 237,576 | 01/15/2007 | 5.00% | 325,900 | 325,900 |
|
|
|
|
|
|
Project Love, Memphis, TN (6) | 255,840 | 01/15/2007 | 5.00% | 43,900 | 43,900 |
|
|
|
|
|
|
Igreja Baptista Pompano Beach, FL | 260,457 | 05/01/2025 | 7.75% | 388,000 | 400,000 |
|
|
|
|
|
|
Canaan COGIC Memphis, TN (7) | 275,433 | 03/01/2010 | 8.00% | 245,000 | 74,900 |
|
|
|
|
|
|
Ministerio International Virginia Gardens, FL | 2,500,000 | 10/01/2008 | 10.25% | 3,900,000 | 2,800,000 |
|
|
|
|
|
|
Amarillo Investors Mortgage, Amarillo, TX (8) | 676,454 | 06/10/05 | 9% | 1,887,021 | N/A |
|
|
|
|
|
|
Mt. Calvary MBC, Ft. Wayne, IN | 514,115 | 12/01/02 | 9.75% | 1,430,000 | N/A |
|
|
|
|
|
|
Highland Heights COC, Memphis, TN (9) | 67,902 | 04/09/92 | 10.5% | 492,000 | N/A |
|
|
|
|
|
|
King Solomon MBC, Jackson, TN (10) | 292,863 | 02/01/07 | 9% | 360,000 | 674,000 |
|
|
|
|
|
|
Promise Land Ministries, Memphis, TN (11) | 266,829 | 02/01/07 | 7.5% | 355,000 | 360,000 |
|
|
|
|
|
|
Fountain of Praise, Trenton, NJ (12) | 183,567 | 07/01/04 | 6% | 275,000 | 275,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-11-
King Jesus Worship Center, Winnsboro, LA | 632,207 | 02/27/04 | 6% | 1,600,000 | N/A |
|
|
|
|
|
|
Divine Mission Baltimore, MD | 177,225 | 06/01/21 | 9% | 375,000 | N/A |
|
|
|
|
|
|
St. Pauls Greenville, TX(13) | 46,191 | 02/01/17 | 8.5% | 1,507,791 | N/A |
|
|
|
|
|
|
Kingdom Life Hayward, CA | 487,351 | 08/01/24 | 6.25% | 2,000,000 | N/A |
|
|
|
|
|
|
Eglise Evangelique Orlando, FL(14) | 915,702 | 02/01/38 | 9% | 1,620,000 | 1,377,000 |
|
|
|
|
|
|
Brazilian Community Framingham, MA(14) | 973,184 | 05/01/29 | 7.25% | 1,500,000 | 1,250,000 |
|
|
|
|
|
|
Gods Tabernacle DeSoto, TX(15) | 613,886 | 09/01/09 | 6% | 756,000 | 538,650 |
|
|
|
|
|
|
Messiah MBC Indianapolis, IN | 1,399,174 | 05/01/10 | 7.3% | 4,585,000 | N/A |
(1) Except as noted, appraised value is at or about the date the loan was made.
(2) The collateral consists of two separate properties. The appraised value of one property is based upon an appraisal dated April 12, 2005 of $750,000. The second property was appraised on July 21, 2004 at $1,100,000. The church has entered into a contract for sale of the second property dated January 2009 that provides for a purchase price of $1,500,000. Therefore, the combined appraised value of the properties securing the loan is $1,850,000 and, based upon the contract of sale, the fair value of the properties securing the loan is approximately $2,250,000.
(3) Appraised value of the collateral is based on the most recent appraisal dated May 25, 2001.
(4) The raw land securing this loan was appraised at $84,000 and the appraised value of the collateral with improvements is $274,000.
(5) Church Loans recently obtained new appraisals of the properties securing this loan. These appraisals contained a range of value from $844,500 to $1,213,000. Church Loans wholly owned subsidiary ChurchLoans.Com, LLC recently acquired title to one of these properties at a foreclosure sale. The credit to the note resulting from the foreclosure was $46,200.
(6) These two loans were also purchased from Regions Bank in 2007. The loans are made to related entities and the loans are secured by four separate properties. It is our understanding that the loans are cross-collateralized. There were no appraisals of the properties in the loan files obtained from Regions Bank. Appraised value for the collateral listed in the table is the 2009 Tax Appraisal from the tax office of Shelby County, Tennessee. Due to the acquisition of these loans from Regions Bank, Church Loans carrying value in these loans is less than the principal balance owing on the loans. Church Loans carrying value in these loans is a total of $185,946 which results in a loan to value ratio of 50%.
(7) Fair value is based upon the Shelby County Tax Assessors 2009 appraisal. Carrying value of this loan is $175,471.
(8) Appraised value is based upon the Potter Randall County Appraisal Districts 2009 valuation of the properties securing the loan.
(9) Carrying value of this loan is $60,800.
(10) Carrying value of this loan is $252,480. Fair value is based on the Madison County Tax Assessors appraisal.
(11) Appraised value and fair value is based upon the Shelby County Tax Assessors 2009 valuation of the property. Carrying value of this loan is $222,343.
-12-
(12) This property was acquired by Church Loans through a foreclosure of a previous loan held by Church Loans and then sold to the Borrower in 2004 for $275,000. The appraised value and fair value are based upon such sales price.
(13) This loan was purchased by Church Loans from Resolution Trust Corporation in the early 1990s. There was not an appraisal in the original lenders file. The appraised value as shown is the amount of fire and extended coverage insurance the borrower maintains on the property and does not include the value of tangible personal property nor the value of the land. We believe that the appraised value as shown is a conservative estimate of value.
(14) Fair value is estimated at the most recent appraised value less 15%.
(15) The Trust sold this property to Gods Tabernacle of Deliverance on September 30, 2008 for $1,995,000. At that time, the Trust took in exchange a note from the church in the amount of $1,961,915 which was secured by a Deed of Trust against the property pari passu with a bond offering in the amount of $2,260,000. At the time of the bond offering and sale to the church, an independent appraiser appraised the property securing the note and bonds at a value of $2,800,000, A portion of the proceeds of the bonds were to be used to retire the note owing to the Trust. The church is in default in the payment of the bonds and it is our understanding that the sales of the bonds have stopped. Sufficient bonds were sold to reduce the note owing to the Trust to $613,000. Therefore, the Trust would hold a 27% interest in the deed of trust to secure its loan. The appraised value of the property is 27% of the $2,800,000 appraised value and fair value is 27% of the $1,995,000 purchase price.
Table 5 below provides information relative to action being taken on loans in default as of September 30, 2009.
Table 5 - Specific Information Relating to Loans in Default and Non-Performing Loans as of September 30, 2009:
Loan | Principal Outstanding | Foreclosure Action Taken | ||||||||||||||||||||||||||||||||
|
|
| ||||||||||||||||||||||||||||||||
Greater Life, Baltimore, MD | $ 7,326 | None. Balance is small. Staff is pursuing normal collection efforts. | ||||||||||||||||||||||||||||||||
|
|
|
|
| ||||||||||||||||||||||||||||||
Holy Trinity, Brooklyn, NY | 468,989 | None. Church is making payments and is staying within 90-120 days of being current. Debt is well secured | ||||||||||||||||||||||||||||||||
|
|
|
|
| ||||||||||||||||||||||||||||||
Rhema Word, Chicago, IL | 1,280,812 | None. Church is making payments. Debt is well secured. Church is trying to sell one of its properties to reduce debt and debt service. | ||||||||||||||||||||||||||||||||
|
|
|
|
| ||||||||||||||||||||||||||||||
Spiritual Light, Detroit, MI | 73,105 | None. Church is making payments. Balance is relatively small. Staff continues make normal collection efforts. | ||||||||||||||||||||||||||||||||
|
|
|
|
| ||||||||||||||||||||||||||||||
Global Christian, Richmond, CA | 226,432 | None. Church is making payments. Staff continues to monitor. | ||||||||||||||||||||||||||||||||
|
|
|
|
| ||||||||||||||||||||||||||||||
Right Spirit, Spanish Fort, AL | 83,810 | None. Church is making payments. Staff continues to monitor and make collection efforts as needed. | ||||||||||||||||||||||||||||||||
|
|
|
|
| ||||||||||||||||||||||||||||||
Cathedral of Faith, Tampa, FL | 741,402 | Litigation has been authorized to obtain insurance settlement proceeds and foreclose the property. In dispute with public adjustor regarding insurance settlement. | ||||||||||||||||||||||||||||||||
|
|
|
|
| ||||||||||||||||||||||||||||||
Love Temple, Memphis, TN | 237,576 | Litigation pending involving this loan, arising out of a dispute within the church. We have cross-claimed for foreclosure. | ||||||||||||||||||||||||||||||||
|
|
|
|
| ||||||||||||||||||||||||||||||
Project Love, Memphis, TN | 255,840 | Litigation pending involving this loan, arising out of a dispute within the church. We have cross-claimed for foreclosure. | ||||||||||||||||||||||||||||||||
|
|
|
|
| ||||||||||||||||||||||||||||||
Canaan COGIC, Memphis, TN | 275,433 | None, but legal action is presently being considered. | ||||||||||||||||||||||||||||||||
|
|
|
|
| ||||||||||||||||||||||||||||||
Igreja Batista, Pompano Beach, FL | 260,457 | This loan has been accelerated. | ||||||||||||||||||||||||||||||||
|
|
|
|
| ||||||||||||||||||||||||||||||
Biltmore Group, West Monroe, LA | 1,053,800 | Foreclosure has been initiated and is pending. One property securing this loan has recently been acquired through foreclosure. | ||||||||||||||||||||||||||||||||
|
|
|
|
| ||||||||||||||||||||||||||||||
Ministerio Intl., Virginia Gardens, FL | 2,500,000 | Foreclosure has been initiated and is pending. | ||||||||||||||||||||||||||||||||
|
|
|
|
|
-13-
|
|
|
|
| ||||||||||||||||||||||||||||||
Amarillo Investors Mortgage, Amarillo, TX | 676,454 | None. Since September 30, 2009, borrower has sold some of the collateral and used the proceeds to bring the loan current. | ||||||||||||||||||||||||||||||||
|
|
|
|
| ||||||||||||||||||||||||||||||
Mt. Calvary MBC, Ft. Wayne, IN | 514,115 | None. Borrower is 2 payments past due. Staff is monitoring. Church is doing fund raising campaign to resolve. | ||||||||||||||||||||||||||||||||
|
|
|
|
| ||||||||||||||||||||||||||||||
Highland Heights COC, Memphis, TN | 67,902 | None. Church is making payments. Staff is monitoring. | ||||||||||||||||||||||||||||||||
|
|
|
|
| ||||||||||||||||||||||||||||||
King Solomon MBC, Jackson, TN | 292,863 | None. Staff is making normal collection efforts. Borrower is 4 payments behind. Church continues to make payments. | ||||||||||||||||||||||||||||||||
|
|
|
|
| ||||||||||||||||||||||||||||||
Promise Land Ministries, Memphis, TN | 266,829 | None. Staff is monitoring. | ||||||||||||||||||||||||||||||||
|
|
|
|
| ||||||||||||||||||||||||||||||
Fountain of Praise, Trenton, NJ | 183,567 | Borrower filed bankruptcy. Chapter 11 Plan has been confirmed. Borrower is to pay $9,923 in arrears in 38 months at 6% interest and is to continue making payments according to the note beginning September 15, 2009. Note payments have yet been received. | ||||||||||||||||||||||||||||||||
|
|
|
|
| ||||||||||||||||||||||||||||||
King Jesus Worship Center, Winnsboro, LA | 632,207 | None. Borrower is making regular payments. Staff continues to monitor. Borrower is 2 payments behind. | ||||||||||||||||||||||||||||||||
|
|
|
|
| ||||||||||||||||||||||||||||||
Divine Mission Baltimore, MD | 177,225 | None. Staff is monitoring. Borrower continues to make payments and is 2 payments behind as of 9/30/09. | ||||||||||||||||||||||||||||||||
|
|
|
|
| ||||||||||||||||||||||||||||||
St. Pauls Greenville, TX | 46,191 | Since 9/30/09 Borrower has brought this loan current. | ||||||||||||||||||||||||||||||||
|
|
|
|
| ||||||||||||||||||||||||||||||
Kingdom Life Hayward, CA | 487,351 | None. Past due 2 payments as of 9/30/09. Borrower is making payments and staff continues to monitor. | ||||||||||||||||||||||||||||||||
|
|
|
|
| ||||||||||||||||||||||||||||||
Eglise Evangelique Orlando, FL | 915,702 | None. Past due 2 payments as of 9/30/09. Legal counsel has been instructed to give formal notice of default. | ||||||||||||||||||||||||||||||||
|
|
|
|
| ||||||||||||||||||||||||||||||
Brazilian Community Framingham, MA | 973,184 | None. Past due 3 payments as of 9/30/09. Borrower is making regular payments plus $2,000 per week to cover past due arrearages. | ||||||||||||||||||||||||||||||||
|
|
|
|
| ||||||||||||||||||||||||||||||
Igreja Asembleia Ft. Myers, FL | 1,026,943 | Legal counsel has given formal notice of default to Borrower. | ||||||||||||||||||||||||||||||||
|
|
|
|
| ||||||||||||||||||||||||||||||
Gods Tabernacle DeSoto, TX | 613,886 | None. The Trust is in conversation with co-mortgage holder regarding best method to proceed. | ||||||||||||||||||||||||||||||||
|
|
|
|
| ||||||||||||||||||||||||||||||
Messiah MBC Indianapolis, IN | 1,399,174 | None. Church is making payments and is in communication with the Trust in an effort to resolve the matter. |
Our allowance for credit losses increased from $1,551,760 as of September 30, 2008 to $1,965,760 as of September 30, 2009. The allowance for credit losses is based on an amount that is adequate in the opinion of the Audit Committee, based upon input from management, to absorb losses inherent in the existing loan portfolio. This evaluation includes a review of a quarterly grading methodology performed by management on impaired loans. Impaired loans include non-performing loans, which have been placed on non-accrual status. At September 30, 2009 and 2008 impaired loans were approximately $15,116,546 and $12,406,532, respectively. Impaired loans include non-performing loans and other loans deemed by management to be impaired that were not classified as non-performing. Our average investment in non-performing loans was $7,943,706 and $6,823,492 for the six-month periods ending September 30, 2009 and September 30, 2008, respectively. See Table 6 for the activity in the allowance for credit losses since September 30, 2008 to September 30, 2009. This increase reflects changes in the portfolio of existing loans. In other words, based on the quarterly grading methodology performed by management and reviewed by the Audit Committee, it is our opinion that there is an increase in impaired loans and there is a higher risk of loss in the portfolio.
-14-
In calculating our reserve for credit losses, we take into account probable credit losses inherent in the remaining portion of our loan portfolio. In calculating the allowance, 1% of the outstanding balance of our loan portfolio of permanent and interim mortgage loans that have not been identified as impaired is reserved for. In addition, 2% of the outstanding balance of half of our church bonds is reserved for and an additional 50% of the remaining half of our church bonds is reserved for.
The amount of loans in default has increased from September 30, 2008 to September 30, 2009. We believe that this is directly related to the current economic recession. We intend to continue to closely monitor our loans in default and will increase our reserve as necessary. Management and the Board of Trust Managers review the loans in default each month. The Audit Committee reviews and adjusts, as necessary, the allowance for credit losses each quarter.
The following table discloses the activity, on a quarterly basis, relating to the allowance for credit losses since September 30, 2008:
Table 6 Activities in the Allowance for Credit Losses
| September 30, 2008 balance |
| $1,551,760 |
|
|
|
|
|
|
| Increases during the quarter |
| -0- |
|
|
|
|
|
|
| Charge offs during the quarter |
| -0- |
|
|
|
|
|
|
| December 30, 2008 balance |
| 1,551,760 |
|
|
|
|
|
|
| Increases during the quarter |
| 75,000 |
|
|
|
|
|
|
| Charge offs during the quarter |
| -0- |
|
|
|
|
|
|
| March 31, 2009 balance |
| 1,626,760 |
|
|
|
|
|
|
| Increases during the quarter |
| 50,000 |
|
|
|
|
|
|
| Charge offs during the quarter |
| -0- |
|
|
|
|
|
|
| June 30, 2009 balance |
| 1,676,760 |
|
|
|
|
|
|
| Increases during the quarter |
| 289,000 |
|
|
|
|
|
|
| Charges offs during the quarter |
| -0- |
|
|
|
|
|
|
| September 30, 2009 balance |
| $1,965,760 |
|
As noted above and in Table 6, we increased the allowance for credit losses during the six-month period ended September 30, 2009 by $339,000.
As of September 30, 2009, Church Loans also held church bonds with a carrying value of $58,933 which were in default.
The weighted average interest rate on our loans and church bonds decreased from 8.17% as of September 30, 2008 to 7.32% as of September 30, 2009. This decrease in the weighted average interest rate on our loans was primarily responsible for the decrease in our interest income during the six-month period ended September 30, 2009 as compared to the six-month period ended September 30, 2008.
Commitment fees earned during the six-month period ended September 30, 2009 were $313,959 as compared to $233,978 for the six-month period ended September 30, 2008, an increase of $79,981 or 34%.
Net income for the six-month period ended September 30, 2009 was $1,356,588 ($.13 per share), a decrease of $443,042 (25%) as compared to the six-month period ended September 30, 2008. This decrease was attributable to the decrease in net interest income and the increase in the provision for credit losses.
-15-
Net interest income decreased from $2,436,862 for the six-month period ended September 30, 2008 to $2,319,287 for the six-month period ended September 30, 2009, a decrease of $117,575 (5%). This decrease in our net interest income for the six-month period ended September 30, 2009 as compared to the six-month period ended September 30, 2008 was the result of an increase in our interest expense.
Our total liabilities increased from $35,966,011 as of September 30, 2008 to $53,364,465 as of September 30, 2009. The weighted average interest rate on our debt decreased from 3.84% as of September 30, 2008 to 3.73% as of September 30, 2009. Our interest expense increased from $716,456 for the six-month period ended September 30, 2008 to $901,398 for the six-month period ended September 30, 2009, an increase of $184,942 or 26%. This increase is attributable to the increase in liabilities.
The following table illustrates the average month end liabilities during the six-month period ended September 30, 2009 as compared to the same period ended September 30, 2008:
Table 7 - Month End Total Liabilities for Each Month in the Six-month Period Ended September 30, 2009 and September 30, 2008
|
|
|
| Month | 2009 |
|
| 2008 |
|
| Difference |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| April | $48,385,780 |
|
| $37,441,086 |
|
| $10,944,694 |
|
|
|
|
|
|
|
| May | 48,309,678 |
|
| 37,192,614 |
|
| 11,117,064 |
|
|
|
|
|
|
|
| June | 48,640,299 |
|
| 36,511,926 |
|
| 12,128,373 |
|
|
|
|
|
|
|
| July | 50,624,346 |
|
| 36,630,689 |
|
| 13,993,657 |
|
|
|
|
|
|
|
| August | 50,372,268 |
|
| 36,549,535 |
|
| 13,822,733 |
|
|
|
|
|
|
|
| September | 53,364,465 |
|
| 35,966,008 |
|
| 17,398,457 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Monthly Average: | $49,949,473 |
|
| $36,715,310 |
|
| $13,234,163 |
|
|
|
|
The following table provides a schedule of maturity dates and the principal amounts maturing for our debt:
Table 8 - Maturity Dates of Month End Liabilities for Each Month in the Six-month Period Ended September 30, 2009
Month | Total Liabilities | Maturing 1-31-12 | Demand/Current |
|
|
|
|
April | $48,385,780 | $26,440,000 | $21,945,780 |
May | 48,309,678 | 26,815,000 | 21,494,678 |
June | 48,640,299 | 27,315,000 | 21,325,299 |
July | 50,624,346 | 28,780,000 | 21,844,346 |
August | 50,372,268 | 28,780,000 | 21,502,268 |
September | 53,364,465 | 31,780,000 | 21,584,465 |
General and administrative expenses increased from $523,558 for the six-month period ended September 30, 2008 to $611,108 for the six-month period ended September 30, 2009, an increase of $87,550 or 17%.
Other income increased from $19,126 for the six-month period ended September 30, 2008 to $31,809 for the six-month period ended September 30, 2009, an increase of $12,683.
As of September 30, 2009, there were 10,217,094 shares of certificates of beneficial interest outstanding. Net income per share decreased from $.18 per share for the six-month period ended September 30, 2008 as compared to $.13 per share for the six-month period ended September 30, 2009. This decrease was attributable to the decrease in our net income discussed above.
Results of OperationsThree-month period ended September 30, 2009 as compared to three-month period ended September 30, 2008
During the three-month period ended September 30, 2009, interest income and fees increased by $169,687 (12%) over the three-month period ended September 30, 2008.
The components of our interest income and fees during the three-month period ended September 30, 2009 as compared to the three-month period ended September 30, 2008 are as follows:
-16-
Table 9 Interest Income and Fees
| For the Three-month Period Ended 09/30/09 | For the Three-month Period Ended 09/30/08 | Increase (Decrease) |
|
|
|
|
Mortgage loans | $ 1,142,227 | $ 1,078,089 | $ 64,138 |
|
|
|
|
Interim loans | 286,836 | 225,312 | 61,524 |
|
|
|
|
Commitment Fees | 199,003 | 121,526 | 77,477 |
|
|
|
|
Other Income and Fees | 10,055 | 43,507 | (33,452) |
|
|
|
|
Total | $ 1,638,121 | $ 1,468,434 | $ 169,687 |
Interest income on mortgage loans increased from $1,078,089 during the three-month period ended September 30, 2008 to $1,142,227 during the three-month period ended September 30, 2009, an increase of $64,138 (6%). Interest income on interim loans increased from $225,312 during the three-month period ended September 30, 2008 to $286,836 for the three-month period ended September 30, 2009, an increase of $61,524 (27%).
Commitment fees earned during the three-month period ended September 30, 2008 as compared to September 30, 2009 increased from $121,526 to $199,003 an increase of $77,477 or 64%.
The increase in interest income and fees for the three-month period ended September 30, 2009 as compared to the three-month period ended September 30, 2008 is attributable to the increase in our portfolio of both mortgage loans and interim loans.
Our net income for the three-month period ended September 30, 2009 was $509,157 ($.05 per share), a decrease of $264,516 (34%) as compared to the three-month period ended September 30, 2008. This decrease was attributable to an increase in our interest expense, an increase in general and administrative expenses and an increase in the provisions for credit losses.
The increase in interest income and fees for the three-month period ended September 30, 2009 as compared to the three-month period ended September 30, 2008 was significantly offset by an increase in interest expense. Interest expense for the three-month period ended September 30, 2008 was $354,600 as compared to $462,538 for the three-month period ended September 30, 2009, an increase of 107,938 or 30%.
The increase in interest expense was attributable to an increase in liabilities. See Table 7 above for the month-end liabilities for each of the three months during the three-month periods ending September 30, 2009 and 2008, respectively.
The weighted average interest rate on all of our debt for each of the three months during the three-month periods ending September 30, 2009 and 2008 decreased from 3.83% to 3.73%, a decrease of 10 basis points.
Therefore, even though interest income increased significantly during the three-month period ended September 30, 2009 as compared to the three-month period ended September 30, 2008, as a result of the significant increase in interest expense, net interest income increased only slightly from $1,113,834 for the three-month period ended September 30, 2008 to $1,175,583 for the three-month period ended September 30, 2009, an increase of $61,749 (6%).
Other income increased slightly from $12,240 for the three-month period ended September 30, 2008 to $12,625 for the three-month period ended September 30, 2009, an increase of $385.
General and administrative expenses increased from $238,601 for the three-month period ended September 30, 2008 to $364,551 for the three-month period ended September 30, 2009, an increase of $125,950 or 53%. This increase is primarily attributable to an increase in legal fees, payroll and contract labor.
Net income for the three-month period ended September 30, 2009 and September 30, 2008 was diminished by an addition to the provision for credit losses recognized during such periods of $289,000 and $95,000, respectively.
-17-
As of September 30, 2009, 10,217,094 shares of certificates of beneficial interest were outstanding. Net income per share decreased from $.08 per share for the three-month period ended September 30, 2008 to $0.05 per share for the three-month ended September 30, 2009. This decrease was primarily attributable to the increase in the provision for credit losses and the increase in general and administrative expense.
Financial ConditionSix-month period ended September 30, 2009 as compared to year ended March 31, 2009.
Our portfolio of performing mortgage loans and church bonds increased from $55,512,158 as of March 31, 2009 to $60,717,222 as of September 30, 2009. Our portfolio of performing interim loans increased during the six-month period ended September 30, 2009 from $16,686,014 to $17,498.510. Mortgage loans, interim loans and church bonds, including non-performing mortgage loans, church bonds and interim loans, held by us increased from $78,945,652 as of March 31, 2009 to $86,159,438 as of September 30, 2009, an increase of $7,213,786 (9%).
Nonperforming mortgage loans, church bonds and interim loans increased from $6,747,480 as of March 31, 2009 to $7,943,706 as of September 30, 2009. Total performing mortgage loans, church bonds and interim loans increased from $72,198,172 as of March 31, 2009 to $78,215,732 as of September 30, 2009, an increase of $6,017,560. Consistent with the increase in loans, total assets increased from $78,315,575 as of March 31, 2009 to $85,208,757 as of September 30, 2009, an increase of $6,893,182 (9%). Impaired loans were approximately $15,116,548 at September 30, 2009 as compared to approximately $12,710,000 at March 31, 2009.
Our liabilities increased from $47,214,845 as of March 31, 2009 to $53,364,465 as of September 30, 2009.
Shareholders equity increased by $743,562 from March 31, 2009 to September 30, 2009. This is attributable to the increase in undistributed net income from $1,354,929 as of March 31, 2009 to $2,098,491 as of September 30, 2009.
Liquidity and Capital Resources
Liquidity is a measurement of our ability to meet potential cash requirements, including the repayment of borrowings by us, fund loan commitments, maintain investments and meet our general business expenses and needs. Additionally, to maintain our status as a REIT under the Internal Revenue Code, we must distribute annually at least 90% of our REIT taxable income.
We are engaged primarily in the business of making permanent and interim loans to churches and other non-profit organizations, and to other borrowers, including businesses engaged in the building and operation of assisted living centers. Our assets primarily consist of our loan portfolio, real estate acquired through foreclosure and our office building and facilities.
Our operating expenses are comprised of the maintenance of our office building, the payment of the salaries of our management and support staff, office expenses, fees paid to the Board of Trust Managers, and the payment for legal and accounting services. Substantially all of our assets are invested in the permanent and interim loans. Our only potential liquidity problems relate to the timely and proper repayment of the leveraged funds we have borrowed to make loans in excess of our capital and the ability to fund outstanding loan commitments which totaled approximately $19,885,405 at September 30, 2009.
Our primary sources of funds for liquidity consist of cash reserves, net cash provided by operations, payments received from the loans comprising our loan portfolio, and funds available through debt financing, including our line of credit agreement with the Amarillo National Bank.
Our level of liquidity based upon cash and cash equivalents decreased by $93,336 during the six-month period ended September 30, 2009 leaving us with cash and cash equivalents of $22,356 as of September 30, 2009. During this same period, we invested $16,964,571 in mortgage and interim construction loans using net cash provided by operating activities in the amount of $1,754,528, principal payments received on our loan portfolio in the amount of $9,673,656, and $20,718,907 in borrowing on master notes and our line of credit. The total liquidity available to invest in mortgage and interim construction loans was reduced by $613,026 paid in cash dividends during the six-month period ended September 30, 2009 and the reduction in our borrowings on our bank line of credit and Master Note agreements in the amount of $14,662,830.
Our primary debt obligations consist of our bank line of credit owing to Amarillo National Bank and Master Note Agreements with various persons. Pursuant to our January 31, 2009 loan agreement with the bank, we have a $49,000,000 line of credit for a term of three years, maturing January 31, 2012.
-18-
As of September 30, 2009, our total liabilities outstanding were $53,364,465. The amount owing on the line of credit as of September 30, 2009 was $31,780,000. It is anticipated that the line of credit will be renewed at the expiration of its three-year term. In the event that the bank elects not to renew the line of credit, we may, under the terms of the loan agreement, retire the line of credit over a period of time, not to exceed five years, equal to the weighted average remaining term of a pool of our real estate lien notes which would be pledged to secure the remaining balance of the bank line of credit.
As of September 30, 2009, pursuant to the credit agreement with Amarillo National Bank dated January 31, 2009, Church Loans has one note owing to Amarillo National Bank. The interest rate on this credit facility adjusts in accordance with the lesser of the 30-day, 90-day or 180-day London Interbank Offered Rates (LIBOR) plus 2.50% or the J.P. Morgan Chase & Co. prime rate as selected on the applicable adjustment dates by Church Loans and with an interest rate floor of 4%. As of September 30, 2009, the balance owing on this note was $31,780,000. The note owing to Amarillo National Bank made pursuant to a new Loan Agreement was entered into with the bank effective January 31, 2009 (the 2009 Loan Agreement) for a term of three years ending January 31, 2012. The rate of interest owing on the obligation owing to the bank as of September 30, 2009 was 4.0%, not including the non-use fee.
The amounts owing to Amarillo National Bank are secured by the portfolio of loans held by Church Loans. Church Loans may borrow up to $49,000,000 pursuant to the 2009 Loan Agreement subject to a borrowing base calculation limit equal to 85% of the principal balance outstanding of the performing mortgage loans and church bonds held by Church Loans and 50% of the principal balance outstanding of the performing interim loans held by Church Loans. Pursuant to that borrowing base calculation, Church Loans, as of September 30, 2009, could borrow up to the entire $49,000,000 line of credit.
Pursuant to the loan agreement with Amarillo National Bank, we must also maintain stockholders equity of not less than $18,000,000, our total indebtedness shall not exceed 250% of our stockholders equity and the ratio of earnings before deduction of interest and taxes as compared to interest expense shall not be less than 1.2. As of September 30, 2009, we were in compliance with these requirements.
At September 30, 2009, loans to us under Master Note Agreements, which are in effect demand notes, totaled $21,154,214. As of September 30, 2009, Church Loans had 90 Master Note Agreements with 38 different unrelated parties. The rate of interest on these Master Notes is at the Wall Street Journal prime rate of interest less 1.25% with an interest rate floor of 3% effective as of February 1, 2009. As of September 30, 2009, the rate of interest on these Master Notes was 3.00%. All of these Master Notes are due on demand except that without the consent of Church Loans a noteholder may not demand payment of more than $250,000 during any 30 day period. These Master Notes are unsecured.
The loan agreement with Amarillo National Bank does provide that it is an event of default under such agreement if Church Loans defaults in the payment of any other indebtedness. Therefore, a default by Church Loans in the payment or performance of a Master Note would be a technical event of default in Church Loans agreement with the bank.
In the past, we have utilized our bank line of credit and the principal paid to us upon our outstanding loan portfolio in order to meet our maturing obligations.
Although our cash and cash equivalents as of September 30, 2009 were only $22,356, the balance which could be borrowed by us upon our bank line of credit as of September 30, 2009 was $17,220,000. The principal payments scheduled to be received on our loan portfolio for the fiscal year ending September 30, 2010 are $23,644,029. Assuming all of these scheduled principal payments are received, these payments, together with the balance available to us on our bank line of credit, would not provide us with sufficient funds to meet our maturing obligations and fund loan commitments without the necessity of borrowing funds from other sources. Based upon our success in obtaining borrowings in the past, we are confident that, should it be necessary, we will be able to obtain additional bank financing in the future in sufficient amounts for us to timely meet all of our obligations.
Should all the scheduled principal payments upon loans not be received, and should we be unable to borrow against our line of credit, and should borrowings from other sources not be available, it would be necessary to sell a portion of our mortgage loan portfolio in order to meet all of our financial obligations. At September 30, 2009, the principal balance of our loan and church bond portfolio was $86,159,438, net of unamortized purchase discounts and deferred commitment fees. The weighted average interest rate on loans and church bonds was 7.32% per annum. In view of the normal marketability of conventional loans, we might be required to discount a majority of these loans in order for them to be attractive for purchase. The principal amount of these loans if discounted to yield a weighted average interest rate of 8%, 10% and 12% would be $78,835,886, $63,068,710, and $52,557,258, respectively. There is no
-19-
assurance that we would be able to sell all, or a portion of, our portfolio of loans, in which event, it would be necessary to secure a loan, or loans, from a lender in order to meet our financial obligations. There is no assurance that we would be able to secure a loan in such instance. We have sold only one of our loans in our mortgage loan portfolio and, therefore, have limited experience in this area. Furthermore, if required to discount our loans in excess of 11.8%, then we would not realize sufficient funds from the sale of the loans to retire all of our debt.
Principal payments scheduled to be received upon our permanent loan portfolio during the twelve-month period ending September 30, 2010, if not used to fund new loan commitments, would be used to reduce our outstanding indebtedness. Should we use the payments of principal which shall be received upon our loan portfolio to reduce our outstanding indebtedness, our interest expense will decrease. In such instance, whether the decrease in the interest income will exceed, or be less than, the decrease in the interest expense will largely be dependent upon the prime rate of interest prevailing at such time due to the fact that the interest to be earned upon our mortgage loan portfolio is generally based upon a fixed rate of interest or a variable rate of interest that periodically reprices, while the interest to be paid upon our outstanding debts is directly, or indirectly, tied to the prime rate of interest charged by major banks.
Pursuant to the loan agreement with the bank, we have pledged all of our mortgage loans, church bonds and interim construction loans to the bank to secure the line of credit. The amount owing on the line of credit must not exceed an amount equal to 85% of the outstanding principal amount of the performing mortgage loans and church bonds and 50% of the outstanding principal amount of the performing interim construction loans. Applying that borrowing limit to our loan portfolio as of September 30, 2009, we can borrow up to the entire $49,000,000 line of credit limit. However, during the term of the loan agreement, we would not have the right to sell our loans, without the banks consent, since all of our loans have been pledged to the bank to secure the line of credit. Therefore, under our loan agreement, it will be very difficult, if not impossible, to sell our loans to meet our financial obligations.
Cash flows from operating activities consist primarily of net income. The primary components of net income are interest income and expense. Interest income should continue to be the main source of cash provided by operating activities; however, the availability of this cash flow is dependent upon the ability of the borrowers to repay loans. Cash provided by operating activities has been and is expected to be a relatively stable source of cash flow.
Cash flows from investing activities results primarily from investment in and payments received on mortgage and interim construction loans and church bonds.
Cash flows from financing activities relate primarily to the borrowings and payments on notes payable and the line of credit. Borrowings are made as funds are needed to make loans or as current obligations become due. Based upon our success to obtain borrowings in the past, we are confident that we will be able to obtain borrowings in the future in sufficient amounts, along with payments to be received on loans, to timely meet our obligations.
Inflation
At September 30, 2009, the weighted average interest rate on our mortgage loan and church bond portfolio was 7.32% per annum while the weighted average interest rate upon all our borrowings was 3.73% per annum resulting in a net interest rate margin of 3.59%. By comparison, as of September 30, 2008, the weighted average interest rate on our mortgage loan and church bond portfolio was 8.17% per annum while the weighted average interest rate on our borrowings was 3.84% per annum resulting in a net interest rate margin of 4.33% per annum. Therefore, our net interest rate margin has decreased by 74 basis points as of September 30, 2009 as compared to September 30, 2008. Although a majority of the loans constituting our loan portfolio have been made at rates of interest that generally reprice either daily, annually, or otherwise periodically, a portion of the loans constituting our loan portfolio have been made at fixed rates of interest and therefore are not subject to being increased or decreased during the term of the loan. All of our indebtedness is either directly or indirectly tied to the prime rate of interest charged by major banking institutions and, therefore, is subject to fluctuation.
During periods of inflation, the prime rate of interest charged by major banking institutions, as well as the interest rate or cost of borrowing money from any lender, generally increases. Consequently, during an inflationary period our interest expense would increase. Since our interest income would not increase as rapidly, an increase in the interest expense would decrease our net income. However, interest income should subsequently increase as variable rate loans reprice.
Should the amount of our loans and the amount of our indebtedness remain constant, and should the weighted average interest rate upon the indebtedness increase to approximately 11.8% per annum, interest income and interest expense would be substantially equal.
-20-
Under the terms of the loan agreement with Amarillo National Bank, the interest rate on our line of credit adjusts in accordance with the lesser of the 30-day, 90-day or 180-day London Interbank Offered Rates (LIBOR) or the J.P. Morgan Chase & Co. prime rate, subject to an interest rate floor of 4%. The interest rate on our Master Note Agreements adjusts as and when the Prime Rate as published by the Wall Street Journal changes subject to a floor of 3%. Most of our loans are made on interest rates that are tied to the Prime Rate as published by the Wall Street Journal or a similar index used by major U.S. banking institutions. Therefore, our cost of funds should be tied to an index that is equal to or less than the index used to price our loan portfolio.
The loan agreement with Amarillo National Bank effective January 31, 2009 changed the index on the rate we pay on the line of credit from, at our option, either LIBOR plus 2.5% or the J. P. Morgan Chase prime rate. These indices are higher than under the previous loan agreement. Additionally, the new loan agreement provides for an interest rate floor of 4% and a commitment fee equal to .25% of the average quarterly unadvanced portion of the loan commitment.
Finally, effective February 1, 2009, we agreed to also place an interest rate floor of 3% on our Master Note Agreements. The interest rate floor on the Master Note Agreements was instituted in order to encourage the maintenance of this source of funds.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements or commitments other than our normal loan commitments.
New Accounting Standards
We do not believe the adoption of any recently issued pronouncements by the Financial Accounting Standards Board will have a significant impact on our financial statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not required.
Item 4T. Controls and Procedures.
We performed an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rules 13a-15 or 15d-15 as of the end of the period covered by this report. Based upon that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures, as defined by Exchange Act Rules 13a-15(e) or 15d-15(e), were effective.
Changes in Internal Control over Financial Reporting
There has not been any change in our internal control over financial reporting during our fiscal quarter ending September 30, 2009 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Part II. Other Information
Item 1. Legal Proceedings.
None
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None
Item 3. Defaults Upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security Holders.
-21-
The annual meeting of shareholders of the Trust was held on August 25, 2009. At such meeting, each of the individuals named below was elected to the Board of Trust Managers of the Trust to serve until the next annual meeting of the shareholders of the Trust:
| Number of Shares |
| ||
| For |
| Against |
|
B.R. McMorries | 6,090,944 |
| 55,651 |
|
Larry G. Brown | 6,135,814 |
| 10,781 |
|
Jack R. Vincent | 6,094,273 |
| 52,322 |
|
Steven Rogers | 6,135,840 |
| 10,755 |
|
Michael A. Bahn | 6,134,636 |
| 11,959 |
|
Stephen W. Myers | 6,135,840 |
| 10,755 |
|
Michael W. Borger | 6,135,840 |
| 10,755 |
|
E. Stan Morris, Jr. | 6,135,840 |
| 10,755 |
|
Additionally, shareholders voted to ratify Hein & Associates, LLP as auditors for the year ending March 31, 2010 as follows:
For | 6,118,623 |
Against | 3,860 |
Abstain | 24,386 |
Item 5. Other Information.
Appointment of Certain Officers. The Trust has employed Jason L. Hall to serve as President and Chief Executive Officer of the Trust. Mr. Hall will assume those responsibilities upon termination of his present employment, but not later than December 1, 2009. Mr. Hall is 35 years of age and has been employed for the past 6 years as Vice-President Commercial Lending for First United Bank, Amarillo, Texas.
First United Bank is not a parent, subsidiary or affiliate of the Trust. Mr. Hall has no family relationships with any director or executive officer of the Trust. Mr. Hall has not previously been employed by the Trust. Furthermore, Mr. Hall is not a party to any transactions with the Trust other than his employment arrangement.
Pursuant to Mr. Halls employment agreement with the Trust, Mr. Hall will be paid an annual salary of $105,000, a starting bonus of $15,000 and will receive similar other employee benefits as other employees of the Trust, including health insurance, vacation pay and participation in the Trusts retirement program upon eligibility.
Mr. Hall will be replacing B. R. McMorries who has been serving as the Trusts interim President and CEO after the resignation of Kelly Archer on August 3, 2009. Mr. McMorries will continue to serve as Chairman of the Board of Trust Managers of the Trust.
Item 6. Exhibits
The Exhibits listed on the accompanying Index to Exhibits are filed as a part of this Quarterly Report.
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CHURCH LOANS & INVESTMENTS TRUST | |
(2) | None |
(3) | (i) Amended and Restated Declaration of Trust dated July 16, 2004, previously filed as an exhibit to the Trusts Definitive Proxy Statement, Form DEF 14A, dated June 25, 2004 (File No. 000-08117) and is incorporated by reference. |
| (ii) Amended and Restated Bylaws dated July 16, 2004, previously filed as an exhibit to the Trusts Definitive Proxy Statement, Form DEF 14A, dated June 25, 2004 (File No. 000-08117) and is incorporated by reference. |
(4) | None other than those listed in (3) above. |
(10) | Loan Agreement dated January 31, 2009 entered into by and between Church Loans and Amarillo National Bank included as an exhibit to Issuers Form 10-Q for the quarterly period ended December 31, 2008 (File No. 000-08117) and is incorporated by reference. Form of Master Note Agreements included as an exhibit to Issuers Form 10-K for the year ended March 31, 2009 (File No. 000-08117) and is incorporated by reference. |
(11) | Statement regarding computation of per share earnings-omitted since information necessary to make the computation is included in the Financial Statements. |
(15) | None |
(18) | None |
(19) | None |
(22) | None |
(23) | None |
(24) | None |
(31) | (i)(1) Certification of President (Principal Executive Officer and CEO) Pursuant to Exchange Act Rule 13a-14(a)/15d-14(a). |
| (2) Certification of Senior Vice-President and CFO (Principal Financial Officer) Pursuant to Exchange Act Rule 13a-14(a)/15d-14(a). |
| (ii) None |
(32) | Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
(99) | None |
(100) | None |
|
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Trade Mark and Copyright Notice Copyright © 2009 by Church Loans & Investments Trust |
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