<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q/A
AMENDMENT NO. 2
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the period ended September 30, 1994
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to ______________
Commission File Number 1-8972
CWM MORTGAGE HOLDINGS, INC.
(Formerly Countrywide Mortgage Investments, Inc.)
(Exact name of registrant as specified in its charter)
DELAWARE 95-3983415
(State or other jurisdiction of (I. R. S. Employer Identification No.)
incorporation or organization)
35 NORTH LAKE AVENUE, PASADENA, CALIFORNIA 91101-1857
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (800) 669-2300
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
requirements for the past 90 days. Yes X No _____
-----
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the close of the period covered by this report.
Common stock outstanding as of September 30, 1994: 32,256,156 shares
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CWM MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
CONSOlIDATED BAlANCE SHEETS
(DOLlAR AMOUNTS IN ThOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
September 30, 1994 December 31, 1993
-------------------- --------------------
<S> <C> <C>
ASSETS (Restated) (Restated)
Mortgage assets
Mortgage loans held for sale $ 420,856 $ 794,132
Mortgage loans held for investment 307,566 -
Collateral for CMOs (market value $243,600 in 1994 and
$413,000 in 1993) 245,871 402,503
Master servicing fees receivable 98,828 -
Revolving warehouse lines of credit 60,500 92,058
Cash 8,913 7,099
Investment in and advances to INMC 115,979 90,394
Other assets 13,385 10,552
-------------------- --------------------
Total assets $ 1,271,898 $ 1,396,738
==================== ====================
LIABILITIES AND SHAREHOLDERS' EQUITY
Reverse-repurchase agreements $ 793,369 $ 770,334
Collateralized mortgage obligations 214,112 365,886
Accounts payable and accrued liabilities 8,150 9,910
-------------------- --------------------
Total liabilities 1,015,631 1,146,130
Commitments and contingencies - -
Shareholders' equity
Common Stock- authorized, 60,000,000 shares of
$.01 par value; issued and outstanding, 32,256,156
shares in 1994 and 32,020,484 in 1993 323 320
Additional paid-in capital 257,815 256,587
Net unrealized gain on available-for-sale securities
held by INMC 166 -
Cumulative earnings 91,367 72,306
Cumulative distributions to shareholders (93,404) (78,605)
-------------------- --------------------
Total shareholders' equity 256,267 250,608
-------------------- --------------------
Total liabilities and shareholders' equity $ 1,271,898 $ 1,396,738
==================== ====================
</TABLE>
The accompanying notes are an integral part of these statements.
2
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CWM MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(DOLLAR AMOUNTS IN TH0USANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30
-------------------------------- -------------------------------
1994 1993 1994 1993
-------------- -------------- ------------- -------------
(RESTATED) (RESTATED)
<S> <C> <C> <C> <C>
REVENUES
Interest income
Mortgage loans held for sale $7,010 $7,283 $26,290 $12,992
Mortgage loans held for investment 3,412 - 6,121 -
Collateral for CMOs 5,152 9,860 16,899 33,701
Master servicing, net 2,194 - 4,578 -
Revolving warehouse lines of credit 913 276 3,055 434
Advances to INMC 1,435 619 2,964 619
Other 231 - 827 674
-------------- --------------- ------------- -------------
Total interest income 20,347 18,038 60,734 48,420
Interest expense
Reverse-repurchase agreements 8,394 3,711 22,077 6,141
Collateralized mortgage obligations 5,917 14,610 21,607 43,409
-------------- --------------- ------------- -------------
Total interest expense 14,311 18,321 43,684 49,550
Net interest income 6,036 (283) 17,050 (1,130)
Equity in earnings of INMC 3,229 1,328 4,426 2,372
Gain on sale of mortgage loans and securities - - 917
Other, net (54) - (172) -
-------------- --------------- ------------- -------------
Net revenues 9,211 1,045 21,304 2,159
EXPENSES
General and administrative 612 373 1,762 1,111
Management fees to affiliate 302 108 481 312
-------------- --------------- ------------- -------------
Total expenses 914 481 2,243 1,423
-------------- --------------- ------------- -------------
NET EARNINGS $ 8,297 $ 564 $ 19,061 $ 736
============== =============== ============= =============
EARNINGS PER SHARE $ 0.26 $ 0.03 $0.59 $0.04
============== =============== ============= =============
Weighted average shares outstanding 32,216,505 21,055,213 32,156,094 16,369,689
============== =============== ============= =============
</TABLE>
The accompanying notes are an integral part of these statements.
3
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CWM MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLAR AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------
1994 1993
------------------ -----------------
(RESTATED) (RESTATED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 19,061 $ 736
Adjustments to reconcile net earnings
to net cash provided by operating activities:
Amortization 6,290 9,450
Gain on sale of securities - (917)
Equity in earnings of INMC (4,426) (2,372)
Change in other assets and liabilities (5,485) 2,293
------------------ -----------------
Net cash provided by operating activities 15,440 9,190
CASH FLOWS FROM INVESTING ACTIVITIES:
Collateral for CMOs:
Purchases of mortgage loans subsequently securitized - (248,269)
Principal payments on collateral 136,841 288,277
Net change in GICs held by trustees 16,532 15,855
Proceeds from sale of collateral for CMOs, net - 33,452
------------------ -----------------
153,373 89,315
Purchases of mortgage loans held for sale and investment (4,410,075) (1,637,838)
Investment in master servicing fees receivable (99,603) -
Proceeds from sale of mortgage loans 4,461,501 1,182,502
Principal payments on mortgage loans and securities 14,286 8,568
Net decrease (increase) in revolving warehouse lines of 31,558 (41,481)
Investment in INMC (4,541) (2,475)
Net advances from INMC (16,618) (5,879)
------------------ ------------------
Net cash provided by (used in) investing 129,881 (407,288)
CASH FLOWS FROM FINANCING ACTIVITIES:
Collateralized mortgage obligations:
Proceeds from issuance of securities - 239,659
Principal payments on securities (152,974) (297,919)
Redemption of securities - (32,689)
------------------ ------------------
(152,974) (90,949)
Net increase in reverse-repurchase agreements 23,035 425,082
Net proceeds from issuance of common stock 1,231 74,802
Cash dividends paid (14,799) (6,270)
------------------ ------------------
Net cash (used in) provided by financing (143,507) 402,665
------------------ ------------------
Net increase in cash 1,814 4,567
Cash at beginning of period 7,099 27
------------------ ------------------
Cash at end of period $ 8,913 $ 4,594
================== ==================
Supplemental cash flow information:
Cash paid for interest $ 25,645 $ 42,937
================== ==================
Cash paid for income taxes - -
================== ==================
</TABLE>
The accompanying notes are an integral part of these statements.
4
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CWM MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1994
(UNAUDITED)
NOTE A - BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Rule 10-01 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. The consolidated financial statements include the accounts of CWM
Mortgage Holdings, Inc. and its qualified REIT subsidiaries ("CWM"). The
mortgage loan conduit operations are primarily conducted through Independent
National Mortgage Corporation ("INMC"), a taxable corporation. Previously, INMC
was consolidated with CWM for financial reporting purposes; the financial
statements have been restated to account for INMC on a method similar to the
equity method. INMC is not consolidated for income tax purposes. As used herein,
the "Company" includes CWM and INMC.
All significant intercompany balances and transactions have been eliminated in
consolidation. Certain reclassifications have been made to the financial
statements for the period ended September 30, 1993 to conform to the September
30, 1994 financial statement presentation.
In the opinion of management, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation have been included.
Operating results for the nine months ended September 30, 1994 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1994. For further information with respect to financial reporting,
refer to the consolidated financial statements and footnotes thereto included in
CWM's annual report on Form 10-K for the year ended December 31, 1993.
NOTE B - MORTGAGE LOANS HELD FOR INVESTMENT
CWM purchases certain mortgage loans to be held as long-term investments. In
addition, mortgage loans transferred from mortgage loans held for sale to
mortgage loans held for investment are recorded at market value on the date of
transfer. Mortgage loans held for investment include various adjustable rate
loans secured by mortgages on single-family residential real estate. The
premiums and discounts and the market valuation related to these loans are
amortized over the estimated life of the loans using the level-yield method.
Loans greater than ninety days past due are evaluated for collectibility and, if
appropriate, previously accrued interest is reversed. As of September 30,
1994, no loans were on nonaccrual status and CWM had no allowance for loan
losses.
NOTE C - MASTER SERVICING FEES RECEIVABLE
Beginning in the second quarter of 1994, CWM received a repayment of certain
advances made to INMC through a transfer of a portion of the master servicing
fees receivable asset from INMC at its then carrying value which approximated
market value. Accordingly, as of September 30, 1994, CWM had master servicing
fees receivable totaling $98.8 million.
5
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NOTE C - MASTER SERVICING FEES RECEIVABLE - CONTINUED
The changes in CWM's master servicing fees receivable for the nine months ended
September 30, 1994 are as follows:
(Dollar amounts in thousands)
<TABLE>
<S> <C>
Balance at December 31, 1993 $ 0
Additions from INMC 102,864
Amortization
Scheduled ( 3,625)
Unscheduled ( 411)
---------
Balance at September 30, 1994 $ 98,828
=========
</TABLE>
NOTE D - INVESTMENT IN INMC
Summarized financial information for INMC is as follows (Dollar amounts in
thousands):
<TABLE>
<CAPTION>
September 30, 1994 December 31, 1993
------------------ -----------------
<S> <C> <C>
Mortgage loans held for sale $178,989 $ 78,358
Mortgage securities 89,203 -
Master servicing fees receivable 47,392 45,237
Other assets 10,700 10,518
--------- --------
Total Assets $ 326,284 $ 134,113
========= =========
Reverse-repurchase agreements $197,782 $36,223
Other liabilities 12,427 7,375
Advances from CWM 94,968 78,466
Shareholders' equity 21,107 12,049
-------- --------
Total liabilities and shareholders' equity $ 326,284 $134,113
========= =========
<CAPTION>
Quarter ended September 30, Nine months ended September 30,
--------------------------- -------------------------------
1994 1993 1994 1993
--------- -------- ------ ------
Interest income $ 9,647 $ 2,888 $21,607 $ 2,888
Interest expense 8,619 1,700 17,737 1,700
-------- ------- ------- --------
Net interest income 1,028 1,188 3,870 1,188
Master servicing, net 1,390 244 (168) 244
Gain on sale of loans & securities 7,090 2,584 7,955 3,696
Gain on sale of servicing - - 5,834 -
Expenses (3,883) (993) (9,783) (1,050)
Provision for income taxes (2,363) (1,682) (3,237) (1,682)
-------- -------- -------- --------
Net earnings $ 3,262 $ 1,341 $ 4,471 $ 2,396
======== ======== ========= ========
</TABLE>
6
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NOTE D - INVESTMENT IN INMC - CONTINUED
Mortgage Securities. As of September 30, 1994, INMC had invested in mortgage
securities totaling $89.2 million. Mortgage securities consist of mortgage
derivatives which primarily include subordinated securities and principal-only
securities retained upon the issuance of INMC's REMIC securities. In connection
with these investments, INMC has adopted Statement of Financial Accounting
Standards No. 115, Accounting for Certain Investments in Debt and Equity
Securities ("SFAS 115"). SFAS 115 requires the classification of debt and
equity securities into one of three categories: held-to-maturity, available-for-
sale or trading securities. Held-to-maturity securities are defined as
securities that INMC has the positive intent and ability to hold to maturity.
Trading securities are defined as securities that are bought and held
principally for the purpose of selling in the near term and are measured at fair
value, with unrealized gains and losses included in earnings. Securities not
classified as either held-to-maturity securities or trading securities are
deemed to be available-for-sale securities and are measured at fair value, with
unrealized gains and losses, net of the related tax effect, reported as a
separate component of stockholders' equity.
As of September 30, 1994, mortgage securities held-to-maturity totaled $33.4
million with an estimated fair value of $32.8 million, resulting in a net
unrealized loss of $.6 million. This net unrealized loss of $.6 million was
comprised of gross unrealized gains and gross unrealized losses totaling
$660,000 and $1,351,000, respectively. Included in mortgage securities held-to-
maturity was one inverse floater with a book value of $7.5 million, and a fair
value of $7.5 million and a weighted average expected life of 11.7 years. INMC
holds this inverse floater as a long-term investment and since the returns on
the inverse floater increase when interest rates decline and when mortgage loan
prepayments increase, the investment also tends to act counter-cyclically to the
income generated by the Company's master servicing fees receivable. Mortgage
securities categorized as available-for-sale had a book value of $55.8 million
which is net of an unrealized gain of $286,000 or $166,000 effected for income
taxes. This net unrealized gain of $286,000 was comprised of gross unrealized
gains and gross unrealized losses totaling $416,000 and $130,000, respectively.
For the quarter ended September 30, 1994, INMC had not sold any mortgage
securities classified as available-for-sale. INMC had no trading securities at
September 30, 1994. As of September 30, 1994, INMC had $49.6 million of
mortgage securities that were pledged as collateral under reverse-repurchase
agreements. Repayment of INMC's reverse repurchase agreements is guaranteed by
CWM.
Related party transactions. During June 1994, INMC sold approximately $1.8
billion of its purchased servicing portfolio to Countrywide Funding Corporation
("CFC"). INMC recorded a gain on the sale of these servicing rights of $5.8
million. Total proceeds from the sale amounted to $24.6 million. Of the $1.8
billion purchased servicing portfolio sold to CFC, $580.4 million was already
being subserviced by CFC. For the nine months ended September 30, 1994, INMC
paid CFC $51,000 in subservicing fees.
NOTE E - RELATED PARTY TRANSACTIONS
CWM has entered into an agreement (the "Management Agreement") with Countrywide
Asset Management Corporation, a subsidiary of Countrywide Credit Industries,
Inc., (the "Manager"), to advise CWM and CMC on various facets of its business
and manage its operations, subject to supervision by CWM's Board of Directors.
The Manager has entered into a subcontract with its affiliate, CFC, to perform
such services for CWM and INMC as the Manager deems necessary.
NOTE F - SUBSEQUENT EVENT
On October 10, 1994, the Board of Directors declared a cash dividend of $.26 per
share to be paid on November 15, 1994 to shareholders of record on October 25,
1994.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
During the first quarter of 1993, the Company commenced operations of a mortgage
loan conduit, which purchases mortgage loans from mortgage bankers and financial
institutions which generally retain the servicing rights. As a mortgage loan
conduit, the Company is an intermediary between the originators of mortgage
loans which have outstanding principal balances in excess of or differ from the
guidelines of the government and government sponsored enterprises that guarantee
mortgage-backed securities ("jumbo or nonconforming mortgage loans") and
permanent investors in mortgage-backed securities secured by or representing an
ownership interest in such mortgage loans. All loans purchased by CWM, for
which a REMIC transaction or whole loan sale is contemplated, are committed for
sale to INMC at the same price at which the loans were acquired by CWM. INMC
does not purchase any loans from entities other than CWM. Sellers generally
retain the rights to service the mortgage loans purchased by the Company. The
Company's principal sources of income from its mortgage conduit operations are
gains recognized on the sale of mortgage loans, the net spread between interest
earned on mortgage loans and the interest costs associated with the borrowings
used to finance such loans pending their securitization and the net interest
earned on its long-term investment portfolio and master servicing fee income.
In addition, the Company earns fee income and net interest income through its
warehouse lending programs which provide warehouse and other types of credit to
third-party mortgage loan originators. Through the warehouse lending programs,
financing is provided to small and medium-size mortgage bankers for the
origination and sale of mortgage loans, the retention or acquisition of
servicing rights, and the carrying of mortgage loans pending foreclosure and/or
repurchase from an investor.
In August 1994, the Company commenced its construction lending operations. The
Company offers both single-family subdivision construction lending to small-to-
medium size builders (tract construction) and construction-to-permanent
financing to individual borrowers who wish to construct or remodel their
principal or second residences. Under the construction-to-permanent program,
one set of documents supports both the construction and permanent phases of the
loan. As of September 30, 1994, $350,000 and $200,000 were outstanding under
the tract construction and construction-to-permanent programs, respectively.
The company earns fee income and net interest income from these programs.
Prior to 1993, the Company's principal source of earnings had been net interest
income generated from its mortgage portfolio which was primarily financed
through the issuance of CMOs (the "CMO Portfolio"). The amount of net interest
earned on the CMO Portfolio is directly affected by the rate of principal
repayment (including prepayments) of the related mortgage loans as discussed
below.
During all of 1993 and the first quarter of 1994, low mortgage interest rates
resulted in continued high prepayment rates which adversely impacted the net
interest earned on the CMO Portfolio. When prevailing mortgage interest rates
are low relative to interest rates of existing mortgage loans, prepayments on
the underlying mortgage loans generally tend to increase as mortgagors refinance
their existing loans. The cash flow generated by these prepayments is used to
repay the CMOs which are collateralized by these mortgage loans. However, the
remaining loans typically carry a lower coupon, and the interest spread between
these loans and the underlying financing thus narrows. The CMO Portfolio
experienced substantial prepayments during all of 1993 and the beginning of
1994, and since mortgage loan premiums, original issue discount and bond
issuance costs were required to be amortized, losses were ultimately realized on
the portfolio. Due to a decrease in the size of the CMO portfolio and the
decrease in prepayment activity during the quarter ended September 30, 1994,
there was a decrease in the net interest expense realized by CWM on the
portfolio during the quarter ended September 30, 1994 compared to the quarter
ended September 30, 1993. Although the recent increase in interest rates has
decreased prepayment activity and the negative impact on CWM's earnings from its
CMO Portfolio, higher interest rates have had an adverse affect on the Company's
mortgage conduit and warehouse lending operations. Higher interest rates have
resulted in increased competition in the market for mortgage loans, increased
hedging costs and more volatile demand for mortgage-backed securities. Higher
interest rates have also resulted in a decrease in warehouse lines outstanding.
In addition, the increase in interest rates has affected the types of loans
8
<PAGE>
currently being purchased, as the market shifted from primarily fixed-rate
mortgages to adjustable-rate mortgages. This trend has resulted in the
reduction of net interest income earned during the loan accumulation phase due
to the lower interest rates typically applicable during the initial phases of an
adjustable rate loan.
FINANCIAL CONDITION
CONDUIT AND WAREHOUSE LENDING OPERATIONS: During the nine months ended
September 30, 1994, CWM purchased $4.5 billion of mortgage loans through its
mortgage loan conduit operations, which were financed on an interim basis using
equity and short-term borrowings in the form of reverse-repurchase agreements.
During the nine months ended September 30, 1994, the Company sold, through INMC,
$4.4 billion of mortgage loans through the issuance of REMIC securities and bulk
whole loan sales. At September 30, 1994 CWM was committed to purchase $826.8
million of mortgage loans from various seller/servicers and committed to sell
$420.8 million of loans to INMC. In addition, at September 30, 1994, CWM held
$307.6 million in mortgage loans as long-term investments.
CWM's warehouse lending program provides secured short-term revolving financing
to small- and medium-size mortgage bankers to finance mortgage loans from the
closing of the loan until it is sold to a permanent investor. In addition,
financing is also provided for the retention or acquisition of servicing rights,
receivables generated through the sales of servicing rights, and the carrying of
mortgage loans pending foreclosure and/or repurchase from an investor. At
September 30, 1994, CWM had extended committed lines of credit under these
programs in the aggregate amount of $328.3 million, of which $60.5 million was
outstanding. Reverse-repurchase agreements associated with the financing of
these lines of credit totaled $36.9 million at September 30, 1994.
The Financial Accounting Standards Board issued Statement No. 114, Accounting by
Creditors for Impairment of a Loan, which is required to be adopted by the
Company in 1995. As it affects the Company, the Statement is applicable only to
its revolving warehouse lines of credit and construction loans and is not
expected to have any material impact on the Company's financial results.
CMO PORTFOLIO: As of September 30, 1994, the CMO Portfolio was comprised of 15
series of CMOs issued from CWM's inception through 1990. In 1993, two new
series of CMOs were issued by CWM in connection with the Company's mortgage
conduit operation. Disclosures relative to the CMO Portfolio include both
groups of CMOs.
Collateral for CMOs decreased from $402.5 million at December 31, 1993 to $245.9
million at September 30, 1994. This decrease of $156.6 million included
repayments (including prepayments and premium and discount amortization) of
$138.5 million and a decrease in guaranteed investment contracts ("GICs") held
by trustees and accrued interest receivable of $16.5 million and $1.6 million,
respectively. CWM's CMOs outstanding decreased to $214.1 million at September
30, 1994 from $365.9 million at December 31, 1993. This decrease of $151.8
million resulted from principal payments (including discount amortization) on
CMOs of $150.2 million and a decrease in accrued interest payable on CMOs of
$1.6 million.
RESULTS OF OPERATIONS
QUARTER ENDED SEPTEMBER 30, 1994 COMPARED TO QUARTER ENDED SEPTEMBER 30, 1993
NET EARNINGS: CWM's net earnings were $8.3 million or $.26 per share, based on
32,216,505 weighted average shares outstanding for the quarter ended September
30, 1994, as compared to $564,000 or $.03 per share, based on 21,055,213
weighted average shares outstanding for the quarter ended September 30, 1993.
The increase in net earnings of $7.7 million was primarily due to an increase in
earnings of $3.7 million associated with CWM's mortgage conduit activities
including its equity in earnings of INMC and warehouse lending operations
combined with a decrease in the loss associated with the CMO Portfolio of $4.0
million.
9
<PAGE>
INTEREST INCOME: Total interest income was $20.3 million and $18.0 million for
the quarters ended September 30, 1994 and 1993, respectively. This increase of
$2.3 million is due to an increase in interest on mortgage loans held for
investment of $3.4 million, and an increase in net master servicing income of
$2.2 million, a new investment for CWM transferred from INMC as a repayment of
debt in the second quarter of 1994. These increases in interest income were
partially offset by a decrease in interest income on collateral for CMOs of $4.7
million.
Interest income earned on mortgage loans held for sale and mortgage loans held
for investment was $7.0 million and $3.4 million respectively, for the quarter
ended September 30, 1994. Interest on mortgage loans held for sale and mortgage
loans held for investment was earned on average principal balances of $372.2
million and $215.7 million, at an effective yield of 7.53% and 6.33%,
respectively, for the quarter ended September 30, 1994. For the third quarter
of 1993, $7.3 million of interest income was earned on mortgage loans held for
sale with an average principal balance of $469.7 million and an effective yield
of 6.21%. CWM did not own any mortgage loans held for investment during the
three months ended September 30, 1993, and therefore no interest was earned
thereon during that period.
Interest income earned on revolving warehouse lines of credit was $913,000 for
the third quarter of 1994. The average principal balance outstanding on
revolving warehouse lines of credit approximated $45.7 million for the third
quarter of 1994 and earned interest at an effective yield of approximately
7.99%.
Interest income on collateral for CMOs was $5.2 million and $9.9 million for the
quarters ended September 30, 1994 and 1993, respectively. The decline was
primarily attributable to a decrease in the average aggregate principal amount
of collateral for CMOs outstanding, to $246.5 million for the quarter ended
September 30, 1994 from $569.3 million for the quarter ended September 30, 1993.
This was offset by an increase in the effective yield earned on the collateral
to 8.36% in the third quarter of 1994 from 6.93% in the third quarter of 1993.
The decrease in the average balance of collateral for CMOs was due to the
continued low interest rate environment experienced throughout 1993 and the
first quarter of 1994 which resulted in significant prepayment activity.
Interest income on collateral is reduced by the amortization of premiums paid in
connection with acquiring the portfolio. The acceleration of prepayments
experienced during 1993 required an increase in the amortization of premiums,
resulting in a decrease in the effective yield. During the third quarter of
1994, prepayments slowed significantly, resulting in a lower amount of premium
amortization. In addition, for most of the CMO series, a time lag of 24 to 45
days exists from the date the underlying mortgage is prepaid to the date CWM
actually receives the cash related to the prepayment. During this interim
period, CWM does not earn interest income on the portion of the mortgage loan or
mortgage-backed security that has been prepaid. As a result, the increase in
prepayments during 1993 resulted in a higher balance of nonearning and lower-
earning investments (GICs) which resulted in a lower yield on the overall CMO
collateral. Accordingly, a decrease in prepayments in 1994 has had the effect
of decreasing this nonearning asset, which resulted in an increase in the
effective yield earned on the collateral.
INTEREST EXPENSE: Total interest expense was $14.3 million and $18.3 million
for the three months ended September 30, 1994 and 1993, respectively. This
decrease of $4.0 million is due to a $4.7 million increase in interest expense
on reverse-repurchase agreements which was offset by a $8.7 million decrease in
interest expense on CMOs.
Interest expense on reverse-repurchase agreements was $8.4 million for the three
months ended September 30, 1994 on average balances of $636.3 million,
representing an effective yield of 5.28%. For the three months ended September
30, 1993, interest expense on such reverse-repurchase agreements was $3.7
million on average balances of $326.5 million, representing an effective yield
of 4.54%.
Interest expense on CMOs was $5.9 million and $14.6 million for the three months
ended September 30, 1994 and 1993, respectively. This decrease of $8.7 million
was primarily attributable to a decrease in average aggregate CMOs outstanding
from $528.3 million for the quarter ended September 30, 1993 to $234.2 million
for the quarter ended September 30, 1994 and a decrease in the weighted average
cost of CMOs from 11.06% in the third quarter of 1993 to 10.11% in the third
quarter of 1994. The decrease in the average balance of CMOs was
10
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directly related to the prepayment activity on collateral for CMOs discussed
above. The prepayments are ultimately used to repay the related CMOs. During the
quarter ended September 30, 1993, prepayments were significantly higher than
during the quarter ended September 30, 1994. Interest expense is increased by
the amortization of bond issuance costs and original issue discounts. During the
quarter ended September 30, 1993, the accelerated amortization associated with
increased prepayment activity resulted in a higher weighted average cost of
CMOs. The decrease in prepayment activity during the quarter ended September 30,
1994 resulted in a decrease in the amortization of these costs and a decrease in
the weighted average cost of the CMOs.
MASTER SERVICING, NET: Beginning in the second quarter of 1994, INMC began to
repay its debt to CWM by the transfer of its master servicing fees receivable
asset from INMC to CWM at its then carrying value which approximated market
value. Accordingly, as of September 30, 1994, CWM had master servicing fees
receivable totaling $98.8 million.
Gross master servicing income for CWM was $4.8 million for the three months
ended September 30, 1994. This gross income was offset by amortization of
master servicing fees receivable of $2.6 million for the three months ended
September 30, 1994.
In September 1994, the Company began securitizing master servicing fees
receivable in order to allow for financing of this asset. As of September 30,
1994, master servicing fees receivable totaled $98.8 million for CWM of which
$93.4 million was securitized. Of the $93.4 million securitized, $88.5 million
was pledged as collateral for borrowings totaling $57.6 million under reverse-
repurchase agreements. Such borrowings had original maturities of less than 31
days and weighted average interest rate of 5.2% as of September 30, 1994.
EQUITY IN EARNINGS OF INMC: The earnings of INMC, which was formed in April 1993
and in which the Company has a 99% economic interest, resulted principally from
net interest income of $1.0 million, net master servicing income of $1.4
million for the third quarter of 1994; gains from the sale of loans and
securities totaled $7.1 million, expenses totaled $3.9 million and the provision
for income taxes totaled $2.4 million for the third quarter of 1994. In the
third quarter of 1993, equity in earnings of INMC totaled $1.3 million which
resulted principally from net interest income of $1.2 million, net master
servicing income of $244,000; gains from the sale of loans and securities
totaled $2.6 million, expenses totaled $1.0 million and the provision for income
taxes totaled $1.7 million.
MANAGEMENT FEES: For the three months ended September 30, 1994, management
fees were $302,000 compared to $108,000 for the three months ended September 30,
1993. This increase is primarily due to an incentive management fee payable to
the Manager in accordance with the management agreement. The incentive
management fee represents a percentage of CWM's earnings that exceed a specified
return on equity. The increase in the incentive management fee is directly
related to the increase in CWM's earnings. Based on CWM's 1993 earnings, no
incentive fee was incurred in the prior year.
NINE MONTHS ENDED SEPTEMBER 30, 1994 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1993
NET EARNINGS: CWM's net earnings were $19.1 million or $.59 per share, based on
32,156,094 weighted average shares outstanding for the nine months ended
September 30, 1994 compared to $736,000 or $.04 per share, based on 16,369,689
weighted average shares outstanding for the nine months ended September 30,
1993. The increase in net earnings of $18.3 million was due to a $14.9 million
increase in income from mortgage conduit activities, including CWM's equity in
earnings of INMC, and warehouse lending operations. In addition, there was a
$3.4 million decrease in losses associated with the CMO portfolio.
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INTEREST INCOME: Total interest income was $60.7 million and $48.4 million for
the nine months ended September 30, 1994 and 1993, respectively. This increase
in interest income of $12.3 million is primarily due to an increase in interest
on mortgage loans held for sale, mortgage loans held for investment, net master
servicing fees and revolving warehouse lines of credit of $13.3 million, $6.1
million, $4.6 million and $2.6 million, respectively. This increase is offset
by a decrease in interest income on collateral for CMOs of $16.8 million.
Interest income earned on mortgage loans held for sale, mortgage loans held for
investment and revolving warehouse lines of credit was $26.3 million, $6.1
million and $3.1 million, respectively, for the nine months ended September 30,
1994. The average principal balance of mortgage loans held for sale, mortgage
loans held for investment and revolving warehouse lines of credit outstanding
approximated $511.0 million, $124.4 million, and $54.1 million, respectively,
for the first nine months of 1994 which represented an effective yield of
approximately 6.86%, 6.56% and 7.52%, respectively. For the nine months ended
September 30, 1993, interest income earned on mortgage loans held for sale was
$13.0 million on an average principal balance outstanding of $261.7 million
representing an effective yield of 6.62%. The warehouse lending operations
commenced in May 1993 and generated $434,000 in interest income during the
period ended September 30, 1993. The Company held no mortgage loans for
investment during the nine months ended September 30, 1993 and therefore no
interest was earned thereon during that period.
Interest income on collateral for CMOs was $16.9 million and $33.7 million for
the nine months ended September 30, 1994 and September 30, 1993, respectively.
The decline was primarily attributable to a decrease in the average aggregate
principal amount of collateral for CMOs outstanding to $292.6 million for the
first nine months of September 30, 1994 from $582.8 million for the same period
in 1993. The effective yield earned on the collateral decreased slightly to
7.70% for the nine months ended September 30, 1994 from 7.71% for the nine
months ended September 30, 1993. As previously discussed above, the decrease in
the average balance of collateral for CMOs was due to the continued low interest
rate environment experienced throughout 1993 and the beginning of 1994, which
resulted in significant prepayment activity.
INTEREST EXPENSE: For the nine months ended September 30, 1994 and 1993, total
interest expense was $43.7 million and $49.6 million, respectively. This
decrease in interest expense of $5.9 million was due to an increase in interest
expense on reverse-repurchase agreements of $16.0 million offset by a decrease
in interest expense on CMOs of $21.9 million.
Interest expense on reverse-repurchase agreements was $22.1 million on average
balances of $607.9 million representing an effective yield of 4.84% for the nine
months ended September 30, 1994. For the nine months ended September 30, 1993,
interest expense on such reverse-repurchase agreements was $6.1 million on
average balances of $193.6 million, representing an effective yield of 4.23%.
For the nine months ended September 30, 1994 and 1993, interest expense on CMOs
was $21.6 million and $43.4 million, respectively. This decrease was primarily
attributable to a decrease in average aggregate CMOs outstanding to $282.5
million for the nine months ended September 30, 1994 from $550.1 million for the
nine months ended September 30, 1993 and a decrease in the weighted average cost
of CMOs to 10.20% in the first nine months of 1994 from 10.52% for the nine
months ended September 30, 1993. The decrease in the average balance and cost
of CMOs was directly related to the decrease in prepayment activity on
collateral for CMOs discussed above.
Master Servicing, Net: Gross master servicing income for CWM was $8.7 million
for the nine months ended September 30, 1994. This gross income was offset by
amortization of master servicing fees receivable of $4.1 million for the nine
months ended September 30, 1994.
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EQUITY IN EARNINGS OF INMC: The earnings of INMC, which was formed in April 1993
and in which the Company has a 99% economic interest, resulted principally from
net interest income of $3.9 million and net master servicing expense of
$168,000; gains from the sale of loans and securities and gains from the sale
of servicing totaled $8.0 million and $5.8 million, respectively, expenses
totaled $9.8 million and the provision for income taxes totaled $3.2 million for
the nine months ended September 30, 1994. For the nine months ended September
30, 1993, equity in earnings for INMC totaled $2.4 million. INMC's earnings
resulted principally from net interest income of $1.2 million and net master
servicing income of $244,000; gains from the sale of loans and securities
totaled $3.7 million, expenses totaled $1.1 million and the provision for income
taxes totaled $1.7 million for the nine months ended September 30, 1993.
MANAGEMENT FEES: For the nine months ended September 30, 1994 and 1993,
management fees were $481,000 and $312,000, respectively. This increase of
$169,000 is due primarily to a quarterly incentive management fee payable to the
Manager in accordance with the management agreement. The incentive management
fee represents a percentage of CWM's earnings that exceed a specified return
on equity. The increase in the incentive management fee is directly related to
the increase in CWM's earnings. Based on CWM's 1993 earnings, no incentive fee
was incurred in the prior year.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has used proceeds from the issuance of CMOs, reverse-
repurchase agreements, other borrowings and proceeds from the issuance of common
stock to meet its working capital needs. In connection with its mortgage
conduit operations, the Company issues CMOs or, through INMC, issues REMIC
securities to help meet such needs. CWM may also borrow collateral or funds
from CFC to meet collateral maintenance requirements under reverse-repurchase
agreements or margin calls on forward securities sales or for other corporate
purposes. These borrowings are made pursuant to a $10.0 million one-year,
unsecured line of credit which expires on September 30, 1995 subject to
extension by CFC and CWM. As of September 30, 1994, CWM had no outstanding
borrowings under this agreement.
CWM has established a committed reverse-repurchase facility through April 1996
in an aggregate amount of up to $500.0 million (with a decreasing annual credit
limit) for its mortgage conduit operations and warehouse lending program. CWM
also has obtained credit approval from the same lender to enter into additional
uncommitted reverse-repurchase agreements associated with the mortgage conduit
operations, under which individual transactions and their terms will be subject
to agreement by the parties based upon market conditions at the time of each
transaction. The maximum balance outstanding under reverse-repurchase agreements
during the third quarter of 1994 was $1.5 billion for both CWM and INMC. (INMC
may borrow under CWM's agreement). In August 1994, CWM signed another master
repurchase agreement with a different lender to provide a committed short-term
credit line in the amount of $300.0 million for its mortgage conduit and
warehouse lending operations. This agreement expires in August 1996. Repayment
of any borrowings by INMC under either of these facilities is guaranteed by CWM.
In the second quarter of 1994, CWM signed a commitment letter with a third
lender for a two-year master repurchase agreement to provide a committed short-
term credit line in the amount of $500 million. In November 1994, CWM signed an
agreement for a committed reverse-repurchase facility in the amount of $225
million to provide financing for certain mortgage-related securities which have
been retained or purchased by CWM or INMC. This agreement expires in November
1996. CWM and INMC, to the extent permitted by their by-laws, may issue other
debt securities or incur other types of indebtedness from time to time.
Repayment of any borrowings by INMC under either of these facilities is
guaranteed by CWM.
The REIT provisions of the Internal Revenue Code restrict CWM's ability to
retain earnings and thereby replenish the capital committed to its mortgage
portfolio by requiring CWM to distribute to its shareholders substantially all
of its income from operations.
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Management believes that the cash flow from operations and the current and
potential financing arrangements are sufficient to meet current liquidity
requirements. The Company's ability to meet future liquidity requirements is
subject to the renewal of credit facilities or obtaining other sources of
financing, including raising additional equity from time to time.
INFLATION
Interest rates often increase during periods of rising inflation. Higher
interest rates may depress the market value of the Company's mortgage assets if
the yield on such mortgage assets does not keep pace with increases in interest
rates. As a result of decreased market values it could be necessary for the
Company to borrow additional funds and pledge additional assets to maintain
financing for its investments that have not been financed to maturity through
the issuance of CMOs or other debt securities. Increases in short-term
borrowing rates relative to rates earned on investments that have not been
financed to maturity through the issuance of CMOs or other debt securities may
also adversely affect the Company's earnings. However, the Company has
implemented a hedging strategy which may mitigate this adverse effect. In
addition, high levels of interest rates tend to decrease the rate at which
mortgages prepay. A decrease in the rate of prepayments may lengthen the
estimated average lives of the underlying mortgages supporting master servicing
fees receivable and for classes of the CMOs issued by the Company and may result
in higher residual cash flows than would otherwise have been obtained. However,
higher rates of interest may also discourage potential mortgagors from borrowing
or refinancing mortgage loans, thus decreasing the volume of loans available to
be purchased through the Company's mortgage conduit operations. With respect to
mortgage loans held for investment, higher interest rates generally will
negatively affect the net interest earned on these loans, as the interest earned
on certain mortgage loans may be fixed for various periods of time while
financing related to these loans floats to a short-term index and therefore
increases more rapidly with rising interest rates.
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PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
--------
3.1 Certificate of Incorporation for CWM, as amended.
4.1 1994 Stock Incentive Plan adopted May 17, 1994.
10.1 1994 Amended and Extended Loan Purchase and Administrative Services
Agreement, dated as of May 15, 1994, by and between CWM and Countrywide
Funding Corporation ("CFC").
10.2 Amended and Restated Credit Agreement, dated as of September 30, 1994,
by and among CWM, Independent National Mortgage Corporation,
Independent Lending Corporation and CFC.
10.3 First Amendment to 1994 Amended and Extended Management Agreement,
dated as of October 1, 1994, by and between CWM and Countrywide Asset
Management Corporation.
10.4 Master Assignment Agreement, dated as of October 28, 1994 between CWM
and Merrill Lynch Mortgage Capital, Inc. and Master Repurchase Agreement
dated as of October 28, 1994 between the Company and Merrill Lynch,
Pierce, Fenner and Smith, Incorporated.
(b) Reports on Form 8-K.
None
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, in the City of
Pasadena, State of California, on February 1, 1995.
CWM MORTGAGE HOLDINGS, INC.
By: /s/ Michael W. Perry
--------------------
Michael W. Perry
Executive Vice President and Chief Operating
Officer
By: /s/ Carmella L. Grahn
---------------------
Carmella L. Grahn
Senior Vice President and Chief Accounting
Officer
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