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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
______________
FORM 10-K
FOR FISCAL YEAR ENDED DECEMBER 31, 1994
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1994
OR
[_] TRANSITION REPORT PURSUANT TO THE SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
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 (I.R.S. EMPLOYER
OF INCORPORATION) IDENTIFICATION NO.)
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
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- ---------------------
COMMON STOCK, $.01 PAR VALUE NEW YORK STOCK EXCHANGE
Securities registered pursuant to Section 12(g) of the Act: NONE
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
------- -------
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K [X].
As of March 23, 1995, there were 40,393,656 shares of CWM Mortgage
Holdings, Inc. Common Stock, $.01 par value, outstanding. Based on the closing
price for shares of Common Stock on that date, the aggregate market value of
Common Stock held by non-affiliates of the registrant was approximately
$407,464,181. For the purposes of the foregoing calculation only, in addition
to affiliated companies, all directors and executive officers of the registrant
have been deemed affiliates.
DOCUMENTS INCORPORATED BY REFERENCE
PROXY STATEMENT FOR THE 1995 ANNUAL MEETING---PART III
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CWM MORTGAGE HOLDINGS, INC.
1994 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I
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Page
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ITEM 1. BUSINESS................................................... 1
ITEM 2. PROPERTIES.................................................. 12
ITEM 3. LEGAL PROCEEDINGS........................................... 12
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......... 12
PART II
ITEM 5. MARKET FOR THE COMPANY'S STOCK
AND RELATED SECURITY HOLDER MATTERS....................... 13
ITEM 6. SELECTED FINANCIAL DATA..................................... 14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS....................... 15
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................. 23
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE........ 23
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.......... 24
ITEM 11. EXECUTIVE COMPENSATION...................................... 24
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT..................................... 24
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 24
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K....................................... 25
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PART 1
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ITEM 1. BUSINESS
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GENERAL
CWM Mortgage Holdings, Inc. (formerly Countrywide Mortgage Investments, Inc.)
("CWM") was incorporated in the State of Maryland on July 16, 1985 and
reincorporated in the State of Delaware on March 6, 1987. References to "CWM"
mean either the parent company alone or the parent company and the entities
consolidated for financial reporting purposes, while references to the "Company"
means the parent company, its consolidated subsidiaries and Independent
National Mortgage Corporation (formerly Countrywide Mortgage Conduit, Inc.)
("INMC"), which is not consolidated with CWM for financial reporting purposes.
All of the outstanding voting common stock and 1% of the economic interest of
INMC is owned by Countrywide Funding Corporation ("CFC"), which is a subsidiary
of Countrywide Credit Industries, Inc. ("CCI"). All of the outstanding non-
voting preferred stock and 99% of the economic interest of INMC is owned by CWM.
The directors and senior officers of INMC are also senior officers of CWM. In
addition, INMC's operations and technology are dependent upon and closely
integrated with CWM, and CWM is the sole supplier of its mortgage loans.
Accordingly, INMC is accounted for under a method similar to the equity method
because CWM (as opposed to affiliates of CWM) has the ability to exercise
significant influence over the financial and operating policies of INMC through
its ownership of the preferred stock and other contracts. CWM has elected to be
taxed as a real estate investment trust ("REIT") under the Internal Revenue Code
of 1986, as amended (the "Code"). As a result of this election, CWM will not,
with certain limited exceptions, be taxed at the corporate level on the net
income distributed to CWM's shareholders.
Under its new operating plan commenced in 1993, the Company conducts mortgage
conduit activities through a newly formed corporation, INMC, which is not a
qualified REIT subsidiary and which is subject to applicable federal and state
income taxes. See "Certain Federal Income Tax Considerations." As part of its
new operating plan, CWM also conducts warehouse lending operations through its
warehouse lending division, Warehouse Lending Corporation of America ("WLCA")
which provide short-term revolving financing to certain mortgage bankers. The
Company also operates construction lending operations through its construction
lending division, Construction Lending Corporation of America ("CLCA") which
provides both tract construction loans to developers and assists INMC with
combined construction to permanent mortgage loans financing to individuals who
wish to construct or remodel their principal or second residences.
Historically, the Company has been a long-term investor in single-family, first-
lien, residential mortgage loans and in mortgage securities representing
interests in such loans which were financed by collateralized mortgage
obligations (the "CMO portfolio").
MORTGAGE CONDUIT OPERATIONS
On October 22, 1992, CWM's Board of Directors approved a new operating plan,
implementation of which was begun in the first quarter of 1993. Under the new
plan, the Company primarily operates as a jumbo and nonconforming mortgage loan
conduit. As a nonconforming mortgage loan conduit, the Company is an
intermediary between the originators of mortgage loans that do not currently
meet the guidelines for purchase by the government and government sponsored
entities (i.e., Government National Mortgage Association ("GNMA"), Federal
National Mortgage Association ("FNMA") and Federal Home Loan Mortgage
Corporation ("FHLMC") that guarantee mortgage-backed securities ("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 real estate mortgage investment conduit ("REMIC")
transaction or whole loan sale is contemplated are committed for sale to INMC at
the same price at which the
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loans were acquired by CWM. INMC does not purchase any loans from entities other
than CWM. The Company's mortgage conduit operations consist of the purchase and
securitization of mortgage loans secured by first liens on single (one-to-four)
family residential properties that are originated in accordance with the
Company's underwriting guidelines. Sellers generally retain the rights to
service the mortgage loans purchased by the Company, although the Company has
the option to purchase such servicing rights under certain circumstances. The
Company's principal sources of income from its mortgage conduit operations are
gains recognized on the sale of mortgage loans and the sale of servicing, 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, the net interest earned on its long-term investment portfolio,
and net interest income from its investment in mortgage securities and master
servicing fees receivable.
MARKETING AND PRODUCTION
Marketing Strategy. The Company's mortgage conduit operations are designed
to attract both large and small sellers of nonconforming mortgage loans by
offering a variety of products, pricing and loan underwriting methods designed
to be responsive to such sellers' needs. The Company expects to continue to
introduce niche products from time to time, which may give the Company temporary
competitive advantages. The Company's products include fixed-rate, adjustable-
rate and negative amortization mortgage loans, combined construction to
permanent mortgage loans, mortgage loans for cooperatives, model homes and
investment properties and mortgage loans to foreign nationals. In response to
the perceived needs of nonconforming mortgage loan sellers, the Company's
marketing strategy seeks to offer competitive pricing, response time
efficiencies in the purchase process, direct and frequent contact through a
trained sales force and flexible commitment programs. The Company recently
restructured its sales and marketing staff by consolidating its sales force so
that the same sales personnel cover all three of the Company's businesses.
Management believes that these restructuring efforts will encourage cross-
selling of the Company's mortgage conduit, warehouse lending and construction
lending products and, at the same time, reduce overall marketing costs.
Additionally, the Company believes that this restructuring will assist it in
targeting smaller mortgage bankers.
The Company has established three underwriting methods designed to be responsive
to the needs of nonconforming mortgage loan sellers. The first method
established by the Company is a delegated underwriting program which is similar
in concept to the delegated underwriting programs established by FNMA, FHLMC and
GNMA. Under this program, mortgage loans are underwritten in accordance with
the Company's guidelines by the seller and purchased on the basis of the
seller's financial strength, historical loan quality and other qualifications.
The delegated underwriting program enables sellers to deliver loans to the
Company without time delay imposed by the Company's underwriters or a third
party underwriter, such as a mortgage pool insurer. A sample of such loans is
subsequently reviewed by the Company in accordance with its quality control
guidelines.
The delegated underwriting program consists of two separate subprograms. The
Company's principal delegated underwriting subprogram is designed for loan
sellers that meet higher financial and performance criteria than those
applicable to sellers generally. While certain sellers have delegated
underwriting authority for all mortgage products under this subprogram, others
have delegated authority only with respect to specified products. The Company
also operates a restricted delegated underwriting subprogram that is available
to substantially all of the Company's sellers. Under this more limited
subprogram, only the Company's standard loan products, with loan-to-value ratios
and outstanding balance requirements which are more restrictive than the
Company's standard guidelines, may be submitted.
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Under the Company's second underwriting method, sellers submit to the Company
mortgage loans for which there is no pool insurance commitment, to be
underwritten by the Company in accordance with its guidelines.
The Company's third method is designed to serve sellers who generally obtain
mortgage pool insurance commitments in connection with the origination of their
loans. Under the third method, the Company does not perform a full underwriting
review of such mortgage loans, but instead relies on the credit review and
analysis of the mortgage pool insurer and its own follow-up quality control
procedures. The Company expects that significantly fewer mortgage loans will be
purchased pursuant to this program in future periods than in recent periods.
Under all three methods, loans are purchased by the Company only after
completion of a legal documentation and eligibility criteria review. See "---
Underwriting and Quality Control."
Mortgage Loans Acquired. Substantially all of the mortgage loans purchased
through the Company's mortgage conduit operations are nonconforming mortgage
loans. Nonconforming mortgage loans are loans which do not qualify for purchase
by FHLMC or FNMA or for inclusion in a loan guarantee program sponsored by GNMA.
Nonconforming mortgage loans generally consist of jumbo mortgage loans or loans
which are not originated in accordance with other agency criteria. Currently,
the maximum principal balance for a conforming loan is $203,150. Loans that
exceed such maximum principal balance are referred to as "jumbo loans." The
Company generally purchases jumbo mortgage loans with original principal
balances of up to $1 million. The Company's loan purchase activities focus on
those regions of the country where higher volumes of jumbo mortgage loans are
originated, including California, Connecticut, Florida, Hawaii, Illinois,
Maryland, Michigan, New Jersey, New York, Ohio, Texas, Virginia, Washington and
Washington, D.C. The Company's highest concentration of jumbo mortgage loans
relates to properties in California because of the generally higher property
values and mortgage loan balances prevalent there. Mortgage loans secured by
California properties accounted for approximately 64% of the mortgage loans
purchased in by the Company in 1994.
Mortgage loans acquired by the Company are secured by first liens on single
(one-to-four) family residential properties with either fixed or adjustable
interest rates. Fixed-rate mortgage loans accounted for approximately 50.4% of
the mortgage loans purchased by the Company in 1994. As interest rates have
risen, the number of adjustable rate mortgage ("ARM") loans purchased by the
Company has increased, since ARM loans typically carry a lower initial interest
rate; during 1994, adjustable rate mortgage loans accounted for approximately
49.6% of all mortgage loans purchased by the Company.
The Company also purchases ARM loans which provide the borrower with the future
option to convert to a fixed rate of interest. Although the Company generally
plans to sell or securitize these ARM loans in connection with its mortgage
conduit operations, it will generally be obligated to repurchase the fixed-rate
loans resulting from any such conversion. Although the Company generally has
the right to require repurchase of any such converted mortgage loan by the
servicer or seller of such loan, no assurance can be given that the servicer or
seller will be able to honor its obligations.
Seller Eligibility Requirements. The mortgage loans acquired pursuant to
the Company's mortgage conduit operations are originated by various sellers,
including savings and loan associations, banks, mortgage bankers and other
mortgage lenders. Sellers are required to meet certain regulatory, financial,
insurance and performance requirements established by the Company before they
are eligible to participate in the Company's mortgage loan purchase program and
must submit to periodic reviews by the Company to ensure continued compliance
with these requirements. The Company's current criteria for seller
participation generally include a tangible net worth of at least $300,000,
approval as a FNMA or FHLMC Seller/Servicer in good standing, and approval as a
U.S. Department of Housing and Urban Development ("HUD") approved mortgagee in
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good standing or a financial institution that is insured by the Federal Deposit
Insurance Corporation ("FDIC") or comparable federal or state agency and is
supervised and examined by a federal or state authority. In addition, sellers
are required to have comprehensive loan origination quality control procedures.
In connection with its qualification, each seller enters into an agreement that
provides for recourse by the Company against such seller in the event of any
material breach of a representation or warranty made by the seller with respect
to mortgage loans sold to the Company, any fraud or misrepresentation during the
mortgage loan origination process or upon early payment default on such loans.
Servicing Retention. Sellers of mortgage loans to the Company are
generally expected to retain the rights to service the mortgage loans purchased
by the Company. Servicing includes collecting and remitting loan payments,
making required advances, accounting for principal and interest, holding escrow
or impound funds for payment of taxes and insurance, if applicable, making
required inspections of the mortgaged property, contacting delinquent borrowers
and supervising foreclosures and property dispositions in the event of
unremedied defaults in accordance with the Company's guidelines. The servicer
receives fees generally ranging from 1/4% to 1/2% per annum on the declining
principal balances of the loans serviced. If a seller/servicer breaches certain
of its representations and warranties made to the Company, the Company may
terminate the servicing rights of such seller/servicer and assign such servicing
rights to another servicer. Under certain circumstances, sellers have the
option to require the Company to purchase such servicing rights at a previously
determined price. The Company generally sells acquired purchased servicing
rights after accumulating a bulk amount, as the Company does not intend to
become a primary servicer of mortgage loans.
Master Loan Servicing. The Company acts as master servicer with respect to
the mortgage loans it sells. Master servicing includes collecting loan payments
from seller/servicers of loans and remitting loan payments, less master
servicing fees and other fees, to trustees. In addition, as master servicer,
the Company monitors the servicer's compliance with the Company's servicing
guidelines and is required to perform, or to contract with a third party to
perform, all obligations not adequately performed by any servicer. The master
servicer may permit the servicer to contract with approved subservicers to
perform some or all of the servicer's servicing duties, but the servicer is not
thereby released from its servicing obligations.
In connection with REMIC issuances, the Company master services on a non-
recourse basis substantially all of the mortgage loans it sells. Each series of
mortgage-backed securities is typically fully payable from the mortgage assets
underlying such series and the recourse of investors is limited to those assets
and any credit enhancement features, such as insurance. Generally, any losses
in excess of the accompanying credit enhancement obtained is borne by the
security holders. Except in the case of a breach of the standard
representations and warranties made by the Company when mortgage loans are
securitized, the securities are non-recourse to the Company. Typically, the
Company has recourse to the sellers of loans for any such breaches.
PURCHASE COMMITMENT PROCESS
Master Commitments. As part of its marketing strategy, the Company
establishes mortgage loan purchase commitments ("Master Commitments") with
sellers that, subject to certain conditions, entitle the seller to sell and the
Company to purchase a specified dollar amount of nonconforming mortgage loans
over a period generally ranging from three months to one year. The terms of
each Master Commitment specify whether a seller may sell loans to the Company on
a mandatory, best efforts or optional basis, or a combination thereof. Master
Commitments do not obligate the Company to purchase loans at a specific price
but rather provide the seller with a future outlet for the sale of its
originated loans based on the Company's quoted prices at the time of purchase.
Master Commitments specify the types of mortgage loans the seller is entitled to
sell to
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the Company and generally range from $5 million to $1 billion in aggregate
committed principal amount.
Bulk and Other Rate-Locks. The Company also acquires mortgage loans from
sellers that are not purchased pursuant to Master Commitments. These purchases
may be made on a bulk or individual rate-lock basis. Bulk rate-locks obligate
the seller to sell and the Company to purchase a specific group of loans,
generally ranging from $1 million to $50 million in aggregate committed
principal amount, at set prices on specific dates. Bulk rate-locks enable the
Company to acquire substantial quantities of loans on a more immediate basis.
The specific pricing, delivery and program requirements of these purchases are
determined by negotiation between the parties but are generally in accordance
with the provisions of the Company's Seller/Servicer Guide. Due to the active
presence of investment banks and other substantial investors in this area,
purchasing loans under bulk pricing is extremely competitive. Loans are also
purchased from individual sellers (typically smaller originators of mortgage
loans) who do not wish to sell pursuant to either a Master Commitment or bulk
rate-lock. The terms of these individual purchases are based primarily on the
Company's Seller/Servicer Guide and standard pricing provisions, and are offered
on a mandatory or best efforts basis.
Following the issuance of a specific rate-lock, the Company is subject to the
risk of interest rate fluctuations and will, through INMC, enter into hedging
transactions to diminish such risk. Hedging transactions may include mandatory
or optional forward sales of mortgage loans or mortgage-backed securities,
mandatory forward sales or financings using REMICs or CMOs, mandatory or
optional sales of futures and other financial futures transactions. See "---
Securitization Process." The nature and quantity of hedging transactions will
be determined by the management of the Company based on various factors,
including market conditions and the expected volume of mortgage loan purchases.
In addition, the Company will not engage in any financial futures transaction
unless the Company or Countrywide Asset Management Corporation ("CAMC"), as
appropriate, would be exempt from the registration requirements of the CEA or
otherwise comply with the provisions thereof.
UNDERWRITING AND QUALITY CONTROL
Purchase Guidelines. The Company has developed comprehensive purchase
guidelines for its acquisition of mortgage loans. Subject to certain
exceptions, each loan purchased must conform to the Company's loan eligibility
requirements specified in its Seller/Servicer Guide with respect to, among other
things, loan amount, type of property, loan-to-value ratio, type and amount of
insurance, credit history of the borrower, income ratios, sources of funds,
appraisal and loan documentation. The Company also performs a legal
documentation review prior to the purchase of any loan. For loans with mortgage
pool insurance commitments, the Company does not perform a full underwriting
review prior to purchase but instead relies on the credit review and analysis
performed by the mortgage pool insurer and its own post-purchase quality control
review. In contrast, for mortgage loans that have not been underwritten for
mortgage pool insurance and are not part of the delegated underwriting program,
the Company performs a full credit review and analysis to ensure compliance with
its loan eligibility requirements. This review specifically includes, among
other things, an analysis of the underlying property and associated appraisal
and an examination of the credit, employment and income history of the borrower.
For loans purchased pursuant to the delegated underwriting program, the Company
relies on the credit review performed by the seller and its own follow-up
quality control procedures. See discussion of the Company's three underwriting
methods under "---Marketing and Production".
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Quality Control. Ongoing quality control reviews are conducted by the
Company to ensure that the mortgage loans purchased meet the Company's quality
standards. The type and extent of the quality control review will depend on the
nature of the seller and the characteristics of the loans. The Company conducts
a full post-purchase underwriting review of 50% of the loans purchased during
the first two months of a seller's participation in the delegated underwriting
program to ensure ongoing compliance with the Company's guidelines. The
percentage of loans fully reviewed is thereafter reduced bimonthly in 10%
increments to 20% after six months and maintained at this level throughout the
seller's participation in the delegated underwriting program. The Company
reviews on a post-purchase basis approximately 10% of all loans submitted to the
Company with mortgage pool insurance commitments or underwritten by the Company
for compliance with the Company's guidelines. In addition, a higher percentage
of mortgage loans with certain specified characteristics are reviewed by the
Company either before or after their purchase, including loans in excess of
$650,000 in principal amount, loans on which 12 or more payments have been made
and loans made in connection with cash-out refinancings. In performing a
quality control review on a loan, the Company analyzes the underlying property
and associated appraisal and examines the credit, employment and income history
of the borrower. In addition, all documents submitted in connection with the
loan, including insurance policies, appraisals, credit records, title policies,
deeds of trust and promissory notes, are examined for compliance with the
Company's underwriting guidelines. Furthermore, the Company reverifies the
employment, income and source of funds documentation, as appropriate, of each
borrower and obtains a new credit report and independent appraisal with respect
to 10% of the reviewed loan sample.
SECURITIZATION PROCESS
General. The Company primarily uses reverse-repurchase agreements and
equity to finance the initial acquisition of mortgage loans from sellers. When
a sufficient volume of mortgage loans with similar characteristics has been
accumulated, generally $100 million to $500 million in principal amount, they
are securitized through the issuance of mortgage-backed securities in the form
of REMICs or CMOs or resold in bulk whole loan sales. The length of time
between when the Company commits to purchase a mortgage loan and when it sells
or securitizes such mortgage loan generally ranges from ten to 90 days,
depending on certain factors, including the length of the purchase commitment
period, the loan volume by product type and the securitization process.
The Company is subject to various risks due to potential interest rate
fluctuations during the period of time after the Company commits to purchase a
mortgage loan at a pre-determined price until such mortgage loan is ultimately
sold. The Company has attempted to mitigate such risks through the
implementation of hedging policies and procedures. In accordance with its
hedging policies and procedures, the Company seeks to utilize financial
instruments whose price sensitivity has very close inverse correlation to the
price sensitivity of the related mortgage loans as a result of changes in
applicable interest rates. With respect to the Company's portfolio of jumbo and
nonconforming fixed rate loans, the financial instrument which has historically
demonstrated close inverse correlation, and also trades in a relatively liquid
and efficient manner, is a forward commitment to sell a FNMA or FHLMC security
of comparable maturity and average weighted interest rate. However, the
Company's private-label mortgage securities typically trade at a discount (or
"spread") compared to the corresponding FNMA or FHLMC securities. Accordingly,
while the Company's hedging strategy may mitigate the impact that changes in
interest rates would have on the price of agency mortgage securities (and
therefore to some extent on the price of the Company's private-label mortgage
securities), such strategy does not protect the Company against the effect of a
widening or narrowing in the pricing spread between agency securities and the
Company's private-label securities. Therefore, any significant widening or
narrowing of the spread commanded by agency mortgage securities compared to the
Company's private-label securities could have a negative effect on the financial
performance of the Company, regardless of the efficiency of the Company's
execution of its hedging strategy.
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With respect to the Company's portfolio of jumbo and nonconforming adjustable
rate loans, the Company generally utilizes forward sales of short-term Treasury
futures to hedge against the effect of interest rate fluctuations. Although
short-term Treasury futures may protect the Company's adjustable rate loan
portfolio against fluctuations of short-term interest rates, such hedging
activities may not always result in precise inverse correlation to changes in
the values of the underlying mortgage loans. The lack of exact inverse
correlation is due to such factors as changes in the relative pricing discount
between mortgage securities and Treasury securities, differences between the
applicable adjustable rate index and the underlying Treasury security and
credit risks in the whole loan market. To the extent any changes in the value
of the instruments used to hedge the risk of interest rate fluctuations do not
inversely correlate precisely to the risks affecting the value of the Company's
adjustable rate mortgage loan portfolio, the financial performance of the
Company could be negatively or positively impacted.
The Company's decision to form REMICs or CMOs or sell the loans in bulk is
influenced by a variety of factors. REMIC transactions are generally accounted
for as sales of the mortgage loans and can eliminate or minimize any long-term
residual investment in such loans. REMIC securities consist of one or more
classes of "regular interests" and a single class of "residual interest." The
regular interests are tailored to the needs of investors and may be issued in
multiple classes with varying maturities, average lives and interest rates.
These regular interests are predominately senior securities but, in conjunction
with providing credit enhancement, may be subordinated to the rights of other
regular interests. The residual interest represents the remainder of the cash
flows from the mortgage loans (including, in some instances, reinvestment
income) over the amounts required to be distributed to the regular interests.
In some cases, the regular interests may be structured so that there is no
significant residual cash flow, thereby allowing the Company to sell its entire
interest in the mortgage loans. As a result, in some cases the capital
originally invested in the mortgage loans by the Company may be redeployed in
the mortgage conduit operations. The Company may retain regular and residual
interests on a short-term or long-term basis. The creation of REMIC securities
through INMC is the Company's preferred method of securitizing mortgage loans,
because this method provides the maximum flexibility in structuring securities
for sale to the broadest group of investors and may permit the immediate
redeployment of a portion of the originally invested capital of the Company.
Beginning in the third quarter of 1993, the Company began issuing all of its
REMIC securities utilizing a shelf registration statement established by CWMBS,
Inc., a wholly owned limited purpose finance subsidiary of CCI. Neither CWMBS,
Inc. nor CCI derived any financial benefit from such issuances.
As an alternative to REMIC sales, the Company may issue CMOs to finance mortgage
loans to maturity. For accounting and tax purposes, the mortgage loans financed
through the issuance of CMOs are treated as assets of the Company, and the CMOs
are treated as debt of the Company. The Company earns the net interest spread
between the interest income on the mortgage loans and the interest and other
expenses associated with the CMO financing. The net interest spread will be
directly impacted by the levels of prepayment of the underlying mortgage loans
and, to the extent CMO classes have variable rates of interest, may be affected
by changes in short term interest rates. The Company is required to retain a
residual interest in its issued CMOs. The Company may issue CMOs from time to
time based on the Company's current and future investment needs, market
conditions and other factors. CMOs, however, do not offer the Company the
structuring flexibility of REMICs and are expected to be a secondary method of
securitizing the Company's mortgage loans.
Credit Enhancement. REMICs or CMOs created by the Company are structured
so that in general substantially all of such securities are rated investment
grade by at least one nationally recognized rating agency. In contrast to
mortgage-backed securities in which the principal and interest payments are
guaranteed by the U.S. government or an agency thereof, securities created by
the Company do not benefit from any such guarantee. The ratings for the
Company's mortgage-backed securities are based on the perceived credit risk by
the applicable rating agency of the
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underlying mortgage loans, the structure of the securities and the associated
level of credit enhancement. Credit enhancement is designed to provide
protection to the security holders in the event of borrower defaults and other
losses including those associated with fraud or reductions in the principal
balances or interest rates on mortgage loans as required by law or a bankruptcy
court. The Company can utilize multiple forms of credit enhancement, including
mortgage pool and special hazard insurance, reserve funds, letters of credit,
surety bonds and subordination or any combination thereof.
In determining whether to provide credit enhancement through mortgage pool
insurance, subordination or other credit enhancement methods, the Company will
take into consideration the costs associated with each method. The Company
principally provides credit enhancement through the issuance of mortgage-backed
securities in senior/subordinated structures. The subordinated securities may
be sold, retained by the Company and accumulated for sale in subsequent
transactions or retained as long term investments.
Retention of Mortgage-Backed Securities and Other Investments. In
connection with the issuance of mortgage-backed securities or other investments
in the form of REMICs or CMOs, the Company may retain subordinated securities or
regular or residual interests (including residual interests that may be
subordinated to other classes of securities) on a short-term or long-term basis.
Any such retained residual or regular interest may include "principal only" or
"interest only" securities including master servicing fees receivable and other
interest rate or prepayment sensitive securities or investments. Master
servicing fees receivable have characteristics similar to excess servicing fees;
accordingly, they have many of the same risks inherent in excess servicing fees,
including the risk that they will lose a substantial portion of their value as a
result of rapid prepayments occasioned by declining interest rates. It is also
possible that under certain high prepayment scenarios the Company would not
fully recoup its initial investment in such receivables. Management believes
that because of the current level of interest rates, investments in current
coupon master servicing fees receivable are prudent, and if interest rates rise,
these investments will mitigate declines in income that may occur in the
Company's origination operations. The Company intends to hold master servicing
fees receivable for investment.
MORTGAGE LOANS HELD FOR INVESTMENT
In an effort to generate continuing earnings that would be less dependent upon
quarterly loan purchase volumes than the Company's loan purchase and
securitization activities, the Company began investing in adjustable rate
mortgage loans on a long-term basis. The Company financed the acquisition of
such loans with borrowings under the reverse-repurchase agreements referred to
under "--Financing Sources" below. During 1994, the Company acquired
approximately $909.9 million in mortgage loans held for investment. While the
Company intends to continue to increase its portfolio of mortgage loans held for
investment, the Company does not expect to continue to acquire mortgage loans
for investment at the same rate as in 1994.
WAREHOUSE LENDING
WLCA engages in warehouse and secured lending operations for small and medium-
sized mortgage originators. The Company's traditional warehouse lending
facilities typically provide short-term revolving financing to mortgage
companies to finance mortgage loans during the time between the closing of a
loan and its sale to investors. Although the loans financed by WLCA through its
traditional warehouse lending activities represent a broader line of mortgage
products than those purchased by INMC, at present all of such loan products
purchased by the Company are eligible for financing by WLCA under the reverse-
repurchase agreements used by WLCA to fund its operations. WLCA also provides
credit facilities to mortgage originators of all sizes secured by other
mortgage-related assets such as servicing rights and servicing sales
receivables.
8
<PAGE>
WLCA offers credit facilities to otherwise qualified mortgage originators with a
minimum audited net worth of $100,000 and subject to a maximum debt to net worth
ratio of 20 to 1. The specific terms of any warehouse line of credit, including
the amount, are determined based upon the financial strength, historical
performance and other qualifications of the mortgage originator. All such lines
of credit are subject to the prior approval of a credit committee comprised of
senior officers and Directors of CWM. WLCA finances these programs through a
combination of reverse-repurchase agreements and equity. WLCA has three
committed two-year reverse-repurchase agreement facilities with investment banks
with sublimits in an aggregate amount of up to $1 billion for certain of its
warehouse lending operations.
CONSTRUCTION LENDING
The Company's new construction lending division, CLCA, which began operations in
August 1994, offers tract construction loans to developers and assists INMC in
purchasing combined construction to permanent mortgage loans from mortgage
companies and administering the construction draws. The tract construction
loans are made to small-and medium-size builders of single-family residences.
The target project for CLCA's construction lending division is 15 to 100 units
of single-family homes, built in one to five phases, that are marketed to entry
level/first-time or trade-up buyers. The maximum loan size is $15 million. The
specific terms of any construction loan, including the principal amount thereof,
are determined based upon, among other things, the location of the project and
value of the land, and the financial strength, historical performance and other
qualifications of the builder. All construction loans to developers are subject
to the prior approval of a credit committee comprised of senior officers and
Directors of CWM. Combined construction to permanent loans are originated by
INMC's sellers to borrowers who want to construct or remodel their residences.
CLCA's construction lending division assists INMC in the purchase of such loans
and administers the construction draws. Under this program, advances to
borrowers to fund the purchase of a lot before construction begins are subject
to a 60% loan-to-value limitation, as well as other detailed criteria. Criteria
for permanent loans are similar to those applied by INMC to loan purchases
generally. The maximum construction to permanent loan size is $1 million.
FINANCING SOURCES
The Company uses proceeds from the sale of REMIC securities and CMOs, reverse-
repurchase agreements, and cash flow from operations to meet its working
capital needs. In addition, the Company has relied on proceeds from public
offerings of common stock. For further information on the material terms of the
borrowings utilized by the Company to finance its inventory of mortgage loans
and mortgage-backed securities, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital Resources."
The Company continues to investigate and pursue alternative and supplementary
methods to finance its operations through the public and private capital and
credit markets.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
CWM has elected to be taxed as a REIT under the Code and intends to continue to
do so. INMC, is not a qualified REIT subsidiary and is not consolidated with
CWM for either tax or financial reporting purposes. Consequently, INMC is
subject to applicable federal and state income taxes. CWM will include in
taxable income amounts earned by INMC only when INMC remits its after-tax
earnings by dividend to the Company.
CWM's election to be treated as a REIT will be terminated automatically if CWM
fails to meet the requirements of the REIT provisions of the Code.
Qualification as a REIT requires that CWM satisfy a variety of tests relating to
its income, assets, distribution and ownership. Although CWM believes it has
operated and intends to continue to operate in such a manner as to qualify as a
REIT, no assurance can be given that CWM will in fact continue to so qualify.
If CWM fails to qualify as a
9
<PAGE>
REIT in any taxable year, it would be subject to federal corporate income tax
(including any alternative minimum tax) on its taxable income at regular
corporate rates, and distributions to its shareholders would not be deductible
by CWM. In that event, CWM would not be eligible again to elect REIT status
until the fifth taxable year which begins after the year for which CWM's
election was terminated unless certain relief provisions apply. CWM may also
voluntarily revoke its election, although it has no intention of doing so, in
which event CWM would be prohibited, without exception, from electing REIT
status for the year to which the revocation relates and the following four
taxable years.
Distributions to shareholders of CWM with respect to any year in which CWM fails
to qualify would not be deductible by CWM nor would they be required to be made
to such shareholders. In such event, to the extent of current and accumulated
earnings and profits, any distributions to shareholders would be taxable as
ordinary income and, subject to certain limitations in the Code, eligible for
the dividends-received deduction for corporations. Failure to qualify would
reduce the amount of after-tax earnings available for distribution to
shareholders and could result in CWM incurring substantial indebtedness (to the
extent borrowings are feasible), or disposing of substantial investments, in
order to pay the resulting taxes or, at the discretion of CWM, to maintain the
level of CWM's distributions to its shareholders.
EXCESS INCLUSION INCOME
A portion of CWM's assets may be in the form of CMO residual interests. In
general, CMOs are debt instruments secured by fixed pools of mortgage
instruments in which investors hold multiple classes of interests. Part or all
of the income derived by CWM from a residual interest of a CMO issued by CWM
after December 31, 1991, pursuant to regulations yet to be published, may be
"excess inclusion" income. Such excess inclusion income generally is subject to
federal income tax in all events. If CWM pays any dividends to its shareholders
that are attributable to excess inclusion income, the shareholders who receive
such dividends generally will be subject to the same tax consequences that would
apply if they derived excess inclusion income from a direct investment in a CMO
residual interest. Excess inclusion income allocable to a shareholder may not
be offset by current deductions or net operating losses of such shareholder.
Moreover, such excess inclusion income constitutes unrelated business taxable
income for tax-exempt entities (including employee benefit plans) and would be
subject to a tax that would be allocable to a "disqualified organization"
holding the Company's shares. CWM's bylaws provide that disqualified
organizations are ineligible to hold CWM's shares.
MANAGEMENT AGREEMENT
Since its inception, CWM has each year entered into a management agreement with
CAMC pursuant to which CAMC advises the Company on various facets of its
business and manages its day-to-day operations. Subject to the supervision of
CWM's Board of Directors, CAMC conducts the day-to-day mortgage conduit,
warehouse lending and construction lending operations. The management agreement
may be terminated by the Company under certain circumstances upon 30 days' prior
notice, or by either party upon 60 days' prior notice. The management agreement
is renewable annually and expires May 15, 1995. CFC has guaranteed the
performance of the duties and obligations of CAMC under the management
agreement. CAMC has subcontracted with CFC to provide certain management
services to the Company. Such subcontract may be terminated by either party
upon 60 days' prior notice.
10
<PAGE>
RELATIONSHIPS WITH COUNTRYWIDE ENTITIES
CWM and CCI are both publicly traded companies whose shares of common stock are
listed on the New York Stock Exchange. The Company utilizes the mortgage
banking experience, management expertise and resources of CCI, CAMC and CFC in
conducting its new mortgage conduit operations. CAMC and CFC are both wholly
owned subsidiaries of CCI. CCI directly or indirectly owns approximately 3.5%
of the Common Stock of CWM. In addition, a number of Directors and officers of
CWM and INMC also serve as Directors and/or officers of CCI, CAMC and/or CFC.
See "Item 13, Certain Relationship and Related Transactions." The Company also
has a $10 million line of credit from CFC, and the Company may utilize CFC as a
resource for loan servicing, technology, information services and loan
production. CFC owns all of the outstanding voting common stock and a 1%
economic interest in INMC, and CWM owns all of the outstanding non-voting
preferred stock and a 99% economic interest in INMC.
HISTORICAL OPERATIONS
Prior to the initiation of the Company's mortgage conduit and warehouse lending
operations in 1993 and the initiation of its construction lending operations in
1994, the Company was principally a long-term investor in single-family, first-
lien, residential mortgage loans and in mortgage-backed securities representing
interests in such loans. The Company's mortgage investment portfolio consisted
primarily of fixed-rate mortgage pass-through certificates issued by FHLMC or
FNMA (collectively, "Agency Securities") and nonconforming mortgage loans. The
principal source of earnings for the Company historically had been interest
income generated from investments in such mortgage loans and mortgage-backed
securities, net of the interest expense on the CMOs or reverse-repurchase
agreements used to finance such mortgage investments. In 1987, CWM began to
invest in Agency Securities representing undivided interests in pools of
adjustable-rate mortgages ("Agency ARMs") purchased through various broker-
dealers and financed primarily through reverse-repurchase agreements. During
1992, CWM sold substantially all of its portfolio of Agency ARMs, resulting in a
gain of approximately $9 million, and the remainder of such portfolio was sold
during the first quarter of 1993 at its approximate carrying value.
During 1992, 1993 and continuing in the beginning of 1994, long-term interest
rates, including mortgage rates, fell to their lowest levels in nearly 20 years.
These lower interest rates affected CWM's portfolios of fixed-rate and ARM
assets and their related debt in dramatically different fashions. The portfolio
of mortgage investments financed by CMOs experienced substantial prepayments,
resulting in significantly decreased net earnings, and as mortgage loan
premiums, original issue discount and bond issuance costs were required to be
amortized, losses on the portfolio were realized. The portfolio of Agency ARMs
served in part as a hedge against the effects of declining interest rates. The
decline in interest rates lowered the cost of financing this portfolio through
reverse-repurchase agreements substantially more quickly than the level of
interest income earned on the Agency ARMs declined and, consequently, the net
interest income generated from the Agency ARMs portfolio improved significantly.
During 1992, CWM sold substantially all of its Agency ARMs to recognize the
increased market values of these assets and to provide capital for CWM's new
operating plan. These sales helped to offset the negative effects of lower
interest rates and higher prepayment rates on the performance of CWM's CMO
portfolio. Regardless of the level of interest rates or prepayments, CWM
anticipates no significant earnings from this CMO portfolio. Any continued
negative performance of this CMO portfolio will continue to adversely impact the
earnings of CWM to the extent of its investment in such portfolio.
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<PAGE>
COMPETITION
In purchasing mortgage loans and issuing mortgage-backed securities, the Company
competes with established mortgage conduit programs, investment banking firms,
savings and loan associations, banks, FNMA, FHLMC, GNMA, mortgage bankers,
insurance companies, other lenders and other entities purchasing mortgage
assets. Mortgage-backed securities issued through the Company's mortgage
conduit operations face competition from other investment opportunities
available to prospective investors.
FNMA and FHLMC are not permitted to purchase mortgage loans with original
principal balances above $203,150 (effective January 1, 1993). If this dollar
limitation increases, FNMA and FHLMC may be able to purchase a greater
percentage of the loans in the secondary market than they currently acquire, and
the Company's ability to maintain or increase its current acquisition levels
could be adversely affected.
The Company also faces competition in its warehouse lending operations from
banks and other warehouse lenders, including investment banks and other
financial institutions who offer warehouse financing through the use of reverse-
repurchase agreements. Similarly, the Company faces competition in its
construction lending operations from banks and other financial institutions.
Many of the institutions with which the Company competes in its mortgage
conduit, warehouse lending and construction lending operations have
significantly greater financial resources than the Company.
EMPLOYEES
All employees and operating management of the Company are presently employees of
CAMC, a CCI subsidiary and manager of the Company. As of December 31, 1994,
CAMC had 138 employees dedicated to the Company's mortgage conduit, warehouse
lending, construction lending and other operations.
ITEM 2. PROPERTIES
------- ----------
The primary executive and administrative offices of the Company and its
subsidiaries are located at 35 North Lake Avenue, Pasadena, California, and
consist of approximately 25,000 square feet. The principal lease covering such
space expires in the year 2001.
ITEM 3. LEGAL PROCEEDINGS
------- -----------------
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
------- ---------------------------------------------------
None.
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PART II
ITEM 5. MARKET FOR CWM'S STOCK AND RELATED SECURITY HOLDER MATTERS
------- ----------------------------------------------------------
CWM's Common Stock became listed on the New York Stock Exchange in November 1986
(Symbol: CWM).
The following table sets forth the high and low closing prices for the Common
Stock of CWM (as reported by NYSE), for the years ended December 31, 1994 and
1993 and cash dividends declared for earnings of the periods as indicated:
<TABLE>
<CAPTION>
1994 1993 CASH DIVIDENDS
HIGH LOW HIGH LOW 1994 1993
<S> <C> <C> <C> <C> <C> <C>
First Quarter $11 3/4 $9 1/2 $ 6 3/4 $5 1/4 $.16 $.12
Second Quarter 10 3/8 7 6 3/4 5 5/8 .18 .12
Third Quarter 9 1/8 7 1/8 10 1/8 5 3/4 .26 .12
Fourth Quarter 9 3/8 7 5/8 11 3/8 8 1/4 .27 .12
</TABLE>
As of March 1, 1995, CWM's Common Stock was held by 1,854 shareholders of
record.
CWM declared quarterly cash dividends for earnings aggregating $.87 for the year
ending December 31, 1994 and $.48 for the year ending December 31, 1993. On
January 16, 1995, CWM declared a cash dividend for the fourth quarter of 1994 of
$.27 per share, payable March 8, 1995, to shareholders of record on February 21,
1995.
CWM maintains a dividend reinvestment plan for shareholders who wish to reinvest
their cash dividends in additional shares of Common Stock. The dividend
reinvestment plan currently provides for the purchase of additional shares of
Common Stock on the open market for the accounts of its participants.
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<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
-------------------------------
(Dollar amounts in thousands, except per share data)
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------------------------
1994 1993 1992 1991 1990
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Selected Consolidated
Statements of Earnings Data
For The Year Ended
Interest income $ 92,119 $ 65,504 $ 106,070 $ 148,634 $ 162,013
Interest expense 66,700 65,312 107,511 35,395 149,511
----------- ----------- ------------ ----------- -----------
Net interest income (expense) 25,419 192 (1,441) 13,239 12,502
Equity in earnings of INMC 5,624 2,523 - - -
Gain on sale of mortgage loans
and securities - 917 9,031 735 -
Other 885 797 - - -
Expenses 4,097 1,949 2,603 3,107 2,989
----------- ----------- ------------ ----------- -----------
Net earnings 27,831 2,480 4,987 10,867 9,513
=========== =========== ============ =========== ===========
Earnings per share $0.86 $0.13 $0.36 $0.78 $0.70
=========== =========== ============ =========== ===========
Cash dividends per share $0.87 $0.48 $0.48 $0.78 $0.69
Weighted average
shares outstanding 32,183,850 18,578,307 13,978,683 13,924,326 13,645,000
Selected Consolidated
Balance Sheet Data
At Year End
Mortgage loans held for sale $ 608,240 $ 794,132 $ - $ - $ -
Mortgage loans held for investment 899,672 - - - -
Collateral for CMOs 233,690 402,503 620,411 1,118,321 1,296,358
Revolving warehouse lines of credit 69,591 92,058 - - -
Total assets 1,997,644 1,396,738 714,225 1,852,057 1,737,731
Short-term borrowings 1,534,189 770,334 21,944 688,860 394,056
Collateralized mortgage obligations 202,259 365,886 571,857 1,040,495 1,220,905
Shareholders' equity 256,020 250,608 119,995 122,403 121,147
Number of shares outstanding 32,281,156 32,020,484 13,980,387 13,976,375 13,645,000
Book value per share $7.93 $7.83 $8.58 $8.76 $8.88
Selected other data:
Mortgage loans acquired $ 5,985,466 $ 3,420,263 - - -
INMC master servicing portfolio $ 6,818,000 $ 1,977,000 - - -
</TABLE>
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<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
------- ---------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
GENERAL
CWM Mortgage Holdings, Inc. was incorporated in the state of Maryland in July
1985 and reincorporated in the state of Delaware in March 1987. References to
"CWM" mean either the parent company alone or the parent company and the
entities consolidated for financial reporting purposes, while references to the
"Company" means the parent company, its consolidated subsidiaries and
Independent National Mortgage Corporation ("INMC"), which is not consolidated
with CWM for financial reporting purposes.
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 that generally retain the servicing rights. As a mortgage loan
conduit, the Company is an intermediary between the originators of mortgage
loans and permanent investors in mortgage-backed securities secured by, or
representing an ownership interest in, such mortgage loans. The Company
purchases "jumbo" and other "nonconforming" 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. 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 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 operations which provide warehouse and other types of credit
to third-party mortgage loan originators. Through its warehouse lending
operations, financing is provided to small-and medium-size mortgage originators
for the origination and sale of mortgage loans, the retention, acquisition or
sale 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 primary
or secondary residences. Under the construction to permanent program, one set
of documents supports both the construction and permanent phases of the loan.
As of December 31, 1994, $4.3 million and $2.6 million were outstanding under
the tract construction and construction to permanent programs, respectively.
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") and net interest income
earned from its portfolio of adjustable rate mortgage-backed securities financed
with reverse-repurchase agreements. 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 1993 and the first quarter of 1994, low mortgage interest rates resulted
in continued high prepayment rates which adversely impacted the net interest
income earned on the CMO Portfolio. When prevailing mortgage interest rates are
low relative to interest rates of existing mortgage loans, prepayments on the
existing mortgage loans generally tend to
15
<PAGE>
increase as mortgagors refinance their loans. The cash flow generated by these
prepayments is used to repay the CMOs 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 loan premiums, original issue discount and bond
issuance costs were required to be amortized, losses were ultimately realized on
the portfolio. However, due to a decrease in the size of the CMO Portfolio and a
decrease in prepayment activity, which was the result of the increase in
interest rates beginning in early 1994, there was a decrease in the net interest
expense realized on the portfolio during 1994 compared to 1993.
Although higher interest rates have decreased prepayments and the negative
impact on the Company's earnings from its CMO Portfolio, higher interest rates
have resulted in increased competition in the market for mortgage-backed
securities, increased hedging costs and lower margins. Higher interest rates
have also resulted in a decrease in the volume of mortgage loans purchased and
warehouse lines outstanding. In addition, the increase in interest rates has
affected the types of loans currently being purchased, as the market shifted
from primarily fixed-rate mortgages to adjustable-rate mortgages ("ARMs"). 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: Through its mortgage loan conduit
operations, the Company purchases jumbo and other nonconforming loans from
mortgage originators who generally retain the mortgage loan servicing rights.
During 1994, CWM purchased $6.0 billion of such mortgage loans, which were
financed on an interim basis using equity and short-term borrowings in the form
of reverse-repurchase agreements. In general, the Company, through INMC, sells
the loans in the form of real estate mortgage investment conduits ("REMICs") or
whole loan sales or, alternatively, through CWM, invests in the loans on a long-
term basis using financing provided by CMOs or reverse-repurchase agreements.
During 1994, INMC sold $5.1 billion of mortgage loans through the issuance of
REMIC securities and the sale of whole loans. In addition, at December 31, 1994
the Company held $899.7 million in mortgage loans as long-term investments.
The Company's warehouse lending program provides secured short-term revolving
financing to small- and medium-size mortgage originators to finance mortgage
loans from the closing of a 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 December 31, 1994, CWM had extended committed lines of credit
under these programs in an aggregate amount of $396.8 million, of which $69.6
million was outstanding. Reverse-repurchase agreements associated with CWM's
financing of these lines of credit totaled $49.0 million at December 31, 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 December 31, 1994, the CMO Portfolio was comprised of 15
series of CMOs issued from CWM's inception through 1990 ("Pre-1993 CMO
Portfolio") and two
16
<PAGE>
series of CMOs which were issued in 1993 by CWM in connection with its 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 $233.7
million at December 31, 1994. This decrease of $168.8 million included
repayments (including prepayments and premium and discount amortization) of
$149.2 million and decreases in guaranteed investment contracts ("GICs") held by
trustees and accrued interest receivable of $17.8 million and $1.8 million
respectively. CWM's CMOs outstanding decreased to $202.3 million at December
31, 1994 from $365.9 million at December 31, 1993. This decrease of $163.6
million resulted from principal payments (including discount amortization) on
CMOs of $161.9 million and a decrease in accrued interest payable on CMOs of
$1.7 million.
When interest rates decline, prepayments on the underlying mortgage loans
generally tend to increase as mortgagors refinance their existing loans. The
cash flow generated by these unanticipated prepayments is ultimately used by CWM
to repay the CMOs since they are collateralized by these mortgages. When
interest rates decline and prepayments increase, the net yield achieved from
CWM's net investment in the CMO Portfolio is adversely impacted due to factors
which are explained below.
RESULTS OF OPERATIONS 1994 COMPARED TO 1993
NET EARNINGS: CWM's net earnings were $27.8 million or $0.86 per share, based
on 32,183,850 weighted average shares outstanding for 1994 compared to $2.5
million or $0.13 per share, based on 18,578,307 weighted average shares
outstanding for 1993. The increase in net earnings of $25.3 million was
primarily due to an increase in earnings of $18.5 million associated with CWM's
mortgage conduit activities, including its equity in earnings of INMC, and its
warehouse lending operations, combined with a decrease in the loss associated
with the CMO Portfolio of $6.8 million.
The increase in net earnings related to CWM's mortgage conduit activities is
principally due to an increase in net interest income and equity in earnings of
INMC of $17.4 million and $3.1 million, respectively, combined with an increase
in other net revenues of $88,000, and offset by an increase in expenses of $2.1
million.
The decrease in the net loss on the CMO Portfolio is due to a decrease in net
interest expense of $7.8 million, offset by an increase in costs related to the
administration of the CMO Portfolio of $46,000 and a gain of $917,000 related to
the sale of mortgage-backed securities that collateralized two CMO series
redeemed in 1993. There was no such gain in 1994.
INTEREST INCOME: Total interest income was $92.1 million for 1994 and $65.5
million for 1993. Interest income earned on mortgage loans held for sale and
revolving warehouse lines of credit was $34.2 million and $4.4 million,
respectively, for 1994. Interest earned on mortgage loans held for sale and
revolving warehouse lines of credit was $20.5 million and $1.7 million,
respectively for 1993. The weighted average principal balance of mortgage loans
held for sale and revolving warehouse lines of credit approximated $470.7
million and $57.9 million, respectively, for 1994 and earned interest at an
effective yield of approximately 7.27% and 7.53%, respectively, compared to
weighted average balances of $281.9 million and $25.3 million, respectively for
1993. Interest on mortgage loans held for sale and warehouse lines of credit
was earned at an effective yield of 7.26% and 6.54%, respectively for 1993.
17
<PAGE>
Interest income earned on mortgage loans held for investment was $20.2 million
during 1994. The weighted average principal balance was $272.8 million during
1994 and earned interest at an effective yield of 7.39%. The Company began
investing in mortgage loans during 1994, and therefore no such income was
reported in 1993.
Interest income on collateral for CMOs was $21.7 million and $41.7 million for
1994 and 1993, respectively. The decline was attributable to a decrease in the
average aggregate principal amount of collateral for CMOs outstanding, from
$550.5 million for 1993 to $290.2 million for 1994, combined with a decrease in
the effective yield earned on the collateral from 7.57% in 1993 to 7.47% in
1994. The decrease in the average balance of collateral for CMOs and the
effective interest yield earned thereon was due to the relatively low interest
rate environment experienced during 1993 and the first part of 1994 which
resulted in significant prepayment activity. The rate of prepayments (including
repayments) was 36% and 50% in 1994 and 1993, respectively. In a declining
interest rate environment, loans with higher interest rates prepay faster than
loans with lower interest rates, resulting in a lower overall effective yield.
In addition, the interest income was reduced on collateral for CMOs by the
amortization of premiums paid in connection with acquiring the portfolio and a
delay in the receipt of prepayments and temporary investment in lower yielding
short-term investments (GICs) until such amounts were used to repay CMOs.
Interest income on adjustable-rate mortgage securities (the "ARM Portfolio")
amounted to $674,000 for 1993 These securities were liquidated in the first
quarter of 1993 and therefore no such interest was earned during 1994. The net
proceeds from the sale of these securities were deployed in the mortgage loan
conduit and warehouse lending operations.
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. In addition, in October 1994, CWM began investing in master servicing
fees receivable associated with REMIC securities issued by INMC. Accordingly,
as of December 31, 1994, CWM had master servicing fees receivable totaling
$121.0 million. Gross master servicing income for CWM was $14.7 million for the
year ended December 31, 1994. This gross income was offset by amortization of
master servicing fees receivable of $7.5 million for the year ended December 31,
1994, including $411,000 of unscheduled amortization.
In September 1994, the Company began securitizing master servicing fees
receivable in order to allow for financing of this asset. As of December 31,
1994, master servicing fees receivable totaled $121.0 million for CWM, all of
which was securitized, and $116.2 million was pledged as collateral for
borrowings totaling $68.4 million under reverse-repurchase agreements. Such
borrowings had original maturities of less than 31 days and a weighted average
interest rate of 6.30% as of December 31, 1994.
INTEREST EXPENSE: For 1994 and 1993, total interest expense was $66.7 million
and $65.3 million, respectively. Interest expense on reverse-repurchase
agreements financing mortgage loans held for sale, mortgage loans held for
investment, master servicing fees receivable and revolving warehouse lines of
credit was $39.6 million during 1994 compared to $10.4 million during 1993. In
1993, there were no borrowings secured by master servicing fees receivable. The
weighted average balance outstanding was $754.4 million and $271.2 million for
1994 and 1993, respectively. The effective yield was 5.25% and 3.82% for 1994
and 1993, respectively.
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<PAGE>
Interest expense on CMOs was $27.1 million and $55.0 million for 1994 and 1993,
respectively. This decrease was primarily attributable to a decrease in average
aggregate CMOs outstanding from $516.2 million for 1993 to $263.8 million for
1994, combined with a decrease in the weighted average cost of CMOs from 10.65%
in 1993 to 10.28% in 1994. The decrease in the average balance of CMOs was
directly related to the prepayment activity on collateral for CMOs discussed
above. The prepayments are ultimately used to repay the related CMOs. In
general, the class of each series of CMO with the shortest maturity receives all
principal payments until it is repaid in full. After the first class is
retired, the second class will receive all principal payments until retired and
so forth. Substantially all CMO bonds were structured with the shortest
maturity class generally having the lowest interest rate and with interest rates
increasing as the maturity of the class increases. Therefore, prepayments
generally must first be applied to the class with the lowest interest rate,
resulting in repayment of CMO classes with relatively low interest rates and
increasing the weighted average interest rate of the remaining outstanding CMOs.
However, the decrease in the weighted average cost of CMOs in 1994 compared to
1993 is due to a decrease in the amortization of original issue discounts and
deferred bond issuance costs associated with the decrease in prepayment
activity.
EQUITY IN EARNINGS OF INMC: During 1994, earnings of INMC, which was formed in
1993 and in which CWM owns 100% of the preferred stock and has a 99% economic
interest, resulted principally from net interest income of $5.3 million, net
master servicing income of $1.1 million, gains on sales of mortgage loans of
$9.7 million, gains on sale of servicing of $7.3 million, expenses of $13.8
million and income taxes of $3.8 million. During 1993, earnings of INMC
resulted principally from net interest income of $3.1 million, net master
servicing expense of $4.5 million, gains on sales of mortgage loans of $8.4
million, expenses of $2.6 million and income taxes of $1.8 million.
As a result of its mortgage conduit operations, INMC began earning master
servicing fee income. At December 31, 1994, INMC master serviced loans with
principal balances aggregating $6.8 billion. The growth in the master servicing
portfolio during 1993 and 1994 was the result of loan production volume from the
Company's conduit operations, partially offset by prepayments of mortgage loans.
The weighted average interest rate of the mortgage loans in the master servicing
portfolio at December 31, 1994 and 1993 was 7.38% and 7.21%, respectively.
Investments in master servicing fees receivable have characteristics comparable
to "excess servicing" insofar as their value tends to decline as prepayment
rates increase. The yield on this investment could decline considerably as a
result of rapid prepayments occasioned by declining interest rates. It is also
possible that under certain high prepayment scenarios the Company would not
recoup its initial investment in such assets. In this scenario, the Company
would write down its master servicing fees receivable asset so that the
remaining asset does not exceed the present value of future net master servicing
income. During 1993, INMC experienced significant prepayment activity due to
the low interest rate environment, requiring a write-down of master servicing
fees receivable totaling $6.2 million. As a result, master servicing
amortization was in excess of master servicing income. In 1994, there was no
write-down of master servicing fees receivable due to the decrease in prepayment
activity associated with rising interest rates.
In December 1993, to mitigate the effect on earnings of higher amortization
(which is deducted from master servicing income) resulting from increased
prepayment activity, INMC purchased call options on FNMA mortgage-backed
securities which increase in value when interest rates decline. As of December
31, 1993, INMC had $300 million of call options on FNMA mortgage-backed
securities which had a book value and an approximate fair market value of $4.1
million. Amortization of these options, which expired in June of 1994, totaled
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<PAGE>
$3.6 million and $150,000 in 1994 and 1993, respectively. There were no call
options outstanding as of December 31, 1994.
The net earnings of INMC for 1993 do not include certain personnel and other
operating expenses totaling $900,000 during the first six months of 1993 which
were absorbed by Countrywide Asset Management Corporation (the "Manager") the
under the terms of the Company's Management Agreement. INMC began paying all
expenses of its new operations in June 1993. INMC's salaries and related
expenses were $7.9 million and $1.7 million for 1994 and 1993, respectively. As
of December 31, 1994 and 1993, the Manager employed approximately 117 and 55
employees, respectively, on behalf of INMC. General and administrative expenses
incurred by INMC were $5.6 million and $892,000 for 1994 and 1993, respectively.
This increase is due to the expansion that occurred in the conduit operation
during 1994 as well as the fact that 1994 included a full year of expenses as
compared to six months of expenses during 1993.
MANAGEMENT FEES: For 1994, management fees were $1.2 million compared to
$400,000 for 1993. The increase was primarily due to incentive compensation of
$941,000 payable to the Manager in 1994, directly related to the increase in
CWM's earnings during 1994. The Manager waived 25% of its incentive
compensation for 1994. Under the agreement with the Manager, all management fees
were waived for 1993. Accordingly, such waived fees are reflected as an expense
and a corresponding capital contribution in the accompanying financial
statements.
RESULTS OF OPERATIONS 1993 COMPARED TO 1992
NET EARNINGS: CWM's net earnings were $2.5 million or $0.13 per share, based on
18,578,307 weighted average shares outstanding for 1993 compared to $5.0 million
or $0.36 per share, based on 13,978,683 weighted average shares outstanding for
1992. The decrease in net earnings of $2.5 million was due to a decrease in
earnings of $17.1 million associated with the Pre-1993 CMO Portfolio and the ARM
Portfolio, offset by an increase in earnings of $14.2 million associated with
the mortgage conduit and warehouse lending operations. In addition, CWM's fixed
organizational expenses decreased by $358,000.
The decrease in net earnings on the Pre-1993 CMO and ARM Portfolios was
primarily due to decreases in net interest income and in gains of approximately
$12.8 million and $7.8 million, respectively, associated with the sale of
substantially all of the Company's investment in adjustable-rate mortgage-backed
securities in 1992. These decreases were offset by the decrease in net interest
expense on the Pre-1993 CMO Portfolio of $3.4 million. In addition, gains
decreased by $283,000 related to the redemption of one CMO series in 1992 and
two CMO series in 1993. The earnings associated with the operation of the
Company's warehouse lending program were $1.7 million in 1993. The earnings
from the conduit operations totaled $9.9 million in addition to CWM's $2.5
million equity in earnings of INMC.
INTEREST INCOME: Total interest income was $65.5 million for 1993 and $106.1
million for 1992. Interest income on collateral for CMOs was $41.7 million and
$68.7 million for 1993 and 1992, respectively. The decline was attributable to
a decrease in the average aggregate principal amount of collateral for CMOs
outstanding, from $847.7 million for 1992 to $550.5 million for 1993, combined
with a decrease in the effective yield earned on the collateral from 8.10% in
1992 to 7.57% in 1993. The decrease in the average balance of collateral for
CMOs and the effective interest yield earned thereon was due to the continued
low interest rate environment experienced in 1993 which resulted in significant
prepayment activity. The rate of prepayments (including repayments) was 50% in
1993 compared to
20
<PAGE>
42% in 1992. In a declining interest rate environment, loans with higher
interest rates prepay faster than loans with lower interest rates, resulting in
a lower overall effective yield. In addition, the interest income was reduced on
collateral for CMOs by the amortization of premiums paid in connection with
acquiring the portfolio, and a delay in the receipt of prepayments and temporary
investment in lower yielding short-term investments (GICs) until such amounts
were used to repay CMOs.
Interest income earned on mortgage loans held for sale and revolving warehouse
lines of credit was $20.5 million and $1.7 million, respectively, for 1993. The
weighted average principal balance of mortgage loans held for sale and revolving
warehouse lines of credit approximated $281.9 million and $25.3 million,
respectively, for 1993 and earned interest at an effective yield of
approximately 7.26% and 6.54%, respectively. These operations commenced in
1993; therefore, there was no such income in 1992.
Interest income on adjustable-rate mortgage securities amounted to $674,000 for
1993 and $37.4 million for 1992. The decrease resulted from the liquidation of
these securities which was completed in the first quarter of 1993. The net
proceeds from the sale of these securities were deployed in the new mortgage
loan conduit and warehouse lending operations.
INTEREST EXPENSE: For 1993 and 1992, total interest expense was $65.3 million
and $107.5 million, respectively. Interest expense on CMOs was $55.0 million
and $83.6 million for 1993 and 1992, respectively. This decrease was primarily
attributable to a decrease in average aggregate CMOs outstanding from $813.6
million for 1992 to $516.2 million for 1993, partially offset by an increase in
the weighted average cost of CMOs from 10.27% in 1992 to 10.65% in 1993. The
decrease in the average balance of CMOs was directly related to the prepayment
activity on collateral for CMOs discussed above.
Interest expense on reverse-repurchase agreements financing mortgage loans held
for sale and revolving warehouse lines of credit was $10.4 million or 3.82% of
the average balance outstanding for 1993. Interest expense on reverse-repurchase
agreements financing the Company's investment in its adjustable-rate mortgage
portfolio was $24.0 million or 4.15% of the average balance outstanding for
1992.
EQUITY IN EARNINGS OF INMC: The earnings of INMC, which was formed in 1993 and
in which CWM owns 100% of the preferred stock and has a 99% economic interest,
resulted principally from interest income, net of interest expense of $3.1
million and net master servicing expense of $4.5 million, gains on sales of
mortgage loans of $8.4 million, expenses of $2.6 million and income taxes of
$1.8 million.
As a result of the new mortgage conduit operations, INMC began earning master
servicing fee income. At December 31, 1993, INMC master serviced loans with
principal balances aggregating $2.0 billion. The growth in the master servicing
portfolio during 1993 was the result of loan production volume from the
Company's new conduit operations, partially offset by prepayments of mortgage
loans. The weighted average interest rate of the mortgage loans in the master
servicing portfolio at December 31, 1993 was 7.21%. During 1993, INMC
experienced significant prepayment activity due to the low interest rate
environment resulting in a write-down of master servicing fees receivable
totaling $6.2 million.
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<PAGE>
MANAGEMENT FEES: For 1993, management fees were $400,000 compared to $997,000
for 1992. The decrease was primarily due to a decrease in the base management
fee. In addition, included in management fees for 1992 were $254,000 in fees
associated with the management of the CMO Portfolio. There were no such fees in
1993 due to a change in the Management Agreement.
LIQUIDITY AND CAPITAL RESOURCES
The Company uses proceeds from the sale of REMIC securities and CMOs, reverse-
repurchase agreements, other borrowings and proceeds from the issuance of common
stock to meet its working capital needs. CWM may also borrow up to $10 million
from Countrywide Funding Corporation ("CFC") to meet collateral maintenance
requirements under reverse-repurchase agreements or margin calls on forward
securities sales. These borrowings can be made pursuant to a one-year,
unsecured line of credit which expires on September 30, 1995, subject to
extension by CFC and CWM. As of December 31, 1994, CWM had no outstanding
borrowings under this agreement, and no drawings were made by CWM pursuant to
this agreement during 1994.
CWM has established a committed reverse-repurchase facility with a lender, in an
aggregate amount up to $500 million (with a decreasing annual credit limit), for
its mortgage conduit and warehouse lending operations. The expiration date for
this repurchase facility is April 1, 1996. CWM has also obtained credit
approval from the same lender to enter into additional 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. In August
1994, the Company entered into a committed reverse-repurchase-facility with
another lender in an aggregate amount of $300 million for the Company's mortgage
conduit and warehouse lending operations. This agreement expires in August
1996. As of December 31, 1994, CWM had $1.5 billion outstanding under these
repurchase facilities.
In October 1994, CWM signed a master repurchase agreement with a lender in an
aggregate amount of $225 million, to provide financing for certain master
servicing fees receivable and mortgage-related securities that have been
retained or purchased by CWM or INMC. This agreement expires two years from the
date of execution. As of December 31, 1994, CWM had $68.4 million outstanding
under this facility.
In December 1994, the Company entered into a master repurchase agreement with a
third lender to provide a committed line of credit in the amount of $500 million
for the Company's mortgage conduit and warehouse lending operations. This
agreement expires two years from the date of execution. As of December 31,
1994, there were no amounts outstanding under this credit facility.
None of the foregoing lenders (other than the $10 million line provided by CFC)
are affiliated with the Company. CWM may, to the extent permitted by its
Bylaws, issue other debt securities or incur other types of indebtedness from
time to time.
Management believes that the cash flow from operations and the current and
potential financing arrangements are sufficient to meet current liquidity
requirements.
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<PAGE>
INFLATION
Interest rates often increase during periods of inflation. Higher interest
rates may depress the market value of the Company's investment portfolio if the
yield on such investments 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
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 mortgage investments prepay. A
decrease in the rate of prepayments may lengthen the estimated average lives for
the underlying mortgages with respect to master servicing fees receivable and
for classes of the CMOs issued by CWM and may result in higher residual cash
flows from the CMOs than would otherwise have been obtained. However, higher
interest rates may otherwise adversely affect the Company's mortgage conduit,
warehouse lending and construction lending operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
------- ------------------------------------------
The information called for by this item 8 is hereby incorporated by reference to
CWM's Consolidated Financial Statements and Report of Independent Certified
Public Accountants beginning at Page F-1 of this Form 10-K.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
------- ----------------------------------------------------
None.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
------------------------------------------------------------
The information required by this Item 10 as to directors and executive officers
of CWM is hereby incorporated by reference to CWM's definitive proxy statement,
to be filed pursuant to Regulation 14A within 120 days after the end of the
fiscal year.
For a listing of the directors and principal executives of Countrywide Asset
Management Corporation, (the Company's manager) see Exhibit 99.1.
ITEM 11. EXECUTIVE COMPENSATION
--------------------------------
The information required by this Item 11 is hereby incorporated by reference to
CWM's definitive proxy statement, to be filed pursuant to Regulation 14A within
120 days after the end of the fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
------------------------------------------------------------------------
The information required by this Item 12 is hereby incorporated by reference to
CWM's definitive proxy statement, to be filed pursuant to Regulation 14A within
120 days after the end of the fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
--------------------------------------------------------
The information required by this Item 13 is hereby incorporated by reference to
CWM's definitive proxy statement, to be filed pursuant to Regulation 14A within
120 days after the end of the fiscal year.
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<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
-------- ---------------------------------------
AND REPORTS ON FORM 8-K
-----------------------
(a)(1) and (2) - Financial Statements and Schedules
The information called for by this section of Item 14 is set forth in the
Index to Financial Statements and Schedules at page F-1 of this Form 10-K.
(3) - Exhibits
Exhibit
No. Description
------- -----------
3.1* Certificate of Incorporation for CWM, as amended (incorporated by
reference to Exhibit 3.1 to the Company's Form 10-Q, for the quarter
ended September 30, 1994).
3.2* Bylaws of CWM, as amended (incorporated by reference to Exhibit 4.2 to
the Company's Form 10-Q, for the quarter ended June 30, 1993).
4.1* Indenture (the "Indenture"), dated as of December 1, 1985, between
Countrywide Mortgage Obligations, Inc. ("CMO, Inc.") and Bankers Trust
Company, as Trustee ("BTC") (incorporated by reference to Exhibit 4.1 to
CMO, Inc.'s Form 8-K filed with the SEC on January 24, 1986).
4.2* Series A Supplement, dated as of December 1, 1985, to the Indenture
(incorporated by reference to Exhibit 4.2 to CMO, Inc.'s Form 8-K filed
with the SEC on January 24, 1986).
4.3* Series B Supplement, dated as of February 1, 1986, to the Indenture
(incorporated by reference to Exhibit 4.1 to CMO, Inc.'s Form 8-K filed
with the SEC on March 31, 1986).
4.4* Series C Supplement, dated as of April 1, 1986, to the Indenture
(incorporated by reference to Exhibit 4.4 to CMO, Inc.'s Amendment No. 1
to S-11 Registration Statement (No. 33-3274) filed with the SEC on May
13, 1986).
4.5* Series D Supplement, dated as of May 1, 1986, to the Indenture
(incorporated by reference to Exhibit 4.5 to the Company's S-11
Registration Statement (No. 33-6787) filed with the SEC on June 26,
1986).
4.6* Series E Supplement, dated as of June 1, 1986, to the Indenture
(incorporated by reference to Exhibit 4.6 to the Company's Amendment No.
1 to S-11 Registration Statement (No. 33-6787) filed with the SEC on July
30, 1986).
4.7* Series F Supplement, dated as of August 1, 1986, to the Indenture
(incorporated by reference to Exhibit 4.1 to CMO, Inc.'s Form 8-K filed
with the SEC on August 14, 1986).
4.8* Series G Supplement, dated as of August 1, 1986, to the Indenture
(incorporated by reference to Exhibit 4.8 to CMO, Inc.'s S-11
Registration Statement (No.33-8705) filed with the SEC on September 12,
1986).
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<PAGE>
4.9* Series H Supplement, dated as of September 1, 1986, to the Indenture
(incorporated by reference to Exhibit 4.1 to CMO, Inc's Form 8-K filed
with the SEC on October 7, 1986).
4.10* Series I Supplement, dated as of October 1, 1986, to the Indenture
(incorporated by reference to Exhibit 4.11 to CMO, Inc.'s Amendment No. 1
to S-11 Registration Statement (No. 33-8705) filed with the SEC on
October 27, 1986).
4.11* Series J Supplement, dated as of October 15, 1986, to the Indenture
(incorporated by reference to Exhibit 4.1 to CMO, Inc.'s Form 8-K filed
with the SEC on November 12, 1986).
4.12* Series K Supplement, dated as of December 1, 1986, to the Indenture
(incorporated by reference to 4.1 to CMO, Inc.'s Form 8-K filed with the
SEC on March 16, 1987).
4.13* Series L Supplement, dated as of December 1, 1986, to the Indenture
(incorporated by reference to Exhibit 4.2 to CMO, Inc.'s Form 8-K filed
with the SEC on March 16, 1987).
4.14* Series M Supplement, dated as of January 1, 1987, to the Indenture
(incorporated by reference Exhibit 4.3 to CMO, Inc.'s Form 8-K filed
with the SEC on March 16, 1987).
4.15* Indenture (the "SPNB Indenture"), dated as of December 1, 1986, between
CMO, Inc. and Security Pacific National Bank, as Trustee ("SPNB")
(incorporated by reference to Exhibit 4.1 to CMO, Inc.'s Form 8-K filed
with the SEC on January 9, 1987).
4.16* Series W-1 Supplement, dated as of December 1, 1986, to the SPNB
Indenture (incorporated by reference to Exhibit 4.2 to CMO, Inc.'s Form
8-K filed with the SEC on January 9, 1987).
4.17* Series N Supplement, dated as of February 1, 1987, to the SPNB Indenture
(incorporated by reference to Exhibit 4.1 to CMO, Inc.'s Form 8-K filed
with the SEC on March 16, 1987).
4.18* Indenture, dated as of February 1, 1987, between Countrywide Mortgage
Trust 1987-I (the "1987-I Trust") and SPNB (incorporated by reference to
Exhibit 4.18 to the Company's Form 10-K for the year ended December 31,
1986).
4.19* Indenture, dated as of June 1, 1987, between Countrywide Mortgage Trust
1987-II (the "1987-II Trust") and SPNB (incorporated by reference to
Exhibit 4.19 to the Company's Form 10-Q for the quarter ended June 30,
1987).
4.20* Indenture Supplement, dated as of September 1, 1987, among Countrywide
Mortgage Obligations III, Inc. ("CMO III, Inc."), CMO, Inc. and BTC
(incorporated by reference to Exhibit 4.1 to CMO III, Inc.'s Form 8-K
filed with the SEC on October 9, 1987).
4.21* Indenture Supplement, dated as of September 1, 1987, among CMO III, Inc.,
CMO, Inc. and SPNB (incorporated by reference to Exhibit 4.2 to CMO III,
Inc.'s. Form 8-K filed with the SEC on October 9, 1987).
4.22* Indenture dated as of November 20, 1990, between the Countrywide Cash
Flow Bond Trust ("CCFBT") and BTC (incorporated by referenced to Exhibit
4.22 to the Company's Form 10-K for the year ended December 31, 1990).
26
<PAGE>
4.23* Indenture dated as of March 30, 1993 between Countrywide Mortgage Trust
1993-I (the "1993-I Trust") and State Street Bank and Trust Company (the
"Bond Trustee") (incorporated by reference to Exhibit 4.1 to the
Company's 10-Q for the quarter ended March 31, 1993) .
4.24* Indenture dated as of April 14, 1993 between Countrywide Mortgage Trust
1993-II (the "1993-II Trust") and the Bond Trustee (incorporated by
reference to Exhibit 4.2 to the Company's 10-Q for the quarter ended
March 31, 1993).
4.25 First Supplemental Indenture dated as of May 24, 1993 betwen the 1993-II
Trust and the Bond Trustee.
4.26* 1994 Stock Incentive Plan adopted May 17, 1994 (incorporated by reference
to Exhibit 4.1 to the Company's 10Q for the quarter ended September 30,
1994).
10.1* 1994 Amended and Extended Management Agreement, dated as of May 15, 1994,
between CWM and Countrywide Asset Management Corporation (the "Manager")
(incorporated by reference to Exhibit 10.1 to the Company's Form 10Q for
the quarter ended June 30, 1994).
10.2* 1987 Amended and Restated Servicing Agreement, dated as of May 15, 1987,
between CMI and Countrywide Funding Corporation ("CFC") (incorporated by
reference to Exhibit 10.2 to the Company's Form 10-Q filed for the
quarter ended June 30, 1987).
10.3* 1994 Amended and Extended Loan Purchase and Administrative Services
Agreement, dated as of May 15, 1994, between CWM and CFC (incorporated by
reference to Exhibit 10.1 to the Company's 10-Q for the quarter ended
September 30, 1994).
10.4* 1988 Amended and Restated Submanagement Agreement, dated as of May 15,
1988, between CFC and the Manager (incorporated by reference to Exhibit
10.4 to CMI's Form 10-Q for the quarter ended March 31, 1988).
10.5* 1985 Stock Option Plan adopted August 26, 1985, as amended February 12,
1987 (incorporated by reference to Exhibit 10.6 to CWM's (formerly known
as Countrywide Mortgage Investments, Inc. ("CMI")) Form 10-K for the year
ended December 31, 1986).
10.6* Form of Indemnity Agreement between CMI and CMI's directors and officers
(incorporated by reference to Exhibit 10.5 to CMI's Form 10-Q for the
quarter ended June 30, 1987).
10.7* Form of Guaranty of Indemnity Agreement made by Countrywide Credit
Industries, Inc. ("Countrywide Credit") to CMI and CMI's directors and
officers (incorporated by reference to Exhibit 10.6 to CMI's Form 10-Q
for the quarter ended June 30, 1987).
10.9* Servicing Agreement, dated as of November 15, 1986, among CMO, Inc., SPNB
and CFC (incorporated by reference to Exhibit 10.1 to CMO, Inc.'s Form
8-K filed with the SEC on January 9, 1987).
10.10* Deposit Trust Agreement (the "1987-I Deposit Trust Agreement"), dated
January 16, 1987, between Countrywide Mortgage Obligations II, Inc. ("CMO
II, Inc.") and Wilmington Trust Company, as Owner Trustee of the 1987-I
Trust (incorporated by reference to Exhibit 10.15 to CMI's Form 10-K for
the year ended December 31, 1986).
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<PAGE>
10.11* Management Agreement, dated as of February 1, 1987, between Wilmington
Trust Company, as Owner Trustee of the 1987-I Trust, and the Manager
(incorporated by reference to Exhibit 10.17 to CMI's Form 10-K for the
year ended December 31, 1986).
10.12* Servicing Agreement, dated as of February 1, 1987, among the 1987-I
Trust, SPNB and CFC (incorporated by reference to Exhibit 10.18 to CMI's
Form 10-K filed for the year ended December 31, 1985).
10.13* Agreement between CMO, II, Inc. and CMI, dated as of February 1, 1987,
regarding certain bankruptcy matters (incorporated by reference to
Exhibit 10.19 to CMI's Form 10-K for the year ended December 31, 1986).
10.14* Agreement among CMO II, Inc., the Manager and CFC, dated as of February
1, 1987, regarding certain bankruptcy matters (incorporated by reference
to Exhibit 10.20 to CMI's Form 10-K for the year ended December 31,
1986).
10.15* Term Revolving Loan Agreement, dated March 30, 1987, between CMI and
Citicorp Real Estate, Inc. (incorporated by reference to Exhibit 10.21
to CMI's Form 10-K for the year ended December 31, 1986).
10.16* Deposit Trust Agreement (the "1987-II Deposit Trust Agreement"), dated
as of April 29, 1987, between CMO II, Inc. and Wilmington Trust Company,
as Owner Trustee of the 1987-II Trust (incorporated by reference to
Exhibit 10.7 to CMI's Form 10-Q for the quarter ended June 30, 1987).
10.17* First Amendment to 1987-II Deposit Trust Agreement, dated as of May 29,
1987, between CMO II, Inc. and Wilmington Trust Company, as Owner Trustee
of the 1987-II Trust (incorporated by reference to Exhibit 10.8 to CMI's
Form 10-Q for the quarter ended June 30, 1987).
10.18* Guaranty, dated as of May 29, 1987, by CMI of obligations of CMO II, Inc.
under the 1987-II Deposit Trust Agreement, as amended (incorporated by
reference to Exhibit 10.9 to CMI's Form 10-Q for the quarter ended June
30, 1987).
10.19* Management Agreement, dated as of June 1, 1987, between Wilmington Trust
Company, as Owner Trustee of the 1987-II Trust, and the Manager
(incorporated by reference to Exhibit 10.10 to CMI's Form 10-Q for the
quarter ended June 30, 1987).
10.20* Servicing Agreement, dated as of June 1, 1987, among the 1987-II Trust,
SPNB and CFC (incorporated by reference to Exhibit 10.11 to CMI's Form
10-Q for the quarter ended June 30, 1987).
10.21* Transfer Agreement, dated as of May 1, 1987, among CMI, CMO II, Inc. and
CMO III, Inc. (incorporated by reference to Exhibit 10.12 to CMI's Form
10-Q for the quarter ended June 30, 1987).
10.22* Guaranty, dated as of May 1, 1987, by CMI of obligations of CMO III, Inc.
under the 1987-I Deposit Trust Agreement (incorporated by reference to
Exhibit 10.13 to CMI's Form 10-Q for the quarter ended June 30, 1987).
10.23* Amended and Restated Security Agreement, dated as of July 15, 1987,
between CMI and Citicorp Real Estate, Inc. (incorporated by reference to
Exhibit 10.14 to CMI's Form 10-Q for the quarter ended June 30, 1987).
28
<PAGE>
10.24* Assignment of Servicing Rights, dated as of July 15, 1987, among CMI, CFC
and Citicorp Real Estate, Inc. (incorporated by reference to Exhibit
10.15 to CMI's Form 10-Q for the quarter ended June 30, 1987).
10.25* Agreement of Merger, dated as of September 11, 1987, between CMO, Inc.
and CMO III, Inc. (incorporated by reference to Exhibit 2 to CMO III,
Inc.'s Form 8-K filed with the SEC on October 9, 1987).
10.26* Amendment to Term Revolving Loan Agreement between CMI and Citicorp Real
Estate, Inc. dated June 22, 1988. (incorporated by reference to Exhibit
10.26 to the Form S-11 filed with the SEC on June 24, 1988).
10.27* Credit Agreement, dated as of September 30, 1993, between CMI and CFC
(incorporated by reference to Exhibit 10.1 to CMI's 10-Q for the quarter
ended September 30, 1993).
10.28* Agreement between CMI and CFC dated December 1, 1988 (incorporated by
reference to Exhibit 10.28 to CMI's Form 10-K for the year ended December
31, 1988).
10.29* 1985 Stock Option Plan adopted August 26, 1985, as amended February 12,
1987 and as further amended on February 15, 1989 (incorporated by
reference to Exhibit 10.30 to CMI's Form 10-K for the year ended December
31, 1989).
10.30* Second Amendment to Term Revolving Loan Agreement between CMI and
Citicorp Real Estate, Inc., dated as of December 26, 1990 (incorporated
by reference to Exhibit 10.30 to CMI's Form 10-K for the year ended
December 31, 1990).
10.31* Trust Agreement, dated as of November 20, 1990, between CMO III, Inc. and
Wilmington Trust Company relating to the CCFBT (the "CCFBT Trust
Agreement") (incorporated by reference to Exhibit 10.31 to CMI's Form
10-K for the year ended December 31, 1990).
10.32* Guaranty, dated as of November 20, 1990, by CMI of obligations of CMO
III, Inc. under the CCFBT Trust Agreement (incorporated by reference to
Exhibit 10.32 to CMI's Form 10-K for the year ended December 31, 1990).
10.33* Management Agreement, dated as of November 20, 1990, between CCFBT and
the Manager (incorporated by reference to Exhibit 10.33 to CMI's Form
10-K for the year ended December 31, 1990).
10.34* Amendment, dated as of November 21, 1990, to the 1990 Amended and
Extended Management Agreement between CMI and the Manager (incorporated
by reference to Exhibit 10.34 to CMI's Form 10-K for the year ended
December 31, 1990).
10.35* Assignment Agreement, dated as of November 21, 1990, between CMO III,
Inc. and CCFBT (incorporated by reference to Exhibit 10.35 to CMI's Form
10-K for the year ended December 31, 1990).
10.36* Deposit Trust Agreement dated as of March 24, 1993 between Countrywide
Mortgage Obligations II, Inc. and Wilmington Trust Company (incorporated
by reference to Exhibit 10.1 to CMI's 10-Q for the quarter ended March
31, 1993).
10.37* Master Servicing Agreement dated as of March 30, 1993 by and among the
1993-I Trust, CMI and the Bond Trustee (incorporated by reference to
Exhibit 10.2 to CMI's 10-Q for the quarter ended March 31, 1993).
29
<PAGE>
10.38* Servicing Agreement dated as of March 30, 1993 by and among the 1993-I
Trust, Countrywide Funding Corporation and the Bond Trustee (incorporated
by reference to Exhibit 10.3 to CMI's 10-Q for the quarter ended March
31, 1993).
10.39* Management Agreement, dated as of March 30, 1993 between Countrywide
Asset Management Corporation and the 1993-I Trust (incorporated by
reference to Exhibit 10.4 to CMI's 10-Q for the quarter ended March 31,
1993).
10.40* First Amendment dated as of March 30, 1993 to Agreement between
Countrywide Mortgage Obligations II, Inc. and CMI (incorporated by
reference to Exhibit 10.5 to CMI's 10-Q for the quarter ended March 31,
1993).
10.41* First Amendment dated as of March 30, 1993 to Agreement between
Countrywide Mortgage Obligations II, Inc., Countrywide Asset Management
Corporation and Countrywide Funding Corporation (incorporated by
reference to Exhibit 10.6 to CMI's 10-Q for the quarter ended March 31,
1993).
10.42* Deposit Trust Agreement dated as of April 7, 1993 between Countrywide
Mortgage Obligations II, Inc. and Wilmington Trust Company (incorporated
by reference to Exhibit 10.7 to CMI's 10-Q for the quarter ended March
31, 1993).
10.43* Master Servicing Agreement dated as of April 14, 1993 by and among the
1993-II Trust, CMI and the Bond Trustee (incorporated by reference to
Exhibit 10.8 to CMI's 10-Q for the quarter ended March 31, 1993).
10.44* Servicing Agreement dated as of April 14, 1993 by and among the 1993-II
Trust, Countrywide Funding Corporation and the Bond Trustee (incorporated
by reference to Exhibit 10.9 to CMI's 10-Q for the quarter ended March
31, 1993).
10.45* Management Agreement, dated as of April 14, 1993 between Countrywide
Asset Management Corporation and the 1993-II Trust (incorporated by
reference to Exhibit 10.10 to CMI's 10-Q for the quarter ended March 31,
1993).
10.46* First Amendment to Deposit Trust Agreement dated as of April 13, 1993
between Countrywide Mortgage Obligations II, Inc. and Wilmington Trust
Company, as Owner Trustee (incorporated by reference to Exhibit 10.11 to
CMI's 10-Q for the quarter ended March 31, 1993).
10.47* Contribution and Mortgage Loan Acquisition Agreement dated as of April
19, 1993 between CMI and Countrywide Funding Corporation (incorporated by
reference to Exhibit 10.2 to CMI's Amendment No. 3 to S-3 Registration
Statement (No. 33-63034) filed with the SEC on July 16, 1993).
10.48* First Amendment to Deposit Trust Agreement dated as of April 16, 1993
between Countrywide Mortgage Obligations II, Inc. and Wilmington Trust
Company (incorporated by reference to Exhibit 10.8 to CMI's 10-Q for the
quarter ended June 30, 1993).
10.49* Custody Agreement dated as of April 5, 1993 among CMI, Merrill Lynch
Mortgage Capital, Inc. and State Street Bank and Trust Company of
California, N.A., Custodian (incorporated by reference to Exhibit 10.10
to CMI's 10-Q for the quarter ended June 30, 1993).
30
<PAGE>
10.50* Master Repurchase Agreement dated as of April 5, 1993 between CMI and
Merrill Lynch Mortgage Capital, Inc. (incorporated by reference to
Exhibit 10.11 to CMI's 10-Q for the quarter ended June 30, 1993).
10.51* Master Repurchase Agreement dated October 1, 1993 between CMI and Merrill
Lynch Mortgage Capital, Inc. (incorporated by Reference to Exhibit 10.52
to CWM's Form 10-K for the year ended December 31, 1994).
10.52* Financing Facility dated as of August 3, 1994 among CWM, INMC, WLCA and
Nomura Asset Capital Corp. (incorporated by reference to Exhibit 10.2 to
CWM's Form 10-Q for the quarter ended June 30, 1994).
10.53* Amended and Restated Credit Agreement, dated as of September 30, 1994 by
and among CWM, Independent National Mortgage Corporation, Independent
Lending Corporation and CFC (incorporated by reference to Exhibit 10.2 to
CWM's Form 10-Q for the quarter ended September 30, 1994).
10.54* First Amendment to 1994 Amended and Extended Management Agreement, dated
as of October 1, 1994, by and between CWM and Countrywide Asset
Management Corporation (incorporated by reference to Exhibit 10.3 to
CWM's Form 10-Q for the quarter ended September 30, 1994).
10.55* 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 (incorporated by reference to
Exhibit 10.4 to CWM's Form 10-Q for the quarter ended September 30,
1994).
10.56* Wet Ink and Interim Funding Facility (Conforming and Nonconforming
Mortgage Loans) dated December 9, 1994 by and among CWM Mortgage
Holdings, Inc., Independent National Mortgage Corporation and Independent
Lending Corporation and Lehman Commercial Paper, Inc. (incorporated by
reference to Exhibit 10.1 to CWM's Amendment No. 1 to S-3 Registration
Statement (No. 33-56547) filed with the SEC on January 6, 1995).
(Portions of this Exhibit have been omitted pursuant to a request for
confidential treatment of such omitted information.)
10.57* Promissory Note of CWM Mortgage Holdings, Inc., Independent National
Mortgage Corporation and Independent Lending Corporation in favor of
Lehman Commercial Paper, Inc. dated December 9, 1994 (incorporated by
reference to Exhibit 10.2 to CWM's Amendment No. 1 to S-3 Registration
Statement (No. 33-56547) filed with the SEC on January 6, 1995).
(Portions of this Exhibit have been omitted pursuant to a request for
confidential treatment of such omitted information.)
10.58* Pledge Agreement dated as of December 9, 1994 by and among Lehman
Commercial Paper, Inc. and CWM Mortgage Holdings, Inc., Independent
National Mortgage Corporation and Independent Lending Corporation
(incorporated by reference to Exhibit 10.3 to CWM's Amendment No. 2 to
S-3 Registration Statement (No. 33-56547) filed with the SEC on February
1, 1995). (Portions of this Exhibit have been omitted pursuant to a
request for confidential treatment of such omitted information.)
31
<PAGE>
10.59* Wet Ink and Interim Funding Facility Tri-Party Custody Agreement dated
December 9, 1994 by and among CWM Mortgage Holding, Inc., Independent
National Mortgage Corporation and Independent Lending Corporation and
Lehman Commercial Paper Inc. and State Street Bank and Trust Company of
California, N.A. (incorporated by reference to Exhibit 10.4 to CWM's
Amendment No. 2 to S-3 Registration Statement (No. 33-56547) filed with
the SEC on February 1, 1995).
10.60 Compensation Plan for Kellie Johnson.
21.1 List of Subsidiaries.
23.1 Consent of Grant Thornton LLP
99.1 Directors and Principal Executive Officers of Countrywide Asset
Management Corporation (the Company's Manager)
*Incorporated by reference.
(B) - REPORTS ON FORM 8-K
None.
32
<PAGE>
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 March 30, 1995.
CWM MORTGAGE HOLDINGS, INC.
BY: /s/ DAVID S. LOEB
-------------------------------------
David S. Loeb
Chairman of the Board of Directors
and Chief Executive Officer
POWER OF ATTORNEY
Each person whose signature appears below hereby appoints David S. Loeb, Angelo
R. Mozilo and Michael W. Perry and any one of them, as his true and lawful
attorneys-in-fact and agents with full power of substitution, for him and in his
name, in any and all capacities, to sign any or all amendments to this report,
and to file the same with the Securities and Exchange Commission, hereby
ratifying and confirming all that said attorneys-in-fact and agents, or any of
them, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the Registrant in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ DAVID S. LOEB Director, Chairman of the March 30, 1995
---------------------------- Board of Directors and
David S. Loeb Chief Executive Officer
/s/ ANGELO R. MOZILO Director, Vice Chairman of March 30, 1995
---------------------------- the Board of Directors
Angelo R. Mozilo and President
/s/ MICHAEL W. PERRY Executive Vice President March 30, 1995
---------------------------- and Chief Operating Officer
Michael W. Perry (Principal Financial Officer)
/s/ CARMELLA L. GRAHN Senior Vice President March 30, 1995
---------------------------- and Chief Accounting Officer
Carmella L. Grahn (Principal Accounting Officer)
/s/ LYLE E. GRAMLEY Director March 30, 1995
----------------------------
Lyle E. Gramley
/s/ THOMAS J. KEARNS Director March 30, 1995
----------------------------
Thomas J. Kearns
/s/ FREDERICK J. NAPOLITANO Director March 30, 1995
----------------------------
Frederick J. Napolitano
</TABLE>
33
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS AND
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
CWM MORTGAGE HOLDINGS, INC.
AND SUBSIDIARIES
December 31, 1994, 1993 and 1992
F-1
<PAGE>
CWM MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
December 31, 1994, 1993, 1992
CWM MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
--------------------------------------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Certified Public Accountants F-3
Financial Statements
Consolidated Balance Sheets F-4
Consolidated Statements of Earnings F-5
Consolidated Statement of Shareholders' Equity F-6
Consolidated Statements of Cash Flows F-7
Notes to Financial Statements F-8
</TABLE>
Schedules
Schedule II - Valuation and Qualifying Accounts
Schedule IV - Mortgage Loans on Real Estate
All other schedules have been omitted since the required information is
not present or not present in amounts sufficient to require submission of
the schedules, or because the information required is included in the
consolidated financial statements or notes thereto.
INDEPENDENT NATIONAL MORTGAGE CORPORATION
-----------------------------------------
<TABLE>
<CAPTION>
<S> <C>
Report of Independent Certified Public Accountants F-22
Financial Statements
Balance Sheet F-23
Statement of Earnings F-24
Statement of Shareholders' Equity F-25
Statement of Cash Flows F-26
Notes to Financial Statements F-27
</TABLE>
F-2
<PAGE>
REPORTS OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Shareholders
CWM Mortgage Holdings, Inc.
We have audited the accompanying consolidated balance sheets of CWM Mortgage
Holdings, Inc. and subsidiaries as of December 31, 1994 and 1993, and the
related consolidated statements of earnings, shareholders' equity, and cash
flows for each of the three years in the period ended December 31, 1994. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of CWM Mortgage
Holdings, Inc. and subsidiaries as of December 31, 1994 and 1993, and the
consolidated results of their operations and their consolidated cash flows for
each of the three years in the period ended December 31, 1994, in conformity
with generally accepted accounting principles.
We have also audited Schedule IV of CWM Mortgage Holdings, Inc. and subsidiaries
for the year ended December 31, 1994, and Schedule II for each of the three
years in the period then ended. In our opinion, these schedules present fairly,
in all material respects, the information required to be set forth therein.
GRANT THORNTON LLP
Los Angeles, California
March 14, 1995
F-3
<PAGE>
CWM Mortgage Holdings, Inc. and Subsidiaries
Consolidated Balance Sheets
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
December 31,
-----------------------------------------
1994 1993
------------------- -------------------
<S> <C> <C>
ASSETS
Mortgage assets
Mortgage loans held for sale $ 608,240 $ 794,132
Mortgage loans held for investment 899,672 -
Collateral for CMOs 233,690 402,503
Master servicing fees receivable 120,954 -
Construction loans receivable 6,370 -
Revolving warehouse lines of credit 69,591 92,058
Cash 2,605 7,099
Investment in and advances to INMC 40,032 90,394
Other assets 16,490 10,552
------------------- -------------------
Total assets $ 1,997,644 $ 1,396,738
=================== ===================
LIABILITIES AND SHAREHOLDERS' EQUITY
Reverse-repurchase agreements $ 1,534,189 $ 770,334
Collateralized mortgage obligations 202,259 365,886
Accounts payable and accrued liabilities 5,176 9,910
------------------- -------------------
Total liabilities 1,741,624 1,146,130
Commitments and contingencies - -
Shareholders' equity
Common stock - authorized, 60,000,000 shares of
$.01 par value; issued and outstanding, 32,281,156
shares in 1994 and 32,020,484 in 1993 323 320
Additional paid-in capital 258,240 256,587
Net unrealized gain on available-for-sale mortgage
securities held by INMC (890) -
Cumulative earnings 100,137 72,306
Cumulative distributions to shareholders (101,790) (78,605)
------------------- -------------------
Total shareholders' equity 256,020 250,608
------------------- -------------------
Total liabilities and shareholders' equity $ 1,997,644 $ 1,396,738
=================== ===================
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
CWM Mortgage Holdings, Inc.
CONSOLIDATED STATEMENTS OF EARNINGS
(Dollar amounts in thousands, except per share data)
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------------------
1994 1993 1992
--------------- --------------- -------------
<S> <C> <C> <C>
REVENUES
Interest income
Mortgage loans held for sale $ 34,238 $ 20,454 $ -
Mortgage loans held for investment 20,161 - -
Collateral for CMOs 21,679 41,685 68,692
Master servicing, net 7,203 - -
Adjustable-rate mortgage-backed securities - 674 37,378
Revolving warehouse lines of credit 4,363 1,655 -
Advances to INMC 4,279 914 -
Other 196 122 -
--------------- --------------- -------------
Total interest income 92,119 65,504 106,070
Interest expense
Reverse-repurchase agreements 39,585 10,354 23,953
Collateralized mortgage obligations 27,115 54,958 83,558
--------------- --------------- -------------
Total interest expense 66,700 65,312 107,511
Net interest income (expense) 25,419 192 (1,441)
Equity in earnings of INMC 5,624 2,523 -
Gain on sale of mortgage securities - 917 9,031
Other 885 797 -
--------------- --------------- -------------
Net revenues 31,928 4,429 7,590
EXPENSES
General and administrative 2,902 1,549 1,606
Management fees to affiliate 1,195 400 997
--------------- --------------- -------------
Total expenses 4,097 1,949 2,603
--------------- --------------- -------------
NET EARNINGS $ 27,831 $ 2,480 $ 4,987
=============== =============== =============
EARNINGS PER SHARE $0.86 $0.13 $0.36
=============== =============== =============
Weighted average shares outstanding 32,183,850 18,578,307 13,978,683
=============== =============== =============
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
CWM Mortgage Holdings, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(Dollar amounts in thousands, except share data)
<TABLE>
<CAPTION>
Unrealized
loss on avail-
Additional able-for-sale Cumulative
Three years ended Number of Common paid-in mortgage Cumulative distribution
December 31, 1994 shares stock capital securities earnings to shareholders Total
--------------------------------- ---------- ------ ---------- ------------- ---------- --------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1991 13,976,375 $140 $119,436 $ - $64,839 ($62,012) $122,403
Common stock issued 2,137 - 10 - - - 10
Common stock options exercised 1,875 - 8 - - - 8
Dividend reinvestment plan expense - - (4) - - - (4)
Net earnings for the year - - - 4,987 - 4,987
Cash dividends paid - $0.53
per share - - - - - (7,409) (7,409)
---------- ------ ----------- --------- ---------- ------------ ---------
Balance at December 31, 1992 13,980,387 140 119,450 - 69,826 (69,421) 119,995
Common stock issued 17,883,972 179 135,916 - - - 136,095
Common stock options exercised 156,125 1 821 - - - 822
Capital contribution by manager - - 400 - - - 400
Net earnings for the year - - - - 2,480 - 2,480
Cash dividends paid - $0.48
per share - - - - - (9,184) (9,184)
---------- ------ ----------- --------- ---------- ------------ ---------
Balance at December 31, 1993 32,020,484 320 256,587 - 72,306 (78,605) 250,608
Common stock issued 922 - 1,339 - - - 1,339
Common stock options exercised 259,750 3 9 - - - 12
Capital contribution by manager - - 305 - - - 305
Unrealized loss on available-for-
sale mortgage securities - - - (890) - - (890)
Net earnings for the year - - - - 27,831 - 27,831
Cash dividends paid - $0.72
per share - - - - - (23,185) (23,185)
---------- ------ ----------- -------- ---------- ------------ ---------
Balance at December 31, 1994 32,281,156 $323 $258,240 $(890) $100,137 ($101,790) $256,020
========== ====== =========== ======== ========== ============ =========
</TABLE>
The accompanying notes are an integral part of this statement.
F-6
<PAGE>
CWM Mortgage Holdings, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------------------------
1994 1993 1992
---------------- ---------------- -----------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings $ 27,831 $ 2,480 $ 4,987
Adjustments to reconcile net earnings
to net cash provided by (used in) operating activities:
Amortization 12,226 12,744 16,644
Gain on sale of mortgage securities - (917) (9,031)
Equity in earnings of INMC (5,624) (2,523) -
Purchases of mortgage loans held for sale (5,073,475) (3,202,845) -
Principal repayments and sale of mortgage loans
held for sale and mortgage securities 5,259,367 2,496,218 947,978
Change in other assets and liabilities (12,394) 5,748 (21,350)
---------------- ---------------- -----------------
Net cash provided by (used in) operating activities 207,931 (689,095) 939,228
Cash flows from investing activities:
Collateral for CMOs:
Purchases of mortgage loans subsequently securitized - (248,222) -
Principal payments on collateral 147,429 401,106 502,713
Net change in GICs held by trustees 17,810 22,923 (16,107)
Proceeds from sale of collateral for CMOs, net - 2,641 6,090
---------------- ---------------- -----------------
165,239 178,448 492,696
Purchases of mortgage loans held for investment (909,895) - -
Purchases of adjustable-rate mortgage-backed securities - - (326,410)
Principal repayments on mortgage loans held for investment 12,750 - -
Investment in master servicing fees receivable (6,167) - -
Net decrease (increase) in revolving warehouse lines of credit 22,267 (92,058) -
Net increase in construction loans receivable (6,670) - -
Decrease in short-term investments - - 8,276
Investment in INMC (6,905) (9,405) -
Advances to INMC, net of cash repayments (60,311) (78,466) -
---------------- ---------------- -----------------
Net cash (used in) provided by investing activities (789,692) (1,481) 174,562
Cash flows from financing activities:
Collateralized mortgage obligations:
Proceeds from issuance of securities - 239,659 -
Principal payments on securities (165,059) (418,534) (439,473)
---------------- ---------------- -----------------
(165,059) (178,875) (439,473)
Net increase (decrease) in reverse-repurchase agreements 763,855 748,390 (666,910)
Net proceeds from issuance of common stock 1,656 137,317 -
Cash dividends paid (23,185) (9,184) (7,409)
---------------- ---------------- -----------------
Net cash provided by (used in) financing activities 577,267 697,648 (1,113,792)
---------------- ---------------- -----------------
Net (decrease) increase in cash (4,494) 7,072 (2)
Cash at beginning of period 7,099 27 29
---------------- ---------------- -----------------
Cash at end of period $ 2,605 $ 7,099 $ 27
================ ================ =================
Supplemental cash flow information:
Cash paid for interest $ 56,885 $ 54,925 $ 103,279
================ ================ =================
Supplemental disclosure of noncash activity:
INMC transferred $122,313 of master servicing
fees receivable to CWM as repayment of advances.
</TABLE>
The accompanying notes are an integral part of these statements.
F-7
<PAGE>
CWM MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
NOTE A - BASIS OF PRESENTATION
The consolidated financial statements include the accounts of CWM Mortgage
Holdings, Inc. and its consolidated subsidiaries ("CWM"). CWM owns all the
preferred stock and has a 99% economic interest in Independent National Mortgage
Corporation ("INMC"), a taxable corporation established in April 1993. CWM's
investment in INMC is accounted for under a method similar to the equity method.
The directors and senior officers of INMC are also senior officers of CWM. In
addition, INMC's operations and technology are dependent upon and closely
integrated with CWM, and CWM is the sole supplier of mortgage loans purchased by
INMC. Accordingly, INMC is accounted for under a method similar to the equity
method because CWM (as opposed to affiliates of CWM) has the ability to
exercise significant influence over the financial and operating policies of INMC
through its ownership of the preferred stock and other contracts. Under this
method, original investments are recorded at cost and adjusted by CWM's share of
earnings or losses and decreased by dividends received. References to the
"Company" means the parent company, its consolidated subsidiaries and INMC.
All material intercompany balances and transactions with CWM's consolidated
subsidiaries have been eliminated in consolidation. Certain amounts for 1992
and 1993 have been reclassified to conform to the 1994 presentation.
NOTE B - NEW OPERATIONS
Historically, CWM's principal source of earnings has been net interest income
generated from mortgage investments which were primarily financed through the
issuance of collateralized mortgage obligations ("CMOs"). In October 1992,
CWM's Board of Directors approved a new operating plan, implementation of which
was commenced in the first quarter of 1993. Under the new plan, the Company,
through INMC, operates primarily as a "jumbo" and "nonconforming" mortgage loan
conduit. As a jumbo and nonconforming mortgage loan conduit, the Company is an
intermediary between the purchasers of mortgage loans and permanent investors in
mortgage-backed securities secured by, or representing an ownership interest in,
such mortgage loans. The Company purchases jumbo or nonconforming mortgage
loans which have outstanding principal balances in excess of, or differ from,
the guidelines of the government and the government-sponsored enterprises that
guarantee mortgage-backed securities and permanent investors in mortgage-backed
securities secured by or representing an ownership interest in such mortgage
loans. 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, net master servicing fees and the net interest earned on its
long-term investment portfolio. In addition, the Company earns fee income and
net interest income through its construction lending operations and warehouse
lending programs which provide a variety of types of revolving warehouse loans
to third-party mortgage loan originators.
F-8
<PAGE>
CWM MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
NOTE C - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
1. Mortgage Loans Held for Sale
Mortgage loans held for sale are carried at the lower of cost or market,
computed by the aggregate method. 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 for which the loans were acquired by CWM. CWM does
not sell any loans to entities other than INMC.
2. 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 types of
adjustable-rate loans secured by mortgages on single-family residential real
estate. Approximately 63% of the mortgage loans held for investment at
December 31, 1994 were collateralized by properties located in California.
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 December 31, 1994, no loans were on nonaccrual status and CWM had no
allowance for loan losses.
3. Collateral for CMOs
Collateral for CMOs consists of mortgage loans and mortgage-backed securities
and is carried at the outstanding principal balances net of unamortized
purchase discounts or premiums. Also included in collateral for CMOs are
guaranteed investment contracts ("GICs") held by trustees and accrued
interest receivable related to such collateral.
4. Master Servicing Fees Receivable
Beginning in the second quarter of 1994, INMC repaid certain advances
received from CWM through a transfer of a portion of the master servicing
fees receivable asset from INMC at its then carrying value which approximated
market value. In addition, in October 1994, CWM began investing in master
servicing fees receivable associated with REMIC securities issued by INMC.
The weighted average discount rate inherent in the initial carrying amount of
the master servicing fees was approximately 9.98%. In determining the
appropriate discount rate to compute the carrying amount, CWM considers the
discount rate inherent in the fair values of similar investments such as
excess servicing, historical and expected prepayment assumptions, and
required spreads against alternative investments. The asset is amortized
over the lives of the underlying mortgages using the original discount rate
and the effective yield method adjusted for the effects of prepayments. CWM
intends to hold the master servicing fees receivable for investment.
F-9
<PAGE>
CWM MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
NOTE C - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
5. Construction Loans Receivable
In August 1994, the Company began offering tract construction loans to
developers and construction to permanent loans for individual borrowers
through its construction lending division, Construction Lending Corporation
of America ("CLCA"). Construction loans receivable are carried at the
outstanding principal balance net of unamortized purchase discounts or
premiums and net of allowance for losses. At December 31, 1994, the
allowance for losses amounted to $300,000.
6. Revolving Warehouse Lines of Credit
Revolving warehouse lines of credit are carried at their outstanding
principal balance net of allowance for losses. At December 31, 1994, the
allowance for losses amounted to $200,000.
7. Collateralized Mortgage Obligations (CMOs) and Deferred Issuance Costs
Collateralized mortgage obligations are carried at their outstanding
principal balances net of unamortized original issue discounts or premiums.
Also included in CMOs is accrued interest payable on such obligations.
Issuance costs have been deferred and are amortized to expense over the
estimated life of the CMOs using the straight-line method with effect given
to principal reductions. Such method does not result in any material
difference than would be realized by utilizing the effective interest method.
Unamortized deferred issuance costs are included in other assets in the
consolidated balance sheets.
8. Revenue Recognition
Interest is recognized as revenue when earned according to the terms of the
mortgage loans and when, in the opinion of management, it is collectible.
Premiums paid and discounts obtained on mortgage loans held for sale are
deferred as an adjustment to the carrying value of the loans until the loans
are sold. Gains on sale of mortgage securities are recognized upon
settlement. Substantially all commitment fees collected from
seller/servicers are refunded as commitments are fulfilled. Such fees, with
respect to expired unfilled commitments, are credited to income at the time
of expiration of the related commitment.
Premiums paid and discounts obtained on collateral for CMOs are amortized to
interest income over the estimated life of the mortgage loans using the
interest method with effect given to principal reductions.
F-10
<PAGE>
CWM MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
NOTE C - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
9. Income Taxes
CWM intends to operate so as to continue to qualify as a real estate
investment trust ("REIT") under the requirements of the Internal Revenue
Code. Requirements for qualification as a REIT include various restrictions
on ownership of CWM's stock, requirements concerning distribution of taxable
income and certain restrictions on the nature of assets and sources of
income. A REIT must distribute at least 95% of its taxable income to its
shareholders, the distribution of which may extend until timely filing of its
tax return in its subsequent taxable year. Qualifying distributions of its
taxable income are deductible by a REIT in computing its taxable income.
Accordingly, no provision for income taxes has been made for CWM. If in any
tax year CWM should not qualify as a REIT, it would be taxed as a corporation
and distributions to the shareholders would not be deductible in computing
taxable income. If CWM were to fail to qualify as a REIT in any tax year, it
would not be permitted to qualify for that year and the succeeding four
years.
10.Earnings Per Share
Earnings per share are computed on the basis of the weighted average number
of common shares outstanding for the year which were 32,183,850, 18,578,307
and 13,978,683 for 1994, 1993 and 1992, respectively. The effect on earnings
per share resulting from dilution upon exercise of stock options is not
material in any year and is therefore not presented. Of the total dividends
per share paid in 1993, approximately $0.45 represented a return of capital.
There was no return of capital in 1994.
NOTE D - MORTGAGE LOANS HELD FOR SALE
Substantially all of the mortgage loans purchased by CWM are fixed-rate and
adjustable-rate nonconforming mortgage loans secured by first liens on single-
family residential properties. Approximately 25% of the mortgage loans held for
sale at December 31, 1994 were collateralized by properties located in
California. In 1994, CWM purchased mortgage loans with an aggregate principal
balance of $5.1 billion and sold mortgage loans with an aggregate principal
balance of $5.2 billion to INMC.
NOTE E - COLLATERAL FOR CMOS
Collateral for CMOs consists of fixed-rate mortgage loans, secured by first
liens (enforceable through foreclosure proceedings) on single-family residential
real estate, and mortgage-backed securities. During the year ended December
31, 1993, CWM pledged approximately $248.2 million of mortgage loans as
collateral for two new series of CMOs.
All principal and interest on the collateral is remitted to a trustee and,
together with any reinvestment income earned thereon, is available for payment
on the CMOs. Generally, any default of a mortgage loan which is the basis for
a foreclosure action is covered (up to an aggregate benefit limit) under a pool
insurance policy provided by a private mortgage insurer. Furthermore, CWM's
mortgage-backed securities pledged to secure CMOs are guaranteed as to the
repayment of principal and interest of the underlying mortgages by the Federal
Home Loan Mortgage Corporation. The maximum amount of credit risk related to
CWM's investment in mortgage loans is represented by the outstanding principal
balance of the mortgage loans plus accrued interest.
F-11
<PAGE>
CWM MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
NOTE E - COLLATERAL FOR CMOS - CONTINUED
Collateral for CMOs is summarized as
follows:
<TABLE>
<CAPTION>
(Dollar amounts in thousands)
December 31,
---------------------
1994 1993
-------- --------
<S> <C> <C>
Mortgage loans $105,635 $154,152
Mortgage-backed securities 118,947 217,856
GICs held by trustees 3,860 21,670
Accrued Interest receivable 2,554 4,337
-------- --------
230,996 398,015
Unamortized premiums, net 2,694 4,488
-------- --------
Collateral for CMOs $233,690 $402,503
======== ========
</TABLE>
The mortgage loans and mortgage-backed securities, together with GICs, which are
all held by trustees, collateralized 17 series of CMOs at December 31, 1994. 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, yet CWM is
obligated to continue to pay interest during such period to the applicable
investor. The weighted average coupon on collateral for CMOs, net of the
related servicing fees, was 8.85% at December 31, 1994.
NOTE F - MASTER SERVICING FEES RECEIVABLE
The changes in CWM's master servicing fees receivable for the year ended
December 31, 1994 are as follows:
<TABLE>
<CAPTION>
(Dollar amounts in thousands)
<S> <C>
Balance at December 31, 1993 $ 0
Additions 6,167
Transfers from INMC 122,313
Amortization
Scheduled (7,115)
Unscheduled (411)
--------
Balance at December 31, 1994 $120,954
========
</TABLE>
NOTE G - REVERSE-REPURCHASE AGREEMENTS
The Company uses proceeds from the sale of REMIC securities and CMOs, reverse-
repurchase agreements, and proceeds from the issuance of common stock to meet
its working capital needs. CWM may also borrow up to $10 million from
Countrywide Funding Corporation ("CFC") to meet collateral maintenance
requirements under reverse-repurchase agreements or margin calls on forward
securities sales. These borrowings can be made pursuant to a one-year,
unsecured line of credit which expires on September 30, 1995, subject to
extension by CFC and CWM. As of December 31, 1994, CWM had no outstanding
borrowings under this agreement, and no drawings were made by CWM pursuant to
this agreement during 1994.
F-12
<PAGE>
CWM MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
NOTE G - REVERSE-REPURCHASE AGREEMENTS - CONTINUED
CWM has established a committed reverse-repurchase facility through April 1996
in an aggregate amount up to $500 million (with a decreasing annual credit
limit) for its mortgage conduit and warehouse lending operations. CWM has also
obtained credit approval from the same lender to enter into additional 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.
In August and December 1994, CWM entered into two additional two-year committed
reverse-repurchase facilities, with different lenders, in an aggregate amount of
$300 million and $500 million, respectively, for the Company's mortgage conduit
and warehouse lending operations.
In October 1994, CWM signed a two-year master repurchase agreement in an
aggregate amount of $225 million, to provide financing for certain master
servicing fees receivable and certain mortgage-related securities which have
been retained or purchased by CWM or INMC. As of December 31, 1994, CWM had
$68.4 million outstanding under this facility, which had maturities of up to 31
days.
As of December 31, 1994, an aggregate amount of $1.5 billion was outstanding
under these whole loan and warehouse lending repurchase facilities. Such
borrowings had maturities of less than 5 days as of December 31, 1994. The
maximum balance outstanding under reverse-repurchase agreements with all lenders
during 1994 was $1.5 billion. INMC may borrow under each of CWM's agreements.
As of December 31, 1994, INMC had $304.1 million in borrowings under reverse-
repurchase agreements outstanding.
The agreements bear interest at rates indexed to the London Interbank Offered
Rates ("LIBOR"). As of December 31, 1994 and 1993, the borrowing rate on these
reverse-repurchase agreements was 6.4% and 4.7%, respectively. None of the
lenders (other than CFC) are affiliated with the Company. As of December 31,
1994, CWM had assets pledged in excess of borrowings from Merrill Lynch and
Nomura Securities of $134.1 million and $15.2 million, respectively. At December
31, 1994, the Company was in compliance with all material representations,
warranties and covenants under its reverse-repurchase agreements.
NOTE H - COLLATERALIZED MORTGAGE OBLIGATIONS
Collateralized mortgage obligations are secured by a pledge of mortgage loans,
mortgage-backed securities or residual cash flows from such securities. As
required by the indentures relating to the CMOs, the pledged collateral is held
in the custody of a trustee. The trustee also held investments in GICs
amounting to $3.9 million and $21.7 million as of December 31, 1994 and 1993,
respectively, as additional collateral which is legally restricted to use in
servicing the CMOs. The trustee collects principal and interest payments on the
underlying collateral, reinvests such amounts in the GICs and makes
corresponding principal and interest payments on the CMOs to the bondholders.
F-13
<PAGE>
CWM MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
NOTE H - COLLATERALIZED MORTGAGE OBLIGATIONS - CONTINUED
In general, each CMO series consists of various classes which are retired in
order of maturity, with the shortest maturity class receiving all principal
payments until it is paid in full. After the first class is fully retired, the
second class will receive principal until retired, and so forth. Each series is
also subject to redemption according to specific terms of the respective
indentures. As a result, the actual maturity of any class of a CMO series is
likely to occur earlier than its stated maturity.
Interest is payable monthly or quarterly, as applicable in accordance with the
respective indenture, for all classes other than deferred interest classes.
Interest on deferred interest classes is accrued and added to the principal
balance and will not be paid until all other classes in the series have been
paid in full. The weighted average coupon on CMOs was 8.25% at December 31,
1994.
CWM's investment in CMO residuals amounted to $33.0 million and $40.2 million at
December 31, 1994 and 1993, respectively.
CMOs are summarized as follows:
<TABLE>
<CAPTION>
(Dollar amounts in thousands)
December 31,
-------------------------------
1994 1993
------------- -------------
<S> <C> <C>
Collateralized mortgage obligations $206,274 $371,332
Accrued interest payable 1,827 3,526
------------- -------------
208,101 374,858
Unamortized discounts, net (5,842) (8,972)
------------- -------------
Collateralized mortgage obligations, net $202,259 $365,886
============= =============
Range of weighted average interest
rates, by series 6.76% - 11.00% 6.51% - 11.00%
Range of stated maturities 1998 - 2023 1998 - 2023
Number of series 17 17
</TABLE>
During 1993, CWM redeemed two series of CMOs (the "Series"), in accordance with
the terms of the indentures governing the Series. The mortgage-backed
securities that collateralized the Series were sold and CWM recognized a gain of
$917,000. Additionally, in March 1993 and April 1993, CWM issued two new series
of CMO's with a total initial balance of $240.2 million.
NOTE I - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial instruments as
of December 31, 1994 and 1993 is made in accordance with the requirements of
Statement of Financial Accounting Standards (SFAS) No. 107, Disclosures about
Fair Value of Financial Instruments, and SFAS No. 119, Disclosures About
Derivative Financial Instruments and Fair Value of Financial Instruments. The
estimated fair value amounts have been determined by CWM using available market
information and appropriate valuation methodologies. However, considerable
judgment is necessarily required to interpret market data to develop the
estimates of fair value. Accordingly, the estimates presented herein are not
necessarily indicative of the amounts CWM could realize in a current market
exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value amounts.
F-14
<PAGE>
CWM MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
NOTE I - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS - CONTINUED
<TABLE>
<CAPTION>
December 31, 1994 December 31, 1993
----------------------- ----------------------
Carrying Estimated Carrying Estimated
(Dollar amounts in thousands) amount fair value amount fair value
---------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Assets:
Mortgage loans held for sale $ 608,240 $ 608,240 $794,132 $794,132
Mortgage loans held for investment 899,672 892,819 - -
Collateral for CMOs 233,690 224,216 402,503 417,400
Master servicing fees receivable 120,954 122,367 - -
Construction loans receivable 6,370 6,370 - -
Revolving warehouse lines of credit 69,591 69,591 92,058 92,058
Advances to INMC 16,464 16,464 78,466 78,466
Liabilities:
Reverse-repurchase agreements 1,534,189 1,534,189 770,334 770,334
Collateralized mortgage obligations 202,259 198,517 365,886 393,400
Off-balance-sheet unrealized gains
(losses):
Short-term commitments to extend
credit - -
Commitments to purchase mortgage
loans - -
</TABLE>
The fair value estimates as of December 31, 1994 and 1993 are based on pertinent
information available to management as of those dates. Although management is
not aware of any factors that would significantly affect the estimated fair
value amounts, such amounts have not been comprehensively revalued for purposes
of these financial statements since those dates and, therefore, current
estimates of fair value may differ significantly from the amounts presented
herein.
The following describes the methods and assumptions used by CWM in estimating
fair values.
Mortgage Loans Held for Sale. The fair value of mortgage loans held for sale
was equivalent to the carrying value. 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 in which the loans were acquired by CWM. CWM does not
sell any loans to entities other than INMC.
Mortgage Loans Held for Investment. Fair value is estimated using either offer
prices by the Company for similar types of loans or quoted market prices from
dealers and brokers for similar types of loans.
Collateral for CMOs. Fair value using either offer prices by the Company for
similar types of loans or quoted market prices from dealers and brokers for
loans and for securities backed by similar types of loans. Collateral for CMOs
cannot be sold until the related obligations mature or are otherwise paid or
redeemed. As a consequence, the aggregate market values indicated above may not
be realizable. As a REIT, CWM's ability to sell these assets for a gain also is
subject to restrictions under the Internal Revenue Code and any such sale may
result in substantial additional tax liability.
Master Servicing Fees Receivable. Fair value is estimated by discounting
future cash flows from master servicing fees using discount rates that
approximate current discount rates used for similar investments such as excess
servicing and using expected future prepayment rates.
Construction Loans Receivable. Fair values approximate the carrying amounts
because of the short-term nature of the asset.
F-15
<PAGE>
CWM MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
NOTE I - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS - CONTINUED
Revolving Warehouse Lines of Credit. Fair values approximate the carrying
amounts because of the short-term nature of the asset.
Advances to INMC. Fair values approximate the carrying amounts because of the
short-term nature of the asset.
Reverse-Repurchase Agreements. Fair values approximate the carrying amounts
because of the short-term to maturity of the liabilities.
Collateralized Mortgage Obligations. Fair value is estimated using discounted
cash flow analyses based on current interest rates and prepayment expectations.
Short-term Commitments to Extend Credit. There are no commitment fees
associated with CWM's lines of credit extended under the warehouse lending
program. Accordingly, these commitments do not have an estimated fair value.
Commitments to Purchase Mortgage Loans. There is no fair value of commitments
to purchase mortgage loans as all loans purchased by CWM are committed for sale
to INMC at CWM's purchase price.
NOTE J - COMMITMENTS AND CONTINGENCIES
Financial Instruments With Off-Balance-Sheet Risk. CWM is a party to financial
instruments with off-balance-sheet risk in the normal course of business. These
instruments include short-term commitments to extend credit associated with
warehouse lines of credit which involve elements of credit risk. In addition,
CWM is exposed to credit loss in the event of nonperformance by such borrowers
or counterparties to the various agreements associated with loan purchases.
However, CWM does not anticipate nonperformance by the counterparties. Unless
noted otherwise, CWM does not require collateral or other security to support
such commitments.
Commitments to Purchase and Sell Loans. As of December 31, 1994 and 1993, CWM
had entered into commitments to purchase mortgage loans totaling $702.3 million
and $618.6 million, respectively, subject to origination or acquisition of such
loans by various mortgage bankers and other financial institutions. In
addition, as of December 31, 1994 and 1993, CWM had committed to sell $608.2
million and $794.1 million, respectively, of mortgage loans to INMC. After
purchase and sale of the mortgage loans, CWM's exposure to credit loss in the
event of nonperformance by the mortgagor is limited.
Revolving Warehouse Lines of Credit Commitments. CWM's warehouse lending
program provides secured short-term revolving financing to small- and medium-
size mortgage originators to finance mortgage loans from the closing of the
loans until sold to permanent investors. At December 31, 1994 and 1993, CWM had
extended lines of credit under this program in the aggregate amount of $396.8
million and $206.0 million, respectively, of which $69.6 million and $92.1
million, respectively, was outstanding. Included as sublimits to these
facilities are servicing-secured lines of credit totaling $33.8 million.
F-16
<PAGE>
CWM MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
NOTE K - STOCK OPTION PLANS
The 1985 Stock Option Plan and 1994 Stock Incentive Plan provide for the
issuance of nonqualified and incentive stock options to purchase up to 1,090,000
shares and 1,600,000 shares, respectively, of CWM's common stock. Under both
plans, options granted are at a per share exercise price equal to the average of
the high and low sales prices per share of CWM's common stock on the date of
grant. Options granted will vest and are exercisable one year from the date of
grant and generally terminate five years from the date of grant.
As of December 31, 1994, options to purchase 325,500 shares were exercisable and
1,328,750 shares were reserved for future grants under both plans. Stock option
transactions for the years ended December 31, 1994, 1993 and 1992 are summarized
as follows:
<TABLE>
<CAPTION>
--------------------------------------------
Year ended December 31, 1994 1993 1992
--------------------------------------------
<S> <C> <C> <C>
Shares subject to:
Options at beginning of year....................... 552,875 558,000 438,625
Options granted.................................. 324,000 206,000 150,000
Options canceled................................. (5,000) (55,000) (28,750)
Options exercised................................ (259,750) (156,125) (1,875)
------------ ------------ ------------
Shares Subject to Options at end of year 612,125 552,875 558,000
============ ============ ============
Exercise price:
Per share for options outstanding at end of year $4.25-$10.75 $4.25-$8.375 $4.25-$6.62
Average per share for options exercised $5.13 $5.26 $4.25
</TABLE>
Six members of CWM's Board of Directors and officers exercised options totaling
228,625 shares during the year ended December 31, 1994. The exercise of these
options was financed through a loan program for directors and officers offered
by CWM. At December 31, 1994 and 1993, the total principal balances of notes
receivable relating to the 1994 and prior option exercises by directors and
officers were $2.2 million and $1.5 million, respectively; the notes are
secured by the common stock issued, have maturities of up to five years and bear
interest rates required by applicable IRS regulations, and range from 4.17% to
7.70% at December 31, 1994.
NOTE L - RELATED PARTY TRANSACTIONS
INMC has an open account with CWM whereby funds are advanced to INMC primarily
to finance assets in which INMC invests. Such advances bear interest at rates
indexed to the London Interbank Offered Rates ("LIBOR"). Interest charged on
advances by CWM to INMC was at a rate of 9.3% at December 31, 1994.
CWM has entered into an agreement (the "Management Agreement") with Countrywide
Asset Management Corporation (the "Manager") to advise the Company 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 the Company as the Manager deems
necessary.
F-17
<PAGE>
CWM MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
NOTE L - RELATED PARTY TRANSACTIONS - CONTINUED
For performing these services, the Manager receives a base management fee of 1/8
of 1% per annum of average-invested mortgage-related assets not pledged to
secure CMOs. The Manager also receives a subsidiary management fee equal to
0.2% per annum of the average amounts outstanding under warehouse lines of
credit. In addition, the Manager receives incentive compensation equal to 25%
of the amount by which CWM's annualized return on equity exceeds the ten-year
U.S. Treasury Rate plus 2%. The Manager waived all management fees pursuant to
the above for 1993 and 25% of incentive compensation earned in 1994. Such
waived amounts are reflected as an expense and a corresponding capital
contribution in the accompanying financial statements. The Manager earned
management fees totaling $1.2 million, $400,000 and $997,000, for the years
ended December 31, 1994, 1993 and 1992, respectively. The Management Agreement
is renewable annually and expires May 15, 1995.
The Manager incurs many of the operating expenses of the Company, including
personnel and related expenses, subject to reimbursement by the Company. The
Company's conduit operations are primarily conducted in INMC and all other
operations are conducted in CWM.
Accordingly, INMC is charged with the majority of the conduit's costs and CWM is
charged with the other operations' costs.
During 1994 and 1993, the amount of common expenses incurred by CFC which were
allocated to the Manager and reimbursed by the Company totaled $1.1 million and
$192,000, respectively. These costs included data processing, occupancy and
human resource charges of $509,000, $559,000, and $50,000 respectively for 1994
and data processing and occupancy charges of $100,000 and $92,000, respectively,
for 1993. Data processing charges are allocated on the basis of actual costs
relative to the number of employees. Occupancy charges are allocated on the
basis of square footage occupied by the Company. The Company estimates that such
expenses would not be materially different on a stand-alone basis. The majority
of these expenses have been allocated to INMC as they primarily relate to the
Company's conduit operations.
During 1994 and 1993, CWM purchased approximately $25.7 million and $415 million
in nonconforming mortgage loans from CFC.
In 1987 and 1993, CWM entered into servicing agreements appointing CFC as
servicer of pools of mortgage loans collateralizing five series of CMOs with
outstanding balances of approximately $105.6 million at December 31, 1994. CFC
is entitled to an annual fee of up to 0.32% of the aggregate unpaid principal
balance of the pledged mortgage loans. Servicing fees received by CFC under
such agreements were approximately $282,000, $500,000 and $290,000 in 1994,
1993 and 1992, respectively.
CFC has extended CWM a $10.0 million line of credit bearing interest at prime
and maturing September 30, 1995. At December 31, 1994 and 1993, there was no
amount outstanding under the agreement.
The Manager and CFC are wholly-owned subsidiaries of Countrywide Credit
Industries, Inc. ("CCI"), a diversified financial services company whose shares
of common stock are traded on the New York Stock Exchange (symbol: CCR). CCI
owned 1,100,000 shares or 3.41% of CWM's common stock at December 31, 1994. The
Manager owned 20,000 shares of CWM's common stock, which was purchased at
inception. CFC owns all of the common stock and has a 1% economic interest in
INMC.
F-18
<PAGE>
CWM MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
NOTE M - SUBSEQUENT EVENTS
On January 16, 1995, the Board of Directors declared a $0.27 cash dividend to be
paid on March 8, 1995 to shareholders of record on February 21, 1995.
In February 1995, CWM issued 8,050,000 shares of common stock. Net proceeds of
this offering amounted to $68.7 million and will be used to expand the Company's
mortgage conduit, warehouse lending and construction lending operations.
NOTE N - QUARTERLY FINANCIAL DATA - UNAUDITED
Selected quarterly financial data follows:
<TABLE>
<CAPTION>
Dollar amounts in thousands Three Months Ended
except per share data: -----------------------------------------------
March 31 June 30 September 30 December 31
-----------------------------------------------
<S> <C> <C> <C> <C>
Year ended December 31, 1994
Net revenues $5,730 $6,368 $9,211 $10,619
Net earnings 5,053 5,711 8,297 8,770
Earnings per share (1) 0.16 0.18 0.26 0.27
Dividends per share (2) 0.16 0.18 0.26 0.27
Year ended December 31, 1993
Net revenues $ 602 $ 512 $1,045 $ 2,270
Net earnings 118 54 564 1,744
Earnings per share (1) 0.01 0.00 0.03 0.07
Dividends per share (2) 0.12 0.12 0.12 0.12
</TABLE>
(1) Earnings per share are computed independently for each of the quarters
presented. Therefore the sum of the quarterly earnings per share may not
equal the total for the year.
(2) Declared for earnings of the period.
F-19
<PAGE>
CWM MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Three years ended December 31, 1994
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
---------------------------------------- ---------------- ------------ ------------- ---------------
Additions
----------------------------
Balance at Charged to Charged to Balance at End
Beginning of Costs and Other
Description Period Expenses Accounts of Period
---------------------------------------- ---------------- ------------ ------------- ---------------
<S> <C> <C> <C> <C>
Year ended December 31, 1994
Allowance for Loan Losses -
Warehouse Lending $0 $200,000 $0 $200,000
Allowance for Loan Losses -
Construction Lending N/A $300,000 $0 $300,000
Year ended December 31, 1993
Allowance for Loan Losses -
Warehouse Lending N/A $0 $0 $0
Year ended December 31, 1992 N/A N/A N/A N/A
</TABLE>
F-20
<PAGE>
CWM MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE
(Dollar amounts in thousands)
December 31, 1994
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E Column F
-------------------------- --------- ------------- ------------ ----------------- -------------------
Principal
Amount
(1)(2)(3)(4) of Loans
(5)(7)(9) Subject to Amount of
Range of Number Carrying Delinquent Mortgage
Carrying Amounts of Prior Amount of Principal Being Range of
of Mortgages Loans (1) Liens (1) Mortgages or Interest(1) Foreclosed (1)(8) Interest Rates (1)(6)
--------------------------- ---------- ------------- --------------- ----------------- --------------------
<S> <C> <C> <C> <C> <C> <C>
$0-$50 1,316 $0 $47,291 $220 $0 4.000-12.250
50-100 3,175 0 241,984 1,511 0 3.250-11.250
101-150 2,461 0 305,271 3,205 0 2.950-11.250
151-200 2,184 0 244,514 4,011 162 2.950-11.000
201 - 250 1,191 0 267,744 3,688 0 2.950-11.000
251 - 300 802 0 219,381 1,692 284 3.500-10.875
301 - 350 382 0 124,440 651 0 4.125-10.750
351 - 400 265 0 99,557 2,213 0 3.875-10.250
401 - 450 103 0 43,740 404 0 4.000-10.250
451 - 500 126 0 59,973 497 0 3.750-10.250
501 - 550 52 0 27,459 1,058 0 3.750-10.625
551 - 600 45 0 26,196 1,169 575 4.500-10.125
601 - 650 37 0 23,429 0 0 4.500-10.250
651 - 700 8 0 5,431 0 0 4.000-9.875
701 - 750 21 0 15,362 0 0 6.375-9.875
751 - 800 5 0 3,910 0 0 7.875-8.875
801 - 850 7 0 5,820 817 0 4.750-9.750
851 - 900 3 0 2,663 0 0 4.875-8.250
901 - 950 4 0 3,762 0 0 7.750-9.625
951 - 1,000 21 0 20,649 3,858 0 4.250-9.500
over 1,000 26 0 40,630 0 0 4.250-10.250
------------ --------- ------------- ------------ ----------------- -------------------
12,234 $0 $1,829,204 $24,995 $1,021
============ ========= ============ =================
Discount (6,507)
-------------
$1,822,697
=============
</TABLE>
----------------
(1) The above amounts are for the Company including both CWM and INMC.
(2) All mortgage loans are fixed or adjustable-rate, conventional mortgage
loans secured by single (one-to-four) family residential properties with
initial maturities of 15 to 30 years.
(3) Total mortgage loans comprised of $818,240 of mortgage loans held for sale,
$905,329 of mortgage loans held for investment and $105,635 of whole loans
pledged as collateral for CMOs.
(4) Information with respect to the geographic breakdown of first mortgages on
single family residential housing as of December 31, 1994 is as follows:
California 47% with no other state comprising more than 5%.
(5) The aggregate cost for federal income tax purposes is $1,822,697.
(6) Interest earned on mortgages by range of carrying amounts is not reasonably
obtainable.
(7) $25.7 million of mortgage loans purchased during 1994 were acquired from
CFC, an affiliate of the Company's Manager.
(8) Of the total amount of mortgages being foreclosed, $575 is related to
mortgage loans held for investment and $446 is related to collateral for
CMOs.
<TABLE>
<CAPTION>
The Company (CWM and INMC) CWM Alone
--------------------------- ---------------------------
<S> <C> <C>
(9) Balance at beginning of period $1,024,292 $945,236
Additions during period:
New mortgage loans 5,985,466 5,985,466
---------- ---------
7,009,758 6,930,702
Deductions during period:
Sales of mortgage loans 5,086,507 5,240,527
Collections of principal 94,047 5,180,554 70,090 5,310,617
--------- --------- --------- ----------
Balance at close of period $1,829,204 $1,620,085
========== ==========
</TABLE>
F-21
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Shareholders
Independent National Mortgage Corporation
We have audited the accompanying balance sheet of Independent National Mortgage
Corporation as of December 31, 1994 and 1993, and the related statements of
earnings, shareholders' equity, and cash flows for the year ended December 31,
1994 and the period from April 20, 1993 (inception) through December 31, 1993.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Independent National Mortgage
Corporation as of December 31, 1994 and 1993, and the results of its operations
and its cash flows for the year ended December 31, 1994 and the period from
April 20, 1993 (inception) through December 31, 1993, in conformity with
generally accepted accounting principles.
GRANT THORNTON LLP
Los Angeles, California
March 14, 1995
F-22
<PAGE>
Independent National Mortgage Corporation
Balance Sheets
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
December 31,
----------------------------------
1994 1993
---------------- ----------------
<S> <C> <C>
ASSETS
Mortgage loans held for sale $ 180,602 $ 78,358
Mortgage securities 138,472 -
Master servicing fees receivable 29,444 45,237
Other assets 16,045 10,518
--------------- ---------------
Total assets $ 364,563 $ 134,113
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Reverse-repurchase agreements $ 304,080 $ 36,223
Due to CWM 16,464 78,466
Accounts payable and accrued liabilities 20,212 7,375
--------------- ---------------
Total liabilities 340,756 122,064
Commitments and contingencies - -
Shareholders' equity
Series A preferred stock - authorized, 10,000
shares of $.01 par value; issued and
outstanding, 9,900 shares - -
Common stock - authorized, 10,000 shares
of $.05 par value; issued and outstanding,
100 shares - -
Capital in excess of par value 16,476 9,500
Net unrealized loss on available-for-sale mortgage securities (899) -
Retained earnings 8,230 2,549
--------------- ---------------
Total shareholders' equity 23,807 12,049
--------------- ---------------
Total liabilities and shareholders' equity $ 364,563 $ 134,113
=============== ===============
</TABLE>
The accompanying notes are an integral part of these statements.
F-23
<PAGE>
Independent National Mortgage Corporation
STATEMENTS OF EARNINGS
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
Period from
Year ended April 20, 1993 (Inception)
December 31, 1994 to December 31, 1993
------------------------ -------------------------
<S> <C> <C>
REVENUES
Interest income
Mortgage loans held for sale $ 25,179 $ 7,985
Mortgage securities, net 4,781 -
Net master servicing income (expense) 1,095 (4,518)
---------------- -----------------
Total interest income 31,055 3,467
Interest expense
Reverse-repurchase agreements 20,398 3,988
Advances from CWM 4,279 914
---------------- -----------------
Total interest expense 24,677 4,902
Net interest income (expense) 6,378 (1,435)
Gain on sale of mortgage loans and securities 9,680 8,388
Gain on sale of servicing 7,251 -
---------------- -----------------
Net revenues 23,309 6,953
EXPENSES
Salaries and related expenses 7,916 1,723
General and administrative 5,554 892
Management fees to affiliate 334 -
---------------- -----------------
Total expenses 13,804 2,615
---------------- -----------------
Earnings before income taxes 9,505 4,338
Provision for income taxes 3,824 1,789
---------------- -----------------
NET EARNINGS $ 5,681 $ 2,549
================ =================
</TABLE>
The accompanying notes are an integral part of these statements.
F-24
<PAGE>
Independent National Mortgage Corporation
STATEMENT OF SHAREHOLDERS' EQUITY
(Dollar amounts in thousands, except share data)
Period from April 20, 1993 (Inception) to December 31, 1994
<TABLE>
<CAPTION>
Unrealized
loss on avail-
Additional able-for-sale
Number of Common Preferred paid-in mortgage Retained
shares stock stock capital securities earnings Total
--------- ------- --------- ---------- -------------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Issuance of preferred
stock - April 20, 1993 9,900 $ - $ - $ 2,475 $ - $ - $ 2,475
Issuance of common stock
- April 20, 1993 100 - - 25 - - 25
Additional capital
contribution - - - 7,000 - - 7,000
Net earnings for the period - - - - - 2,549 2,549
-------- ------ --------- --------- ------------ ---------- ---------
Balance at December 31, 1993 10,000 - - 9,500 - 2,549 12,049
Additional capital contribution - - - 6,976 - - 6,976
Unrealized loss on
available-for-sale
mortgage securities - - - - (899) - (899)
Net earnings for the year - - - - - 5,681 5,681
-------- ------ --------- --------- ------------ ---------- ---------
Balance at December 31, 1994 10,000 $ - $ - $ 16,476 $(899) $ 8,230 $ 23,807
======== ====== ========= ========= ============ ========== =========
</TABLE>
The accompanying notes are an integral part of this statement.
F-25
<PAGE>
Independent National Mortgage Corporation
STATEMENTS OF CASH FLOWS
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
Period from
Year ended April 20, 1993 (Inception)
December 31, 1994 to December 31, 1993
----------------------- ------------------------
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 5,681 $ 2,549
Adjustments to reconcile net earnings
to net cash used in operating activities:
Amortization 10,844 7,387
Gain on sale of mortgage securities and servicing (7,456) -
Purchases of mortgage loans from CWM (5,243,278) (2,391,132)
Principal repayments and sale of mortgage loans 5,141,035 2,312,772
Change in other assets and liabilities 6,436 1,562
----------------------- ------------------------
Net cash used in operating activities (86,738) (66,862)
----------------------- ------------------------
Cash flows from investing activities:
Investment in master servicing fees receivable (113,006) (52,222)
Investment in mortgage securities (178,638) -
Principal repayments and sale of mortgage securities 39,715 -
Purchase of servicing (30,398) (5,105)
Proceeds from sale of servicing 33,921 -
----------------------- ------------------------
Net cash used in investing activities (248,406) (57,327)
----------------------- ------------------------
Cash flows from financing activities:
Advances from CWM, net of cash repayments 60,311 78,466
Net proceeds of reverse-repurchase agreements 267,857 36,223
Proceeds from issuance of common stock - 25
Proceeds from issuance of preferred stock - 2,475
Proceeds from additional capital contribution 6,976 7,000
----------------------- ------------------------
Net cash provided by financing activities 335,144 124,189
----------------------- ------------------------
Net change in cash 0 0
Cash at beginning of period 0 0
----------------------- ------------------------
Cash at end of period $ 0 $ 0
======================= ========================
Supplemental cash flow information:
Cash paid for interest $ 19,757 $ 3,871
======================= ========================
Cash paid for income taxes $ 4 -
======================= ========================
Supplemental disclosure of noncash activity:
INMC transferred $122,313 of master servicing fees receivable
to CWM as repayment of advances.
</TABLE>
The accompanying notes are an integral part of these statements.
F-26
<PAGE>
INDEPENDENT NATIONAL MORTGAGE CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994 AND 1993
NOTE A - NEW OPERTIONS
In October 1992, the Board of Directors of CWM Mortgage Holdings, Inc. ("CWM")
approved a new operating plan, implementation of which was begun in the first
quarter of 1993. Under the new plan, CWM and Countrywide Funding Corporation
("CFC") established Independent National Mortgage Corporation ("INMC"), which
was incorporated in April 1993 and principally operates as a jumbo and
nonconforming mortgage loan conduit. All of the common stock and 1% of the
economic interest of INMC is owned by CFC. All of the preferred stock and 99%
of the economic interest of INMC is owned by CWM. All loans purchased by CWM,
for which a real estate mortgage investment conduit ("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 any entity other than CWM. INMC's principal sources of income are gains
recognized on the sale of mortgage loans and sale of servicing, 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
mortgage securities and net master servicing income.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
1. Mortgage Loans Held for Sale
Mortgage loans held for sale are carried at the lower of cost or market, which
is computed by the aggregate method (unrealized losses are offset by unrealized
gains). The cost of mortgage loans is adjusted by gains and losses generated
from corresponding hedging transactions, principally using forward commitments
and futures contracts, entered into to protect the inventory value from
increases in interest rates. Hedge positions are also used to protect the
pipeline of commitments to purchase loans from CWM from changes in interest
rates. Gains and losses resulting from changes in the market value of the
inventory, pipeline and open hedge positions are netted. Any net gain that
results is deferred; any net loss that results is recognized when incurred.
Hedging gains and losses realized during the commitment and warehousing period
related to the pipeline and mortgage loans held for sale are deferred. Hedging
losses are recognized currently if deferring such losses would result in
mortgage loans held for sale and the pipeline being valued in excess of their
estimated net realizable value.
2. Master Servicing Fees Receivable
INMC retains the master servicing rights associated with sales of mortgage loans
and securities. These master servicing rights entitle INMC to a future stream
of cash flows based on the outstanding principal balance of the mortgage loans
and the related contractual master servicing fees. The sales price of the loans
and the resulting gain or loss on sale are adjusted to provide for the
recognition of a normal master servicing fee rate over the estimated servicing
lives of the loans. The adjustment results in a receivable that is realized
through receipt of excess master servicing fees over time. Master servicing
fees receivable are amortized over the lives of the underlying mortgages using
the original discount rate and the effective yield method adjusted for the
effects of prepayments. INMC intends to hold the master servicing fees
receivable for investment.
F-27
<PAGE>
INDEPENDENT NATIONAL MORTGAGE CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994 AND 1993
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
The weighted average discount rate inherent in the initial carrying amount of
the master servicing fees receivable was approximately 11.79%. In determining
the appropriate discount rate to compute the carrying amount, INMC considers the
discount rate inherent in the fair values of similar investments such as excess
servicing, historical and expected prepayment assumptions and required spreads
against alternative investments.
To protect the value of the master servicing fees receivable from the effects of
increased prepayment activity, in December 1993 and January 1994, INMC purchased
call options on mortgage-backed securities that increase in value when interest
rates decline. The cost of the option fees was charged to expense over the
contractual life of the options. Options gains were recognized first as an
offset to the "Unscheduled Amortization" of the master servicing fees receivable
(i.e., amortization due to the impairment caused by increased projected
prepayment speeds). To the extent the master servicing hedge generates gains in
excess of the Unscheduled Amortization ("Excess Hedge Gain"), INMC writes down
the master servicing fees receivable through additional amortization in an
amount equal to the Excess Hedge Gain. During 1993 and 1994, INMC had no gains
from these hedging transactions. As of December 31, 1994, INMC had no call
options outstanding. As of December 31, 1993, INMC had $300 million of call
options on FNMA mortgage-backed securities with a carrying value and an
approximate fair value of $4.1 million.
3. Purchased Servicing Rights
INMC from time to time acquires the rights to service, as opposed to master
service, mortgage loans that it has previously purchased. INMC capitalizes the
cost of bulk purchases of servicing rights. The amount capitalized does not
exceed the present value of future net servicing income. Purchased servicing
rights are amortized over the lives of the underlying mortgages in proportion to
estimated net servicing revenues. As of December 31, 1994 and 1993, INMC's
purchased servicing portfolio totaled $425.0 million and $439.8 million,
respectively. Capitalized costs associated with acquiring these portfolios
totaled $4.0 million and $4.9 million, respectively, and are included in other
assets. Gains on the sale of servicing rights are recognized when title and all
risks and rewards have irrevocably passed to the buyer and there are no
significant unresolved contingencies.
4. Revenue Recognition
Interest is recognized as revenue when earned according to the terms of the
mortgage loans and securities and when, in the opinion of management, it is
collectible. Premiums paid and discounts obtained on mortgage loans held for
sale are deferred as an adjustment to the carrying value of the loans until the
loans are sold. Gains on sale of mortgage loans and securities are recognized
upon settlement.
5. Income Taxes
For income tax purposes, INMC files a separate tax return and is not
consolidated with CWM or CFC. Taxable earnings of INMC are subject to state and
federal income taxes at the applicable statutory rates. Deferred income taxes
in the accompanying financial statements is computed using the liability method.
F-28
<PAGE>
INDEPENDENT NATIONAL MORTGAGE CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994 AND 1993
NOTE C - MORTGAGE LOANS HELD FOR SALE
Substantially all of the mortgage loans purchased by INMC from CWM are fixed-
rate and adjustable-rate nonconforming mortgage loans secured by first liens on
single-family residential properties. Approximately 25% of mortgage loans held
for sale at December 31, 1994 were collateralized by properties located in
California.
In 1994 and 1993, INMC purchased mortgage loans from CWM with an aggregate
principal balance of $5.2 billion and $2.4 billion, respectively, and sold
mortgage loans in the form of REMIC securities or bulk whole loan sales with an
aggregate principal balance of $5.1 billion and $2.3 billion, respectively. In
connection with the issuance of these securities and whole loan sales, INMC
retained master servicing rights with a carrying value of $29.4 million and
$45.2 million at December 31, 1994. During 1994 and 1993, INMC recognized gains
on these securitizations totaling $9.7 million and $8.4 million, respectively,
net of related expenses, losses and hedging costs.
NOTE D - MORTGAGE SECURITIES
As of December 31, 1994, INMC had invested in mortgage securities totaling
$138.5 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 shareholders'
equity.
As of December 31, 1994, mortgage securities held-to-maturity totaled $33.1
million with an estimated fair value of $33.2 million, resulting in a net
unrealized gain of $107,000. This net unrealized gain of $107,000 was comprised
of gross unrealized gains and gross unrealized losses totaling $1.5 million and
$1.4 million, respectively. Included in mortgage securities held-to-maturity
was one inverse floater with a book value of $7.3 million, and a fair value of
$8.2 million and an original 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 countercyclically to the
income generated by master servicing fees receivable. Mortgage securities
categorized as available-for-sale had a book value of $105.4 million which is
net of an unrealized loss of $1.5 million, or $899,000 adjusted for income
taxes. This net unrealized loss of $1.5 million was comprised of gross
unrealized gains and gross unrealized losses totaling $512,000 and $2.1 million,
respectively. During 1994, INMC sold mortgage securities classified as
available-for-sale with a net book value of $38.8 million (based on specific
identification) and realized gross losses in the amount of $340,000 and gross
gains in the amount of $545,000 resulting in proceeds of $39.0 million. INMC
had no trading securities at December 31, 1994. As of
F-29
<PAGE>
INDEPENDENT NATIONAL MORTGAGE CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994 AND 1993
NOTE D - MORTGAGE SECURITIES - CONTINUED
December 31, 1994, all of INMC's mortgage securities were pledged as collateral
under reverse-repurchase agreements.
During the fourth quarter of 1994, INMC transferred its entire $11.8 million
portfolio of principal-only securities classified as held-to-maturity to
available-for-sale. The unrealized loss as of the date of transfer was
$172,000. The decision to transfer these securities to available-for-sale was
based on a reassessment of the purpose of such investments. INMC considers the
category of available-for-sale to more properly reflect INMC's intention with
respect to principal-only securities.
NOTE E - MASTER SERVICING FEES RECEIVABLE
Beginning in the second quarter of 1994, INMC began to repay its debt to CWM
through a transfer of a portion of the master servicing fees receivable asset
from INMC at its then carrying value which approximated market value.
The changes in master servicing fees receivable during 1993 and 1994 are as
follows:
<TABLE>
<CAPTION>
(Dollar amounts in thousands)
1994 1993
---- ----
<S> <C> <C>
Balance at beginning of period $ 45,237 $ 0
Additions 113,006 52,232
Amortization
Scheduled (6,486) (836)
Unscheduled 0 (6,159)
Transfers to CWM (122,313) 0
--------- -------
Balance at end of period $ 29,444 $45,237
========= =======
</TABLE>
NOTE F - REVERSE-REPURCHASE AGREEMENTS
CWM may assign to INMC a portion of its rights to borrow under three separate
reverse-repurchase agreements totaling $1.3 billion which expire in April
through December 1996, subject to CWM's continuing to remain jointly and
severally liable for repayment. The maximum balance outstanding during the year
was $919.1 million and the balance outstanding at December 31, 1994 totaled
$205.0 million. These facilities are secured by mortgage loans which are
ultimately sold in the form of REMIC securities or whole loans. The borrowings
under such agreements had original maturities of less than five days.
In October 1994, CWM signed a master repurchase agreement in an aggregate amount
of $225 million, to provide committed financing for master servicing fees
receivable and certain mortgage-related securities which have been retained or
purchased by CWM or INMC. This agreement expires two years from the date of
execution. As of December 31, 1994, INMC had $99.1 million outstanding under
this facility; CWM is jointly and severally liable for repayment. Such
borrowings had original maturities of up to 31 days.
F-30
<PAGE>
INDEPENDENT NATIONAL MORTGAGE CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994 AND 1993
NOTE F - REVERSE-REPURCHASE AGREEMENTS - CONTINUED
The agreements bear interest at rates indexed to the London Interbank Offered
Rates ("LIBOR"). As of December 31, 1994 and 1993, the borrowing rates on these
reverse-repurchase agreements were 6.3% and 4.7%, respectively. None of the
lenders are affiliated with INMC. As of December 31, 1994, INMC had assets
pledged in excess of borrowings from Merrill Lynch of $46.3.
NOTE G - INCOME TAXES
The provision for income taxes for the years ended December 31, 1994 and 1993
consist of the following:
<TABLE>
<CAPTION>
1994 1993
------ ------
<S> <C> <C>
Current expense
Federal $ - $ -
State 932 -
------ ------
Total current expense 932 -
Deferred expense
Federal 2,731 1,275
State 161 514
------ ------
Total deferred expense 2,892 1,789
------ ------
Total income tax expense $3,824 $1,789
====== ======
<CAPTION>
1994 1993
------ ------
<S> <C> <C>
Deferred tax asset
State taxes $ 546 $ 175
Net operating loss carry forward 3,031 133
Deferred tax liability
Master Servicing fees receivable 8,242 2,097
Other 16 -
------ ------
Net deferred tax liability $4,681 $1,789
====== ======
</TABLE>
The effective income tax rate differed from the Federal statutory
rate as follows:
<TABLE>
<CAPTION>
1994 1993
------ ------
<S> <C> <C>
Federal statutory rate 34.0% 34.0%
State statutory rate 7.6 7.8
Other items (1.3) (0.6)
Effective income tax rate 40.3% 41.2%
====== ======
</TABLE>
NOTE H - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial instruments as
of December 31, 1994 and 1993 is made in accordance with the requirements of
Statement of Financial Accounting Standards (SFAS) No. 107, Disclosures about
Fair Value of Financial Instruments, and SFAS No. 119, Disclosures About
Derivative Financial Instruments and Fair Value of Financial Instruments. The
estimated fair value amounts have been determined by INMC using available market
information and appropriate valuation methodologies.
F-31
<PAGE>
INDEPENDENT NATIONAL MORTGAGE CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994 AND 1993
NOTE H - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS - CONTINUED
However, considerable judgment is necessarily required to interpret market data
to develop the estimates of fair value. Accordingly, the estimates presented
herein are not necessarily indicative of the amounts INMC could realize in a
current market exchange. The use of different market assumptions and/or
estimation methodologies may have a material effect on estimated fair value
amounts.
<TABLE>
<CAPTION>
December 31, 1994 December 31, 1993
------------------------ -----------------------
Carrying Estimated Carrying Estimated
(Dollar amounts in thousands) amount fair value amount fair value
---------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Assets:
Mortgage loans held for sale $203,213 $203,213 $78,475 $78,475
Commitments to purchase mortgage (19,700) (19,700) (264) (264)
loans
Commitments to sell mortgage loans (2,911) (2,911) 147 147
and securities -------- -------- ------- -------
Total mortgage loans held for sale $180,602 $180,602 $78,358 $78,358
Mortgage securities 138,472 138,580 - -
Master servicing fees receivable 29,444 33,122 45,237 45,237
Liabilities:
Reverse-repurchase agreements 304,080 304,080 36,223 36,223
Due to CWM 16,464 16,464 78,466 78,466
</TABLE>
The fair value estimates as of December 31, 1994 and 1993 are based on pertinent
information available to management as of those dates. Although management is
not aware of any factors that would significantly affect the estimated fair
value amounts, such amounts have not been comprehensively revalued for purposes
of these financial statements since those dates and, therefore, current
estimates of fair value may differ significantly from the amounts presented
herein.
The following describes the methods and assumptions used by INMC in estimating
fair values.
Mortgage Loans Held for Sale. Fair value is estimated using the methodology
described in Note B.1.
Mortgage Securities. Fair value is estimated using quoted market prices and by
discounting future cash flows using discount rates that approximate current
market rates and market consensus prepayment rates.
Master Servicing Fees Receivable. Fair value is estimated by discounting
future cash flows from master servicing fees using discount rates that
approximate current discount rates used for similar investments such as excess
servicing and using expected future prepayment rates.
Reverse-Repurchase Agreements. Fair values approximate the carrying amounts
because of the short-term to maturity of the liabilities.
F-32
<PAGE>
INDEPENDENT NATIONAL MORTGAGE CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994 AND 1993
NOTE H - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS - CONTINUED
Due to CWM. Fair values approximate the carrying amounts because of the short-
term nature of the underlying liabilities.
Commitments to Purchase Mortgage Loans. Fair value is estimated based upon the
difference between the current value of similar loans and the price at which
INMC has committed to purchase the loans.
Commitments to Sell Mortgage Loans. INMC utilizes forward commitments to sell
private-label mortgage-backed securities, FNMA mortgage-backed securities and
two-year U.S. Treasury futures contracts to hedge interest rate risk associated
with mortgage loans held for sale and commitments to purchase mortgage loans.
Fair value of these commitments is determined based upon the difference between
the settlement values of the commitments and the quoted market values of the
underlying loans and securities.
NOTE I - COMMITMENTS AND CONTINGENCIES
Financial Instruments With Off-Balance-Sheet Risk. INMC is a party to financial
instruments with off-balance-sheet risk in the normal course of business through
the acquisition and sale of mortgage loans and the management of interest-rate
risk. These instruments include short-term commitments to purchase and sell
loans. The instruments involve, to varying degrees, elements of credit and
interest rate risk. INMC is exposed to credit loss in the event of
nonperformance by the counterparties to the various agreements. However, INMC
does not anticipate nonperformance by the counterparties. As discussed below,
INMC's exposure to credit risk with respect to the master servicing portfolio in
the event of nonperformance by the mortgagor is limited due to the non-recourse
nature of the loans in the servicing portfolio. INMC's exposure to credit risk
in the event of default by the counterparty is the difference between the
contract price and the current market price. Unless noted otherwise, INMC does
not require collateral or other security to support financial instruments with
credit risk.
Master Loan Servicing. As of December 31, 1994 and 1993, INMC was master
servicing loans totaling $6.8 billion and $2.0 billion, respectively, associated
with mortgage-backed securities and whole loans securitizing REMICs and whole
loan sales.
In connection with REMIC issuances, each series of mortgage-backed securities is
typically fully payable from the mortgage assets underlying such series and the
recourse of investors is limited to those assets and any credit enhancement
features, such as insurance. Generally, any losses in excess of the credit
enhancement obtained is borne by the security holders. Except in the case of a
breach of the standard representations and warranties made by INMC when mortgage
loans are securitized or sold, the loans or securities are nonrecourse to INMC.
Typically, INMC has recourse to the sellers of such loans for any breaches of
similar representations and warranties made by the sellers.
As of December 31, 1994, approximately 66% of mortgage loans in INMC's master
servicing portfolio were secured by properties located in California. The
remainder are geographically dispersed throughout the United States, with no
more than 5% of the mortgage loans collateralized by properties in any other
single jurisdiction.
F-33
<PAGE>
INDEPENDENT NATIONAL MORTGAGE CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994 AND 1993
NOTE I - COMMITMENTS AND CONTINGENCIES - CONTINUED
Commitments to Purchase Loans. As of December 31, 1994 and 1993, INMC had
entered into commitments to purchase mortgage loans from CWM totaling $1.3
billion and $1.4 billion, respectively, including loans subject to purchase from
sellers by CWM. After purchase and sale of the mortgage loans, INMC's exposure
to credit loss in the event of nonperformance by the mortgagor is limited as
described above.
Commitments to Sell Loans. As of December 31, 1994 and 1993, INMC had open
commitments amounting to approximately $157.4 million and $680.0 million,
respectively, to sell mortgage loans. These commitments are utilized in
delivering mortgage loans held for sale and are considered in the valuation of
the mortgage loan inventory. In addition, INMC had forward commitments to sell
$747.0 million and $569.0 million of FNMA mortgage-backed securities as of
December 31, 1994 and 1993, respectively, and $563.8 million of two-year U.S.
Treasury futures contracts as of December 31, 1994. These commitments to sell
loans and securities had a net unrealized loss of approximately $2.9 million and
a gain of approximately $147,000, as of December 31, 1994 and 1993,
respectively, which was deferred as part of INMC's lower of cost or market
analysis on its mortgage loans held for sale.
NOTE J - RELATED PARTY TRANSACTIONS
As of December 31, 1994, advances due by INMC to CWM totaled $16.5 million.
Such funds were advanced by CWM, under an open account arrangement, to finance
assets by INMC. Such advances bear interest at rates indexed to the London
Interbank Offered Rates ("LIBOR"). Interest charged on advances to INMC from
CWM was at a rate of 9.3% and 5.0% at December 31, 1994 and 1993,
respectively.
CWM has entered into an agreement (the "Management Agreement") with Countrywide
Asset Management Corporation (the "Manager") to advise CWM and INMC on various
facets of their businesses and to manage their operations, subject to
supervision by CWM's Board of Directors. The Manager has entered into a
subcontract with its affiliate, Countrywide Funding Corporation ("CFC"), to
perform such services for CWM and INMC as the Manager deems necessary. The
Manager and CFC are wholly-owned subsidiaries of Countrywide Credit Industries,
Inc. ("CCI"), a diversified financial services company whose shares of common
stock are traded on the New York Stock Exchange (Symbol: CCR).
For performing these services, the Manager receives a base management fee of 1/8
of 1% per annum of average invested assets not pledged to secure CMOs. In
addition, the Manager receives incentive compensation equal to 25% of the amount
by which CWM's annualized return on equity exceeds the ten-year U.S. Treasury
Rate plus 2%. The Manager waived all management fees pursuant to the above for
1993. During 1994, the Manager waived 25% of its incentive compensation. Base
management fees are allocated between CWM and INMC based upon their respective
average invested assets net of related borrowings and incentive management fees
are allocated between CWM and INMC based upon their respective contributions to
the earnings of the Company. Management fees allocated to INMC in 1994 amounted
to $334,000. Management fees allocated to INMC in 1993 were insignificant. The
Management Agreement is renewable annually and expires on May 15, 1995.
F-34
<PAGE>
INDEPENDENT NATIONAL MORTGAGE CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994 AND 1993
NOTE J - RELATED PARTY TRANSACTIONS - CONTINUED
The Manager incurs many of the operating expenses of the Company, including
personnel and related expenses. The Company's conduit operations are primarily
conducted in INMC and all other operations are conducted in CWM. Accordingly,
INMC is charged with the majority of the conduit's costs and CWM is charged with
the other operations' costs. During 1993 the Manager absorbed $900,000 of
operating expenses incurred in connection with its duties under the Management
Agreement, all of which would have been charged to INMC. INMC began paying all
expenses related to its operations in June 1993.
During June 1994 and December 1994, INMC sold approximately $1.8 billion and
$1.2 billion, respectively, of its purchased servicing portfolio to CFC. INMC
recorded gains on the sale of these servicing rights of $5.8 million and $1.5
million, respectively. Total proceeds from these sales amounted to $24.6
million and $13.6 million, respectively. As of December 31, 1994, $4.2 million
in capitalized purchased servicing rights was outstanding. Of the $1.8 billion
purchased servicing portfolio sold to CFC in June 1994, $580.4 million was
already being subserviced by CFC. Of the $1.2 billion purchased servicing
portfolio sold to CFC in December 1994, $178.4 million was already being
subserviced by CFC. As of December 31, 1994 and 1993, CFC was subservicing $0
and $72.7 million, respectively, in mortgage loans associated with purchased
servicing rights. INMC paid CFC $94,000 and $6,000 in subservicing fees during
1994 and 1993, respectively.
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 any entities other
than CWM.
F-35
<PAGE>
Exhibit 4.25
COUNTRYWIDE MORTGAGE TRUST 1993-II,
as Issuer
and
STATE STREET BANK AND TRUST COMPANY,
as Trustee
FIRST SUPPLEMENTAL INDENTURE
Dated as of May 24, 1993
COUNTRYWIDE MORTGAGE TRUST 1993-II
COLLATERALIZED MORTGAGE OBLIGATIONS
SERIES 1993-II
<PAGE>
This FIRST SUPPLEMENTAL INDENTURE, dated as of May 24, 1993, between
Countrywide Mortgage Trust 1993-II (herein, together with its permitted
successors and assigns, called the "Issuer"), a statutory business trust created
under the Deposit Trust Agreement, dated as of April 7, 1993, between
Countrywide Mortgage obligations II, Inc. and Wilmington Trust Company, as
amended, and State Street Bank and Trust Company, a Massachusetts banking
corporation, as trustee (herein, together with its permitted successors in the
trusts hereunder, called the "Trustee");
W I T N E S S E T H:
WHEREAS, the Issuer and the Trustee have entered into an Indenture,
dated as of April 14, 1993 (the "Indenture"), pursuant to which the Issuer has
issued its Collateralized Mortgage obligations, Series 1993-II, consisting of
Class I Bonds, Class 2 Bonds, Class 3 Bonds, Class 4 Bonds, Class 5 Bonds, Class
6 Bonds, Class 7 Bonds and Class 8 Bonds; and
WHEREAS, the Issuer and the Trustee desire to amend the Indenture, as
permitted in Section 9.01(5) of the Indenture, on the terms and conditions
hereinafter set forth, to cure an ambiguity arising with respect to the release
of the Spread to the Issuer;
NOW, THEREFORE, in consideration of the mutual covenants and
agreements herein contained, and for other good and valuable consideration, the
receipt of which is hereby acknowledged, the parties hereto agree as follows:
Section 1. Unless the context clearly otherwise requires, all
capitalized terms used herein without definition shall have the meanings given
to such terms in Section 1.01 of the Indenture.
Section 2. Clause (b)(ii) of subsection (b) of Section 2.03 of the
Indenture is hereby amended by deleting it in its entirety and substituting the
following therefor:
"(ii) on any Payment Date on which the Class 1 and the Class 2 Bonds are
outstanding, an aggregate amount equal to 86.00601696% of the Priority
Principal Distribution Amount remaining after giving effect to the payments
in clause (i) above, to the payment of principal of the Class 1 and Class 2
Bonds, pro rata between such Bonds in proportion to their respective
original principal balances, until the Class 1 and Class 2 Bonds have been
paid in full, and the remainder of the Priority Principal Distribution
Amount on each such Payment Date will constitute a portion of the spread
which will be released from the lien of this Indenture and paid to the
Issuer. on the Payment Date on which the Class 1 and Class 2 Bonds are paid
in full, an amount equal to 16.27093491% of the Current Principal Amount of
the Class 1 and Class 2 Bonds, before giving effect to the principal
payment for such Payment Date, will be released from the lien of this
Indenture and paid to the Issuer (the "Issuer Distribution");
Exhibit 4.25
2
<PAGE>
Section 3. Clause (b)(iii) of subsection (b) of Section 2.03 of the
Indenture is hereby amended by deleting it in its entirety and substituting the
following therefor:
"(iii) on the Payment Date on which the Class 1 Bonds and the Class 2 Bonds
are paid in full and after the Issuer Distribution has been made and on any
Payment Date thereafter, to the payment of principal of the class 8 Bonds
until the Class 8 Bonds have been paid in full; and".
Section 4. The Indenture is hereby ratified and confirmed in all
respects and all terms, conditions and provisions of the Indenture, except as
amended by this First Supplemental Indenture, shall remain in full force and
effect.
Section 5. THIS FIRST SUPPLEMENTAL INDENTURE SHALL BE CONSTRUED IN
ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF CALIFORNIA, INCLUDING
ALL MATTERS OF CONSTRUCTION, VALIDITY AND PERFORMANCE.
Section 6. This First Supplemental Indenture may be executed in any
number of counterparts, each of which so executed shall be deemed to be an
original, but all such counterparts shall together constitute but one and the
same instrument. This First Supplemental Indenture shall become effective upon
the execution of a counterpart hereof by the Issuer and the Trustee.
IN WITNESS WHEREOF, the parties hereto have caused this First
Supplemental Indenture to be duly executed by their respective officers hereunto
duly authorized, as of the day and year first above written.
COUNTRYWIDE MORTGAGE TRUST 1993-II,
as Issuer
By: /s/ Eric P. Sieracki
--------------------
Title /s/ Authorized Officer
----------------------
STATE STREET BANK AND TRUST COMPANY,
as Trustee
By: /s/ Barbara Bateman
-------------------
Title /s/ Vice President
------------------
Exhibit 4.25
3
<PAGE>
Exhibit 10.60
CWM MORTGAGE HOLDINGS, INC.
INTEROFFICE MEMORANDUM
Date: December 6, 1994
To: Kellie Johnson
From: Mike Perry
________________________________________________________________
Subject: Promotion and Compensation Plan
________________________________________________________________
Kellie, congratulations on your promotion to Senior Vice President and Director
of Sales and Marketing for CWM, and Executive Vice President of CWM's three
principal subsidiaries: Independent National Mortgage Corporation (INMC),
Warehouse Lending Corporation of America (WLCA), and Construction Lending
Corporation of America (CLCA). This promotion is well-deserved given your hard
work and outstanding sales and marketing efforts on behalf of INMC.
The following is the compensation plan for your new position:
BASE SALARY: $180,000 per annum (effective November 1, 1994)
1994 BONUS PROGRAM
You will be eligible for a 1994 bonus based upon your new position of up to
$35,000 based upon the following factors:
1. Successful implementation of the "barrel" or "no territories" approach to
administering CWM's production personnel. Make sure our key customers remain
extremely happy during our transition to this new approach. Cross-train all
personnel on all products ASAP. Gain the confidence and respect of all National
Account Managers and WLCA and CLCA personnel.
2. The master commitment process must be thoroughly reorganized to my
specifications - - from commitment format to coordinating weekly master
commitment meetings.
<PAGE>
3. Develop a strong sales and market effort (subject to my review) to implement
serviced-released product and target mortgage brokers.
4. Develop an effective group of marketing brochures
for all products and types of customers.
5. Work effectively and productively with all CWM managers especially the heads
of WLCA and CLCA.
1995 BONUS PROGRAM
PRODUCTION BONUS:
You will be eligible for an INMC production related bonus up to $100,000 per
annum to be determined as follows:
(((INMC's annual purchase volume excluding the construction and model home
products) multiplied by (100% minus the % of annual purchase volume from INMC's
top 10 accounts)) multiplied by (.10% divided by average price break in yield of
annual fundings)) multiplied by (7/10th's of 1 basis point (.00007)).
You will be eligible for a WLCA production related bonus up to $40,000 per annum
to be determined as follows:
(((Annual average outstandings for WLCA's traditional lines of credit) minus
($60 million)) multiplied by (6.5 basis points (.00065))) plus (((Annual average
outstandings for WLCA's other lending products) minus ($10 million)) multiplied
by (3.0 basis points (.0003))).
You will be eligible for a CLCA production related bonus up to $40,000 per annum
to be determined as follows:
((The combined total of the construction to permanent, tract construction and
model home loan annual purchase volume based on commitment amount excluding
loans obtained from sources other than your sales and marketing force) minus
($120 million)) multiplied by (2 basis points (.0002)).
CORPORATE BONUS:
If you are rated excellent on developing and implementing controls, and
policies and procedures and you are timely and innovative in developing and
implementing new product and marketing strategies you will be eligible for an
additional bonus of $10,000 per annum.
Exhibit 10.60
<PAGE>
STOCK OPTIONS:
An initial grant of 10,000 shares will be made at the December, 1994, CWM Board
meeting. Future annual grants will be made as appropriate. All grants are
subject to approval by CWM's board.
This plan is subject to change or amendment at anytime by CWM and is not to be
construed as a contract of employment. All bonuses will be paid on an annual
basis after CWM's annual external audit has been completed.
Kellie, I am very excited for you and the Company about your well-deserved
promotion, and I am confident that you will bring the same work ethic and "can-
do" attitude to it that you brought to your previous position. However, success
in your previous position will not automatically translate into success in your
new position. You are now a senior manager and no longer just a salesperson. The
challenges and rewards will be great, but you will need to rise to the occasion
and give everything you have to succeed. I will be there to help. Please keep me
well informed of your ideas and activities. Good luck!
Exhibit 10.60
<PAGE>
SUBSIDIARIES OF
CWM MORTGAGE HOLDINGS, INC.
<TABLE>
<CAPTION>
SUBSIDIARY STATE OF INCORPORATION OR OWNERSHIP
ORIGINATION
<S> <C> <C>
CWM MORTGAGE DELAWARE DIRECT
OBLIGATIONS II, INC.
CWM MORTGAGE DELAWARE DIRECT
OBLIGATIONS III, INC.
INDEPENDENT NATIONAL MORTGAGE DELAWARE DIRECT
CORPORATION
INDEPENDENT LENDING CORPORATION DELAWARE DIRECT
COUNTRYWIDE MORTGAGE TRUST DELAWARE BUSINESS TRUST INDIRECT
1987-I
COUNTRYWIDE MORTGAGE TRUST DELAWARE BUSINESS TRUST INDIRECT
1987-II
COUNTRYWIDE CASH FLOW BOND DELAWARE BUSINESS TRUST INDIRECT
TRUST
COUNTRYWIDE MORTGAGE TRUST DELAWARE BUSINESS TRUST INDIRECT
1993-I
COUNTRYWIDE MORTGAGE TRUST DELAWARE BUSINESS TRUST INDIRECT
1993-II
</TABLE>
EXHIBIT 21.1
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated March 14, 1995, accompanying the consolidated
financial statements and schedules included in the Annual Report of CWM Mortgage
Holdings, Inc. (formerly Countrywide Mortgage Investments, Inc.) on Form 10-K
for the year ended December 31, 1994. We hereby consent to the incorporation by
reference of said report in the Registration Statements of CWM Mortgage
Holdings, Inc. on Forms S-8 (File No. 33-8442, effective August 25, 1986 and
File No. 33-32562, effective December 15, 1989) and on Form S-3 (File No.
33-48149, effective June 15, 1992).
GRANT THORNTON LLP
Los Angeles, California
March 14, 1995
<PAGE>
DIRECTORS AND PRINCIPAL EXECUTIVE OFFICERS OF
COUNTRYWIDE ASSET MANAGEMENT CORPORATION
(The Company's Manager)
<TABLE>
<CAPTION>
NAME AGE OFFICE
----------------------------- --- ------
<C> <C> <S>
Angelo R. Mozilo* 55 Chairman of the Board of Directors
David S. Loeb* 70 Vice Chairman of the Board of Directors
and Chief Executive Officer
Stanford L. Kurland 41 Director and President
Michael W. Perry* 32 Director and Executive Vice President and
Chief Operating Officer
Richard H. Wohl* 36 Director and Senior Vice President,
General Counsel and Secretary
Sterling B. Abernathy* 33 Senior Vice President and Chief Accounting
Officer
Carmella L. Grahn* 33 Senior Vice President/Secondary Marketing
Kellie A. Johnson* 33 Senior Vice President/Sales and Marketing
Kevin W. Bartlett 37 Director
Ralph S. Mozilo 53 Director
</TABLE>
* The above are also directors and/or officers of CWM. A description of their
backgrounds is hereby incorporated by reference to CWM's definitive proxy
statement, to be filed pursuant to Regulation 14A within 120 days after the end
of the fiscal year.
Stanford L. Kurland joined CFC in 1979 and is Senior Managing Director and Chief
Operating officer of CFC. He became a director of CAMC in 1985.
Kevin W. Bartlett joined CFC in 1986 and is Managing Director, Secondary
Marketing, for CCI and CFC. He became a director of CAMC in 1986.
Ralph S. Mozilo joined CFC in 1971 and is Executive Vice President of
Underwriting and Compliance for CFC. He became a director of CAMC in 1993. Ralph
Mozilo is Angelo Mozilo's brother.
Exhibit 99.1
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> DEC-31-1994
<CASH> 2,605
<SECURITIES> 0
<RECEIVABLES> 36,210
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 1,837
<DEPRECIATION> 302
<TOTAL-ASSETS> 1,997,644
<CURRENT-LIABILITIES> 0
<BONDS> 202,259
<COMMON> 323
0
0
<OTHER-SE> 255,697
<TOTAL-LIABILITY-AND-EQUITY> 1,997,644
<SALES> 0
<TOTAL-REVENUES> 31,928<F1>
<CGS> 0
<TOTAL-COSTS> 4,097
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 27,831
<INCOME-TAX> 0
<INCOME-CONTINUING> 27,831
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 27,831
<EPS-PRIMARY> 0.86
<EPS-DILUTED> 0.86
<FN>
<F1>Includes 66,700 of interest expense related to mortgage loan activities.
</FN>
</TABLE>
