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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
FOR FISCAL YEAR ENDED DECEMBER 31, 1995
(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, 1995
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 OF (I.R.S. EMPLOYER
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 ON WHICH
TITLE OF EACH CLASS 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 1, 1996, there were 43,459,851 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 $656,448,896. 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 1996 Annual Meeting---Part III.
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CMW MORTGAGE HOLDINGS, INC.
1995 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I
Page
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ITEM 1. BUSINESS...................................................... 1
ITEM 2. PROPERTIES.................................................... 13
ITEM 3. LEGAL PROCEEDINGS............................................. 13
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........... 13
PART II
ITEM 5. MARKET FOR THE COMPANY'S STOCK
AND RELATED SECURITY HOLDER MATTERS..................... 14
ITEM 6. SELECTED FINANCIAL DATA....................................... 15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS..................... 16
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................... 25
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.......... 25
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............ 26
ITEM 11. EXECUTIVE COMPENSATION........................................ 26
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT................................... 26
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................ 26
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K..................................... 27
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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.) ("Indy Mac"),
which is not consolidated with CWM for financial reporting or tax purposes. All
of the outstanding voting common stock and 1% of the economic interest of Indy
Mac is owned by Countrywide Home Loans, Inc. ("CHL"), 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 Indy Mac is owned by CWM.
The directors and senior officers of Indy Mac are also senior officers of CWM.
In addition, Indy Mac's operations and technology are dependent upon and closely
integrated with CWM's, and CWM is the sole supplier of Indy Mac's purchased
mortgage loans. Accordingly, Indy Mac 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
Indy Mac 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.
The Company conducts mortgage conduit activities through Indy Mac, which is not
a qualified REIT subsidiary of CWM and which is subject to applicable federal
and state income taxes. See "Certain of CWM Federal Income Tax Considerations."
The Company also conducts the following operations: (1) Construction Lending
Corporation of America (CLCA), which offers a variety of consumer construction
loan programs (Consumer Division) and single family construction lending program
for builders and developers (Builder Division), (2) Warehouse Lending
Corporation of America (WLCA), which provides various types of short-term
revolving financing to mortgage originators and servicers, (3) Independent
National Finance Corporation (INFC), a division of Indy Mac, which was formed to
facilitate the purchase, securitization and sale of mortgage loans to borrowers
with prior adverse credit circumstances (i.e., "B through D" paper mortgages),
and (4) Independent National Housing Services (INHS), a division of Indy Mac,
which was formed in 1996 to facilitate the purchase or origination,
securitization and sale of consumer loans and mortgage loans secured by
manufactured housing. In addition, the Company invests in mortgage loans and
securitized master servicing fees for long-term investment and maintains an
investment portfolio of mortgage securities which are held available-for-sale.
Prior to 1993, CWM was primarily a passive investor in single-family, first-
lien, residential mortgage loans and mortgage-backed securities representing
interests in such loans which were financed by collateralized mortgage
obligations (the "CMO Portfolio").
MORTGAGE CONDUIT OPERATIONS
Through Indy Mac, the Company primarily operates as a jumbo and nonconforming
mortgage loan conduit. As a nonconforming mortgage loan conduit, the Company
acts as an intermediary between the originators of mortgage loans that do not
currently meet the guidelines for purchase by the government and government
sponsored entities (GSEs) (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
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committed for sale to Indy Mac at the same price at which the loans were
acquired by CWM. Indy Mac does not currently 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 and second liens
on single (one-to-four) family residential properties that are originated in
accordance with the Company's underwriting guidelines. The Company and its
sellers negotiate whether such sellers will retain, or the Company will
purchase, the rights to service the mortgage loans delivered by such sellers to
the Company. The Company subcontracts the servicing associated with the
servicing rights acquired to CHL or a third party servicer. The Company's
principal sources of income from its mortgage conduit operations are gains
recognized on the sale of mortgage loans, securities 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 or sale and the net interest earned on its mortgage loans held
for investment, investments in mortgage securities, securitized master servicing
fees and master servicing fees receivable. In addition, during 1995, the Company
expanded its conduit operations through INFC, a division of Indy Mac, to include
the purchase and securitization of "B through D" credit quality mortgage loans.
As of December 31, 1995 the Company employed thirteen people in INFC's business
and through December 31, 1995 had purchased $49.4 million of such mortgage
loans.
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 and
adjustable-rate mortgage loans, home loans to foreign nationals, reduced
documentation loans and non-owner occupied loans. 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. In addition, through its construction lending division,
the Company offers combined construction-to-permanent mortgage loans, home
improvement loans, tract construction loans, land loans, model home loans and
builder custom home loans. The Company's warehouse lending division offers
traditional revolving lines of credit to mortgage originators, servicing-secured
and servicing-acquisition lines of credit and foreclosure and repurchase loan
facilities.
In the latter half of 1995, the Company restructured its sales and marketing
staff as well as certain of its operations areas to pursue business on a
servicing-released basis and to market products more effectively to smaller
mortgage bankers and brokers. As a general rule, the Correspondent Division will
serve mortgage originators with GAAP net worths of less than $1,000,000 and the
Conduit Division will serve mortgage originators with GAAP net worths of greater
than $1,000,000. Additionally, within the Conduit Division, a separate sales
team was established to market solely to financial institutions. The sale force
as a whole will continue to cross-sell products for all of the Company's
business lines. The Company believes that these restructuring efforts will
encourage the growth of business from smaller mortgage originators and financial
institutions of all sizes.
The Company has three principal 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, in reliance on the
seller's representations and warranties, 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.
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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.
Under the Company's second underwriting method, sellers submit to the Company
mortgage loans to be underwritten by the Company in accordance with its
guidelines.
The Company's third underwriting method is designed to serve sellers who
generally obtain mortgage pool insurance commitments in connection with the
origination of their loans. Under this 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 the Company's own
follow-up quality control procedures. In 1995, significantly fewer mortgage
loans were purchased pursuant to this program compared to past periods. Under
all three methods, mortgage 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 $207,000. Loans that
exceed such maximum principal balance are referred to as "jumbo loans." The
Company generally purchases jumbo loans with original principal balances of up
to $3 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, DC. The Company's highest concentration of 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 40% of the mortgage loans purchased by
the Company in 1995.
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 64% of
the mortgage loans purchased by the Company in 1995. As interest rates declined
during 1995, the number of adjustable rate mortgage ("ARM") loans purchased by
the Company has decreased from 50% of all mortgage loans purchased in 1994 to
36% of 1995 mortgage loan purchases.
The Company also purchases certain ARM loans which provide the borrowers with
the future option to convert the loans 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 of such loan, no assurance can be given that the servicer
will be able to honor its obligations. Because overall interest rates declined
during 1995, the Company is purchasing fewer of these types of loans.
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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, mortgage
brokers 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. For sellers who also perform
mortgage loan servicing for the Company, the Company generally requires a
minimum level of tangible net worth, approval as a FNMA or FHLMC seller/servicer
in good standing, and/or approval as a U.S. Department of Housing and Urban
Development ("HUD") approved mortgagee in 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 under various circumstances,
including 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. Certain sellers of mortgage loans to the Company have
contracted with the Company 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 is required to perform these servicing functions pursuant to
standards set forth in 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 sell or 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 pursuant to securitizations. 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 or require 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 and whole loan sales, 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
generally limited to those assets and any credit enhancement features, such as
insurance. As a general rule, 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 or sold, the securities or sales are non-recourse
to the Company. Typically, the Company has recourse to the sellers of loans for
any such breaches.
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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 the Company and generally range from $5 million to $1 billion in
aggregate committed principal amount. The Master Commitment also specifies
whether the seller will retain or release to the Company the right to service
delivered mortgage loans.
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) which 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 specific rate-locks related to mortgage loans held for
sale, Indy Mac is subject to the risk of interest rate fluctuations and will
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, 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 management based on various factors, including market
conditions and the expected or contracted 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 Commodity
Exhange Act 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 the Company's 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. By
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contrast, for mortgage loans that have not been underwritten for mortgage pool
insurance and are not part of the Company's 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 Company's delegated underwriting program, the
Company relies on the credit review performed by the seller and the Company's
own follow-up quality control procedures. See discussion of the Company's three
underwriting methods under "---Marketing and Production."
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 depends on the
nature of the seller and the characteristics of the loans. The Company conducts
a full post-purchase underwriting review of approximately 50% of the loans
purchased during the first two months of a seller's participation in the
delegated underwriting program to monitor ongoing compliance with the Company's
guidelines. The percentage of loans fully reviewed is thereafter reduced
bimonthly in 10% increments to approximately 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 approximately 10% of the reviewed
loan sample.
SECURITIZATION PROCESS
General. The Company primarily uses repurchase agreements, bank borrowings,
unsecured debt 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, such loans 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 market
fluctuations in the prices of mortgage-backed securities and variations in 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 weighted average interest rate. However, the
Company's private-label mortgage securities typically trade at a discount (or
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"spread") compared to the corresponding FNMA or FHLMC securities, due to the
implied government guarantees or certain FNMA or FHLMC obligations. 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 effects of a
widening or narrowing in the pricing spread between agency mortgage securities
and the Company's private-label mortgage securities. Therefore, any significant
widening or narrowing of the spread commanded by agency mortgage securities
compared to the Company's private-label mortgage securities could have a
positive or negative effect on the financial performance of the Company,
regardless of the efficiency of the Company's execution of its hedging strategy.
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 effects 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
perceived 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 whole loans in bulk is
influenced by a variety of factors. REMIC transactions are generally accounted
for as sales of the mortgage loans and may eliminate or minimize any long-term
residual investment by the Company in such loans, depending on the extent to
which the Company decides to retain residual or other interests. REMIC
securities typically 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 also retain regular and residual interests on a short-term or long-term
basis. The creation of REMIC securities through Indy Mac 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 redeployment of a portion of the 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
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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 statistical 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 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 bond insurance guarantees,
mortgage pool insurance, special hazard insurance, reserve funds, letters of
credit, surety bonds and subordination, or any combination thereof.
In determining whether to provide credit enhancement through bond 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 securitized master servicing fees and
master servicing fees receivable ("master servicing assets"), or other interest
rate- or prepayment-sensitive securities or investments. The Company has assumed
a certain degree of credit risk in relation to its portfolio of subordinated
securities. See "Credit Risk" below.
Master servicing assets 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 recoup its initial investment in such receivables. Investments in
master servicing assets have values which tend to move inversely to the values
of the retained subordinated and principal-only securities as interest rates
change. For example, as interest rates decline, prepayments tend to increase and
the value of the Company's master servicing assets tend to decrease. By
contrast, in a declining interest rate environment, the Company's portfolio of
subordinated securities and principal-only securities would tend to increase.
The Company seeks to manage the effects of rising and falling interest rates
through investing in financial instruments with contrasting sensitivity to
interest rates; however, there can be no assurance that this strategy will
succeed under any particular interest rate scenario. In addition, during 1995
the Company acquired call options on U.S. Treasury bonds and interest rates
floors that react inversely to changes in interest rates compared to the
Company's master servicing assets, in an effort to further reduce the interest
rate risk associated with such master servicing assets. The Company intends to
hold master servicing assets for investment.
8
<PAGE>
MORTGAGE LOANS HELD FOR INVESTMENT
In an effort to generate continuing earnings that are less dependent upon
quarterly loan purchase volumes than the Company's loan purchase and
securitization activities, the Company seeks to selectively invest in mortgage
loans on a long-term basis. The Company finances the acquisition of such loans
with its capital, borrowings under the repurchase agreements and other credit
facilities referred to under "--Financing Sources" below. The Company has
assumed a certain degree of credit risk in relation to its portfolio of mortgage
loans held for investment. See "Credit Risk" below.
CONSTRUCTION LENDING
The Company's construction lending division, CLCA, was separated into two
operating divisions during 1995. The Builder Division provides tract
construction loans, builder custom home loans, model home loans and land loans
on a nationwide basis to small-to-medium size builders. The Consumer Division
provides construction-to-permanent financing, home improvement loans and lot
financing to individual borrowers who wish to construct or remodel their
principal or secondary residences.
The baseline project for CLCA's Builder 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. In general, the maximum loan size per
project is $15 million. The specific terms of any construction loan, including
the principal amount thereof, are based upon, among other things, the location
of the project, the value of the land and the financial strength, historical
performance and other qualifications of the builder. All construction loans to
builders are subject to the prior approval of a credit committee comprised of
senior officers of CWM.
Combined construction-to-permanent loans, home improvement loans and lot loans
are originated by Indy Mac's sellers to borrowers who wish to construct or
remodel their residences or purchase lots for future construction of residences.
CLCA's Consumer Lending Division assists Indy Mac in the purchase of such loans
and administers the construction draws. Under these programs, all loans are
prior-approved and underwritten to Indy Mac standard guidelines for borrower
qualifications, as well as other detailed criteria. Criteria for the permanent
loans are similar to those applied by Indy Mac to loan purchases generally. In
general the maximum construction-to-permanent loan size is $1 million. The
Company has assumed a certain degree of credit risk in relation to its
construction lending activities. See "Credit Risk" below.
WAREHOUSE LENDING
WLCA engages in warehouse and secured lending operations for small- and medium-
size 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 currently purchased by the Company, at present all of such
loan products purchased by the Company are eligible for financing by WLCA under
the 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.
Under its standard program, 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. Under its Advantage Line and
Captive Line programs, WLCA offers credit facilities to otherwise qualified
mortgage originators with a minimum net worth of $25,000. The specific terms of
any warehouse line of credit, including the maximum principal amount, are
determined based upon
9
<PAGE>
the financial strength, historical performance and other qualifications of the
mortgage originator. All lines of credit under the standard program are subject
to the prior approval of a credit committee comprised of senior officers of CWM.
WLCA finances these programs through a combination of repurchase agreements,
equity and other borrowings. WLCA has two committed two-year repurchase
agreement facilities with two investment banks with sublimits in an aggregate
amount of up to $500 million for certain of its warehouse lending operations.
MANUFACTURED HOUSING
INHS, a division of Indy Mac, was established in December 1995 to provide
financing to consumers who are purchasing or refinancing a new or used
manufactured home. INHS plans to solicit business through established dealer
networks, brokers, "in-park" marketing activities and direct consumer marketing.
CREDIT RISK
The Company has assumed a certain degree of credit risk in its investments in
mortgage loans, subordinated mortgage securities, construction loans and
warehouse lines of credit. The Company evaluates and monitors its exposure to
credit losses and has established a reserve for anticipated credit losses based
upon estimated future losses on the loans, general economic conditions and
trends in portfolio volume.
The Company has experienced an increase in delinquencies associated with its
investments in mortgage loans. This increase can primarily be attributed to the
seasoning, or aging, of the portfolio. As of December 31, 1995, the Company had
accumulated $4.7 million in loan loss reserves associated with the mortgage
loans owned by both CWM and Indy Mac, and net charge-offs from inception to date
total $583,000. In addition, as of December 31, 1995, the Company has not
accrued any income on mortgage loans 90 days or greater past due where full
collectibility is in doubt.
The Company has invested in subordinated securities with ratings ranging from AA
to unrated. As of December 31, 1995 investment grade securities (i.e., rating of
BBB or higher) comprise 69% of the Company's MBS portfolio. In general,
subordinated securities bear all losses prior to the related senior securities.
Indy Mac's subordinated securities portfolio was acquired at a discount of $78.3
million to such securities' face value. This discount primarily reflects
estimates of future expected losses.
With respect to its construction loan portfolio and warehouse lending
operations, the Company has sought to institute significant operational controls
in order to help minimize credit risk. There have been no charge-offs with
respect to construction loans as of December 31, 1995. Since the Company's
current actual experience is not necessarily indicative of future losses, as of
December 31, 1995, $766,000 in loan loss reserves has been allocated to
construction lending activities. The warehouse lending program commenced in May
1993. Since that time there has been one loan write-off amounting to
approximately $45,000 that was not subsequently recovered. Since the Company's
current actual experience is not necessarily indicative of future losses, as of
December 31, 1995, $647,000 in loan loss reserves have been allocated to
warehouse lending activities.
In addition to the creation of reserves, the Company established a risk
management committee during 1995 to further manage the Company's exposure to
credit losses. This committee reviews the products the Company offers, the
authority limits of the Company's customers and personnel and customers'
performance, and implements changes that seek to balance the Company's credit
risk with the Company's production and profitability goals. While management
cannot make any predictions as to the extent to which the Company will incur
credit losses and any related effect on earnings, significant controls are in
place in an effort to reduce exposure in this area.
10
<PAGE>
FINANCING SOURCES
The Company uses proceeds from the sale of REMIC securities and CMOs, repurchase
agreements, other borrowings and issuance of common stock to meet its working
capital needs. 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 Internal Revenue Code and
intends to continue to do so. Indy Mac is not a qualified REIT subsidiary and
is not consolidated with CWM for either tax or financial reporting purposes.
Consequently, Indy Mac is subject to applicable federal and state income taxes.
CWM will include in taxable income amounts earned by Indy Mac only when Indy Mac
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 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
11
<PAGE>
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 the
Company's business and manages the Company's day-to-day operations. Subject to
the supervision of CWM's Board of Directors, CAMC conducts the Company's day-to-
day mortgage conduit, warehouse lending and construction lending operations. The
management agreement may be terminated by the CWM 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 16, 1996. CHL has
guaranteed the performance of the duties and obligations of CAMC under the
management agreement. CAMC has subcontracted with CHL to provide certain
management services to the Company. Such subcontract may be terminated by either
party upon 60 days' prior notice.
RELATIONSHIPS WITH COUNTRYWIDE ENTITIES
CWM and CCI are each 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 CHL in
conducting the Company's mortgage conduit, construction lending and warehouse
lending operations. CAMC and CHL are both wholly owned subsidiaries of CCI. CCI
directly or indirectly owns approximately 2.6% of the Common Stock of CWM. In
addition, a number of directors and officers of CWM and Indy Mac also serve as
Directors and/or officers of CCI, CAMC and/or CHL. See "Item 13, Certain
Relationships and Related Transactions." CHL owns all of the outstanding voting
common stock and a 1% economic interest in Indy Mac, and CWM owns all of the
outstanding non-voting preferred stock and a 99% economic interest in Indy Mac.
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 was interest income
generated from investments in such mortgage loans and mortgage-backed
securities, net of the interest expense on the CMOs or repurchase agreements
used to finance such mortgage investments.
During 1993 and continuing in the beginning of 1994, long-term interest rates,
including mortgage rates, fell to their lowest levels in nearly 20 years. 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. As interest rates rose
during 1994, principal prepayments on the underlying mortgage loans declined and
the Company experienced stabilization of its CMO Portfolio, resulting in a
decrease in the net interest expense on the CMO Portfolio in 1995 compared to
1994 and 1993. Regardless of the level of interest rates or prepayments, CWM
anticipates no significant earnings from this CMO Portfolio, and CWM could incur
additional
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<PAGE>
losses. 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.
COMPETITION
In its conduit operations, the Company competes with established mortgage
conduit programs, investment banking firms, banks, savings and loan
associations, GSEs, mortgage bankers and other lenders and 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.
The GSEs have made and will continue to make significant technological and
economic advances to broaden their customer bases. There has been much debate
and discussion in Congress and in the news media as to the proper role of these
agencies. If the GSEs contract or expand, there may a positive or negative
impact on the Company's conduit operations. The Company seeks to address these
competitive pressures by making a strong effort to maximize its use of
technology by diversifying into other lines of business that are less impacted
by GSEs and by operating in a more cost-effective manner compared to its
competitors, but there can be no assurance that these efforts will succeed.
FNMA and FHLMC are not permitted to purchase mortgage loans with original
principal balances above $207,000 (effective January 1, 1996). 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 loan acquisition
levels could be adversely affected.
WLCA and CLCA face competition from banks and other financial institutions. Many
of these institutions have significantly greater financial resources and a lower
cost of funds than the Company. The Company seeks to compete with these
institutions through an emphasis on quality of service and diversified products.
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, 1995,
CAMC had 245 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 39,000 square feet. The principal lease covering such
space expires in the year 2001. In addition INFC and INHS utilize space located
at 570 Rancheros Drive, Suite 200, San Marcos, California. This space consists
of approximately 3,800 square feet. The lease associated with this space
expires in 1997.
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 was initially 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, 1995 and
1994 and cash dividends declared for earnings of the periods as indicated:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1995 1994 Dividends Declared
----------------- ----------------- -------------------
High Low High Low 1995 1994
------- ------- ------- -------- ---- -----
<S> <C> <C> <C> <C> <C> <C>
First Quarter $10 5/8 $ 9 7/8 $11 3/4 $9 1/2 $.27 $.16
Second Quarter 12 7/8 11 1/2 10 3/4 7 .30 .18
Third Quarter 14 13 1/8 9 1/8 7 1/8 .33 .26
Fourth Quarter 17 1/8 15 9 3/8 7 5/8 .35 .27
</TABLE>
- --------------------------------------------------------------------------------
As of March 1, 1996, CWM's Common Stock was held by 2,473 shareholders of
record.
CWM declared quarterly cash dividends for earnings aggregating $1.25 for the
year ending December 31, 1995 and $.87 for the year ending December 31, 1994. On
January 18, 1996, CWM declared a cash dividend for the fourth quarter of 1995 of
$.35 per share, payable March 1, 1996, to shareholders of record on January 29,
1996.
CWM maintains a dividend reinvestment plan for shareholders who wish to reinvest
their cash dividends in additional shares of Common Stock. Shareholders may
also purchase additional shares of the Corporation's Common Stock through an
optional cash investment feature.
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<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
(Dollar amounts in thousands, except per share data)
<TABLE>
<CAPTION>
December 31,
1995 1994 1993 1992 1991
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SELECTED CONSOLIDATED
STATEMENTS OF EARNINGS DATA
FOR THE YEAR ENDED
Interest income $ 180,465 $ 92,119 $ 65,504 $ 106,070 $ 148,634
Interest expense 131,910 66,700 65,312 107,511 135,395
----------------------------------------------------------------------
Net interest income (expense) 48,555 25,419 192 (1,441) 13,239
Provision for loan losses 4,037 500 - - -
Equity in earnings of Indy Mac 13,801 5,624 2,523 - -
Gain on sale of mortgage loans and securities - - 917 9,031 735
Other income 1,427 885 797 - -
Expenses:
Salaries, general and administrative 4,213 2,402 1,549 1,606 1,485
Management fees to affiliate 5,522 1,195 400 997 1,622
----------- ----------- ----------- ----------- -----------
Net earnings $ 50,011 $ 27,831 $ 2,480 $ 4,987 $ 10,867
=========== =========== =========== =========== ===========
Earnings per share $1.25 $0.86 $0.13 $0.36 $0.78
======================================================================
Dividends paid per share $1.17 $0.72 $0.48 $0.53 $0.79
Weighted average shares outstanding 39,902,680 32,183,850 18,578,307 13,978,683 13,924,326
SELECTED CONSOLIDATED
BALANCE SHEET DATA
AT YEAR-END
Mortgage loans held for investment, net $ 1,424,583 $ 899,672 $ - $ - $ -
Mortgage loans held for sale 409,584 608,240 794,132 - -
Collateral for CMOs 184,111 233,690 402,503 620,411 1,118,321
Construction loans, net 129,323 6,370 - - -
Securitized master servicing fees 120,281 120,954 - - -
Revolving warehouse lines of credit, net 190,705 69,591 92,058 - -
Total assets 2,643,613 1,997,644 1,396,738 714,225 1,852,057
Short-term borrowings 2,037,834 1,534,189 770,334 21,944 688,860
Collateralized mortgage obligations 164,760 202,259 365,886 571,857 1,040,495
Senior unsecured notes 59,649 - - - -
Shareholders' equity 362,984 256,020 250,608 119,995 122,403
Number of shares outstanding 42,413,842 32,281,156 32,020,484 13,980,387 13,976,375
Book value per share $8.56 $7.93 $7.83 $8.58 $8.76
SELECTED OTHER DATA
Mortgage loans acquired $ 4,186,392 $ 5,985,466 $ 3,420,263 $ - $ -
Indy Mac master servicing portfolio 9,419,000 6,818,000 1,977,000 - -
</TABLE>
15
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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" mean the parent company, its consolidated subsidiaries and
Independent National Mortgage Corporation ("Indy Mac"), which is not
consolidated with CWM for financial reporting or tax purposes.
In its mortgage loan conduit business, the Company acts as an intermediary
between the originators of mortgage loans and permanent investors in mortgage-
backed securities ("MBS") secured by or representing an ownership interest in
such mortgage loans. The Company purchases "jumbo" and other "nonconforming"
mortgage loans from mortgage originators who generally retain the servicing
rights. 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 Indy Mac at the same price at which the loans were acquired by CWM.
At present, Indy Mac 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 the Company's investment portfolio and mortgage securities,
and master servicing fee income. In addition, the Company earns fee income and
net interest income through its construction and warehouse lending programs. The
construction lending operation consists of two distinct divisions: (i) the
Builder Division, which provides tract construction loans, builder custom home
loans, model home loans and lot financing on a nationwide basis to small-to-
medium size builders, and (ii) the Consumer Division, which provides
construction-to-permanent financing, home improvement loans and lot financing to
individual borrowers who wish to construct or remodel their principal or
secondary residences. The warehouse lending operation provides financing 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 the first quarter of 1995, the Company introduced a new division, Independent
National Finance Corporation ("INFC"), to purchase, securitize and sell mortgage
loans to borrowers with prior adverse credit circumstances (i.e., "B through D"
paper mortgages). The Company earns fee income and net interest income from
this program and will recognize gains or losses from the sale of such loans once
adequately sized pools of loans have been purchased for securitization.
Prior to 1993, the Company's principal source of earnings had been net interest
income generated from its mortgage portfolio which was primarily financed
through the issuance of CMOs (the "CMO Portfolio"). The amount of net interest
earned on the CMO Portfolio is directly affected by the rate of principal
repayment (including prepayments) of the related mortgage loans. When
prevailing mortgage interest rates are low relative to interest rates of
existing mortgage loans, prepayments on the underlying mortgage loans generally
tend to increase as mortgagors refinance their existing loans. The cash flow
generated by these prepayments is used to repay the CMOs which are
collateralized by these mortgage loans. However, the remaining mortgage loans
typically carry a lower coupon, and the interest spread between these loans and
the underlying financing thus narrows. The CMO Portfolio
16
<PAGE>
experienced accelerated prepayments during 1993 through the beginning of 1994,
and since mortgage loan premiums, original issue discount and bond issuance
costs were required to be amortized, losses were realized on the CMO Portfolio
during those periods. As mortgage rates rose during 1994, principal prepayments
on the underlying mortgage loans declined and the Company experienced
stabilization of the CMO Portfolio, resulting in a decrease in the net interest
expense on the CMO Portfolio in 1995 compared to 1994.
FINANCIAL CONDITION
CONDUIT OPERATIONS: During 1995, CWM purchased $4.2 billion of non-conforming
mortgage loans, including $49.4 million of "B through D" paper mortgage loans
through INFC. These loans were financed on an interim basis using equity and
short-term financing in the form of repurchase agreements and other borrowings.
In general, the Company, through Indy Mac, sells the loans in the form of REMIC
securities or whole loan sales or, alternatively, through CWM invests in the
loans on a long-term basis using financing provided by CMOs or repurchase
agreements and other credit facilities. During 1995, Indy Mac sold $3.7 billion
of mortgage loans through the issuance of 22 series of multiple-class MBS in the
form of REMIC securities and sold $17 million of non-conforming mortgage loans
as whole loans. At December 31, 1995, the Company was committed to purchase
$436.2 million of mortgage loans from various mortgage originators. The Indy Mac
master servicing portfolio at year-end had an aggregate outstanding principal
balance of $9.4 billion with a weighted average coupon of 8.35%.
MORTGAGE LOANS HELD FOR INVESTMENT: The $1.4 billion portfolio of mortgage
loans held for investment at December 31, 1995 consisted of $888.4 million of
varying types of adjustable-rate products which contractually reprice in
monthly, semi-annual or annual periods; $369.4 million of mortgage loans which
have a fixed rate for a period of three, five, seven or ten years and
subsequently convert to adjustable-rate mortgage loans that reprice annually and
$171.8 million of fixed-rate mortgage loans. The weighted average coupon of the
mortgage loans held for investment at December 31, 1995 was 8.82%. The Company
finances mortgage loans held for investment with repurchase agreements and other
credit facilities which have maturities ranging from overnight to 17 months as
of December 31, 1995. The Company also utilizes interest rate swap agreements
to manage the interest rate exposure on its portfolio of mortgage loans held for
investment. In addition, in December 1995, the Company traded a CMO for
settlement in January 1996, to finance $154.7 million of mortgage loans in the
portfolio whose rate begins to adjust after a fixed term of ten years. The
allowance for losses related to mortgage loans held for investment totaled $2.9
million at year end.
CONSTRUCTION LENDING OPERATIONS: At December 31, 1995, the Builder Division
had loans outstanding totaling $86.0 million with $144.7 million of remaining
commitments to fund tract and custom home loans. The Consumer Division had
loans outstanding at December 31, 1995 totaling $44.1 million with remaining
commitments to fund construction-to-permanent and home improvement loans of
$26.9 million. The allowance for losses related to construction loans totaled
$766,000 at December 31, 1995. The Company had outstanding borrowings under a
revolving credit facility totaling $50.2 million at December 31, 1995 associated
with the financing of construction loans.
WAREHOUSE LENDING OPERATIONS: At December 31, 1995, CWM had extended committed
warehouse and related lines of credit in an aggregate amount of $342.9 million,
of which $191.4 million was outstanding. The allowance for loan losses related
to warehouse lines of credit totaled $647,000 at December 31, 1995. Repurchase
agreements associated with CWM's financing of these lines of credit totaled
$155.8 million at December 31, 1995.
17
<PAGE>
RESULTS OF OPERATIONS 1995 COMPARED TO 1994
NET EARNINGS: CWM's net earnings were $50.0 million, or $1.25 per share, based
on 39,902,680 weighted average shares outstanding for 1995, compared to $27.8
million, or $0.86 per share, based on 32,183,850 weighted average shares
outstanding for 1994. The increase in net earnings of $22.2 million was
primarily due to an increase in earnings of $17.0 million associated with CWM's
mortgage conduit activities, including its equity in earnings of Indy Mac and
the Company's warehouse and construction lending operations, combined with a
decrease in the loss associated with the CMO Portfolio of $5.2 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
Indy Mac of $17.9 million and $8.2 million, respectively, combined with an
increase in other net revenues of $542,000, offset by increases in the provision
for loan losses and expenses of $3.5 million and $6.2 million, respectively.
The decrease in the net loss on the CMO Portfolio is primarily due to a decrease
in net interest expense of $5.2 million.
INTEREST INCOME: Total interest income was $180.5 million for 1995 and $92.1
million for 1994. The increase of $88.4 million in interest income was
primarily the result of an increase of $77.5 million in interest on mortgage
loans held for investment, with additional increases in interest earned on
construction loans, warehouse lines of credit and advances to Indy Mac of $6.5
million, $5.7 million and $2.2 million, respectively. These increases were
offset by a reduction in the interest income on collateral for CMOs of $4.4
million.
Interest income earned on mortgage loans held for investment totaled $97.7
million during 1995 compared to $20.2 million during 1994. The substantial
increase from 1994 is the result of an increase in the average amount of loans
held for investment during the year combined with an increase in the average
yield. The average principal balance of loans held for investment was $1.2
billion during 1995 with interest earned at an effective yield of 8.08%,
compared to the average principal balance of loans held for investment during
1994 of $272.8 million with interest earned at an effective rate of 7.39%.
Interest income earned on mortgage loans held for sale totaled $34.7 million
and $34.2 million, resulting in an effective yield of 9.22% and 7.27%,
respectively, for the years ended December 31, 1995 and 1994.
Interest income on construction loans totaled $6.5 million and $93,000 during
1995 and 1994, respectively. The average principal balance of construction
loans outstanding totaled $49.5 million during 1995, representing an increase of
$48.6 million from the average principal balance of $825,000 during 1994.
Interest was earned at an effective yield of 13.24% and 11.22% in 1995 and 1994,
respectively.
Interest income on revolving warehouse and related lines of credit totaled $10.0
million and $4.4 million with interest earned at an effective yield of 9.50% and
7.53% for the years ended December 31, 1995 and 1994, respectively.
Interest income on collateral for CMOs was $17.3 million and $21.7 million for
the years ended December 31, 1995 and 1994, respectively. The decline was
attributable to a decrease in the average aggregate principal amount of
collateral for CMOs outstanding,
18
<PAGE>
from $290.2 million for 1994 to $213.3 million for 1995, offset by an increase
in the effective yield earned on the collateral from 7.47% in 1994 to 8.09% in
1995. Interest income on collateral for CMOs includes the impact of amortization
of premiums paid in connection with acquiring the CMO Portfolio and the impact
of the delay in the receipt of prepayments and temporary investment in lower
yielding short-term holdings (GICs) until such amounts are used to repay CMOs.
Accordingly, during periods of higher interest rates and reduced prepayments, as
in 1995 compared to 1994, amortization of premium declines and the amount of the
non-earning assets associated with the delay in the receipt of prepayments,
combined with the lower yielding GICs, are reduced relative to the portfolio,
resulting in a higher effective yield.
SECURITIZED MASTER SERVICING FEES, NET:
Investments in securitized master servicing fees have characteristics comparable
to "excess servicing" insofar as their value tends to decline as market interest
rates decline and prepayment rates increase. Accordingly, 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 securitized
master servicing fees asset so that the remaining asset does not exceed the
present value of future net master servicing income. Gross master servicing
income for CWM was $27.2 million and $14.7 for the years ended December 31,
1995 and 1994, respectively. This gross income was offset by amortization of
the securitized master servicing fees of $19.8 million, including $2.7 million
of unscheduled amortization, and $7.5 million, including $411,000 of unscheduled
amortization, for the years ended December 31, 1995 and 1994, respectively. In
September 1994, the Company began securitizing master servicing fees receivable
to facilitate the financing of this asset. As of December 31, 1995, securitized
master servicing fees of $120.3 million were pledged to secure borrowings
totaling $61.8 million.
INTEREST EXPENSE: For 1995 and 1994, total interest expense was $131.9 million
and $66.7 million, respectively. The increase of $65.2 million in interest
expense is the result of an increase in the interest expense on repurchase
agreements and other credit facilities and senior unsecured notes of $73.8
million and $999,000, respectively, offset by a reduction in the interest
expense on CMOs of $9.6 million.
Interest expense on repurchase agreements and other credit facilities used to
finance mortgage loans held for sale, mortgage loans held for investment, master
servicing fees receivable, construction loans and revolving warehouse lines of
credit totaled $113.4 million during 1995 compared to $39.6 million during 1994.
The increase in interest expense was primarily the result of an increase in the
aggregate average balance of indebtedness outstanding for the year from $754.4
million in 1994 to $1.7 billion in 1995, combined with an increase in the
weighted average effective interest rate from 5.25% in 1994 to 6.74% in 1995.
During 1995, CWM issued senior unsecured notes with a face amount of $60.5
million, bearing interest at rates ranging from 8.86% to 8.91%. CWM recognized
interest expense totaling $999,000 related to the senior unsecured notes during
1995. The effective cost of the notes, including costs of issuance, was 9.22%.
Interest expense on CMOs was $17.5 million and $27.1 million for 1995 and 1994,
respectively. This decrease was primarily attributable to a decrease in average
aggregate CMOs outstanding to $185.1 million for 1995 from $263.8 million for
1994, combined with
19
<PAGE>
a decrease in the weighted average cost of CMOs to 9.47% in 1995 from 10.28% in
1994. The decrease in the average balance of CMOs was directly related to the
prepayment activity on collateral for CMOs as discussed above. The prepayments
are ultimately used to repay the related CMOs. As interest rates increase and
prepayments decline on the underlying collateral, the amortization of original
issue discount and bond issue costs also decreases, resulting in a lower
effective rate of interest expense on the portfolio.
EQUITY IN EARNINGS OF INDY MAC: CWM owns 100% of the preferred stock and has a
99% economic interest in Indy Mac. During 1995, earnings of Indy Mac resulted
principally from net interest income of $18.1 million, gains on sales of
mortgage loans and issuance of securities of $22.7 million and gains on sales of
mortgage securities available for sale of $8.2 million, offset by a provision
for loan losses of $2.2 million, expenses of $20.7 million, management fee
expense of $1.8 million and income taxes of $10.4 million. During 1994,
earnings of Indy Mac resulted principally from net interest income of $6.4
million, gains on sales of mortgage loans and issuance of securities of $9.4
million, gains on sales of mortgage securities available for sale of $205,000
and gains on the sale of servicing of $7.3 million, offset by expenses of $13.5
million, management fee expense of $334,000 and income taxes of $3.8 million.
Indy Mac master serviced loans with principal balances aggregating $9.4 billion
at December 31, 1995, compared to $6.8 billion at December 31, 1994. The growth
in the master servicing portfolio during 1994 and 1995 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, 1995 and 1994
was 8.35% and 7.38%, respectively. The mix of fixed- rate product and
adjustable-rate product was 74% and 26%, respectively, at December 31, 1995.
Net income related to the securitized master servicing fees and master servicing
fees receivable totaled $9.2 million in 1995, including gross income of $23.1
million, offset by amortization of the related asset balances of $13.9 million.
Net master servicing income in 1994 totaled $1.1 million, including gross income
of $7.6 million, offset by amortization of the asset balances totaling $6.5
million.
As previously discussed, investments in securitized master servicing fees and
master servicing fees receivable ("master servicing assets") have
characteristics comparable to "excess servicing" insofar as their value tends to
decline as prepayment rates increase. During 1994, there was no write-down of
the master servicing assets. During 1995, Indy Mac experienced an increase in
prepayment rates as interest rates declined in the latter part of the year. As a
result, Indy Mac recorded write-downs on the master servicing assets totaling
$835,000 during 1995.
The portfolio of mortgage securities available for sale held by Indy Mac
includes subordinated securities and principal-only and inverse-floater
securities with market values which tend to perform inversely to the master
servicing assets. Indy Mac's investments in subordinated securities are
comprised of $271.8 million of securities issued by Indy Mac with ratings
ranging from AA to non-rated. At December 31, 1995, 70% of these securities were
investment grade (i.e., rated "BBB" or better). The pre-tax unrealized gain
associated with the mortgage securities available for sale totaled $13.7 million
at December 31, 1995.
In an effort to further reduce the Company's sensitivity to interest rates with
respect to the master servicing assets, the Company acquires other financial
instruments, including
20
<PAGE>
derivative contracts such as call options on U.S. Treasury bonds and interest
rate floors, that react inversely to changes in interest rates in relation to
the master servicing fees receivable assets.
SALARIES, GENERAL AND ADMINISTRATIVE EXPENSES: The increase from $2.4 million
for the year ended December 31, 1994 to $4.2 million for the year ended December
31, 1995 is primarily the result of additional staffing and increased operating
costs related to the construction lending and warehouse lending operations as
the Company has developed and expanded these business lines.
MANAGEMENT FEES: For 1995, management fees were $5.5 million compared to $1.2
million for 1994. The increase was primarily due to incentive compensation of
$3.8 million payable to Countrywide Asset Management Corporation (the "Manager")
in 1995, directly related to the increase in CWM's earnings during 1995. During
1994, the Manager waived 25% of this fee. The waived fees were reflected as an
expense and a corresponding capital contribution in the accompanying financial
statements.
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 Indy Mac, 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
Indy Mac of $17.4 million and $3.1 million, respectively, offset by an increase
in expenses and a provision for loan losses of $1.6 million and $500,000,
respectively.
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 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 with interest earned at an effective yield of 7.27% and
7.53%, respectively. 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 with interest earned at an effective yield of 7.26% and
6.54%, respectively for 1993.
Interest income earned on mortgage loans held for investment was $20.2 million
during 1994 with interest earned at an effective yield of 7.39%. The Company
began investing in mortgage loans for the purpose of forming an investment
portfolio 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
21
<PAGE>
$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.
SECURITIZED MASTER SERVICING FEES, NET: As of December 31, 1994, CWM had
securitized master servicing fees 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 securitized master servicing
fees of $7.5 million for the year ended December 31, 1994, including $411,000 of
unscheduled amortization due to a decline in applicable interest rates.
As of December 31, 1994, securitized master servicing fees totaling $116.2
million were pledged as collateral for borrowings totaling $68.4 million under
repurchase agreements. These 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 repurchase agreements
financing mortgage loans held for sale, mortgage loans held for investment,
securitized master servicing fees and revolving warehouse lines of credit was
$39.6 million during 1994 compared to $10.4 million during 1993. 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.
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 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 INDY MAC: During 1994, earnings of Indy Mac resulted
principally from net interest income of $6.4 million, including net master
servicing income of $1.1 million, gains on sales of mortgage loans of $9.5
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 Indy Mac resulted
principally from net interest expense of $1.4 million, including net master
servicing expenses 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.
At December 31, 1994, Indy Mac 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.
During 1993, Indy Mac experienced significant prepayment activity due to the
then-prevailing low interest rate environment, requiring a write-down of master
servicing fees
22
<PAGE>
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, Indy Mac purchased call options on FNMA mortgage-backed
securities which increase in value when interest rates decline. As of December
31, 1993, Indy Mac 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
$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 Indy Mac 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 the manager under the terms of the Company's Management
Agreement. Indy Mac began paying all expenses of its new operations in June
1993. Indy Mac'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
Indy Mac. General and administrative expenses incurred by Indy Mac 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.
LIQUIDITY AND CAPITAL RESOURCES
The Company uses proceeds from the issuance of CMOs, repurchase agreements,
other borrowings and common stock to meet its working capital needs. In
addition, in connection with its mortgage conduit operations, Indy Mac issues
REMIC securities to help meet such needs.
CWM has established a repurchase facility with a leading investment bank,
committed through April 1997 and renewable thereafter, in an aggregate amount up
to $500 million for its mortgage conduit, warehouse lending and consumer
construction lending operations. CWM has also obtained credit approval from the
same lender to enter into additional 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. Additionally, CWM has a master repurchase facility
with the same lender in an aggregate amount of $225 million to provide financing
for securitized master servicing fees and certain mortgage-related securities
which have been retained or purchased by CWM or Indy Mac. CWM has two additional
two-year committed and renewable repurchase facilities with different investment
banks, in an aggregate amount of $300 million and $500 million, for the
Company's mortgage conduit, warehouse lending and consumer construction lending
operations.
23
<PAGE>
In May 1995, the Company entered into a two-year committed credit facility in
the aggregate amount of $100 million with First Union National Bank of North
Carolina ("First Union"). During the third quarter of 1995, the Company and
First Union completed the syndication of this credit facility with seven
additional lenders, resulting in an increase in the aggregate credit to $300
million and an extension of the relevant maturity date. This facility finances
mortgage loans, builder construction loans, master servicing and servicing
secured, servicing-receivable and foreclosure/repurchase lines of credit.
During the fourth quarter of 1995, the Company raised $59.6 million associated
with the private placement of senior unsecured notes with certain institutional
lenders.
During the first quarter of 1995, the Company completed a public offering in
which 8.05 million shares of the Company's common stock were issued at an
offering price of $9.125 per share, with net proceeds totaling $68.7 million. In
August of 1995, the Company's registration statement relating to the Company's
amended and restated Dividend Reinvestment Stock Purchase Plan (the Dividend
Reinvestment Plan) was declared effective. Primarily through the optional cash
investment feature of the Dividend Reinvestment Plan, the Company raised $24.9
million of new capital during the latter part of 1995.
The REIT provisions of the Internal Revenue Code restrict CWM's ability to
retain earnings and thereby replenish the capital committed to its mortgage
portfolio by requiring CWM to distribute to its shareholders substantially all
of its taxable income from operations.
Management believes that the cash flow from operations and the current and
potential financing arrangements are sufficient to meet current liquidity
requirements. The Company's ability to meet future liquidity requirements is
subject to the renewal of credit facilities and/or obtaining other sources of
financing, including raising additional debt or equity from time to time.
EFFECT OF INTEREST RATE CHANGES
The Company's earnings may be affected by changes in interest rates in a variety
of ways. For example, higher interest rates may depress the market value to an
extent of the Company's investment portfolio if the yield on such holdings does
not keep pace with increases in interest rates. As a result of decreased market
values it could be necessary for the Company to borrow additional funds and
pledge additional assets to maintain financing for its holdings 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 holdings
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 to an extent mitigate this
adverse effect. In addition, high levels of interest rates tend to decrease the
rate at which mortgages prepay. A decrease in the rate of prepayments may
lengthen the estimated average lives of the underlying mortgages supporting
securitized master servicing fees and master servicing fees receivable and for
classes of the CMOs issued by the Company and may result in higher residual cash
flows from such assets than would otherwise have been obtained. However, higher
rates of interest may also discourage potential mortgagors from borrowing or
refinancing mortgage loans, thus decreasing the volume of loans available to be
purchased through the Company's mortgage conduit operations or financed through
the Company's construction and warehouse lending operations.
Conversely, lower interest rates tend to increase the rate at which mortgages
prepay, which may have an adverse effect on the value of the Company's
securitized master servicing fees
24
<PAGE>
and master servicing fees receivable. However, lower interest rates also tend to
improve the Company's mortgage origination and production volumes and increase
the market value, to an extent, of the Company's mortgage loan and mortgage
securities investment portfolio.
ITEM 8. FINANCIAL STATMENTS AND SUPPLEMENTARY DATA
- ---------------------------------------------------
The information called for by this item 8 is already incorporated by reference
to CWM's Consolidated Financial Statements and Report of Independent Certified
Public Accountants beginning at page F-! of this form 10-K.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
- -------------------------------------------------------------
None.
25
<PAGE>
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.
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.
26
<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
<TABLE>
<CAPTION>
Exhibit
No. Description
- ------- ------------
<S> <C>
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 June 30, 1995).
3.2* Bylaws of CWM, as amended (incorporated by reference to Exhibit 3.2 to
the Company's Form 10-Q, for the quarter ended June 30, 1995).
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 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).
4.4* 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).
4.5* 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).
4.6* 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).
4.7* Series M Supplement, dated as of January 1, 1987, to the Indenture
(incorporated by reference to Exhibit 4.3 to CMO, Inc.'s Form 8-K
filed with the SEC on March 16, 1987).
4.8* 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).
4.9* 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).
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description
- ------- ------------
<S> <C>
4.10* 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) .
4.11* 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) .
4.12* 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).
4.13* 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).
4.14* Indenture dated as of November 20, 1990, between the Countrywide Cash
Flow Bond Trust ("CCFBT") and BTC (incorporated by reference to
Exhibit 4.22 to the Company's Form 10-K for the year ended December
31, 1990).
4.15* 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).
4.16* 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).
4.17* First Supplemental Indenture dated as of May 24, 1993 between the
1993-II Trust and the Bond Trustee. (incorporated by reference to
Exhibit 4.25 to the Company's Form 10-K for the year ended
December 31, 1994).
4.18* 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* 1995 Amended and Extended Management Agreement, dated as of May 15,
1995, 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, 1995).
10.2* 1987 Amended and Restated Servicing Agreement, dated as of May 15,
1987, between CMI and Countrywide Home Loans, Inc. ("CHL")
(incorporated by reference to Exhibit 10.2 to the Company's Form 10-Q
filed for the quarter ended June 30, 1987).
10.3* 1995 Amended and Extended Loan Purchase and Administrative Services
Agreement, dated as of May 15, 1995, between CWM and CHL (incorporated
by reference to Exhibit 10.3 to the Company's Form 10-Q for the
quarter ended June 30, 1995).
10.4* 1988 Amended and Restated Submanagement Agreement, dated as of May 15,
1988, between CHL and the Manager (incorporated by reference to
Exhibit 10.4 to CMI's Form 10-Q for the quarter ended March 31, 1988).
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description
- ------- ------------
<S> <C>
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).
10.8* Servicing Agreement, dated as of November 15, 1986, among CMO, Inc.,
SPNB and CHL (incorporated by reference to Exhibit 10.1 to CMO, Inc.'s
Form 8-K filed with the SEC on January 9, 1987).
10.9* 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).
10.10* 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).
10.11* Servicing Agreement, dated as of February 1, 1987, among the 1987-I
Trust, SPNB and CHL (incorporated by reference to Exhibit 10.18 to
CMI's Form 10-K filed for the year ended December 31, 1985).
10.12* 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).
10.13* Agreement among CMO II, Inc., the Manager and CHL, 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).
10.14* 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).
10.15* 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).
10.16* 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) .
10.17* 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).
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description
- ------- ------------
<S> <C>
10.18* Servicing Agreement, dated as of June 1, 1987, among the 1987-II
Trust, SPNB and CHL (incorporated by reference to Exhibit 10.11 to
CMI's Form 10-Q for the quarter ended June 30, 1987).
10.19* 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).
10.20* 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).
10.21* 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).
10.22* 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).
10.23* 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).
10.24* 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).
10.25* 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).
10.26* 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).
10.27* 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).
10.28* Deposit Trust Agreement dated as of March 24, 1993 between CMO 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).
10.29* 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).
10.30* Servicing Agreement dated as of March 30, 1993 by and among the 1993-I
Trust, CHL and the Bond Trustee (incorporated by reference to Exhibit
10.3 to CMI's 10-Q for the quarter ended March 31, 1993).
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description
- ------- ------------
<S> <C>
10.31* Management Agreement, dated as of March 30, 1993 between the Manager
and the 1993-I Trust (incorporated by reference to Exhibit 10.4 to
CMI's 10-Q for the quarter ended March 31, 1993).
10.32* First Amendment dated as of March 30, 1993 to Agreement between CMO
II, Inc. and CMI (incorporated by reference to Exhibit 10.5 to CMI's
10-Q for the quarter ended March 31, 1993).
10.33* First Amendment dated as of March 30, 1993 to Agreement between CMO
II, Inc., the Manager and CHL (incorporated by reference to Exhibit
10.6 to CMI's 10-Q for the quarter ended March 31, 1993).
10.34* Deposit Trust Agreement dated as of April 7, 1993 between CMO 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).
10.35* 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).
10.36* Servicing Agreement dated as of April 14, 1993 by and among the 1993-
II Trust, CHL and the Bond Trustee (incorporated by reference to
Exhibit 10.9 to CMI's 10-Q for the quarter ended March 31, 1993).
10.37* Management Agreement, dated as of April 14, 1993 between the Manager
and the 1993-II Trust (incorporated by reference to Exhibit 10.10 to
CMI's 10-Q for the quarter ended March 31, 1993).
10.38* First Amendment to Deposit Trust Agreement dated as of April 13, 1993
between CMO 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).
10.39* Contribution and Mortgage Loan Acquisition Agreement dated as of April
19, 1993 between CMI and CHL (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).
10.40* First Amendment to Deposit Trust Agreement dated as of April 16, 1993
between CMO 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).
10.41* Compensation Plan for Kellie Johnson (incorporated by reference to
Exhibit 10.60 to CWM's form 10K for the year ended December 31, 1994).
10.42* Facility I Credit Agreement dated May 30, 1995 by and among CWM,
** Independent National Mortgage Corporation ("Indy Mac"), ILC and First
Union National Bank of North Carolina ("First Union") (incorporated by
reference to Exhibit 10.4 to CWM's Form 10-Q for the quarter ended
June 30, 1995).
10.43* Facility II Credit Agreement dated May 30, 1995 by and among CWM, Indy
** Mac, ILC and First Union (incoporated by reference to Exhibit 10.5 to
CWM's Form 10-Q for the quarter ended June 30, 1995).
</TABLE>
31
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description
- ------- ------------
<S> <C>
10.44* Security and Collateral Agency Agreement dated May 30, 1995 by and
among CWM, Indy Mac, ILC, First Union and Banker's Trust Company of
California, N.A. ("BT") (incorporated by reference to Exhibit 10.6 to
CWM's Form 10-Q for the quarter ended June 30, 1995).
10.45** First Amendment to Facility I Credit Agreement dated September 25,
1995 by and among CWM, Indy Mac, ILC, First Union and the Lenders
party thereto.
10.46** First Amendment to Facility II Credit Agreement dated September 25,
1995 by and among CWM, Indy Mac, ILC, First Union and the Lenders from
time to time party thereto.
10.47 First Amendment to Security and Collateral Agency Agreement dated
September 25, 1995 by and among CWM, Indy Mac, ILC, First Union and
BT.
10.48 1995 Compensation Plan for Michael Perry.
21.1 List of Subsidiaries.
23.1 Consent of Grant Thornton LLP
27 Financial Data Schedule
99.1 Directors and Principal Executive Officers of Countrywide Asset
Management Corporation (the Company's Manager)
</TABLE>
* Incorporated by reference.
** Certain confidential portions of this Exhibit have been deleted and have
been filed separately with the Securities and Exchange Commission in
connection with a request for confidential treatment filed pursuant to Rule
24b-2 under the Securities Exchange Act of 1934, as amended.
(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 29, 1996.
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 Board March 29, 1996
- ----------------------------- of Directors and Chief Executive
David S. Loeb Officer
/s/ ANGELO R. MOZILO Director, Vice Chairman of the March 29, 1996
- ----------------------------- Board of Directors and President
Angelo R. Mozilo
/s/ MICHAEL W. PERRY Executive Vice President March 29, 1996
- ----------------------------- and Chief Operating Officer
Michael W. Perry (Principal Financial Officer)
/s/ CARMELLA L. GRAHN Senior Vice President March 29, 1996
- ----------------------------- and Chief Accounting Officer
Carmella L. Grahn (Principal Accounting Officer)
Director March 29, 1996
- -----------------------------
Lyle E. Gramley
/s/ THOMAS J. KEARNS Director March 29, 1996
- -----------------------------
Thomas J. Kearns
/s/ FREDERICK J. NAPOLITANO Director March 29, 1996
- -----------------------------
Frederick J. Napolitano
</TABLE>
35
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS AND
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
CWM MORTGAGE HOLDINGS, INC.
AND SUBSIDIARIES
December 31, 1995, 1994 and 1993
F-1
<PAGE>
CWM MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
December 31, 1995, 1994, 1993
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
Schedules
Schedule IV - Mortgage Loans on Real Estate F-23
</TABLE>
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>
<S> <C>
Report of Independent Certified Public Accountants F-24
Financial Statements
Balance Sheet F-25
Statement of Earnings F-26
Statement of Shareholders' Equity F-27
Statement of Cash Flows F-28
Notes to Financial Statements F-29
</TABLE>
F-2
<PAGE>
REPORT 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, 1995 and 1994, and the
related consolidated statements of earnings, shareholders' equity, and cash
flows for each of the three years in the period ended December 31, 1995. 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, 1995 and 1994, and the
consolidated results of their operations and their consolidated cash flows for
each of the three years in the period ended December 31, 1995, 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, 1995. In our opinion, this schedule presents
fairly, in all material respects, the information required to be set forth
therein.
Grant Thornton LLP
Los Angeles, California
February 19, 1996
F-3
<PAGE>
CWM MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1995 1994
---------- ----------
<S> <C> <C>
ASSETS
Mortgage assets
Mortgage loans held for investment, net $1,424,583 $ 899,672
Mortgage loans held for sale 409,584 608,240
Collateral for CMOs 184,111 233,690
Construction loans receivable, net 129,323 6,370
Securitized master servicing fees 120,281 120,954
Revolving warehouse lines of credit, net 190,705 69,591
Cash and cash equivalents 8,049 2,605
Investment in and advances to Indy Mac 145,537 40,032
Other assets 31,440 16,490
---------- ----------
Total assets $2,643,613 $1,997,644
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Repurchase agreements and other credit facilities $2,037,834 $1,534,189
Collateralized mortgage obligations 164,760 202,259
Senior unsecured notes 59,649 -
Accounts payable and accrued liabilities 18,386 5,176
---------- ----------
Total liabilities 2,280,629 1,741,624
Commitments and contingencies - -
Shareholders' equity
Common stock - authorized, 60,000,000 shares of
$.01 par value; issued and outstanding, 42,413,842
shares in 1995 and 32,281,156 in 1994 424 323
Additional paid-in capital 353,965 258,240
Net unrealized gain (loss) on available-for-sale mortgage
securities held by Indy Mac 7,845 (890)
Cumulative earnings 150,148 100,137
Cumulative distributions to shareholders (149,398) (101,790)
---------- ----------
Total shareholders' equity 362,984 256,020
---------- ----------
Total liabilities and shareholders' equity $2,643,613 $1,997,644
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
CWM MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1995 1994 1993
----------- ----------- ------------
<S> <C> <C> <C>
REVENUES
Interest income
Mortgage loans held for investment $ 97,720 $ 20,161 $ -
Mortgage loans held for sale 34,733 34,238 20,454
Collateral for CMOs 17,257 21,679 41,685
Construction Loans 6,548 93 -
Securitized master servicing fees, net 7,405 7,203 -
Revolving warehouse lines of credit 10,024 4,363 1,655
Advances to Indy Mac 6,502 4,279 914
Other 276 103 796
----------- ----------- -----------
Total interest income 180,465 92,119 65,504
Interest expense
Repurchase agreements and other credit facilities 113,379 39,585 10,354
Collateralized mortgage obligations 17,532 27,115 54,958
Senior unsecured notes 999 - -
----------- ----------- -----------
Total interest expense 131,910 66,700 65,312
Net interest income 48,555 25,419 192
Provision for loan losses 4,037 500 -
----------- ----------- -----------
Net interest income after provision for loan losses 44,518 24,919 192
Equity in earnings of Indy Mac 13,801 5,624 2,523
Other 1,427 885 1,714
----------- ----------- -----------
Net revenues 59,746 31,428 4,429
EXPENSES
Salaries, general and administrative 4,213 2,402 1,549
Management fees to affiliate 5,522 1,195 400
----------- ----------- -----------
Total expenses 9,735 3,597 1,949
----------- ----------- -----------
NET EARNINGS $ 50,011 $ 27,831 $ 2,480
=========== =========== ===========
EARNINGS PER SHARE $1.25 $0.86 $0.13
=========== =========== ===========
Weighted average shares outstanding 39,902,680 32,183,850 18,578,307
=========== =========== ===========
</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
gain (loss)
on available-
Additional for-sale Cumulative
Number of Common paid-in mortgage Cumulative distributions
THREE YEARS ENDED DECEMBER 31, 1995 shares stock capital securities earnings to shareholders Total
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
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 259,750 3 1,339 - - - 1,342
Common stock options exercised 922 - 9 - - - 9
Capital contribution by manager - - 305 - - - 305
Unrealized loss on available-for-sale
mortgage securities held by Indy Mac - - - (890) - - (890)
Net earnings for the year - - - - 27,831 - 27,831
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
Common stock issued 9,801,686 98 93,565 - - - 93,663
Common stock options exercised 331,000 3 2,160 - - - 2,163
Unrealized gain on available-for-sale
mortgage securities held by Indy Mac - - - 8,735 - - 8,735
Net earnings for the year - - - - 50,011 - 50,011
Dividends paid - $1.17 per share - - - - - (47,608) (47,608)
---------------------------------------------------------------------------------------
Balance at December 31, 1995 42,413,842 $424 $353,965 $7,845 $150,148 $(149,398) $362,984
=======================================================================================
</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,
-------------------------------------------
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 50,011 $ 27,831 $ 2,480
Adjustments to reconcile net earnings
to net cash provided by (used in) operating activities:
Amortization 22,456 12,226 12,744
Provision for loan losses 4,037 500 -
Equity in earnings of Indy Mac (13,801) (5,624) (2,523)
Purchases of mortgage loans held for sale (3,779,914) (5,073,475) (3,202,845)
Principal repayments and sale of mortgage loans
held for sale 3,670,576 5,259,367 2,495,301
Change in accrued assets and liabilities 2,913 (10,922) 4,175
----------- ----------- -----------
Net cash provided by (used in) operating activities (43,722) 209,903 (690,668)
CASH FLOWS FROM INVESTING ACTIVITIES:
Collateral for CMOs:
Purchases of mortgage loans subsequently securitized - - (248,222)
Principal payments on collateral 28,975 147,429 401,106
Net change in GICs held by trustees 953 17,810 22,923
Proceeds from sale of collateral for CMOs, net 9,205 - 2,641
----------- ----------- -----------
39,133 165,239 178,448
Purchases of mortgage loans held for investment (406,478) (909,895) -
Principal repayments on mortgage loans held for investment 183,200 12,750 -
Investment in securitized master servicing fees (19,118) (128,480) -
Net decrease (increase) in revolving warehouse lines of credit (121,606) 22,267 (92,058)
Net increase in construction loans receivable (111,646) (6,670) -
Investment in Indy Mac (15,840) (6,905) (9,405)
Advances to Indy Mac, net of cash repayments (67,128) 62,002 (78,466)
Change in other assets (8,911) (1,526) (243)
----------- ----------- -----------
Net cash used in investing activities (528,394) (791,218) (1,724)
CASH FLOWS FROM FINANCING ACTIVITIES:
Collateralized mortgage obligations:
Proceeds from issuance of securities - - 239,659
Principal payments on securities (39,309) (165,059) (418,534)
----------- ----------- -----------
(39,309) (165,059) (178,875)
Net increase in repurchase agreements and other borrowings 503,642 763,855 748,390
Net proceeds from issuance of unsecured debt 59,623 - -
Net proceeds from issuance of common stock 95,827 1,656 137,317
Cash dividends paid (47,608) (23,185) (9,184)
Change in other liabilities 5,385 (446) 1,816
----------- ----------- -----------
Net cash provided by financing activities 577,560 576,821 699,464
----------- ----------- -----------
Net increase (decrease) in cash 5,444 (4,494) 7,072
Cash at beginning of period 2,605 7,099 27
----------- ----------- -----------
Cash at end of period $ 8,049 $ 2,605 $ 7,099
=========== =========== ===========
Supplemental cash flow information:
Cash paid for interest $ 121,288 $ 56,885 $ 54,925
=========== =========== ===========
</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, 1995, 1994 AND 1993
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements of CWM Mortgage Holdings, Inc. ("CWM") are
prepared in conformity with generally accepted accounting principles (GAAP). In
preparing financial statements in conformity with GAAP, management is required
to make estimates and assumptions that affect the reported amounts. Actual
results could differ from those estimates. The following is a summary of the
more significant accounting and reporting policies used in preparing the
consolidated financial statements.
1. Financial Statement Presentation
The consolidated financial statements include the accounts of CWM Mortgage
Holdings, Inc. and its qualified REIT subsidiaries. The mortgage loan
conduit activities are primarily conducted through Independent National
Mortgage Corporation ("Indy Mac") a taxable corporation established in
1993. CWM owns all the preferred stock and has a 99% economic interest in
Indy Mac. The directors and senior officers of Indy Mac are also senior
officers of CWM. In addition, Indy Mac's operations and technology are
dependent upon and closely integrated with CWM, and CWM is the sole
supplier of mortgage loans purchased by Indy Mac. Accordingly, CWM's
investment in Indy Mac 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 Indy Mac 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" mean the parent company, its
consolidated subsidiaries and Indy Mac.
All significant intercompany balances and transactions with CWM's
consolidated subsidiaries have been eliminated in consolidation of CWM.
Certain reclassifications have been made to the financial statements for
the periods ended December 31, 1994 and 1993 to conform to the December 31,
1995 presentation.
2. Mortgage Loans Held for Investment, Net
CWM purchases certain mortgage loans to be held as long-term investments
and transfers mortgage loans held for sale to the "held for investment"
designation. Such transfers are recorded at the lower of cost or market on
the date of transfer. The resulting market discount is amortized to
interest income over the estimated life of the loan using a level-yield
method. Premiums paid and discounts obtained on mortgage loans held for
investment are recorded as an adjustment to the carrying amount of the loan
and amortized to income over the estimated life of the loans using the
level-yield method. 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. Loans are evaluated for collectibility and, if
appropriate, previously accrued interest is reversed. Mortgage loans held
for investment are carried at their outstanding balance net of the
allowance for losses.
F-8
<PAGE>
CWM MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
3. Mortgage Loans Held for Sale
Mortgage loans held for sale are carried at the lower of cost or market,
computed by the aggregate method. 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. 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. Loans are evaluated for
collectibility and, if appropriate, previously accrued interest is
reversed. All loans purchased by CWM for which a REMIC transaction or
whole loan sale is contemplated are committed for sale to Indy Mac at the
same price for which the loans were acquired by CWM. At present, CWM does
not sell any loans to entities other than Indy Mac.
4. 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 CMO collateral.
5. Construction Loans Receivable, Net
Construction loans receivable are carried at the outstanding principal
balance net of unamortized purchase discounts or premiums and net of
allowance for losses.
6. Securitized Master Servicing Fees
In the second quarter of 1994, Indy Mac repaid certain advances received
from CWM through the sale of a portion of the securitized master servicing
fees to CWM at its then carrying value which approximated market value. In
addition, CWM from time to time invests in securitized master servicing
fees related to the REMIC securities issued by Indy Mac.
Interest income on the securitized master servicing fees is recognized at
an effective yield based upon current estimates of prepayment rates. Cash
received in excess of the effective yield is applied to amortize the asset.
CWM evaluates the recoverability of the securitized master servicing fees
by computing the present value of the asset given current estimates for
prepayment rates using a risk free rate of return. An impairment write-down
to fair value is recorded for those securities whose amortized cost exceeds
the present value at the risk-free rate. The securitized master servicing
fees values are sensitive to variations in estimates of prepayment rates
and changes in the risk-free rate. CWM estimates future prepayment rates
based upon current interest rate levels, economic conditions and market
forecasts, as well as relevant characteristics of the collateral underlying
the assets, such as loan types, interest rates and recent prepayment
experience. The estimates of prepayment rates may change in the near term
due to changes in interest rates and market conditions. CWM holds
securitized master servicing fees for investment.
F-9
<PAGE>
CWM MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
7. Revolving Warehouse Lines of Credit, Net
Revolving warehouse lines of credit are carried at their outstanding
principal balance net of allowance for losses.
8. Allowance for Loan Losses
CWM maintains an allowance for possible credit losses on mortgage loans
held for investment, construction loans and warehouse lines of credit.
Additions to the reserve are based on an assessment of certain factors,
including but not limited to estimated future losses on the loans, general
economic conditions and trends in portfolio volume, composition, maturity
and delinquency. Additionally, since the Company's various loan portfolios
are relatively immature, the Company looks at historical statistics of loan
portfolios with similar characteristics at other financial institutions.
Additions to the allowance are provided through a charge to earnings.
Actual losses on loans are recorded as a reduction to the allowance.
Subsequent recoveries of items previously charged off are credited back to
the allowance.
9. Collateralized Mortgage Obligations (CMOs) and Deferred Issuance Costs
Collateralized mortgage obligations are carried at their outstanding
principal balances net of unamortized original issue discounts. 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 compared to the figures that would be realized by utilizing the
effective interest method. Unamortized deferred issuance costs are included
in other assets in the Company's consolidated balance sheets.
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.
10. Interest Rate Swap Agreements
CWM utilizes interest rate swap agreements to help mitigate the interest
rate risk inherent in its portfolio of mortgage loans held for investment.
The differential to be received or paid under the agreements is accrued and
is recognized as an adjustment to net interest income. The related amount
payable to or receivable from counterparties is included in accounts
payable and accrued liabilities.
11. 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. Among other things, 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 for its subsequent taxable year.
F-10
<PAGE>
CWM MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
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.
12. Earnings Per Share
Earnings per share are computed on the basis of the weighted average number
of common shares outstanding which were 39,902,680, 32,183,850 and
18,578,307 for 1995, 1994 and 1993, 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 1995 and 1993, approximately $0.20 per share and $0.45
per share, respectively, represented a return of capital. There was no
return of capital included in dividends paid per share in 1994.
13. Stock Based Compensation
CWM grants stock options for a fixed number of shares to officers and
employees with an exercise price equal to the fair value of the shares at
the date of grant. The Company accounts for stock option grants in
accordance with Accounting Principles Board Opinion ("APBO") No. 25,
Accounting for Stock Issued to Employees, and accordingly, recognizes no
compensation expense for the stock option grants.
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards ("SFAS") No. 123, Accounting for Stock-Based
Compensation, which recommends changes to the recognition of expense in
connection with the grant of stock options effective for fiscal years
beginning after December 15, 1995. The standard encourages, but does not
require, companies to recognize compensation expense (equal to the fair
value of the options at the grant dates) ratably over the vesting periods.
Additionally, the standard sets forth new minimum disclosure requirements
to reflect the proforma adjusted net income calculated by applying the fair
value requirement. CWM intends to continue the recognition of expense under
APBO No. 25 and to adopt the additional disclosure requirements set forth
in SFAS No. 123; therefore, the adoption of SFAS No. 123 in 1996 will not
affect the results of operations of CWM.
F-11
<PAGE>
CWM MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
NOTE B - MORTGAGE LOANS HELD FOR INVESTMENT
Mortgage loans held for investment consist of various types of fixed- and
adjustable-rate nonconforming mortgage loans secured primarily by first liens on
single family residential properties as follows.
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------
(dollar amounts in thousands) 1995 1994
----------------------------------------------------------
Principal Weighted Principal Weighted
Product Type Amount Average Coupon Amount Average Coupon
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Adjustable-rate mortgages:
Monthly LIBOR $ 238,639 8.68% $233,066 6.68%
Monthly COFI 138,465 8.23 124,131 6.40
6-Month LIBOR 298,848 9.18 240,078 7.47
1-Year CMT 212,476 8.76 82,170 7.66
3/1 CMT 118,822 8.85 45,235 8.64
5/1 CMT 71,994 8.88 - -
10/1 CMT 163,341 7.28 168,875 7.20
Other adjustable-rate mortgages 15,213 8.25 11,773 7.43
----------------------------------------------------------
Fixed-rate mortgages 171,791 10.41 - -
----------------------------------------------------------
1,429,589 8.82% 905,328 7.15%
Unamortized net discount (2.087) - (5,656) -
Allowance for loan losses (2,919) - - -
-----------------------------------------------------------
Total $1,424,583 $899,672
===========================================================
</TABLE>
In reference to the above chart, "LIBOR" refers to London Interbank Offered Rate
index, CMT refers to the Constant Maturity Treasury index, and COFI refers to
the Cost Of Funds Index.
Included in mortgage loans held for investment at December 31, 1995 are $18.1
million of mortgage loans on which the Company was not currently accruing
interest income due to the delinquent status of such loans. If interest on such
loans had been accrued, interest income would have increased $931,000 for the
year ended December 31, 1995. There were no loans on non-accrual status as of
December 31, 1994.
NOTE C - 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 37 percent of the principal amount
of mortgage loans held for sale at December 31, 1995 was collateralized by
properties located in California. In 1995, CWM purchased mortgage loans held
for sale with an aggregate principal balance of $3.8 billion and sold mortgage
loans with an aggregate principal balance of $3.6 billion to Indy Mac.
Included in mortgage loans held for sale were $30.2 million held for sale to
Independent National Finance Corporation ("INFC"), a division of Indy Mac which
purchases loans to borrowers with adverse credit histories.
F-12
<PAGE>
CWM MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
NOTE D - ALLOWANCE FOR CREDIT LOSSES
Transactions in the allowance for credit losses were as follows:
<TABLE>
<CAPTION>
(Dollars amounts in thousands) 1995 1994
------- -----
<S> <C> <C>
Balance at January 1 $ 500 $ -
Provision for the year 4,037 500
Chargeoffs (249) -
Recoveries 43 -
------ -----
Balance at December 31 $4,331 $ 500
====== =====
</TABLE>
The allowance for credit losses at December 31, 1995 is comprised of the
following: (1) $2.9 million for mortgage loans held for investment, (2) $647,000
for warehouse lines of credit and (3) $766,000 for construction loans
receivable.
NOTE E - COLLATERAL FOR CMOs
Collateral for CMOs consists of fixed-rate mortgage loans, secured by first
liens on single-family residential real estate, and mortgage-backed securities.
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.
Collateral for CMOs is summarized as follows:
<TABLE>
<CAPTION>
(Dollar amounts in thousands)
December 31,
------------------------
1995 1994
-------- --------
<S> <C> <C>
Mortgage loans $ 88,457 $105,635
Mortgage-backed securities 89,014 118,947
GICs held by trustees 2,907 3,860
Accrued interest receivable 1,949 2,554
182,327 230,996
Unamortized premiums, net 1,784 2,694
-------- --------
Collateral for CMOs $184,111 $233,690
======== ========
</TABLE>
The mortgage loans and mortgage-backed securities, together with GICs, which are
all held by trustees, collateralized 12 series of CMOs at December 31, 1995. 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.
F-13
<PAGE>
CWM MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
NOTE E - COLLATERAL FOR CMOS - CONTINUED
The weighted average coupon on collateral for CMOs, net of the related servicing
fees, was 8.50% and 8.85% at December 31, 1995 and 1994, respectively.
During 1995, CWM redeemed one 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 recogized a loss of
aproximately $46,000.
NOTE F - SECURITIZED MASTER SERVICING FEES
The changes in CWM's securtized master servicing fees for the years ended
December 31, 1995 and 1994, respectively, are as follows.
<TABLE>
<CAPTION>
(Dollar amounts in thousands)
1995 1994
-------- --------
<S> <C> <C>
Balance at January 1 $120,954 $ -
Additions 19,118 6,167
Purchases from Indy Mac - 122,313
Amortization
Scheduled (17,099) (7,115)
Unscheduled (2,692) (411)
-------- --------
Balance at December 31 $120,281 $120,954
======== ========
</TABLE>
The estimated fair value of the securitized master servicing fees was $123.1
million at December 31, 1995. The estimated fair value includes gross gains of
$10.2 million and gross losses of $7.8 million. Contractual maturities of the
securitized master servicing fees asset exceeded 10 years as of December 31,
1995.
NOTE G - REPURCHASE AGREEMENTS AND OTHER CREDIT FACILITIES
Repurchase agreements and other credit facilities consisted of the following at
December 31, 1995 and 1994.
<TABLE>
<CAPTION>
December 31,
----------------------
(Dollar amounts in thousands) 1995 1994
---------- ----------
<S> <C> <C>
Repurchase agreements $1,871,057 $1,534,189
Revolving credit facility 166,777 -
---------- ----------
$2,037,834 $1,534,189
========== ==========
</TABLE>
REPURCHASE AGREEMENTS
The Company uses proceeds from the sale of REMIC securities and CMOs, repurchase
agreements, and proceeds from the issuance of senior unsecured notes and common
stock to meet its working capital needs.
F-14
<PAGE>
CWM MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
NOTE G - REPURCHASE AGREEMENTS AND OTHER CREDIT FACILITIES - CONTINUED
CWM has established a committed and renewable repurchase facility with a leading
investment bank through April 1997 in an aggregate amount up to $500 million for
its mortgage conduit, warehouse lending and consumer construction lending
operations. CWM has also obtained credit approval from the same lender to enter
into additional 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 October 1994, CWM signed a two-year master repurchase agreement
with the same lender in an aggregate amount of $225 million, to provide
financing for securitized master servicing fees and certain mortgage-related
securities which have been retained or purchased by CWM or Indy Mac. As of
December 31, 1995, CWM had $61.8 million outstanding under this facility.
In May and December 1994, CWM entered into two additional two-year committed and
renewable repurchase facilities, with different investment banks, in an
aggregate amount of $300 million and $500 million, respectively, for the
Company's mortgage conduit and warehouse lending operations and consumer
construction lending. These lines have maturity dates in May and December,
1996.
As of December 31, 1995, an aggregate amount of $1.8 billion was outstanding
under these whole loan and warehouse lending repurchase facilities. Such
borrowings had average maturities ranging from overnight to 17 months as of
December 31, 1995. Indy Mac may borrow under each of CWM's agreements as a co-
borrower. As of December 31, 1995, Indy Mac had $428.2 million outstanding in
borrowings under repurchase agreements.
The repurchase agreements bear interest at rates indexed to the London Interbank
Offered Rates ("LIBOR"). As of December 31, 1995 and 1994, the borrowing rate
on these repurchase agreements was 6.57% and 6.42%, respectively. None of the
lenders are affiliated with the Company. At December 31, 1995, the Company was
in compliance with all material representations, warranties and covenants under
its repurchase agreements.
REVOLVING CREDIT FACILITY
In 1995, CWM entered into a two-year committed secured revolving credit facility
with eight commercial banks allowing CWM and Indy Mac to borrow an aggregate
maximum amount of $300 million. The credit facility provides for the financing
of the Company's mortgage loans held for sale, mortgage loans held for
investment, master servicing fees receivable, builder and consumer construction
loans and warehouse lines of credit, subject to certain limitations. The
interest rate is based upon a margin over selected indices, including the weekly
average federal funds rate and the LIBOR for U.S. dollar deposits. The weighted
average borrowing rate on borrowings under this facility at December 31, 1995
was 6.42%.
NOTE H - COLLATERALIZED MORTGAGE OBLIGATIONS
Collateralized mortgage obligations are secured by a pledge of mortgage loans,
mortgage-backed securities and residual cash flows from such securities. As
required by the indentures relating to the CMOs, the pledged collateral is held
in the custody of trustees. The trustees collectively also held investments in
GICs amounting to $2.9 million and $3.9 million on the CMO Portfolio as of
December 31, 1995 and 1994, respectively, as additional collateral which is
legally restricted to use in servicing the CMOs. The trustees collect 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-15
<PAGE>
CWM MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
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 may
occur earlier than its stated maturity.
Interest is payable monthly or quarterly, 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 8.10% at December 31,
1995.
CWM's investment in CMO residuals amounted to $20 million and $33 million at
December 31, 1995 and 1994, respectively.
CMOs are summarized as follows:
<TABLE>
<CAPTION>
(Dollar amounts in thousands)
December 31,
-----------------------------
1995 1994
----------- ------------
<S> <C> <C>
Collateralized mortgage obligations $167,831 $206,274
Accrued interest payable 1,394 1,827
----------- ------------
169,225 208,101
Unamortized discounts, net (4,465) (5,842)
----------- ------------
Collateralized mortgage obligations, net $164,760 $202,259
=========== ============
Range of weighted average interest
rates, by series 6.84%-11.00% 6.76%-11.00%
Range of stated maturities 1998 - 2023 1998 - 2023
Number of series 12 17
</TABLE>
NOTE I - SENIOR UNSECURED NOTES
In October 1995, the Company completed the private placement of senior unsecured
notes in the aggregate amount of $60.5 million with certain institutional
lenders. The notes bear interest at rates ranging from 8.86% to 8.91%, and
mature October 15, 2002. The notes require principal repayment in three equal
installments of $20.17 million on October 15 in each of 2000, 2001 and 2002. The
notes are carried net of issuance costs totaling $851,000 which are amortized to
interest expense over the life of the notes using the interest method. The
effective interest rate on the notes, including costs of issuance, is 9.22%.
F-16
<PAGE>
CWM MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
NOTE J - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the estimated fair values of the various classes of
financial instruments held by CWM as of December 31, 1995 and 1994. The
estimated fair value amounts have been determined by CWM using available market
information and valuation methodologies which the Company believes are
appropriate under the circumstances. These estimates are subjective in nature
and involve matters of significant uncertainty and judgment to interpret
relevant market and other data. The use of different market assumptions and/or
estimation methodologies may have a material effect on the estimated fair value
amounts. Accordingly, the estimates presented herein are not necessarily
indicative of the amounts CWM could realize in a current market exchange.
<TABLE>
<CAPTION>
December 31, 1995 December 31, 1994
------------------------ -----------------------
(Dollar amounts in thousands) Carrying Estimated Carrying Estimated
amount fair value amount fair value
------------------------ -----------------------
<S> <C> <C> <C> <C>
Assets:
Mortgage loans held for investment $1,424,583 $1,439,560 $ 899,672 $ 892,819
Mortgage loans held for sale 409,584 409,584 608,240 608,240
Collateral for CMO's 184,111 185,198 233,690 224,216
Construction loans receivable 129,323 129,323 6,370 6,370
Securitized master servicing fees 120,281 123,090 120,954 122,367
Revolving warehouse lines of credit 190,705 190,705 69,591 69,591
Liabilities:
Repurchase agreements 2,037,834 2,039,458 1,534,189 1,534,189
Collateralized mortgage obligations 164,760 174,467 202,259 198,517
Senior unsecured notes 59,649 62,874 - -
Off Balance Sheet gains (losses):
Interest rate swap - (2,066) - -
Short-term commitments to extend
credit - - - -
Short-term commitments to purchase - - - -
loans
</TABLE>
The fair value estimates as of December 31, 1995 and 1994 are based on pertinent
information available to management as of those dates. The estimates have not
been comprehensively reevaluated or updated since those dates for purposes of
these financial statements 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 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.
Mortgage Loans Held for Sale The fair value of mortgage loans held for sale
is 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
Indy Mac at the same price at which the loans were acquired by CWM. CWM does
not sell any loans to entities other than Indy Mac.
F-17
<PAGE>
CWM MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
NOTE J - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS - CONTINUED
Collateral for CMOs 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 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.
Construction Loans Receivable, Revolving Warehouse Lines of Credit, and Advances
to Indy Mac Fair values approximate the carrying amounts of each of the
aforementioned assets and liabilities due to their respective short-term nature
or short-term repricing characteristics.
Securitized Master Servicing Fees Fair value is estimated by discounting
estimated future cash flows from securitized master servicing fees using
discount rates that approximate current discount rates used for similar
investments such as excess servicing and using current expected future
prepayment rates.
Repurchase Agreements and Other Credit Facilities Fair values approximate the
carrying amounts for repurchase agreements and other credit facilities with
remaining maturity of one year or less. Fair value for repurchase agreements
with longer maturities is estimated using discounted for cash flow analysis
based on current market rates.
Collateralized Mortgage Obligations Fair value is estimated using discounted
cash flow analysis based on current interest rates and prepayment expectations.
Senior Unsecured Notes Fair values are estimated by discounting future cash
flows using rates currently available to the Company for debt with similar terms
and remaining maturity.
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 committed for purchase by CWM are committed
for sale to Indy Mac at CWM's purchase price.
Interest Rate Swaps Fair value is estimated using discounted cash flow analysis
based on current market yields for similar instruments and remaining maturity.
NOTE K - COMMITMENTS AND CONTINGENCIES - FINANCIAL INSTRUMENTS WITH
OFF-BALANCE SHEET RISK
In the normal course of business CWM is a party to financial instruments with
off-balance-sheet risk. These financial instruments include short-term
commitments to extend credit to borrowers under warehouse lines of credit which
involve elements of credit risk.
Additionally, CWM is exposed to credit loss in the event of nonperformance by
counterparties to the various agreements associated with loan purchases.
However, CWM does not anticipate nonperformance by such borrowers or
counterparties. Unless noted otherwise, CWM does not require collateral or other
security to support such commitments. The following various types of
commitments were outstanding at year-end:
F-18
<PAGE>
CWM MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
NOTE K - COMMITMENTS AND CONTINGENCIES - FINANCIAL INSTRUMENTS WITH OFF-BALANCE
SHEET RISK - CONTINUED
Commitments to Purchase and Sell Loans. As of December 31, 1995 and 1994, CWM
had entered into commitments to purchase mortgage loans totaling $436.2 million
and $702.3 million, respectively, subject to origination or acquisition of such
loans by various approved mortgage originators. In addition, as of December 31,
1995 and 1994, CWM had committed to sell $816 million and $1.3 billion,
respectively, of mortgage loans to Indy Mac. 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, 1995 and 1994, CWM had
extended lines of credit under this program in the aggregate amount of $342.9
million and $396.8 million, respectively, of which $191.4 million and $69.6
million, respectively was outstanding.
Construction Lending Credit Commitments. CWM's construction lending program
consists of a Builder Division which provides tract construction, builder custom
home loans, and model home loan financing, and a Consumer Division which
provides construction-to-permanent financing as well as financing for home
improvement and lot loans to individuals. At December 31, 1995 and 1994 CWM had
undisbursed construction loan commitments totaling $172 million and $13.9
million, respectively.
NOTE L - STOCK OPTION PLANS
The Company has two stock option plans (the "Plans") that provide for the
granting of both non-qualified and incentive stock options to officers,
employees and directors. Options are granted at the average market price of the
Company's common stock on the date of grant and are exercisable beginning one
year from the date of grant and expire five years from date of grant.
F-19
<PAGE>
CWM MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
NOTE L - STOCK OPTION PLANS - CONTINUED
As of December 31, 1995, options to purchase 261,125 shares were exercisable and
806,660 shares were reserved for future grants under both plans. Stock option
transactions for the years ended December 31, 1995, 1994 and 1993 are summarized
as follows:
<TABLE>
<CAPTION>
----------------------------------------------
Year ended December 31, 1995 1994 1993
----------------------------------------------
<S> <C> <C> <C>
Shares subject to:
Options outstanding at beginning of 612,125 552,875 558,000
year
Options granted 521,440 324,000 206,000
Options exercised (331,000) (259,750) (156,125)
Options canceled (600) (5,000) (55,000)
----------------------------------------------
Options outstanding at end of year 801,965 612,125 552,875
==============================================
Exercise price:
Per share for options outstanding at
end of year $5.81-$14.375 $4.25-$10.375 $4.25-$8.375
Average per share for options exercised $6.54 $5.13 $5.26
</TABLE>
Eleven members of CWM's Board of Directors and officers exercised options
totaling 331,000 shares during 1995. The exercise of these options was financed
through both private sources and a loan program offered by CWM to its Officers
and Directors. At December 31, 1995 and 1994, the total principal balances of
notes receivable relating to the 1995 and prior option exercises by directors
and officers were $2.6 million and $2.2 million, respectively; the notes are
secured by the common stock issued, have maturities of up to five years and bear
interest rates required by IRS regulations, which ranged from 4.17% to 7.70% at
December 31, 1995.
NOTE M - RELATED PARTY TRANSACTIONS
Indy Mac has an open borrowing account with CWM whereby funds are advanced to
Indy Mac primarily to finance assets in which Indy Mac invests. Such advances
bear interest at rates indexed to the London Interbank Offered Rates ("LIBOR").
Interest charged on advances by CWM to Indy Mac was at a rate of 9.0% at
December 31, 1995 and 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 review and
supervision by CWM's Board of Directors. The Manager has entered into a
subcontract with its affiliate, Countrywide Home Loans, Inc. ("CHL"), to perform
such services for the Company as the Manager deems necessary.
F-20
<PAGE>
CWM MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
NOTE M - RELATED PARTY TRANSACTIONS - CONTINUED
For performing these services, the Manager receives a base management fee of
0.125% per annum of average-invested mortgage-related assets not pledged to
secure CMOs, and excluding mortgage loans held for sale. The Manager also
receives a separate management fee equal to 0.2% per annum of the average
amounts outstanding under traditional 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 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 $5.5 million, $1.2
million and $400,000 for the years ended December 31, 1995, 1994 and 1993,
respectively. The Management Agreement is renewable annually and is terminable
upon sixty days prior notice.
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 by Indy Mac and all other
operations are conducted in CWM.
Accordingly, Indy Mac incurrs the majority of the conduit's costs and CWM
incurrs the other operations' costs.
During 1995, 1994 and 1993, the amount of expenses incurred by CHL which were
allocated to the Manager and reimbursed by the Company totaled $1.9 million,
$1.1 million and $192,000, respectively. These costs included data processing,
occupancy and human resource charges of $729,000, $1,018,000, and $100,000,
respectively, for 1995, data processing, occupancy, and human resources 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 serviced. Occupancy charges are allocated on the basis of
square footage occupied by the Company. The majority of these expenses have been
allocated to Indy Mac as they relate primarily to the Company's conduit
operations.
During 1995 and 1994, CWM purchased approximately $74.6 million and $25.7
million, respectively, in nonconforming mortgage loans from CHL.
In 1987 and 1993, CWM entered into servicing agreements appointing CHL as
servicer of pools of mortgage loans collateralizing five series of CMOs with
outstanding balances of approximately $88.5 million at December 31, 1995. CHL
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 CHL under
such agreements were approximately $250,000, $282,000, and $500,000 in 1995,
1994 and 1993, respectively.
The Manager and CHL 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 2.6% of CWM's common stock at December 31, 1995. The
Manager owned 20,000 shares of CWM's common stock. CHL owns all of the common
stock and has a 1% economic interest in Indy Mac.
F-21
<PAGE>
CWM MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
NOTE N SUBSEQUENT EVENTS
On January 18, 1996, the Board of Directors declared a $0.35 cash dividend per
share to be paid on March 1, 1996 to shareholders of record on January 29, 1996.
In January, 1996 CWM completed a $500 million committed repurchase faciliity
with an investment bank for the purpose of financing mortgage loans, securitized
master servicing fees and certain mortgage-related securities which have been
purchased or retained by CWM or Indy Mac.
NOTE O - QUARTERLY FINANCIAL DATA - UNAUDITED
Selected quarterly financial data follows:
<TABLE>
<CAPTION> Three Months Ended
Dollar amounts in thousands -------------------------------------------------
except per share data: March 31 June 30 September 30 December 31
-------------------------------------------------
<S> <C> <C> <C> <C>
Year ended December 31, 1995
Net revenues $11,840 $14,472 $16,452 $16,982
Net earnings 10,229 11,963 13,491 14,328
Earnings per share (1) 0.28 0.30 0.33 0.35
Dividends paid per share 0.27 0.27 0.30 0.33
Year ended December 31, 1994
Net revenues $ 5,730 $ 6,368 $ 9,211 $10,119
Net earnings 5,053 5,711 8,297 8,770
Earnings per share (1) 0.16 0.18 0.26 0.27
Dividends paid per share 0.12 0.16 0.18 0.26
</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.
F-22
<PAGE>
CWM MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE
(Dollar amounts in thousands)
December 31, 1995
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E Column F
- ----------------------------- --------- ------------ ------------- ------------------ ---------------------
Principal
Amount
(1)(2)(3) of Loans
(4)(5)(7)(9) Subject to Amount of
Range of Number Carrying Delinquent Mortgage
Carrying Amounts of Prior Amount of Principal or Being Range of
of Mortgages Loans (1) Liens (1) Mortgages Interest (1) (Foreclosed (1)(8) Interest Rates (1)(6)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$0-$50 1,186 $0 $39,151 $919 $0 6.000-13.000
50-100 3,770 0 276,077 9,347 917 6.000-13.000
101-150 2,934 0 364,629 13,758 1,734 6.000-13.125
151-200 1,500 0 263,643 15,064 2,170 6.125-12.250
201 - 250 1,174 0 291,445 10,237 2,547 6.000-12.375
251 - 300 745 0 223,341 9,403 810 6.375-11.500
301 - 350 395 0 139,265 6,856 999 5.875-11.250
351 - 400 235 0 94,441 5,642 729 5.875-10.875
401 - 450 142 0 66,643 2,121 882 4.000-10.250
451 - 500 113 0 57,744 3,313 1,453 5.875-12.250
501 - 550 49 0 25,662 1,562 0 6.000-11.250
551 - 600 51 0 30,454 3,469 0 6.500-10.500
601 - 650 50 0 34,141 1,273 601 6.000-11.250
651 - 700 22 0 14,906 650 700 6.650-11.000
701 - 750 18 0 13,167 1,448 0 7.100-10.500
751 - 800 12 0 9,184 1,504 0 7.875-9.125
801 - 850 9 0 7,343 819 0 6.850-10.750
851 - 900 8 0 7,862 1,735 0 7.450-10.750
901 - 950 5 0 4,587 0 0 8.312-11.125
951 - 1,000 12 0 11,787 1,000 0 6.950-10.500
over 1,000 30 0 46,003 7,756 4,647 6.375-11.125
------ --- ---------- ------- -------
12,460 0 $2,021,475 $97,876 $18,189
====== === ======= =======
Premium (2,053)
----------
$2,019,422
==========
</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 $504,019 of mortgage loans held for sale,
$1,428,999 of mortgage loans held for investment and $88,457 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, 1995 is as follows:
California 55% with no other state comprising more than 8%.
(5) The aggregate cost for federal income tax purposes is $2,025,458.
(6) Interest earned on mortgages by range of carrying amounts is not
reasonably obtainable.
(7) $74.6 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, $6.2 million is
related to mortgage loans held for investment and $11.9 million is related
to collateral for CMOs.
<TABLE>
<CAPTION>
The Company (CWM and INMC) CWM Alone
------------------------- ---------------------------
<S> <C> <C> <C> <C>
(9) Balance at beginning of period $1,829,204 $1,620,085
Additions during period:
New mortgage loans 4,202,940 4,299,724
---------- ----------
6,032,144 5,919,809
Deductions during period:
Sales of mortgage loans 3,712,077 3,800,385
Collections of principal 298,592 4,010,669 226,679 4,027,064
--------- ---------- --------- ----------
Balance at close of period $2,021,475 $1,892,745
========== ==========
</TABLE>
F-23
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Shareholders
CWM Mortgage Holdings, Inc.
We have audited the accompanying balance sheets of Independent National Mortgage
Corporation as of December 31, 1995 and 1994, and the related statements of
earnings, shareholders' equity, and cash flows for the years ended December 31,
1995, and 1994 and the period from April 20, 1993 (inception) to 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 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 financial position of Independent National Mortgage
Corporation as of December 31, 1995 and 1994, and the results of its operations
and its cash flows for the years ended December 31, 1995 and 1994 and the
period from April 20, 1993 (inception) to December 31, 1993, in conformity with
generally accepted accounting principles.
Grant Thornton LLP
Los Angeles, California
February 19, 1996
F-24
<PAGE>
INDEPENDENT NATIONAL MORTGAGE CORPORATION
BALANCE SHEETS
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1995 1994
--------- ---------
<S> <C> <C>
ASSETS
Mortgage loans held for sale, net $ 92,088 $180,602
Mortgage securities available for sale 350,752 138,472
Securitized master servicing fees 116,851 -
Master servicing fees receivable 36,570 29,444
Other assets 22,953 16,045
-------- --------
Total assets $619,214 $364,563
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Repurchase agreements and other credit facilities $441,305 $304,080
Due to CWM 83,592 16,464
Accounts payable and accrued liabilities 31,746 20,212
-------- --------
Total liabilities 556,643 340,756
Commitments and contingencies - -
Shareholders' equity
Series A preferred stock - authorized, 10,000 shares of
$.05 par value; issued and outstanding, 9,900 shares - -
Common stock - authorized, 10,000 shares of $.01 par
value; issued and outstanding, 100 shares - -
Capital in excess of par value 32,476 16,476
Net unrealized gain (loss) on available-for-sale mortgage securities 7,925 (899)
Retained earnings 22,170 8,230
-------- --------
Total shareholders' equity 62,571 23,807
-------- --------
Total liabilities and shareholders' equity $619,214 $364,563
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-25
<PAGE>
INDEPENDENT NATIONAL MORTGAGE CORPORATION
STATEMENTS OF EARNINGS
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
Period from
Year ended December 31, April 20, 1993 (Inception)
1995 1994 to December 31, 1993
-------- ------- --------------------------
<S> <C> <C> <C>
REVENUES
Interest income
Mortgage loans held for sale $36,862 $25,179 $ 7,985
Mortgage securities available for sale 19,862 4,781 -
Securitized master servicing fees, net 3,623 91 -
Master servicing fees receivable, net 5,565 1,004 (4,518)
------- ------- -------
Total interest income 65,912 31,055 3,467
Interest expense
Repurchase agreements and other credit facilities 41,345 20,398 3,988
Advances from CWM 6,502 4,279 914
------- ------- -------
Total interest expense 47,847 24,677 4,902
Net interest income (expense) 18,065 6,378 (1,435)
Provision for loan losses 2,168 - -
Net interest income after provision for loan losses 15,897 6,378 (1,435)
Gain on sale of mortgage loans and issuance of securities 22,722 9,475 8,388
Gain on sale of mortgage securities available for sale 8,220 205 -
Gain on sale of servicing 36 7,251 -
------- ------- -------
Net revenues 46,875 23,309 6,953
EXPENSES
Salaries and related expenses 12,979 7,916 1,723
General and administrative expenses 7,750 5,554 892
Management fees to affiliate 1,769 334 -
------- ------- -------
Total expenses 22,498 13,804 2,615
------- ------- -------
Earnings before income tax provision 24,377 9,505 4,338
Income tax provision 10,437 3,824 1,789
------- ------- -------
NET EARNINGS $13,940 $ 5,681 $ 2,549
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-26
<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, 1995
<TABLE>
<CAPTION>
Unrealized
gain (loss)
on available-
Capital in for-sale
Number of Common Preferred excess of mortgage Retained
shares stock stock par value 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
Additional capital contribution - - - 16,000 - - 16,000
Unrealized gain on available-for-sale
mortgage securities - - - - 8,824 - 8,824
Net earnings for the year - - - - - 13,940 13,940
------------------------------------------------------------------------------------------
Balance at December 31, 1995 10,000 $ - $ - $32,476 $7,925 $22,170 $62,571
==========================================================================================
</TABLE>
F-27
<PAGE>
INDEPENDENT NATIONAL MORTGAGE CORPORATION
STATEMENTS OF CASH FLOWS
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
December 31, Period from
----------------------------- April 20, 1993 (Inception)
1995 1994 to December 31, 1993
------------- -------------- --------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings $ 13,940 $ 5,681 $ 2,549
Adjustments to reconcile net earnings
to net cash provided by (used in) operating activities:
Amortization and depreciation 16,098 10,844 7,387
Gain on sale of mortgage loans and issuance of securities (22,814) (9,475) -
Gain on sale of mortgage securities available for sale (8,220) (205) -
Gain on the sale of purchased servicing (36) (7,251) -
Provision for loan losses 2,168 - -
Purchases of mortgage loans from CWM (3,641,760) (5,243,278) (2,391,132)
Principal repayments and sale of mortgage loans 3,748,787 5,150,510 2,312,772
Change in accrued assets and liabilities (10,680) 7,460 4,190
----------- ----------- -----------
Net cash provided by (used in) operating activities 97,483 (85,714) (64,234)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in mortgage securities available for sale (373,904) (178,638) -
Investment in securitized master servicing fees (124,838) - -
Investment in master servicing fees receivable (13,033) (113,006) (52,222)
Sale of securitized master servicing fees to CWM - 122,313 -
Principal repayments and sale of mortgage securities 184,384 39,715 -
Purchase of servicing (7,581) (30,398) (5,105)
Proceeds from sale of servicing 6,982 33,921 -
Change in other assets (2,462) (4,191) (4,640)
----------- ----------- -----------
Net cash used in investing activities (330,452) (130,284) (61,967)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances from CWM, net of cash repayments 67,128 (62,002) 78,466
Net proceeds of repurchase agreements 137,225 267,857 36,223
Proceeds from issuance of common stock - - 25
Proceeds from issuance of preferred stock - - 2,475
Proceeds from additional capital contribution 16,000 6,976 7,000
Change in other liabilities 12,616 3,167 2,012
----------- ----------- -----------
Net cash provided by financing activities 232,969 215,998 126,201
----------- ----------- -----------
Net change in cash - - -
Cash at beginning of period - - -
----------- ----------- -----------
Cash at end of period $ - $ - $ -
=========== =========== ===========
Supplemental cash flow information:
Cash paid for interest $ 40,510 $ 19,757 $ 3,871
Cash paid for income taxes 1,097 4 -
</TABLE>
The accompanying notes are an integral part of these statements.
F-28
<PAGE>
INDEPENDENT NATIONAL MORTGAGE CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The financial statements of Independent National Mortgage Corporation (Indy
Mac) are prepared in conformity with generally accepted accounting principles
(GAAP). In preparing financial statements in accordance with GAAP, management is
required to make estimates and assumptions that affect the reported amounts.
Actual results could differ from those estimates. The following is a summary of
the more significant accounting and reporting policies used in preparing the
financial statements.
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 of the loans 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. Mortgage Securities
Mortgage securities consist of mortgage derivative products including
subordinated securities, principal-only securities and inverse floaters
securities. These securities primarily consist of securities retained upon
the issuance of Indy Mac's REMIC securities. Securities are classified at
acquisition as available-for-sale when Indy Mac intends to hold the
securities for a period of time, but not necessarily to maturity. A
decision to sell a security classified as available-for-sale is based on a
variety of factors including movements in interest rates and other changes
in economic conditions. Mortgage securities available for sale are carried
at estimated fair value with unrealized gains and losses excluded from
earnings and included in a separate component of shareholders' equity net
of related income tax effects. Estimated fair value is determined based on
market quotes when available or discounted cash flow techniques using
assumptions for prepayment rates and market yield requirements. Such
assumptions are estimates and may change in the near term as interest rates
or economic conditions change.
Securities are classified as held to maturity when Indy Mac has the
positive intent and ability to hold the securities to maturity. Securities
held to maturity are carried at cost, adjusted for amortization of premium
or discount over the estimated life of the security.
F-29
<PAGE>
INDEPENDENT NATIONAL MORTGAGE CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
3. Securitized Master Servicing Fees
Indy Mac retains securitized master servicing fees associated with the
issuance of mortgage securities. In determining the initial carrying
amount, Indy Mac considers the effective yield inherent in the fair values
of similar investments. Interest income on the securitized master servicing
fees is recognized at an effective yield based upon current estimates of
prepayment rates. Cash received in excess of the effective yield is applied
to amortize the asset. Indy Mac evaluates the recoverability of securitized
master servicing fees by computing the present value of the asset using
current estimates for prepayment rates and a risk-free rate of return. An
impairment write-down to fair value is recorded for those securities whose
amortized cost exceeds the present value at the risk-free rate. The
securitized master servicing values are sensitive to variations in
estimates of prepayment rates and changes in the risk-free rate. Indy Mac
estimates future prepayment rates based upon current interest rate levels,
economic conditions and market forecasts, as well as relevant
characteristics of the collateral underlying the assets, such as loan
types, interest rates and past prepayment experience. The estimates of
prepayment rates may change in the near term due to changes in interest
rates and market conditions. Indy Mac intends to hold securitized master
servicing fees for investment.
To protect the value of securitized master servicing fees from the effects
of increased prepayment activity, Indy Mac has acquired financial
instruments, including derivative contracts, that increase in value when
interest rates decline. These financial instruments include call options on
U.S. Treasury bonds and interest rate floors. The cost of these financial
instruments is amortized to expense over the contractual life of the
contracts. Unamortized costs are included in other assets on the balance
sheet. Gains are recognized first as an offset to the "Unscheduled
Amortization" of securitized master servicing fees (i.e., amortization
due to the impairment caused by increased projected prepayment rates). To
the extent the master servicing hedge generates gains in excess of the
Unscheduled Amortization ("Excess Hedge Gain"), Indy Mac writes down
securitized master servicing fees through additional amortization in an
amount equal to the Excess Hedge Gain.
4. Master Servicing Fees Receivable
Indy Mac retains the master servicing rights associated with sales of
mortgage loans and securities. These master servicing rights entitle Indy
Mac 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.
F-30
<PAGE>
INDEPENDENT NATIONAL MORTGAGE CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
In determining the appropriate discount rate to compute the initial
carrying amount, Indy Mac 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.
5. Purchased Servicing Rights
Indy Mac from time to time acquires the rights to service, as opposed to
master service, mortgage loans that it has previously purchased. Indy Mac
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, 1995 and 1994, Indy Mac's purchased servicing portfolio
totaled $439.6 million and $425.0 million, respectively. Capitalized costs
associated with acquiring these portfolios totaled $3.6 million and $4.0
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 (subject to customer representations
and warranties) and there are no significant unresolved contingencies.
6. 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.
7. Income Taxes
For income tax purposes, Indy Mac files a separate tax return and is not
consolidated with CWM or CHL. Taxable earnings of Indy Mac are subject to
state and federal income taxes at the applicable statutory rates. Deferred
income taxes in the accompanying financial statements are computed using
the liability method.
8. Allowance for Loan Losses
Indy Mac maintains an allowance for possible credit losses on mortgage
loans held for sale. Additions to the reserve are based on an assessment
of certain factors, including but not limited to estimated future losses on
the loans, general economic conditions and trends in portfolio volume,
composition, maturity, and delinquency statistics. Additions to the reserve
are provided through a charge to earnings. Actual losses on loans are
recorded as a charge-off or a reduction to the loan loss reserve.
Subsequent recoveries of amounts previously charged off are credited back
to the reserve.
F-31
<PAGE>
INDEPENDENT NATIONAL MORTGAGE CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993
NOTE B - MORTGAGE LOANS HELD FOR SALE
Substantially all of the mortgage loans purchased by Indy Mac from CWM are
fixed-rate and adjustable-rate nonconforming mortgage loans secured by first
liens on single-family residential properties. Approximately 39% of the
principal amount of mortgage loans held for sale at December 31, 1995 were
collateralized by properties located in California.
In 1995 and 1994, Indy Mac purchased mortgage loans from CWM with an aggregate
principal balance of $3.6 billion and $5.2 billion, respectively, and sold
mortgage loans in the form of REMIC securities or bulk whole loan sales with an
aggregate principal balance of $3.7 billion and $5.1 billion, respectively.
During 1995 and 1994, Indy Mac recognized gains on these securitizations
totaling $22.7 million and $9.5 million, respectively, net of related expenses,
losses and hedging costs.
NOTE C - ALLOWANCE FOR LOAN LOSSES
Transactions in Indy Mac's allowance for loan losses were as follows.
<TABLE>
<CAPTION>
(Dollar amounts in thousands) 1995
- ------------------------------------------
<S> <C>
Balance at January 1 $ -
Provision for the year 2,168
Chargeoffs (377)
Recoveries -
------
Balance at December 31 $1,791
======
</TABLE>
NOTE D - MORTGAGE SECURITIES
The following is a disclosure of the amortized cost and estimated fair value of
mortgage securities as of December 31, 1995 and 1994. Contractual maturities on
the mortgage securities range from 10 to 30 years.
<TABLE>
<CAPTION>
(Dollar amounts in thousands)
ESTIMATED GROSS GROSS
AMORTIZED FAIR UNREALIZED UNREALIZED
CLASSIFICATION COST VALUE GAINS LOSSES
- ------------------------ --------- --------- ---------- ----------
<S> <C> <C> <C> <C>
December 31, 1995:
Available-for-sale $337,088 $350,752 $17,158 $3,494
==============================================
December 31, 1994:
Available-for-sale $106,928 $105,378 $ 512 $2,062
Held-to-maturity 33,094 33,201 1,463 1,356
----------------------------------------------
Total $140,022 $138,579 $ 1,975 $3,418
==============================================
</TABLE>
F-32
<PAGE>
INDEPENDENT NATIONAL MORTGAGE CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993
NOTE D - MORTGAGE SECURITIES - CONTINUED
During the year ended December 31, 1995, Indy Mac sold mortgage securities
classified as available-for-sale with a net book value of $213.2 million (based
on specific identification) for proceeds of $221.4 million, resulting in gross
realized gains of $8.4 million and gross realized losses of $169,000.
During the first quarter of 1995, Indy Mac transferred its entire portfolio of
mortgage securities classified as held-to-maturity to available-for-sale. The
unrealized gain as of the date of transfer was $1.2 million. The decision to
transfer these securities to available-for-sale was based on a reassessment of
the purpose of such investments. Indy Mac considers the category of available-
for-sale to more properly reflect Indy Mac's intentions with respect to the
mortgage securities.
As of December 31, 1995, all of Indy Mac's mortgage securities were pledged as
collateral under repurchase agreements.
NOTE E - SECURITIZED MASTER SERVICING FEES
The changes in securitized master servicing fees during 1995 are as follows:
<TABLE>
<CAPTION>
(Dollar amounts in thousands)
- --------------------------------------------
1995
--------
<S> <C>
Balance at January 1 $ -
Additions 124,838
Amortization (7,987)
--------
Balance at December 31 $116,851
========
</TABLE>
The estimated fair value of the securitized master servicing fees was $110.7
million at December 31, 1995. The estimated fair value includes gross gains of
$4.9 million and gross losses of $11.0 million. Contractual maturities of the
securitized master servicing fees asset exceeded 10 years as of December 31,
1995. As of December 31, 1995, Indy Mac had $670.0 million notional amount of
call options on U.S. Treasury bonds and $300.0 million notional amount of
interest rate floors outstanding to hedge the securitized master servicing fees.
During 1995, Indy Mac recognized gains on hedging transactions in the amount of
$503,000 included in the amortization of securitized master servicing fees.
F-33
<PAGE>
INDEPENDENT NATIONAL MORTGAGE CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993
NOTE F - MASTER SERVICING FEES RECEIVABLE
The changes in master servicing fees receivable during 1995 and 1994 are as
follows:
<TABLE>
<CAPTION>
(Dollar amounts in thousands)
- ---------------------------------------------------------
1995 1994
------- ---------
<S> <C> <C>
Balance at January 1 $29,444 $ 45,237
Additions 13,034 113,006
Amortization
Scheduled (5,073) (6,486)
Unscheduled (835) -
Securitization and sale to CWM - (122,313)
------- ---------
Balance at December 31 $36,570 $ 29,444
======= =========
</TABLE>
NOTE G - REPURCHASE AGREEMENTS AND OTHER CREDIT FACILITIES
Indy Mac is a co-borrower under the repurchase agreements and other credit
facilities, subject to CWM's continuing to remain jointly and severally liable
for repayment. The balance outstanding at December 31, 1995 totaled $441
million. These facilities are secured by mortgage loans which are ultimately
sold in the form of REMIC securities or whole loans, mortgage-related securities
and securitized master servicing. During 1995, borrowings under such agreements
had original average maturities of less than five days.
The agreements bear interest at rates indexed to the London Interbank Offered
Rates ("LIBOR"). As of December 31, 1995 and 1994, the borrowing rates on these
repurchase agreements were 6.2% and 6.3%, respectively. None of the
lenders are affiliated with CWM or Indy Mac.
NOTE H - INCOME TAXES
The provision for income taxes for the years ended December 31, 1995, 1994 and
1993 consist of the following:
<TABLE>
<CAPTION>
(Dollar amounts in thousands)
1995 1994 1993
---------------------------
<S> <C> <C> <C>
Current expense
Federal $ 164 $ - $ -
State 110 932 -
---------------------------
Total current expense 274 932 -
---------------------------
Deferred expense
Federal 7,515 2,731 1,275
State 2,648 161 514
---------------------------
Total deferred expense 10,163 2,892 1,789
---------------------------
Total income tax expense $10,437 $3,824 $1,789
===========================
</TABLE>
F-34
<PAGE>
INDEPENDENT NATIONAL MORTGAGE CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993
NOTE H - INCOME TAXES - CONTINUED
The tax effect of temporary differences that gave rise to significant portions
of deferred tax assets and liabilities as of December 31, 1995 and 1994 are
presented below:
<TABLE>
<CAPTION>
1995 1994
-------------------
<S> <C> <C>
Deferred tax asset
State tax expense $(1,130) $ (546)
Allowance for loan losses (814) -
Net operating loss carryforward (1,879) (3,031)
Unrealized losses on available for sale securities - (651)
Deferred tax libility
Master servicing fees receivable 18,629 8,242
Unrealized gains on available for sale securities 5,739 -
Other 38 16
------- -------
Net deferred tax liability $20,583 $ 4,030
======= =======
</TABLE>
At December 31, 1995, Indy Mac had a net operating loss carryforward for federal
income tax purposes of approximately $5.5 million, which begins to expire in the
year 2009.
The effective income tax rate differed from the federal statutory rate as
follows:
<TABLE>
<CAPTION>
1995 1994 1993
--------------------
<S> <C> <C> <C>
Federal statutory income tax rate 34.0% 34.0% 34.0%
State income taxes, net of federal tax effect 7.0% 7.6% 7.8%
Other items, net 0.7% -1.3% -0.6%
--------------------
Effective income tax rate 41.7% 40.3% 41.2%
====================
</TABLE>
F-35
<PAGE>
INDEPENDENT NATIONAL MORTGAGE CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993
NOTE I - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the estimated fair value of the various classes of
financial instruments as of December 31, 1995 and 1994. The estimated fair
value amounts have been determined by Indy Mac using available market
information and valuation methodologies which the Company believes are
appropriate under the circumstances.
<TABLE>
<CAPTION>
December 31, 1995 December 31, 1994
-------------------------------------------------
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 $ 91,767 $ 91,767 $203,213 $203,213
Commitments to purchase mortgage loans 321 321 (19,700) (19,700)
Commitments to sell mortgage loans and securities - - (2,911) (2,911)
Total mortgage loans held for sale 92,088 92,088 180,602 180,602
Mortgage securities 350,752 350,752 138,472 138,580
Securitized master servicing fees 116,851 110,744 - -
Master servicing fees receivable 36,570 38,302 29,444 33,122
Liabilities:
Repurchase agreements and other borrowings 441,305 441,305 304,080 304,080
Off Balance Sheet
Call Options and interest rate floors 3,137 4,773 - -
</TABLE>
These estimates are subjective in nature and involve matters of significant
judgment to interpret relevant market and other data. The use of different
market assumptions and/or estimation methodologies may have a material effect
on estimated fair value amounts. Accordingly, the estimates presented herein
are not necessarily indicative of the amounts Indy Mac could realize in a
current market exchange.
The fair value estimates as of December 31, 1995 and 1994 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 Indy Mac in
estimating fair values.
Mortgage Loans Held for Sale Fair value is estimated using the methodology
described in Note A.1.
F-36
<PAGE>
INDEPENDENT NATIONAL MORTGAGE CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993
NOTE I - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS - CONTINUED
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.
Securitized Master Servicing Fees and 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.
Repurchase Agreements and Other Borrowings Fair values approximate the
carrying amounts because of the short-term to maturity of the 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
Indy Mac has committed to purchase the loans.
Commitments to Sell Mortgage Loans Indy Mac 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.
Call Options and Interest Rate Floors The fair values of Indy Mac's call option
contracts and interest rate floors are estimated based upon quoted market prices
at year end.
NOTE J - COMMITMENTS AND CONTINGENCIES
Financial Instruments With Off-Balance-Sheet Risk Indy Mac 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 and option contracts. The instruments involve, to
varying degrees, elements of credit and interest rate risk. Indy Mac is exposed
to credit loss in the event of nonperformance by the counterparties to the
various agreements. However, Indy Mac does not anticipate nonperformance by the
counterparties. As discussed below, Indy Mac'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. Indy Mac'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, Indy Mac does not require collateral or
other security to support financial instruments with credit risk.
Master Loan Servicing As of December 31, 1995 and 1994, Indy Mac was master
servicing loans totaling $9.4 billion and $6.8 billion, respectively, associated
with its issuance of REMIC securities and whole loan sales.
F-37
<PAGE>
INDEPENDENT NATIONAL MORTGAGE CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993
NOTE J - COMMITMENTS AND CONTINGENCIES- CONTINUED
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 Indy Mac when
mortgage loans are securitized or sold, the loans or securities are nonrecourse
to Indy Mac. Typically, the Company has recourse to the sellers of such loans
for any breaches of similar representations and warranties made by the sellers
to Indy Mac.
As of December 31, 1995, approximately 56% of mortgage loans in Indy Mac's
master servicing portfolio were secured by properties located in California.
The remainder are geographically dispersed throughout the United States, with no
more than 6% of the mortgage loans collateralized by properties in any other
single jurisdiction.
Commitments to Purchase Loans As of December 31, 1995 and 1994, Indy Mac had
entered into commitments to purchase mortgage loans from CWM totaling $816
million and $1.3 billion, respectively, including loans subject to purchase from
sellers by CWM. After purchase and sale of the mortgage loans, Indy Mac'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, 1995, Indy Mac had no open
commitments to sell mortgage loans. As of December 31, 1994, commitments to sell
mortgage loans totaled $157.4 million. These commitments are utilized in
delivering mortgage loans held for sale and are considered in the valuation of
the mortgage loan inventory. In addition, Indy Mac had forward commitments to
sell $601.5 million and $747.0 million of FNMA mortgage-backed securities as of
December 31, 1995 and 1994, respectively, and $70 million and $563.8 million of
two-year U.S. Treasury Futures contracts as of December 31, 1995 and 1994,
respectively. The commitments to sell loans and securities had a net
unrealized loss of approximately $2.9 million as of December 31, 1994, which was
deferred as part of Indy Mac's lower of cost or market analysis on its mortgage
loans held for sale.
NOTE K - RELATED PARTY TRANSACTIONS
As of December 31, 1995 and 1994, advances due by Indy Mac to CWM totaled $83.6
million and $16.5 million, respectively. Such funds were advanced by CWM, under
an open account arrangement, to finance assets by Indy Mac. Such advances bear
interest at rates indexed to the London Interbank Offered Rates ("LIBOR").
Interest charged on advances to Indy Mac from CWM was at a rate of 9.0% and 9.3%
at December 31, 1995 and 1994, respectively.
F-38
<PAGE>
INDEPENDENT NATIONAL MORTGAGE CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993
NOTE K - RELATED PARTY TRANSACTIONS - CONTINUED
CWM has entered into an agreement (the "Management Agreement") with Countrywide
Asset Management Corporation (the "Manager") to advise CWM and Indy Mac on
various facets of their businesses and to manage their operations, subject to
review and supervision by CWM's Board of Directors. The Manager has entered into
a subcontract with its affiliate, Countrywide Home Loans, Inc. ("CHL"), to
perform such services for CWM and Indy Mac as the Manager deems necessary. The
Manager and CHL 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
0.125% 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 Indy Mac based upon their
respective average invested assets net of related borrowings and incentive
management fees are allocated between CWM and Indy Mac based upon their
respective contributions to the earnings of the Company. Management fees
allocated to Indy Mac in 1995 amounted to $1.8 million and $334,000 in 1994.
Management fees allocated to Indy Mac in 1993 were insignificant. The Management
Agreement is renewable annually and is terminable upon sixty days prior notice.
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 Indy Mac and all other operations are conducted in CWM.
Accordingly, Indy Mac 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 Indy Mac. Indy Mac began paying all expenses related to
its operations in June 1993.
During June 1994 and December 1994, Indy Mac sold approximately $1.8 billion and
$1.2 billion, respectively, of its purchased servicing portfolio to CHL. No
sales of this type were made to CHL during 1995. Indy Mac 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. Of the $1.8 billion purchased servicing portfolio sold to CHL in
June 1994, $580.4 million was already being subserviced by CHL. Of the $1.2
billion purchased servicing portfolio sold to CHL in December 1994, $178.4
million was already being subserviced by CHL. As of December 31, 1995, CHL was
subservicing $342.1 million in mortgage loans associated with purchased
servicing rights. Indy Mac paid CHL $461,000, $94,000 and $6,000 in subservicing
fees during 1995, 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 Indy Mac at the same price at which the
loans were acquired by CWM. Indy Mac currently does not purchase any loans from
any entities other than CWM.
F-39
<PAGE>
EXHIBIT 10.45
FIRST AMENDMENT TO
FACILITY I CREDIT AGREEMENT
---------------------------
THIS FIRST AMENDMENT TO FACILITY I CREDIT AGREEMENT dated as of
September 25, 1995 (this "Amendment") is made by and among CWM MORTGAGE
- ------------------
HOLDINGS, INC., a Delaware corporation ("CWM"), INDEPENDENT NATIONAL MORTGAGE
CORPORATION, a Delaware corporation ("INMC"), INDEPENDENT LENDING CORPORATION, a
Delaware corporation ("ILC" and, together with CWM and INMC, the "Companies"),
FIRST UNION NATIONAL BANK OF NORTH CAROLINA, a national banking association
("First Union") in its individual capacity, THE BANK OF NEW YORK, a New York
banking corporation ("BNY"), CREDIT LYONNAIS, CAYMAN ISLANDS BRANCH, a
______________ ("Credit Lyonnais"), THE FIRST NATIONAL BANK OF CHICAGO, a
national banking association ("FNB Chicago"), GUARANTY FEDERAL BANK F.S.B., a
_____________ ("Guaranty Federal"), HIBERNIA NATIONAL BANK, a national banking
association ("Hibernia"), NATWEST BANK N.A., a national banking association
("NatWest") and NATIONSBANK OF TEXAS, N.A., a national banking association,
("NationsBank") (First Union in its individual capacity, BNY, Credit Lyonnais,
FNB Chicago, Guaranty Federal, Hibernia, NatWest and NationsBank, each together
with its permitted successors and assigns, a "Lender" and, collectively, the
"Lenders"), and First Union as administrative agent for the Lenders (in such
capacity, the "Administrative Agent").
STATEMENT OF PURPOSE
--------------------
WHEREAS, each of the parties hereto other than BNY, Credit Lyonnais,
FNB Chicago, Guaranty Federal, Hibernia, NatWest and NationsBank are parties to
a Facility I Credit Agreement dated as of May 30, 1995 (the "Credit Agreement");
and
WHEREAS, each of BNY, Credit Lyonnais, FNB Chicago, Guaranty Federal,
Hibernia, NatWest, and NationsBank desire to become parties to and Lenders under
the Credit Agreement and all other documents entered into in connection
therewith pursuant to the terms of Paragraph 11(j) of the Credit Agreement, and
each of such parties shall become a party to and a Lender under the Credit
Agreement and all other agreements and documents entered into in connection
therewith by execution of this Amendment in lieu of any other additional lender
agreement; and
WHEREAS, the parties hereto wish to amend the Credit Agreement to
provide, inter alia, for the inclusion of BNY, Credit Lyonnais, FNB Chicago,
----- ----
Guaranty Federal, Hibernia, NatWest and NationsBank as parties thereto and
Lenders thereunder, for the extension of the term thereof and for the
modification of various terms and covenants thereof; and
WHEREAS, subject to and upon the terms and conditions herein set
forth, the Lenders are willing to make available, and to continue to make
available, to the Companies the credit facilities provided for in the Credit
Agreement, as amended hereby;
1
<PAGE>
NOW, THEREFORE, in consideration of the premises and agreements
contained herein, and for good and valuable consideration, the receipt and
sufficiency of which are acknowledged by the parties hereto, the parties hereto
hereby agree as follows:
1. All capitalized terms used herein and not otherwise defined shall
have the respective meanings provided to such terms in the Credit Agreement, as
amended hereby.
2. The Credit Agreement is hereby amended to include, as parties
thereto, BNY, Credit Lyonnais, FNB Chicago, Guaranty Federal, Hibernia, NatWest
and NationsBank and the term "Lenders" as defined in the preamble to and
Paragraph 12 of the Credit Agreement is hereby amended to include BNY, Credit
Lyonnais, FNB Chicago, Guaranty Federal, Hibernia, NatWest and NationsBank and
as of the date hereof, each of BNY, Credit Lyonnais, FNB Chicago, Guaranty
Federal, Hibernia, NatWest and NationsBank shall be deemed to be a "Lender"
under the Credit Agreement and under each agreement and document entered into in
connection therewith.
3. Paragraph 3(a)(1) of the Credit Agreement is hereby amended by
deleting the third sentence thereof in its entirety and substituting the
following sentence in lieu thereof:
"The Companies may elect from time to time to convert Corporate Rate
Loans to Eurodollar Loans by giving the Administrative Agent at least
two Eurodollar Business Days' prior irrevocable notice of such
election."
4. Paragraph 3(a)(1) of the Credit Agreement is hereby amended by
deleting the sixth sentence thereof and its entirety and substituting the
following sentence in lieu thereof:
"No Corporate Rate Loan shall be converted into a Eurodollar Loan if
an Event of Default or Potential Default has occurred and is
continuing on the day occurring two Eurodollar Business Days prior to
the date of the conversion requested by the Companies or on the date
of conversion."
5. Paragraph 3(a)(2) of the Credit Agreement is hereby amended by
deleting clause (A) thereof in its entirety and substituting the following
clause in lieu thereof:
"(A) Any Eurodollar Loan may be continued as such upon the expiration
of the Interest Period with respect thereto by the Companies giving
the Administrative Agent at least two Eurodollar Business Days' prior
irrevocable notice of such election as set forth in a Loan Request,
and"
6. Paragraph 3(a)(2) of the Credit Agreement is hereby amended by
deleting the proviso contained therein in its entirety and substituting the
following clause in lieu thereof:
2
<PAGE>
"provided, however, that no Eurodollar Loan may be continued as such
when any Event of Default has occurred and is continuing on the day
occurring two Eurodollar Business Days prior to the proposed date of
such continuation or on the date of continuation, but shall be
automatically converted to a Corporate Rate Loan on the last day of
the then current Interest Period applicable thereto, and the
Administrative Agent shall notify the Lenders affected thereby and the
Companies promptly that such automatic conversion will occur."
7. Paragraph 3(a)(2) of the Credit Agreement is hereby amended by
deleting the phrase "Event of Default" contained therein and by substituting the
phrase "Event of Default or Potential Default" in lieu thereof.
8. Paragraph 3(f) of the Credit Agreement is hereby amended by
deleting the phrase "dollar deposits of lending banks" contained therein and
substituting the phrase "dollar deposits of leading banks" therefor.
9. Paragraph 3(g) of the Credit Agreement is hereby deleted in its
entirety and the following paragraph is substituted in lieu thereof:
"3(g) Funding Indemnification -- Failure to Borrower, Default or
----------------------------------------------------------
Failure to Continue or Convert. In addition to all other payment
------------------------------
obligations hereunder, in the event the Companies shall fail to borrow
a Eurodollar Loan or to continue or to make a conversion to a
Eurodollar Loan after the Companies have given notice thereof as
provided in Paragraph 3(a) above, or if after giving a notice to have
any Lender make a Eurodollar Loan, such Lender is not obligated to do
so due to the existence of an Event of Default, then the Companies
shall immediately pay any Lender holding the Eurodollar Loan not
borrowed, continued or converted, or which would have been obligated
to make such Eurodollar Loan, through the Administrative Agent, an
additional amount compensating each such Lender for losses and
expenses incurred by such Lender in connection with such failure to
borrow, continue or convert a Eurodollar Loan, or the occurrence of an
Event of Default including, without limitation, such as may arise out
of re-employment of funds obtained by such Lender and from fees
payable to terminate the deposits from which such funds were obtained,
such losses and expenses and the method of calculation thereof being
set forth in reasonable detail in a statement delivered to the
Companies by such Lender. The provisions hereof shall survive
termination of this Agreement and payment of the outstanding Loans and
all other amounts payable hereunder."
10. Paragraph 3(g) of the Credit Agreement is hereby amended by
deleting the phrase "Event of Default" in both of the instances
3
<PAGE>
in which it occurs therein and by substituting the phrase "Event of Default or
Potential Default" in lieu thereof in both instances.
11. Paragraph 3(j)(1) of the Credit Agreement is hereby amended by
deleting the time "3:00 p.m." therefrom and substituting the time "2:45 p.m." in
lieu thereof.
12. Paragraph 3(j)(2) of the Credit Agreement is hereby amended by
deleting the first sentence thereof in its entirety and substituting the
following sentence in lieu thereof:
"If the Companies desire to borrow or continue a Eurodollar Loan or to
convert a Corporate Rate Loan to a Eurodollar Loan as provided in
Paragraph 3(a) above, the Companies shall make a Loan Request to the
Administrative Agent no later than 2:00 p.m. (Charlotte, North
Carolina time) on the day occurring at least two Eurodollar Business
Days prior to the date of the borrowing, conversion or continuation
requested therein, and the Administrative Agent shall notify the
Lenders of the contents of such Loan Request no later than 2:45 p.m.
(Charlotte, North Carolina time) on such Business Day."
13. Paragraph 3(l)(1) of the Credit Agreement is hereby amended by
deleting clause (A) thereof in its entirety and substituting the following
clause in lieu thereof:
"(A) in the case of the Corporate Rate Loans and any Loans bearing
interest at a rate established pursuant to Paragraph 3(u) below, on or
before the fifth Business Day of each month, and"
14. Paragraph 3(t)(1) is amended to change the amount of the annual
fee to XXX-XXXXX XX XXX percent (X.XXX%) of the Aggregate Facility Commitment.
15. Paragraph 3(s)(2)(ii) of the Credit Agreement is hereby amended
by adding the following clause immediately prior to the semicolon contained
therein:
", and provided further that for the sole purpose of this Paragraph
-------- -------
3(s)(2)(ii), the Lenders' respective Repayment Shares shall be
adjusted to take into account interest which may be owing to any
Lender at a rate determined pursuant to the provisions of Paragraph
3(u) hereof"
16. The following paragraph is hereby added as a new Paragraph
3(t)(4) to the Credit Agreement:
"(4) To each of the Co-Agents for its own account, such co-
agency fees as have been agreed to in writing in that certain letter
dated as of June 19, 1995 from the Companies to the Co-Agents, as
modified from time to time in writing by the Companies and the Co-
Agents."
4
<PAGE>
17. Paragraph 6(k) of the Credit Agreement is hereby amended by
deleting the clause "Paragraph 6(a)" therefrom in the second instance in which
such phrase occurs therein and substituting the clause "Paragraph 8(a)" in lieu
thereof.
18. Paragraph 6(l) of the Credit Agreement is hereby amended by
deleting the phrase "Securities and Exchange Act of 1934, as amended" contained
therein and by substituting the phrase "Securities Exchange Act of 1934, as
amended" in lieu thereof.
19. Paragraph 7(a)(3) of the Credit Agreement is hereby amended by
deleting the phrase "Paragraphs 8(g), 8(h) and 8(i)" therefrom and substituting
the phrase "Paragraphs 8(g), 8(h), 8(i) and 8(j)" in lieu thereof.
20. The following paragraphs are hereby added as new Paragraphs
7(a)(4) and 7(a)(5) to the Credit Agreement:
"(4) Within ninety (90) days after the last day of each fiscal
year of the Companies, consolidating financial statements for CWM
(except for CWM Mortgage Obligations II, Inc. and CWM Mortgage
Obligations III, Inc.), each dated as of the last day of such fiscal
year for the fiscal year then ended, which consolidating financial
statements shall present fairly, in accordance with GAAP (except for
the accounting of INMC, which is not consolidated with CWM under
GAAP), the financial condition of CWM and its consolidated
subsidiaries (including INMC for this purpose) at such date and the
results of their operations and cash flows for the fiscal year then
ended.
(5) Within forty-five (45) days after the last day of each
fiscal quarter of the Companies, consolidating financial statements
for CWM (except for CWM Mortgage Obligations II, Inc. and CWM Mortgage
Obligations III, Inc.), each dated as of the last day of such fiscal
quarter for the fiscal quarter then ended, which consolidating
financial statements shall present fairly, in accordance with GAAP
(except for the accounting of INMC, which is not consolidated with CWM
under GAAP), the financial condition of CWM and its consolidated
subsidiaries (including INMC for this purpose) at such date and the
results of their operations and cash flows for the fiscal year then
ended."
21. Paragraph 7(a) of the Credit Agreement is hereby amended by
adding the following sentence as the last sentence of such paragraph:
"Upon receipt of any of the items listed in subparagraphs (1), (2),
(3), (4) or (5) above, the Administrative Agent shall promptly furnish
copies of such items to the Lenders."
5
<PAGE>
22. Paragraph 8(e) of the Credit Agreement is hereby amended by
adding the following sentence as the last sentence of such paragraph:
"In the event that the Administrative Agent consents in writing to a
material change by the Companies in or to any of the above-described
programs, procedures or policies, the Administrative Agent shall
promptly notify the Lenders of the nature and content of such change."
23. Paragraph 8(g) of the Credit Agreement is hereby deleted in its
entirety and the following paragraph is hereby substituted in lieu thereof:
"8(g) Indebtedness to Net Worth Ratio of CWM. Permit the ratio
--------------------------------------
of (i) the sum of (A) the Adjusted Total Indebtedness of INMC and (B)
the consolidated Adjusted Total Indebtedness of CWM (as shown on the
most recent consolidated financial statements of CWM delivered to the
Administrative Agent pursuant to Paragraph 7(a)), to (ii) the sum of
(A) the Book Net Worth of INMC and (B) the consolidated Book Net Worth
of CWM (as shown on the most recent consolidated financial statements
of CWM delivered to the Administrative Agent pursuant to Paragraph
7(a)), provided, however that the sum referenced in the immediately
-------- -------
preceding subparagraph (ii) shall be reduced by the amount of equity
in earnings of INMC as shown on the most recent consolidated financial
statements of CWM), on any date to be more than XX.X:1.0."
24. The following paragraph is hereby added as a new Paragraph 8(j)
to the Credit Agreement:
"8(j) Minimum Master Servicing Portfolio. Without the written
----------------------------------
consent of the Majority Lenders, transfer any rights to service
Mortgage Loans which would result in the Master Servicing Portfolio at
any date being less than $X,XXX,XXX,XXX.XX."
25. Paragraph 9(f) of the Credit Agreement is hereby amended by
deleting the comma occurring immediately after the phrase "or any other event
shall occur" contained therein.
26. Paragraph 10(a) of the Credit Agreement is hereby amended by
deleting the next-to-last sentence thereof in its entirety and substituting the
following sentence in lieu thereof:
"The Lenders specifically authorize the Administrative Agent to agree
to indemnify the Collateral Agent from and to pay to the Collateral
Agent all costs (including, without limitation, costs incurred by
Collateral Agent as a result of any examination performed by any
Lender under Paragraph 12 of the Security Agreement) as set out in the
Security Agreement and to the extent, if any, that the Companies are
not required to or do not reim-
6
<PAGE>
burse the Administrative Agent for any such indemnification or costs,
then the Lenders will do so ratably in accordance with their
Percentage Shares, unless such cost is related to an examination by a
Lender under Paragraph 12 of the Security Agreement, in which case all
such costs will be borne by the examining Lender; provided, however,
-------- -------
that if the Companies are not required to reimburse the Administrative
Agent for any such indemnification or costs due to the gross
negligence or willful misconduct of either the Collateral Agent or the
Administrative Agent, then the Lenders shall not be required to
reimburse the Administrative Agent for any such indemnification or
costs."
27. Paragraph 10(g) of the Credit Agreement is hereby amended by
deleting the next-to-last sentence thereof in its entirety and substituting the
following sentence in lieu thereof:
"The Lenders agree to indemnify and hold harmless the Administrative
Agent in its capacity as such ratably in accordance with their
Percentage Shares to the extent required by the Companies hereunder if
the Administrative Agent is not reimbursed by the Companies hereunder
and without limiting the obligation of the Companies to do so;
provided, however, that the Lenders shall not be required to indemnify
-------- -------
the Administrative Agent under this Paragraph 10(g) for claims,
obligations, penalties, actions, suits, judgments, costs,
disbursements, losses, liabilities or damages resulting from the gross
negligence or willful misconduct of the Administrative Agent."
28. Paragraph 10(l) of the Credit Agreement is hereby amended by
inserting the following phrase immediately following the second parenthetical
contained in the first sentence thereof:
", except pursuant to Paragraph 3(c) or (d) above or Paragraph
11(i) below,"
29. Paragraph 11(l) of the Credit Agreement is hereby amended by
deleting the clause "Facility I Agreement" appearing in subparagraph (i) thereof
and substituting the clause "Facility II Agreement" in lieu thereof.
30. The following paragraph is hereby added as a new Paragraph 11
(m) to the Credit Agreement:
"11(m) Co-Agents. The Co-Agents shall have no agency duties or
----------------
obligations under this Agreement or any of the other Credit
Documents."
31. The definition of "Agent" contained in Paragraph 12 of the
Credit Agreement is hereby deleted in its entirety and the following definition
is hereby substituted in lieu thereof:
7
<PAGE>
"`Agent' shall mean either of the Administrative Agent or the
-----
Collateral Agent, as the context may require, and "Agents" shall mean
both of the Administrative Agent and the Collateral Agent."
32. The definition of "Approved Investor" contained in Paragraph 12
of the Credit Agreement is hereby deleted in its entirety and the following
definition is hereby substituted in lieu thereof:
"`Approved Investor' shall mean any Person pre-approved (which pre-
-----------------
approval may be limited in dollar amounts by type and otherwise) by
the Majority Lenders (including those shown on Schedule III set forth
------------
in the Addendum) and which approval has not been revoked by the
Majority Lenders (such revocation to be effective on the tenth
Business Day following notice thereof given to the Companies by the
Administrative Agent in writing); provided, that the Administrative
--------
Agent shall notify the Lenders in writing of any proposed additional
Approved Investor and such proposed Approved Investor shall be deemed
to have been pre-approved five (5) Business Days after such notice has
been given, unless the Majority Lenders shall have notified the
Administrative Agent prior to such date that such proposed Approved
Investor is not approved."
33. The definition of "Approved Repo Lender" contained in Paragraph
12 of the Credit Agreement is hereby deleted in its entirety and the following
definition is hereby substituted in lieu thereof:
"`Approved Repo Lender' shall mean any Approved Investor or any other
--------------------
entity pre-approved by the Majority Lenders (including those shown on
Schedule III set forth in the Addendum) and which approval has not
------------
been revoked by the Majority Lenders (such revocation to be effective
on the tenth Business Day following notice thereof given to the
Companies by the Administrative Agent in writing); provided, that the
--------
Administrative Agent shall notify the Lenders in writing of any
proposed additional Approved Repo Lender and such proposed Approved
Repo Lender shall be deemed to have been pre-approved five (5)
Business Days after such notice has been given, unless the Majority
Lenders shall have notified the Administrative Agent prior to such
date that such proposed Approved Repo Lender is not approved."
34. The following definition of "Borrowing Base" is hereby added as
a new definition to Paragraph 12 of the Credit Agreement:
"`Borrowing Base' shall mean the Tranche A Borrowing Base or the
--------------
Tranche B Borrowing Base, as the context may require, and "Borrowing
---------
Bases" shall mean, collectively, the Tranche A Borrowing Base and the
-----
Tranche B Borrowing Base."
8
<PAGE>
35. The following definition of "Co-Agent" is hereby added as a new
definition to Paragraph 12 of the Credit Agreement:
"'Co-Agent' shall mean any of The Bank of New York, Guaranty
--------
Federal Bank F.S.B. or NationsBank of Texas, N.A., and 'Co-Agents'
shall mean all of such Lenders collectively."
36. The definition of "Collateral Value of the Tranche A Borrowing
Base" contained in Paragraph 12 of the Credit Agreement is hereby deleted in its
entirety and the following definition is hereby substituted in lieu thereof:
"`Collateral Value of the Tranche A Borrowing Base' shall mean at
------------------------------------------------
any date the sum of the Unit Collateral Values of all Eligible A/B
Mortgage Loans included in the Tranche A Borrowing Base at such date
(including Eligible A/B Mortgage Loans shipped into pools supporting
Mortgage Backed Securities pending sale of such Mortgage Backed
Securities and delivery of the sale proceeds thereof to the
Settlement Account) (which amount shall be subject to adjustment as
provided in Paragraph 11(l) above)."
37. Subparagraph (j) of the definition of "Eligible A/B Mortgage
Loan" contained in Paragraph 12 of the Credit Agreement is hereby amended by
deleting the proviso contained at the end thereof and substituting the following
proviso in lieu thereof:
"provided, however, that such Property may be subject to one
-------- -------
(1) Lien prior to the Lien in favor of the Companies so long as, if
said Mortgage Loan is included in the Tranche B Borrowing Base, the
Unit Collateral Value of said Mortgage Loan, when added to the Unit
Collateral Values of all other Mortgage Loans included in the Tranche
B Borrowing Base with respect to which the underlying Property is
subject to one (1) Lien prior to the Lien in favor of the Companies,
does not exceed XXXXXX-XXXX percent (XX%) of the aggregate
outstanding principal amount of all Tranche B Loans at such time."
38. The definition of "Fair Market Value" contained in Paragraph
12 of the Credit Agreement is hereby deleted in its entirety and the following
definition is hereby substituted in lieu thereof:
"'Fair Market Value' shall mean, with respect to any Mortgage
-----------------
Loan, the market bid price obtainable for such Mortgage Loan, as such
market bid price shall be determined no less frequently than monthly
on a reasonable basis by the Administrative Agent by reference to the
average of bids therefor solicited by the Administrative Agent and
obtained from at least
9
<PAGE>
three (3) dealers with a general reputation as being reputable in
the pricing of Mortgage Loans."
39. The following definition of "Master Servicing Portfolio" is
hereby added as a new definition to Paragraph 12 of the Credit Agreement:
"'Master Servicing Portfolio' shall mean the aggregate
--------------------------
outstanding principal amount at the time of determination of the
Mortgage Loans serviced by the Companies or their affiliates under
Master Servicing Contracts."
40. The definition of "Maturity Date" contained in Paragraph 12
of the Credit Agreement is hereby amended by deleting the date "May 29, 1996"
contained therein and substituting the date "September 24, 1996" in lieu
------------
thereof.
41. Subparagraph (b) of the definition of "Unit Collateral Value"
contained in Paragraph 12 of the Credit Agreement is hereby deleted in its
entirety and the following paragraphs are hereby substituted in lieu thereof:
"(b) with respect to each Eligible A/B Mortgage Loan included
in the Tranche B Borrowing Base:
(i) if such Eligible A/B Mortgage Loan is sixty (60)
days delinquent or less, XXXXXX-XXXX percent (XX%) of the lesser of:
(1) the unpaid principal amount thereof at the time such Eligible
A/B Mortgage Loan is included in the Tranche B Borrowing Base (or,
in the case of a Construction-to-Permanent Mortgage Loan, the
greater of a. the principal amount thereof disbursed at the date of
-
determination or b. the maximum principal amount thereof disbursed
-
at any time), and (2) the Fair Market Value thereof.
(ii) if such Eligible A/B Mortgage Loan is more than
sixty (60) days delinquent but is less than or equal to one hundred
eighty (180) days delinquent, XXXXXX percent (XX%) of the lesser of:
(1) the unpaid principal amount thereof at the time such Eligible
A/B Mortgage Loan is included in the Tranche B Borrowing Base (or,
in the case of a Construction-to-Permanent Mortgage Loan, the
greater of a. the principal amount thereof disbursed at the date of
-
determination or b. the maximum-principal amount thereof disbursed
-
at any time), and (2) the Fair Market Value thereof.
(iii) if such Eligible A/B Mortgage Loan is more than
one hundred eighty (180) days delinquent, XXXXXXX-XXXX percent (XX%)
of the lesser of: (1) the unpaid principal amount thereof at the
time such Eligible A/B Mortgage Loan is included in the Tranche B
Borrowing Base (or, in the case of a Construction-to-Permanent
Mortgage Loan, the greater of a. the principal
-
10
<PAGE>
amount thereof disbursed at the date of determination or b. the
-
maximum principal amount thereof disbursed at any time), and (2) the
Fair Market Value thereof."
42. The Commitment Schedule (Facility I Credit Agreement)
contained as Schedule I-1 to the Addendum is hereby deleted and the Commitment
Schedule (Facility I Credit Agreement) attached as EXHIBIT A to this Amendment
is substituted therefor.
43. The Schedule of Addresses contained as Schedule II to the
Addendum is hereby deleted and the Schedule of Addresses attached as EXHIBIT B
to this Amendment is substituted therefor.
44. The Form of Borrowing Base Schedule (Facility I Credit
Agreement) contained as Exhibit F-1 to the Addendum is hereby deleted and the
Form of Borrowing Base Schedule (Facility I Credit Agreement) attached as
EXHIBIT C to this Amendment is substituted therefor.
45. The Form of Covenant Compliance Certificate contained as
Exhibit G to the Addendum is hereby deleted and the Form of Covenant Compliance
Certificate attached as EXHIBIT D to this Amendment is substituted therefor.
46. This Amendment shall become effective as of the date hereof,
provided that the Administrative Agent shall have received by such date the
following items:
(A) A copy of this Amendment executed by each of the Companies, each
of the Lenders, and the Administrative Agent (whether such parties
shall have signed the same or different copies);
(B) Facility I Promissory Notes of even date herewith, each as duly
executed by the Companies, each such note to be payable by the
Companies to the order of a Lender named in Section 2 of this
Amendment and to be in the form of ANNEX I hereto (all such notes
being considered to be Notes for all purposes); and
(C) Certificates of even date herewith signed by the President or
any Vice President of each of CWM, INMC and ILC, and attested to by
the Secretary or any Assistant Secretary of each of CWM, INMC and
ILC, certifying that (i) the Articles, Bylaws and resolutions of
each such party previously delivered to the Administrative Agent
remain in full force and effect except as provided therein, (ii)
such party remains in good standing, (iii) all representations and
warranties of such party previously made to the Lenders remain true,
complete and accurate, and (iv) no Event of Default or Potential
Default has occurred and is continuing under any of the Credit
Documents.
47. The parties hereto agree and acknowledge that on the date
hereof, to the extent necessary, the Administrative Agent
11
<PAGE>
shall reallocate the Loans made by First Union and outstanding on such date
among all the Lenders so that as of such date the ratios of (i) the aggregate
principal amount of Tranche A Loans outstanding from any Lender to the aggregate
principal amount of Tranche A Loans outstanding from all the Lenders and (ii)
the aggregate principal amount of Tranche B Loans outstanding from any Lender to
the aggregate principal amount of Tranche B Loans outstanding from all the
Lenders, shall be equal to the ratio of such Lender's Maximum Commitment to the
Aggregate Facility Commitment after giving effect to this Amendment, and the
Lenders shall make such payments among themselves as may be necessary to effect
such transactions.
48. This Amendment is limited and, except as set forth herein,
shall not constitute a modification, acceptance or waiver of any other provision
of the Credit Agreement, or any other document or instrument entered into in
connection therewith.
49. This Amendment may be executed in any number of counterparts
by the different parties hereto on separate counterparts, each of which
counterparts when executed and delivered shall be an original, but all of which
together shall constitute one and the same instrument. A complete set of
counterparts shall be lodged with the Companies and the Administrative Agent.
50. This Amendment and the rights and obligations of the parties
hereunder shall be construed in accordance with and governed by the laws of the
State of North Carolina.
51. From and after the date hereof, all references in the Credit
Agreement, and any other document or instrument entered into in connection
therewith, to the Credit Agreement shall be deemed to be references to the
Credit Agreement as amended hereby. Each of BNY, Credit Lyonnais, FNB Chicago,
Guaranty Federal, Hibernia, NatWest and NationsBank hereby assumes, and agrees
to be bound under and by, the terms of the Credit Agreement and all agreements
and documents entered into in connection therewith from and after the date
hereof. Each of BNY, Credit Lyonnais, FNB Chicago, Guaranty Federal, Hibernia,
NatWest and NationsBank shall be considered to be a "Lender" for all purposes
under the Security Agreement, the Uniform Commercial Code financing statements
filed pursuant thereto, the Custodial Agreement and the other Credit Documents.
52. THE LENDERS, THE ADMINISTRATIVE AGENT, AND THE COMPANIES EACH
HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVES, TO THE MAXIMUM EXTENT
PERMITTED BY LAW, THE RIGHT ANY OF THEM MAY HAVE TO A TRIAL BY JURY IN RESPECT
OF ANY LITIGATION BASED HEREON, OR ARISING OUT OF, UNDER OR IN CONNECTION WITH
THIS AMENDMENT AND ANY AGREEMENT CONTEMPLATED TO BE EXECUTED IN CONJUNCTION
HEREWITH. THIS PROVISION IS A MATERIAL INDUCEMENT FOR THE LENDERS AND THE
ADMINISTRATIVE AGENT TO ENTER INTO THIS AMENDMENT.
12
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused a counterpart of
this Amendment to be duly executed and delivered as of the date first above
written.
CWM MORTGAGE HOLDINGS, INC.
By: /s/ Michael W. Perry
---------------------
Name: Michael W. Perry
-----------------
Title: Exec. Vice President & Chief Operating
---------------------------------------
Officer
-------
INDEPENDENT NATIONAL MORTGAGE CORPORATION
By: /s/ Michael W. Perry
---------------------
Name: Michael W. Perry
-----------------
Title: President & Chief Executive Officer
------------------------------------
INDEPENDENT LENDING CORPORATION
By: /s/ Michael W. Perry
---------------------
Name: Michael W. Perry
-----------------
Title: President & Chief Executive Officer
------------------------------------
FIRST UNION NATIONAL BANK OF
NORTH CAROLINA,
as Administrative Agent and as a Lender
By: /s/ Carolyn Eskridge
---------------------
Name: Carolyn Eskridge
-----------------
Title: SVP
----
THE BANK OF NEW YORK
By: /s/ Cynthia E. Crites
----------------------
Name: Cynthia E. Crites
------------------
Title: AVP
----
13
<PAGE>
CREDIT LYONNAIS, CAYMAN ISLANDS BRANCH
By: /s/ William J. Fischer
-----------------------
Name: William J. Fischer
-------------------
Title: Authorized Signatory
---------------------
THE FIRST NATIONAL BANK OF CHICAGO
By: /s/ J.S. Winn, Jr.
-------------------
Name: J.S. Winn, Jr.
---------------
Title: SVP
----
GUARANTY FEDERAL BANK F.S.B.
By: /s/ Abbie Y Tidmore
--------------------
Name: Abbie Y Tidmore
----------------
Title: Vice President
---------------
HIBERNIA NATIONAL BANK
By: /s/ Colleen Lacy
-----------------
Name: Colleen Lacy
-------------
Title: Vice President
---------------
NATWEST BANK N.A.
By: /s/ Kevin J. Batterton
-----------------------
Name: Kevin J. Batterton
-------------------
Title: Vice President
---------------
NATIONSBANK OF TEXAS, N.A.
By: /s/ Beth S. Sorensen
---------------------
Name: Beth S. Sorensen
-----------------
Title: SVP
----
14
<PAGE>
EXHIBIT 10.46
FIRST AMENDMENT TO
FACILITY II CREDIT AGREEMENT
----------------------------
THIS FIRST AMENDMENT TO FACILITY II CREDIT AGREEMENT dated as of
September 25, 1995 (this "Amendment") is made by and among CWM MORTGAGE
- ------------
HOLDINGS, INC., a Delaware corporation ("CWM"), INDEPENDENT NATIONAL MORTGAGE
CORPORATION, a Delaware corporation ("INMC"), INDEPENDENT LENDING CORPORATION, a
Delaware corporation ("ILC" and, together with CWM and INMC, the "Companies"),
FIRST UNION NATIONAL BANK OF NORTH CAROLINA, a national banking association
("First Union") in its individual capacity, THE BANK OF NEW YORK, a New York
banking corporation ("BNY"), CREDIT LYONNAIS, CAYMAN ISLANDS BRANCH, a
("Credit Lyonnais"), THE FIRST NATIONAL BANK OF CHICAGO, a
- -----------------
national banking association ("FNB Chicago"), GUARANTY FEDERAL BANK F.S.B., a
("Guaranty Federal"), HIBERNIA NATIONAL BANK, a national
- ------------------
banking association ("Hibernia"), NATWEST BANK N.A., a national banking
association ("NatWest") and NATIONSBANK OF TEXAS, N.A., a national banking
association, ("NationsBank") (First Union in its individual capacity, BNY,
Credit Lyonnais, FNB Chicago, Guaranty Federal, Hibernia, NatWest and
NationsBank, each together with its permitted successors and assigns, a "Lender"
and, collectively, the "Lenders"), and First Union as administrative agent for
the Lenders (in such capacity, the "Administrative Agent").
STATEMENT OF PURPOSE
--------------------
WHEREAS, each of the parties hereto other than BNY, Credit Lyonnais,
FNB Chicago, Guaranty Federal, Hibernia, NatWest and NationsBank are parties to
a Facility II Credit Agreement dated as of May 30, 1995 (the "Credit
Agreement"); and
WHEREAS, each of BNY, Credit Lyonnais, Guaranty Federal and Hibernia
has become a party to and a Lender under the Credit Agreement and all other
agreements and documents entered into in connection therewith pursuant to the
terms of Paragraph 15(i) of the Credit Agreement, each as evidenced by that
certain Assignment Agreement of even date herewith between such institution and
First Union (collectively, the "Assignments"), each such Assignment being in the
form attached as ANNEX I hereto; and
WHEREAS, each of FNB Chicago, NatWest, and NationsBank desire to
become parties to and Lenders under the Credit Agreement and all other documents
entered into in connection therewith pursuant to the terms of Paragraph 15(j) of
the Credit Agreement, and each of such parties shall become a party to and a
Lender under the Credit Agreement and all other agreements and documents entered
into in connection therewith by execution of this Amendment in lieu of any other
additional lender agreement; and
WHEREAS, the parties hereto wish to amend the Credit Agreement to
provide, inter alia, for the inclusion of BNY, Credit Lyonnais, FNB Chicago,
----- ----
Guaranty Federal, Hibernia, NatWest and NationsBank as parties thereto and
Lenders thereunder, for the extension of the
1
<PAGE>
term thereof and for the modification of various terms and covenants thereof;
and
WHEREAS, subject to and upon the terms and conditions herein set
forth, the Lenders are willing to make available, and to continue to make
available, to the Companies the credit facilities provided for in the Credit
Agreement, as amended hereby;
NOW, THEREFORE, in consideration of the premises and agreements
contained herein, and for good and valuable consideration, the receipt and
sufficiency of which are acknowledged by the parties hereto, the parties hereto
hereby agree as follows:
1. All capitalized terms used herein and not otherwise defined shall
have the respective meanings provided to such terms in the Credit Agreement, as
amended hereby.
2. The Credit Agreement is hereby amended to include, as parties
thereto, BNY, Credit Lyonnais, FNB Chicago, Guaranty Federal, Hibernia, NatWest
and Nations Bank and the term "Lenders" as defined in the preamble to and
Paragraph 16 of the Credit Agreement is hereby amended to include BNY, Credit
Lyonnais, FNB Chicago, Guaranty Federal, Hibernia, NatWest and NationsBank and
as of the date hereof, each of BNY, Credit Lyonnais, FNB Chicago, Guaranty
Federal, Hibernia, NatWest and NationsBank shall be deemed to be a "Lender"
under the Credit Agreement and under each agreement and document entered into in
connection therewith.
3. Paragraph 7(a)(1) of the Credit Agreement is hereby amended by
deleting the third sentence thereof in its entirety and substituting the
following sentence in lieu thereof:
"The Companies may elect from time to time to convert Corporate Rate
Loans to Eurodollar Loans by giving the Administrative Agent at least
two Eurodollar Business Days' prior irrevocable notice of such
election."
4. Paragraph 7(a)(1) of the Credit Agreement is hereby amended by
deleting the sixth sentence thereof and its entirety and substituting the
following sentence in lieu thereof:
"No Corporate Rate Loan shall be converted into a Eurodollar Loan if
an Event of Default or Potential Default has occurred and is
continuing on the day occurring two Eurodollar Business Days prior to
the date of the conversion requested by the Companies or on the date
of conversion."
5. Paragraph 7(a)(2) of the Credit Agreement is hereby amended by
deleting clause (A) thereof in its entirety and substituting the following
clause in lieu thereof:
"(A) Any Eurodollar Loan may be continued as such upon the expiration
of the Interest Period with respect thereto by the Companies giving
the Administrative Agent
2
<PAGE>
at least two Eurodollar Business Days' prior irrevocable notice of
such election as set forth in a Loan Request, and"
6. Paragraph 7(a)(2) of the Credit Agreement is hereby amended by
deleting the proviso contained therein in its entirety and substituting the
following clause in lieu thereof:
"provided, however, that no Eurodollar Loan may be continued as such
when any Event of Default has occurred and is continuing on the day
occurring two Eurodollar Business Days prior to the proposed date of
such continuation or on the date of continuation, but shall be
automatically converted to a Corporate Rate Loan on the last day of
the then current Interest Period applicable thereto, and the
Administrative Agent shall notify the Lenders affected thereby and the
Companies promptly that such automatic conversion will occur."
7. Paragraph 7(a)(2) of the Credit Agreement is hereby amended by
deleting the phrase "Event of Default" contained therein and by substituting the
phrase "Event of Default or Potential Default" in lieu thereof.
8. Paragraph 7(f) of the Credit Agreement is hereby amended by
deleting the phrase "dollar deposits of lending banks" contained therein and
substituting the phrase "dollar deposits of leading banks" therefor.
9. Paragraph 7(g) of the Credit Agreement is hereby deleted in its
entirety and the following paragraph is substituted in lieu thereof:
"7(g) Funding Indemnification -- Failure to Borrower, Default
-------------------------------------------------------
or Failure to Continue or Convert. In addition to all other payment
---------------------------------
obligations hereunder, in the event the Companies shall fail to
borrow a Eurodollar Loan or to continue or to make a conversion to a
Eurodollar Loan after the Companies have given notice thereof as
provided in Paragraph 7(a) above, or if after giving a notice to have
any Lender make a Eurodollar Loan, such Lender is not obligated to do
so due to the existence of an Event of Default, then the Companies
shall immediately pay any Lender holding the Eurodollar Loan not
borrowed, continued or converted, or which would have been obligated
to make such Eurodollar Loan, through the Administrative Agent, an
additional amount compensating each such Lender for losses and
expenses incurred by such Lender in connection with such failure to
borrow, continue or convert a Eurodollar Loan, or the occurrnce of an
Event of Default including, without limitation, such as may arise out
of re-employment of funds obtained by such Lender and from fees
payable to terminate the deposits from which such funds were obtained,
such losses and expenses and the
3
<PAGE>
method of calculation thereof being set forth in reasonable detail in
a statement delivered to the Companies by such Lender. The provisions
hereof shall survive termination of this Agreement and payment of the
outstanding Loans and all other amounts payable hereunder."
10. Paragraph 7(g) of the Credit Agreement is hereby amended by
deleting the phrase "Event of Default" in both of the instances in which it
occurs therein and by substituting the phrase "Event of Default or Potential
Default" in lieu thereof in both instances.
11. Paragraph 7(j)(1) of the Credit Agreement is hereby amended by
deleting the time "3:00 p.m." therefrom and substituting the time "2:45 p.m." in
lieu thereof.
12. Paragraph 7(j)(2) of the Credit Agreement is hereby amended by
deleting the first sentence thereof in its entirety and substituting the
following sentence in lieu thereof:
"If the Companies desire to borrow or continue a Eurodollar Loan or to
convert a Corporate Rate Loan to a Eurodollar Loan as provided in
Paragraph 7(a) above, the Companies shall make a Loan Request to the
Administrative Agent no later than 2:00 p.m. (Charlotte, North
Carolina time) on the day occurring at least two Eurodollar Business
Days prior to the date of the borrowing, conversion or continuation
requested therein, and the Administrative Agent shall notify the
Lenders of the contents of such Loan Request no later than 2:45 p.m.
(Charlotte, North Carolina time) on such Business Day."
13. Paragraph 7(l)(1) of the Credit Agreement is hereby amended by
deleting clause (A) thereof in its entirety and substituting the following
clause in lieu thereof:
"(A) in the case of the Corporate Rate Loans and any Loans bearing
interest at a rate established pursuant to Paragraph 7(u) below, on or
before the fifth Business Day of each month, and"
14. Paragraph 7(s)(2)(ii) of the Credit Agreement is hereby amended by
adding the following clause immediately prior to the semicolon contained
therein:
", and provided further that for the sole purpose of this Paragraph
-------- -------
7(s)(2)(ii), the Lenders' respective Repayment Shares shall be
adjusted to take into account interest which may be owing to any
Lender at a rate determined pursuant to the provisions of Paragraph
7(u) hereof"
15. The following paragraph is hereby added as a new Paragraph 7(t)(4)
to the Credit Agreement:
"(4) To each of the Co-Agents for its own account, such co-agency
fees as have been agreed to in writing in
4
<PAGE>
that certain letter dated as of June 19, 1995 from the Companies to the Co-
Agents, as modified from time to time in writing by the Companies and the
Co-Agents."
16. Paragraph 10(l) of the Credit Agreement is hereby amended by
deleting the phrase "Securities and Exchange Act of 1934, as amended" contained
therein and by substituting the phrase "Securities Exchange Act of 1934, as
amended" in lieu thereof.
17. Paragraph 11(a)(3) of the Credit Agreement is hereby amended by
deleting the phrase "Paragraphs 12(g), 12(h) and 12(i)" therefrom and
substituting the phrase "Paragraphs 12(g), 12(h), 12(i) and 12(j)" in lieu
thereof.
18. The following paragraphs are hereby added as new Paragraphs
11(a)(4) and 11(a)(5) to the Credit Agreement:
"(4) Within ninety (90) days after the last day of each fiscal
year of the Companies, consolidating financial statements for CWM (except
for CWM Mortgage Obligations II, Inc. and CWM Mortgage Obligations III,
Inc.), each dated as of the last day of such fiscal year for the fiscal
year then ended, which consolidating financial statements shall present
fairly, in accordance with GAAP (except for the accounting of INMC, which
is not consolidated with CWM under GAAP), the financial condition of CWM
and its consolidated subsidiaries (including INMC for this purpose) at such
date and the results of their operations and cash flows for the fiscal year
then ended.
(5) Within forty-five (45) days after the last day of each fiscal
quarter of the Companies, consolidating financial statements for CWM
(except for CWM Mortgage Obligations II, Inc. and CWM Mortgage Obligations
III, Inc.), each dated as of the last day of such fiscal quarter for the
fiscal quarter then ended, which consolidating financial statements shall
present fairly, in accordance with GAAP (except for the accounting of INMC,
which is not consolidated with CWM under GAAP), the financial condition of
CWM and its consolidated subsidiaries (including INMC for this purpose) at
such date and the results of their operations and cash flows for the fiscal
year then ended."
19. Paragraph 11(a) of the Credit Agreement is hereby amended by
adding the following sentence as the last sentence of such paragraph:
"Upon receipt of any of the items listed in subparagraphs (1), (2), (3),
(4) or (5) above, the Administrative Agent shall promptly furnish copies of
such items to the Lenders."
5
<PAGE>
20. Paragraph 12(e) of the Credit Agreement is hereby amended by
adding the following sentence as the last sentence of such paragraph:
"In the event that the Administrative Agent consents in writing to a
material change by the Companies in or to any of the above-described
programs, procedures or policies, the Administrative Agent shall
promptly notify the Lenders of the nature and content of such change."
21. Paragraph 12(g) of the Credit Agreement is hereby deleted in its
entirety and the following paragraph is hereby substituted in lieu thereof:
"12(g) Indebtedness to Net Worth Ratio of CWM. Permit the
--------------------------------------
ratio of (i) the sum of (A) the Adjusted Total Indebtedness of INMC
and (B) the consolidated Adjusted Total Indebtedness of CWM (as shown
on the most recent consolidated financial statements of CWM delivered
to the Administrative Agent pursuant to Paragraph 11(a)), to (ii) the
sum of (A) the Book Net Worth of INMC and (B) the consolidated Book
Net Worth of CWM (as shown on the most recent consolidated financial
statements of CWM delivered to the Administrative Agent pursuant to
Paragraph 11(a)), provided, however that the sum referenced in the
-------- -------
immediately preceding subparagraph (ii) shall be reduced by the
amount of equity in earnings of INMC as shown on the most recent
consolidated financial statements of CWM), on any date to be more
than XX.X:1.0."
22. The following paragraph is hereby added as a new Paragraph 12(j)
to the Credit Agreement:
"12(j) Minimum Master Servicing Portfolio. Without the written
----------------------------------
consent of the Majority Lenders, transfer any rights to service
Mortgage Loans which would result in the Master Servicing Portfolio at
any date being less than $X,XXX,XXX,XXX.XX."
23. Paragraph 13(f) of the Credit Agreement is hereby amended by
deleting the comma occurring immediately after the phrase "or any other event
shall occur" contained therein.
24. Paragraph 14(a) of the Credit Agreement is hereby amended by
deleting the next-to-last sentence thereof in its entirety and substituting the
following sentence in lieu thereof:
"The Lenders specifically authorize the Administrative Agent to agree
to indemnify the Collateral Agent from and to pay to the Collateral
Agent all costs (including, without limitation, costs incurred by
Collateral Agent as a result of any examination performed by any
Lender under Paragraph 12 of the Security Agreement) as set out in the
Security Agreement and to the extent, if any,
6
<PAGE>
that the Companies are not required to or do not reimburse the
Administrative Agent for any such indemnification or costs, then the
Lenders will do so ratably in accordance with their Percentage Shares,
unless such cost is related to an examination by a Lender under
Paragraph 12 of the Security Agreement, in which case all such costs
will be borne by the examining Lender; provided, however, that if the
-------- -------
Companies are not required to reimburse the Administrative Agent for
any such indemnification or costs due to the gross negligence or
willful misconduct of either the Collateral Agent or the
Administrative Agent, then the Lenders shall not be required to
reimburse the Administrative Agent for any such indemnification or
costs."
25. Paragraph 14(g) of the Credit Agreement is hereby amended by
deleting the next-to-last sentence thereof in its entirety and substituting the
following sentence in lieu thereof:
"The Lenders agree to indemnify and hold harmless the Administrative
Agent in its capacity as such ratably in accordance with their
Percentage Shares to the extent required by the Companies hereunder if
the Administrative Agent is not reimbursed by the Companies hereunder
and without limiting the obligation of the Companies to do so;
provided, however, that the Lenders shall not be required to indemnify
-------- -------
the Administrative Agent under this Paragraph 14(g) for claims,
obligations, penalties, actions, suits, judgments, costs,
disbursements, losses, liabilities or damages resulting from the gross
negligence or willful misconduct of the Administrative Agent."
26. Paragraph 14(l) of the Credit Agreement is hereby amended by
inserting the following phrase immediately following the second parenthetical
contained in the first sentence thereof:
", except pursuant to Paragraph 7(c) or (d) above or Paragraph
15(i) below,"
27. The following paragraph is hereby added as a new Paragraph 15 (m)
to the Credit Agreement:
"15(m) Co-Agents. The Co-Agents shall have no agency duties or
---------
obligations under this Agreement or any of the other Credit
Documents."
28. The definition of "Agent" contained in Paragraph 16 of the Credit
Agreement is hereby deleted in its entirety and the following definition is
hereby substituted in lieu thereof:
"`Agent' shall mean either of the Administrative Agent or the
-----
Collateral Agent, as the context may require, and "Agents" shall mean
both of the Administrative Agent and the Collateral Agent."
7
<PAGE>
29. The definition of "Approved Investor" contained in Paragraph 16 of
the Credit Agreement is hereby deleted in its entirety and the following
definition is hereby substituted in lieu thereof:
"`Approved Investor' shall mean any Person pre-approved (which pre-
-----------------
approval may be limited in dollar amounts by type and otherwise) by
the Majority Lenders (including those shown on Schedule III set forth
------------
in the Addendum) and which approval has not been revoked by the
Majority Lenders (such revocation to be effective on the tenth
Business Day following notice thereof given to the Companies by the
Administrative Agent in writing); provided, that the Administrative
--------
Agent shall notify the Lenders in writing of any proposed additional
Approved Investor and such proposed Approved Investor shall be deemed
to have been pre-approved five (5) Business Days after such notice has
been given, unless the Majority Lenders shall have notified the
Administrative Agent prior to such date that such proposed Approved
Investor is not approved."
30. The definition of "Approved Repo Lender" contained in Paragraph 16
of the Credit Agreement is hereby deleted in its entirety and the following
definition is hereby substituted in lieu thereof:
"`Approved Repo Lender' shall mean any Approved Investor or any other
--------------------
entity pre-approved by the Majority Lenders (including those shown on
Schedule III set forth in the Addendum) and which approval has not
------------
been revoked by the Majority Lenders (such revocation to be effective
on the tenth Business Day following notice thereof given to the
Companies by the Administrative Agent in writing); provided, that the
--------
Administrative Agent shall notify the Lenders in writing of any
proposed additional Approved Repo Lender and such proposed Approved
Repo Lender shall be deemed to have been pre-approved five (5)
Business Days after such notice has been given, unless the Majority
Lenders shall have notified the Administrative Agent prior to such
date that such proposed Approved Repo Lender is not approved."
31. The following definition of "Borrowing Base" is hereby added as a
new definition to Paragraph 16 of the Credit Agreement:
"`Borrowing Base' shall mean the Tranche A Borrowing Base, the Tranche
--------------
B Borrowing Base, the Tranche C Borrowing Base, the Tranche D
Borrowing Base, the Tranche E Borrowing Base, or the Tranche F
Borrowing Base, as the context may require, and "Borrowing Bases"
---------------
shall mean, collectively, the Tranche A Borrowing Base, the Tranche B
Borrowing Base, the Tranche C Borrowing Base, the Tranche D Borrowing
Base, the Tranche E Borrowing Base,
8
<PAGE>
and the Tranche F Borrowing Base, or any lesser combination thereof,
as the context may require."
32. The following definition of "Co-Agent" is hereby added as a new
definition to Paragraph 16 of the Credit Agreement:
"'Co-Agent' shall mean any of The Bank of New York, Guaranty Federal
--------
Bank F.S.B. or NationsBank of Texas, N.A., and 'Co-Agents' shall mean
all of such Lenders collectively."
33. Subparagraph (j) of the definition of "Eligible A/B Mortgage Loan"
contained in Paragraph 16 of the Credit Agreement is hereby amended by deleting
the proviso contained at the end thereof and substituting the following proviso
in lieu thereof:
"provided, however, that such Property may be subject to one (1) Lien
-------- -------
prior to the Lien in favor of the Companies so long as, if said
Mortgage Loan is included in the Tranche B Borrowing Base, the Unit
Collateral Value of said Mortgage Loan, when added to the Unit
Collateral Values of all other Mortgage Loans included in the Tranche
B Borrowing Base with respect to which the underlying Property is
subject to one (1) Lien prior to the Lien in favor of the Companies,
does not exceed XXXXXX-XXXX percent (XX%) of the aggregate outstanding
principal amount of all Tranche B Loans at such time."
34. The definition of "Fair Market Value" contained in Paragraph 16 of
the Credit Agreement is hereby deleted in its entirety and the following
definition is hereby substituted in lieu thereof:
"'Fair Market Value' shall mean, with respect to any Mortgage Loan,
-----------------
the market bid price obtainable for such Mortgage Loan, as such market
bid price shall be determined no less frequently than monthly on a
reasonable basis by the Administrative Agent by reference to the
average of bids therefor solicited by the Administrative Agent and
obtained from at least three (3) dealers with a general reputation as
being reputable in the pricing of Mortgage Loans."
35. The following definition of "Master Servicing Portfolio" is hereby
added as a new definition to Paragraph 16 of the Credit Agreement:
"'Master Servicing Portfolio' shall mean the aggregate outstanding
--------------------------
principal amount at the time of determination of the Mortgage Loans
serviced by the Companies or their affiliates under Master Servicing
Contracts."
36. The definition of "Maturity Date" contained in Paragraph 16 of the
Credit Agreement is hereby amended by deleting the date
9
<PAGE>
"May 29, 1997" contained therein and substituting the date "September 24, 1997"
in lieu thereof.
37. Subparagraph (b) of the definition of "Unit Collateral Value"
contained in Paragraph 16 of the Credit Agreement is hereby deleted in its
entirety and the following paragraphs are hereby substituted in lieu thereof:
"(b) with respect to each Eligible A/B Mortgage Loan included in the
Tranche B Borrowing Base:
(i) if such Eligible A/B Mortgage Loan is sixty (60) days
delinquent or less, XXXXXX-XXXX percent (XX%) of the lesser of: (1)
the unpaid principal amount thereof at the time such Eligible A/B
Mortgage Loan is included in the Tranche B Borrowing Base (or, in the
case of a Construction-to-Permanent Mortgage Loan, the greater of a.
-
the principal amount thereof disbursed at the date of determination or
b. the maximum principal amount thereof disbursed at any time), and
-
(2) the Fair Market Value thereof.
(ii) if such Eligible A/B Mortgage Loan is more than sixty (60)
days delinquent but is less than or equal to one hundred eighty (180)
days delinquent, XXXXXX percent (XX%) of the lesser of: (1) the unpaid
principal amount thereof at the time such Eligible A/B Mortgage Loan
is included in the Tranche B Borrowing Base (or, in the case of a
Construction-to-Permanent Mortgage Loan, the greater of a. the
-
principal-amount thereof disbursed at the date of determination or b.
-
the maximum-principal amount thereof disbursed at any time), and (2)
the Fair Market Value thereof.
(iii) if such Eligible A/B Mortgage Loan is more than one hundred
eighty (180) days delinquent, XXXXXXX-XXXX percent (XX%) of the lesser
of: (1) the unpaid principal amount thereof at the time such Eligible
A/B Mortgage Loan is included in the Tranche B Borrowing Base (or, in
the case of a Construction-to-Permanent Mortgage Loan, the greater of
a. the principal amount thereof disbursed at the date of
-
determination or b. the maximum principal amount thereof disbursed at
-
any time), and (2) the Fair Market Value thereof."
38. The Commitment Schedule (Facility II Credit Agreement) contained
as Schedule I-2 to the Addendum is hereby deleted and the Commitment Schedule
(Facility II Credit Agreement) attached as EXHIBIT A to this Amendment is
substituted therefor.
39. The Schedule of Addresses contained as Schedule II to the Addendum
is hereby deleted and the Schedule of Addresses attached as EXHIBIT B to this
Amendment is substituted therefor.
10
<PAGE>
40. The Form of Borrowing Base Schedule (Facility II Credit Agreement)
contained as Exhibit F-2 to the Addendum is hereby deleted and the Form of
Borrowing Base Schedule (Facility II Credit Agreement) attached as EXHIBIT C to
this Amendment is substituted therefor.
41. The Form of Covenant Compliance Certificate contained as Exhibit G
to the Addendum is hereby deleted and the Form of Covenant Compliance
Certificate attached as EXHIBIT D to this Amendment is substituted therefor.
42. This Amendment shall become effective as of the date hereof,
provided that the Administrative Agent shall have received by such date the
following items:
(A) A copy of this Amendment executed by each of the Companies, each
of the Lenders, and the Administrative Agent (whether such parties
shall have signed the same or different copies);
(B) Facility II Promissory Notes of even date herewith, each as duly
executed by the Companies, each such note to be payable by the
Companies to the order of a Lender named in Section 2 of this
Amendment and to be in the form of ANNEX II hereto (all such notes
being considered to be Notes for all purposes);
(C) A copy of each of the Assignments, each as duly executed by First
Union and the Lender party thereto and acknowledged by the Companies
and the Administrative Agent; and
(D) Certificates of even date herewith signed by the President or any
Vice President of each of CWM, INMC and ILC, and attested to by the
Secretary or any Assistant Secretary of each of CWM, INMC and ILC,
certifying that (i) the Articles, Bylaws and resolutions of each such
party previously delivered to the Administrative Agent remain in full
force and effect except as provided therein, (ii) such party remains
in good standing, (iii) all representations and warranties of such
party previously made to the Lenders remain true, complete and
accurate, and (iv) no Event of Default or Potential Default has
occurred and is continuing under any of the Credit Documents.
43. The parties hereto agree and acknowledge that on the date hereof,
to the extent necessary, the Administrative Agent shall reallocate the Loans
made by First Union and outstanding on such date among all the Lenders so that
as of such date the ratios of (i) the aggregate principal amount of Tranche A
Loans outstanding from any Lender to the aggregate principal amount of Tranche A
Loans outstanding from all the Lenders, (ii) the aggregate principal amount of
Tranche B Loans outstanding from any Lender to the aggregate principal amount of
Tranche B Loans outstanding from
11
<PAGE>
all the Lenders, (iii) the aggregate principal amount of Tranche C Loans
outstanding from any Lender to the aggregate principal amount of Tranche C Loans
outstanding from all the Lenders, (iv) the aggregate principal amount of Tranche
D Loans outstanding from any Lender to the aggregate principal amount of Tranche
D Loans outstanding from all the Lenders, (v) the aggregate principal amount of
Tranche E Loans outstanding from any Lender to the aggregate principal amount of
Tranche E Loans outstanding from all the Lenders, and (vi) the aggregate
principal amount of Tranche F Loans outstanding from any Lender to the aggregate
principal amounts of all Tranche F Loans outstanding from all the Lenders, shall
be equal to the ratio of such Lender's Maximum Commitment to the Aggregate
Facility Commitment after giving effect to this Amendment, and the Lenders shall
make such payments among themselves as may be necessary to effect such
transactions.
44. This Amendment is limited and, except as set forth herein, shall
not constitute a modification, acceptance or waiver of any other provision of
the Credit Agreement, or any other document or instrument entered into in
connection therewith.
45. This Amendment may be executed in any number of counterparts by
the different parties hereto on separate counterparts, each of which
counterparts when executed and delivered shall be an original, but all of which
together shall constitute one and the same instrument. A complete set of
counterparts shall be lodged with the Companies and the Administrative Agent.
46. This Amendment and the rights and obligations of the parties
hereunder shall be construed in accordance with and governed by the laws of the
State of North Carolina.
47. From and after the date hereof, all references in the Credit
Agreement, and any other document or instrument entered into in connection
therewith, to the Credit Agreement shall be deemed to be references to the
Credit Agreement as amended hereby. Each of BNY, Credit Lyonnais, FNB Chicago,
Guaranty Federal, Hibernia, NatWest and NationsBank hereby assumes, and agrees
to be bound under and by, the terms of the Credit Agreement and all agreements
and documents entered into in connection therewith from and after the date
hereof. Each of BNY, Credit Lyonnais, FNB Chicago, Guaranty Federal, Hibernia,
NatWest and NationsBank shall be considered to be a "Lender" for all purposes
under the Security Agreement, the Uniform Commercial Code financing statements
filed pursuant thereto, the Custodial Agreement and the other Credit Documents.
48. THE LENDERS, THE ADMINISTRATIVE AGENT, AND THE COMPANIES EACH
HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVES, TO THE MAXIMUM EXTENT
PERMITTED BY LAW, THE RIGHT ANY OF THEM MAY HAVE TO A TRIAL BY JURY IN RESPECT
OF ANY LITIGATION BASED HEREON, OR ARISING OUT OF, UNDER OR IN CONNECTION WITH
THIS AMENDMENT AND ANY AGREEMENT CONTEMPLATED TO BE EXECUTED IN CONJUNCTION
HEREWITH. THIS PROVISION IS A MATERIAL INDUCEMENT FOR THE LENDERS AND THE
ADMINISTRATIVE AGENT TO ENTER INTO THIS AMENDMENT.
IN WITNESS WHEREOF, each of the parties hereto has caused a counterpart of
this Amendment to be duly executed and delivered as of the date first above
written.
CWM MORTGAGE HOLDINGS, INC.
By: /s/ Michael W. Perry
---------------------
Name: Michael W. Perry
-----------------
Title: Exec. Vice President & Chief
-----------------------------
Operating Officer
-----------------
INDEPENDENT NATIONAL MORTGAGE CORPORATION
By: /s/ Michael W. Perry
---------------------
Name: Michael W. Perry
-----------------
Title: President & Chief Executive
----------------------------
Officer
-------
INDEPENDENT LENDING CORPORATION
By: /s/ Michael W. Perry
---------------------
Name: Michael W. Perry
-----------------
Title: President & Chief Executive
----------------------------
Officer
-------
FIRST UNION NATIONAL BANK OF
NORTH CAROLINA,
as Administrative Agent and as a Lender
By: /s/ Carolyn Eskridge
---------------------
Name: Carolyn Eskridge
-----------------
Title: SVP
----
THE BANK OF NEW YORK
By: /s/ Cynthia E. Crites
----------------------
Name: Cynthia E. Crites
------------------
Title: AVP
----
12
<PAGE>
CREDIT LYONNAIS, CAYMAN ISLANDS BRANCH
By: /s/ William J. Fischer
-----------------------
Name: William J. Fischer
-------------------
Title: Authorized Signatory
---------------------
THE FIRST NATIONAL BANK OF CHICAGO
By: /s/ J.S. Winn, Jr.
-------------------
Name: J.S. Winn, Jr.
---------------
Title: SVP
----
GUARANTY FEDERAL BANK F.S.B.
By: /s/ Abbie Y Tidmore
--------------------
Name: Abbie Y Tidmore
----------------
Title: Vice President
---------------
HIBERNIA NATIONAL BANK
By: /s/ Colleen Lacy
-----------------
Name: Colleen Lacy
-------------
Title: Vice President
---------------
NATWEST BANK N.A.
By: /s/ Kevin J. Batterton
-----------------------
Name: Kevin J. Batterton
-------------------
Title: Vice President
---------------
NATIONSBANK OF TEXAS, N.A.
By: /s/ Beth S. Sorensen
---------------------
Name: Beth S. Sorensen
-----------------
Title: SVP
----
13
<PAGE>
EXHIBIT 10.47
FIRST AMENDMENT TO
SECURITY AND COLLATERAL AGENCY AGREEMENT
----------------------------------------
THIS FIRST AMENDMENT TO SECURITY AND COLLATERAL AGENCY AGREEMENT dated
as of September 25, 1995 (this "Amendment") is made by and among CWM
------------
MORTGAGE HOLDINGS, INC., a Delaware corporation ("CWM"), INDEPENDENT NATIONAL
MORTGAGE CORPORATION, a Delaware corporation ("INMC"), INDEPENDENT LENDING
CORPORATION, a Delaware corporation ("ILC" and, together with CWM and INMC, the
"Companies"), FIRST UNION NATIONAL BANK OF NORTH CAROLINA, a national banking
association ("First Union") acting in its capacity as administrative agent for
the Lenders from time to time participating in the Facility II Agreement (as
defined below) (in such capacity, the "Facility II Administrative Agent"), First
Union, acting in its capacity as administrative agent for the Lenders from time
to time participating in the Facility I Agreement (as defined below) (in such
capacity, the "Facility I Administrative Agent" and for convenience, First
Union, acting in either capacity, is sometimes referred to herein as the
"Administrative Agent") (the Facility II Administrative Agent and the Facility I
Administrative Agent being collectively referred to herein as the
"Administrative Agent"), and BANKERS TRUST COMPANY OF CALIFORNIA, N.A., a
national banking association, acting in its capacity as collateral agent for the
Administrative Agent (in such capacity, the "Collateral Agent").
STATEMENT OF PURPOSE
--------------------
WHEREAS, pursuant to that certain Facility II Credit Agreement dated
as of May 30, 1995 among the Companies, the lenders party thereto from time to
time (the "Facility II Lenders") and the Facility II Administrative Agent (as
the same has been and may be amended, extended or replaced from time to time,
the "Facility II Agreement"), the Facility II Lenders have agreed to extend
credit to the Companies on the terms and subject to the conditions set forth
therein; and
WHEREAS, pursuant to that certain Facility I Credit Agreement dated as
of May 30, 1995 among the Companies, the lenders party thereto from time to time
(the "Facility I Lenders") and the Facility I Administrative Agent (as the same
has been and may be amended, extended or replaced from time to time, the
"Facility I Agreement"), the Facility I Lenders have agreed to extend credit to
the Companies on the terms and subject to the conditions set forth therein; and
WHEREAS, each of the parties hereto are parties to a Security and
Collateral Agency Agreement dated as of May 30, 1995 (the "Security Agreement"),
which Security Agreement was executed in connection with the Facility II
Agreement and the Facility I Agreement; and
1
<PAGE>
WHEREAS, the parties hereto wish to amend the Security Agreement to
provide for the modification of various terms and covenants thereof;
NOW, THEREFORE, in consideration of the premises and agreements
contained herein, and for good and valuable consideration, the receipt and
sufficiency of which are acknowledged by the parties hereto, the parties hereto
hereby agree as follows:
1. All capitalized terms used herein and not otherwise defined shall have
the respective meanings which such terms have under the Security Agreement.
2. Paragraph 3(b) of the Security Agreement is hereby amended by deleting
the last sentence thereof in its entirety and substituting the following
sentence in lieu thereof:
"The Collateral Agent will promptly provide a written copy of each such
item to the Administrative Agent."
3. Paragraph 7(c) of the Security Agreement is hereby amended by adding
the following sentence to the end thereof:
"The Administrative Agent will promptly provide a copy of the Other
Collateral Value Determination to the Facility II Lenders."
4. Paragraph 7(d) of the Security Agreement is hereby amended by adding
the following sentence to the end thereof:
"The Administrative Agent will promptly provide a copy of such certified
schedule to the Facility II Lenders."
5. Paragraph 11 of the Security Agreement is hereby
deleted in its entirety and the following paragraph is substituted in lieu
thereof:
"11. Fees of the Collateral Agent. The Collateral Agent shall charge
----------------------------
such fees for its services under this Agreement as are set forth in a
separate agreement between the Collateral Agent and the Companies, the
payment of which fees, together with the Collateral Agent's expenses in
connection herewith, shall be solely the obligation of the Companies."
6. Paragraph 14(e) of the Security Agreement is hereby amended by
deleting the phrase "Paragraph 22" contained therein and substituting the phrase
"Paragraph 23" in lieu thereof.
7. Exhibit 1B of the Security Agreement is hereby amended by deleting the
clause "BY THE ADMINISTRATIVE AGENT, WITH RESPECT TO ALL TRANCHE C LOANS AND
REQUIRED DOCUMENTS DELIVERED:" contained therein and substituting the clause "BY
THE ADMINISTRATIVE AGENT, WITH RESPECT TO ALL REQUIRED DOCUMENTS DELIVERED IN
CONNECTION WITH TRANCHE C LOANS:" in lieu thereof.
2
<PAGE>
8. This Amendment shall become effective as of the date hereof.
9. This Amendment is limited and, except as set forth herein, shall not
constitute a modification, acceptance or waiver of any other provision of the
Security Agreement, or any other document or instrument entered into in
connection therewith.
10. This Amendment may be executed in any number of counterparts by the
different parties hereto on separate counterparts, each of which counterparts
when executed and delivered shall be an original, but all of which together
shall constitute one and the same instrument. A complete set of counterparts
shall be lodged with the Companies, the Administrative Agent and the Collateral
Agent.
11. This Amendment and the rights and obligations of the parties hereunder
shall be construed in accordance with and governed by the laws of the State of
North Carolina.
12. From and after the date hereof, all references in the Security
Agreement, and any other document or instrument entered into in connection
therewith, to the Security Agreement shall be deemed to be references to the
Security Agreement as amended hereby.
3
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused a counterpart of
this Amendment to be duly executed and delivered as of the date first above
written.
CWM MORTGAGE HOLDINGS, INC., a
Delaware corporation
By: /s/ Michael W. Perry
---------------------
Name: Michael W. Perry
-----------------
Title: Executive Vice President &
---------------------------
Chief Operating Officer
-----------------------
INDEPENDENT NATIONAL MORTGAGE CORPORATION, a
Delaware corporation
By: /s/ Michael W. Perry
---------------------
Name: Michael W. Perry
-----------------
Title: President & Chief Executive
----------------------------
Officer
-------
INDEPENDENT LENDING CORPORATION, a
Delaware corporation
By: /s/ Michael W. Perry
---------------------
Name: Michael W. Perry
-----------------
Title: President & Chief Executive
----------------------------
Officer
-------
FIRST UNION NATIONAL BANK OF
NORTH CAROLINA, a national banking
association, as Facility II
Administrative Agent and as
Facility I Administrative Agent
By: /s/ Carolyn Eskridge
---------------------
Name: Carolyn Eskridge
-----------------
Title: SVP
----
BANKERS TRUST COMPANY OF CALIFORNIA, N.A., a
national banking association, as Facility II
Collateral Agent and as Facility I Collateral
Agent
By: /s/ Michelle A. Lambott
------------------------
Name: Michelle A. Lambott
--------------------
Title: Assistant Vice President
-------------------------
4
<PAGE>
EXHIBIT 10.48
Compensation Plan for Michael Perry
-----------------------------------
The Compensation Committee considered and approved the following
compensation plan for Michael Perry with respect to his potential bonus for
1995:
<TABLE>
<CAPTION>
Earnings Per Share Bonus Amount
- --------------------- ------------
<S> <C>
Below $0.70 -
$0.70 $100,000
$0.80 $200,000
$0.90 $300,000
$1.00 $400,000
$1.10 $475,000
$1.20 $550,000
</TABLE>
1
<PAGE>
EXHIBIT 21.1
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>
1
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated February 19, 1996, 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, 1995. We hereby consent to the incorporation by
reference of said report in the Registration Statements of CWM Mortgage
Holdings, Inc. on Form S-8 (File No. 33-8442, effective August 25, 1986, File
No. 33-32562, effective December 15, 1989 and File No. 33-56267, effective
October 31, 1994) and on Form S-3 (File No. 33-48159, effective June 14, 1992
and File No. 33-60137, effective August 8, 1995).
GRANT THORNTON LLP
Los Angeles, California
February 19, 1996
1
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 8,049
<SECURITIES> 0
<RECEIVABLES> 2,546,510
<ALLOWANCES> (4,331)
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 2,643,613
<CURRENT-LIABILITIES> 0
<BONDS> 164,760
0
0
<COMMON> 424
<OTHER-SE> 362,560
<TOTAL-LIABILITY-AND-EQUITY> 2,643,613
<SALES> 0
<TOTAL-REVENUES> 63,783
<CGS> 0
<TOTAL-COSTS> 9,785
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 4,037
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 50,011
<INCOME-TAX> 0
<INCOME-CONTINUING> 50,011
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 50,011
<EPS-PRIMARY> 1.25
<EPS-DILUTED> 1.25
<FN>
<F1>Includes 131,910 of interest expense related to mortgage loan activities.
</FN>
</TABLE>
<PAGE>
DIRECTORS AND PRINCIPAL EXECUTIVE OFFICERS OF
COUNTRYWIDE ASSET MANAGEMENT CORPORATION
(THE COMPANY'S MANAGER)
<TABLE>
<CAPTION>
NAME AGE OFFICE
---- --- ------
<S> <C> <C>
Angelo R. Mozilo* 57 Chairman of the Board of Directors
David S. Loeb* 72 Vice Chairman of the Board of Directors,
Chief Executive Officer
Stanford L. Kurland 42 Director and President
Kevin W. Bartlett 38 Director
Ralph S. Mozilo 54 Director
Michael W. Perry* 33 Director and Executive Vice President and
Chief Operating Officer
Richard H. Wohl* 37 Director and Senior Vice President,
General Counsel and Secretary
Carmella L. Grahn* 32 Senior Vice President, Chief Accounting
Officer
Kellie A. Johnson* 34 Senior Vice President, Production and
Operations
</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 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
