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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
____________
FORM 10-K/A
MAY 1997
AMENDMENT # 2
FOR FISCAL YEAR ENDED DECEMBER 31, 1996
(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, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO THE SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from to
Commission file number: 1-8972
CWM MORTGAGE HOLDINGS, INC.
(FORMERLY COUNTRYWIDE MORTGAGE INVESTMENTS, INC.)
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 95-3983415
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION) IDENTIFICATION NO.)
35 NORTH LAKE AVENUE, PASADENA, CALIFORNIA 91101-1857
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including area code: (800) 669-2300
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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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 31, 1997, there were 52,600,148 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
$1,019,127,867. 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
1996 ANNUAL REPORT---PART IV
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CWM MORTGAGE HOLDINGS, INC.
1996 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
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Page
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PART I
ITEM 1. BUSINESS 1
ITEM 2. PROPERTIES 13
ITEM 3. LEGAL PROCEEDINGS 13
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 14
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 16
CONDITION AND RESULTS OF OPERATIONS
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 28
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 28
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 29
ITEM 11. EXECUTIVE COMPENSATION 29
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL 29
OWNERS AND MANAGEMENT
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 29
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K 30
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PART 1
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ITEM 1. BUSINESS
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GENERAL
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CWM Mortgage Holdings, 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 ("Indy Mac") and its subsidiary, which
are 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.
Accordingly, Indy Mac is accounted for under a method similar to the equity
method because CWM has the ability to exercise 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 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
programs 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, (3) the Subprime Mortgage 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., "A- through D" paper mortgage loans), and (4) the Manufactured Housing
Division of Indy Mac, which was formed in 1995 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 financed by collateralized mortgage obligations (the "CMO
Portfolio").
MORTGAGE CONDUIT OPERATIONS
The Company operates a jumbo and nonconforming mortgage loan conduit. With
respect to its nonconforming mortgage loan conduit operations, the Company acts
as an intermediary between (i) 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 ("Fannie Mae") and Federal Home
Loan Mortgage Corporation ("Freddie Mac")) that guarantee mortgage-backed
securities ("nonconforming mortgage loans") and (ii) permanent investors in
mortgage-backed securities secured by or representing an ownership interest in
such mortgage loans. All loans purchased by CWM for which a real estate mortgage
investment conduit ("REMIC") transaction or whole loan sale is contemplated are
committed for sale to Indy Mac at the same price at which the loans were
acquired by CWM. The Company's mortgage conduit operations consist of the
purchase and
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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 and securities, master servicing revenue, and 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.
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, although more recently the Company has
sought to focus on the smaller seller market where the Company believes purchase
margins may be higher. The Company expects to continue to introduce niche loan
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, loans to foreign nationals, reduced documentation loans, non-
owner occupied loans, loans secured by alternative types of collateral in
addition to residential real estate, subprime credit quality loans and consumer
loans secured by manufactured housing. 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, subdivision construction loans, land acquisition and
development loans, lot loans, model home loans, certain condominium loans and
builder custom home loans. The Company's warehouse lending division offers
traditional revolving lines of credit to mortgage originators secured by the
financed mortgage loans.
The Company's sales and marketing staff as well as certain of its operations
areas are established to pursue business on a servicing-released basis and to
market products effectively to mortgage bankers and brokers of all sizes. 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 has been
established to market the Company's products 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 has two 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 Fannie Mae, Freddie Mac
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.
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. Certain sellers have delegated
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underwriting authority for all mortgage products. The Company also operates a
restricted delegated underwriting subprogram. Under this more limited
subprogram, only the Company's standard loan products, albeit 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.
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 Freddie Mac or Fannie Mae 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 GSE
criteria. Currently, the maximum principal balance for a conforming loan is
$214,600. 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 33% of the mortgage
loans purchased by the Company in 1996.
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 79% of
the mortgage loans purchased by the Company in 1996 compared to 64% for 1995.
The number of adjustable rate mortgage ("ARM") loans purchased by the Company
has decreased from 36% of all mortgage loans purchased in 1995 to 21% of 1996
mortgage loan purchases.
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 programs and must submit to periodic reviews by the Company to ensure
continued compliance with these requirements. The Company requires that sellers
that also perform mortgage loan servicing for the Company, have a minimum level
of tangible net worth, be approved as a Fannie Mae or Freddie Mac
seller/servicer in good standing, be approved as a U.S. Department of Housing
and Urban Development ("HUD") approved mortgagee in good standing, or be 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 or acquisition 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
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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 not involving default by
the seller/servicers, seller/servicers 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, although there can be no assurance that the seller will be
able to honor its obligations.
PURCHASE COMMITMENT PROCESS
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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 $500 million 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
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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) that do not wish to sell loans
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 with respect
to the contractual rate of interest on such loans, 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, the expected
or contracted volume of mortgage loan purchases and the product types or coupon
rates to be purchased. 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 Exchange 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 and where the seller is
not authorized to participate in one of the Company's delegated programs, the
Company performs a full credit review and analysis to ensure compliance with its
loan eligibility requirements. The latter 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 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,
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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, market
fluctuations in the prices of mortgage-backed securities and variations in the
securitization process. With respect to subprime and manufactured housing loans
this holding period may be longer, due to an overall smaller market combined
with the relative infancy of both these programs.
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 Fannie Mae or Freddie
Mac security of comparable maturity and weighted average interest rate.
However, the Company's private-label mortgage securities typically trade at a
discount (or "spread") compared to the corresponding Fannie Mae or Freddie Mac
securities, due to the implied government guarantees of certain Fannie Mae or
Freddie Mac 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 and manufactured housing loans, the Company generally utilizes
forward sales of Treasury futures to hedge against the effects of interest rate
fluctuations. Although Treasury futures may protect the Company's adjustable-
rate loan and manufactured housing loan portfolios 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 loans.
The lack of exact inverse correlation is due to such factors as changes in the
relative pricing discount between mortgage or asset backed 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
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inversely correlate precisely to the risks affecting the value of the Company's
adjustable rate mortgage loan and manufactured housing loan portfolios, 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
predominantly 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, other
than recoupment of a portion of the allocable costs of establishing and
maintaining the shelf registration.
As an alternative to REMIC sales, the Company may issue CMOs to finance mortgage
loans to maturity. For accounting and tax purposes, the mortgage loans financed
through the issuance of CMOs are treated as assets of the Company, and the CMOs
are treated as debt of the Company. The Company earns the net interest spread
between the interest income on the mortgage loans and the interest and other
expenses associated with the CMO financing. The net interest spread will be
directly impacted by the levels of prepayment of the underlying mortgage loans
and, to the extent CMO classes have variable rates of interest, may be affected
by changes in short-term interest rates. The Company is required to retain a
residual interest in its issued CMOs. The Company may issue CMOs from time to
time based on the Company's current and future investment needs, market
conditions and other factors. CMOs, however, do not offer the Company the
structuring flexibility of REMICs and are expected to be a secondary method of
securitizing the Company's mortgage loans.
Credit Enhancement. REMICs or CMOs created by the Company are structured so
that in general substantially all of such securities are rated investment grade
by at least one nationally recognized 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 one or more classes of security
holders in the event of borrower defaults and to protect against 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
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hazard insurance, reserve funds, letters of credit, surety bonds and
subordination of certain classes of interest to other classes, 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 value of the Company's portfolio
of subordinated securities and principal-only securities would tend to increase,
because the rise in prepayments would tend to accelerate return of the Company's
investment in the principal portion of the underlying loans. The Company seeks
to manage the effects of rising and falling interest rates through investing in
financial instruments with contrasting sensitivities to interest rates; however,
there can be no assurance that this strategy will succeed under any particular
interest rate scenario. In addition, the Company has used 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.
MORTGAGE LOANS HELD FOR INVESTMENT
In an effort to generate continuing earnings that are less dependent upon
quarterly loan purchase volumes of 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 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 group, CLCA, consists of two operating
divisions: The Builder Division and the Consumer Division. The Builder
Division provides subdivision construction loans, land acquisition and
development loans, builder custom home loans, model home loans, and certain
8
<PAGE>
condominium loans on a nationwide basis to builders and developers. 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 a 15 to 100 unit
subdivision, built in one to five phases, that will be 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 and the applicable interest rate and fees, 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 or directly by CWM to borrowers who wish to
construct or remodel their residences or purchase lots for future construction
of residences. CLCA's Consumer Lending Division assists CWM in the purchase of
such loans and administers the construction draws. Under these programs, all
loans are prior- approved and underwritten to the Company's 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 $3
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 secured warehouse 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 the origination or acquisition of mortgage loans during the time between
the closing of such loans and their sale to investors. Loans financed by WLCA
through its traditional warehouse lending activities represent a broader line of
mortgage products than those currently purchased by the Company. Presently all
of such loan products purchased by the Company are eligible for financing by
WLCA under the financing agreements used by WLCA to fund its operations.
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 22 to 1. Under its Advantage Line and
Captive Line programs, WLCA offers credit facilities to otherwise qualified
mortgage originators with no net worth requirement. The specific terms of any
warehouse line of credit, including the maximum credit limit, are determined
based upon 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
The Manufactured Housing 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. This division solicits business through established
dealer networks, brokers, "in-park" marketing activities and direct and consumer
marketing in addition to the Company's National Sales force. The Manufactured
Housing Division operates currently from two regional offices in San Diego and
Houston with an additional regional office scheduled to open in Atlanta in April
1997.
9
<PAGE>
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 and manufactured housing loans. 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. Delinquencies on the total portfolio rose to
5.18% from 4.13% for the periods ending December 31, 1996 and 1995,
respectively. This increase can primarily be attributed to the seasoning, or
aging, of the Company's loan portfolio.
As of December 31, 1996, the company had accumulated $17.0 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 totaling $2.7 million. In addition, the
company suspends the accrual of 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, 1996 investment grade securities (i.e., rating of
BBB or higher) comprise 41% 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 $73
million to such securities' face value. This discount primarily reflects
estimates of future expected credit losses on approximately $6.6 billion of
single-family mortgage loans which are related to the subordinated securities.
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, 1996. Since the Company's
current actual experience is not necessarily indicative of future losses, as of
December 31, 1996, $2.3 million 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 charge-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, 1996, $1.2 million in loan loss reserves have been allocated to
warehouse lending activities.
In addition to the creation of reserves, the Company has established a risk
management committee 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 offer any assurance
as to the extent to which the Company will incur credit losses and any related
effects on earnings, significant controls are in place in an effort to reduce
exposure in this area.
FINANCING SOURCES
The Company uses proceeds from the sale of REMIC securities and CMOs, repurchase
agreements, other borrowings and issuance of common stock and unsecured debt 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.
10
<PAGE>
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 CWM.
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, administration 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 present
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 as a REIT
would reduce the amount of CWM's after-tax earnings available for distribution
to shareholders and could result in CWM's 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 or REMIC residual interests.
Part or all of the income derived by CWM from a residual interest of a CMO
issued or invested in by CWM after December 31, 1991, may be "excess inclusion"
income. Such excess inclusion income generally is subject to federal income tax
in all events. If CWM pays any dividends to its shareholders that are
attributable to excess inclusion income, the shareholders who receive such
dividends generally will be subject to the same tax consequences that would
apply if they derived excess inclusion income from a direct investment in a CMO
residual interest. Excess inclusion income allocable to a shareholder may not be
offset by current deductions or net operating losses available to be claimed by
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 CWM's shares. CWM's bylaws provide that disqualified
organizations are ineligible to hold CWM's shares. Approximately 3% of the 1996
dividends paid by CWM were attributable to excess inclusion income.
MANAGEMENT AGREEMENT
11
<PAGE>
Since its inception, CWM has each year entered into a management agreement with
Countrywide Asset Management Corporation (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, construction lending and manufactured housing lending operations. The
management agreement may be terminated by 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 31, 1997. 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.
On November 4, 1996 CWM and CCI announced that they reached a preliminary
agreement and plan of merger whereby CWM will acquire all of the outstanding
stock of CAMC from CCI in exchange for approximately 3.6 million new shares of
common stock of CWM (subject to certain adjustments). Subsequent to year end,
the agreement and plan of merger, and a related registrations rights agreement,
were approved by the boards of directors of both CWM and CCI and executed and
delivered by the respective parties thereto. If the transaction is consummated,
CAMC will be merged into CWM, and CWM will become a self-managed REIT. Assuming
receipt of regulatory approvals, the merger will be presented to CWM's
shareholders for final approval pursuant to a definitive proxy statement.
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 currently utilizes the
mortgage banking experience, management expertise and resources of CCI, CAMC and
CHL in conducting the Company's mortgage conduit, construction lending,
warehouse lending and manufactured housing lending operations. CAMC and CHL are
both wholly owned subsidiaries of CCI. CCI directly or indirectly owns
approximately 2.2% of the Common Stock of CWM, although when the merger
transaction described above is consummated, CCI would own approximately 8.8% 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 Freddie Mac
or Fannie Mae (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, and the initiation of its
manufactured housing operations in 1995, long-term interest rates, including
mortgage rates, fell to their lowest levels in nearly 20 years. The CMO
Portfolio 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 CMO
Portfolio were realized.
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Regardless of the level of interest rates or prepayments, CWM anticipates no
significant earnings from this CMO Portfolio, and CWM could incur additional
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 mortgage 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 be 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.
Fannie Mae and Freddie Mac are not permitted to purchase mortgage loans with
original principal balances above $214,600 (effective January 1, 1997). If this
dollar limitation increases, Fannie Mae and Freddie Mac 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, 1996,
CAMC had 453 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 49,000 square feet. The principal lease covering such
space expires in the year 2001. In addition the Manufactured Housing Division of
Indy Mac occupies space located in San Diego, California, and Houston, Texas.
These consists of approximately 15,000 square feet. The lease associated with
these properties expires in 1997.
ITEM 3. LEGAL PROCEEDINGS
- ------- -----------------
None.
13
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------- ---------------------------------------------------
None.
PART II
ITEM 5. MARKET FOR CWM'S STOCK AND RELATED SECURITY HOLDER MATTERS
- ------- ----------------------------------------------------------
CWM Mortgage Holdings, Inc.'s common stock is traded on the New York Stock
Exchange ("NYSE") under the symbol CWM.
The following table sets forth the high and low sales prices (as reported by the
NYSE) for common stock for the years ended December 31, 1996 and 1995 and cash
dividends declared for earnings of the period as indicated.
<TABLE>
<CAPTION>
1996 1995 Dividends Declared
-----------------------------------------------------------------------
High ($) Low ($) High ($) Low ($) 1996 1995
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
First Quarter 18 14 3/4 10 3/4 8 1/2 0.36 0.27
Second Quarter 18 3/4 14 3/4 12 7/8 10 3/8 0.37 0.30
Third Quarter 20 1/2 16 1/8 14 11 3/4 0.39 0.33
Fourth Quarter 21 7/8 19 17 1/4 12 3/4 0.40 0.35
- ---------------------------------------------------------------------------------------
</TABLE>
As of February 12, 1997, 51,318,778 shares of CWM Mortgage Holdings, Inc.'s
common stock were held by 3,445 shareholders of record.
Shareholders can reinvest their cash dividends in additional shares of the CWM's
common stock at 99 percent (subject to change) of the average high and low
market prices on the investment date, as defined in the Plan.
Shareholders may also purchase additional shares of CWM's common stock through
the cash investment option at 97 percent (subject to change) of the average high
and low market prices for the 12 days preceding the investment date, as defined
in the Plan.
Investors not yet participating in the Plan, as well as brokers and custodians
who hold CWM common stock for clients, can get a Prospectus relating to the Plan
by writing to the Company's transfer agent or Investor Relations department as
noted above.
14
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
(Dollar amounts in thousands, except per share data)
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------------------
1996 1995 1994 1993 1992
-----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SELECTED CONSOLIDATED
STATEMENTS OF EARNINGS DATA
FOR THE YEAR ENDED
Interest income $ 242,303 $ 180,465 $ 92,119 $ 65,504 $ 106,070
Interest expense 159,365 131,910 66,700 65,312 107,511
----------- ----------- ----------- ----------- -----------
Net interest income (expense) 82,938 48,555 25,419 192 (1,441)
Provision for loan losses 12,991 4,037 500 - -
Equity in earnings of Indy Mac 19,533 13,801 5,624 2,523 -
Gain on sale of mortgage loans
and securities - - - 917 9,031
Other income 2,470 1,427 885 797 -
Expenses:
Salaries, general and administrative 14,202 4,213 2,402 1,549 1,606
Management fees to affiliate 8,761 5,522 1,195 400 997
----------- ----------- ----------- ----------- -----------
Net earnings $ 68,987 $ 50,011 $ 27,831 $ 2,480 $ 4,987
=========== =========== =========== =========== ===========
Earnings per share $ 1.51 $ 1.25 $ 0.86 $ 0.13 $ 0.36
=========== =========== =========== =========== ===========
Dividends declared per share
for earnings of the period $ 1.52 $ 1.25 $ 0.87 $ 0.48 $ 0.48
Weighted average
shares outstanding 45,643,885 39,902,680 32,183,850 18,578,307 13,978,683
=========== =========== =========== =========== ===========
SELECTED CONSOLIDATED
BALANCE SHEET DATA
AT YEAR-END
Mortgage and manufactured housing
loans held for investment, net $ 1,236,713 $ 1,424,583 $ 899,672 $ - $ -
Mortgage and manufactured housing
loans held for sale 657,208 409,584 608,240 794,132 -
Construction loans, net 460,546 129,323 6,370 - -
Collateral for CMOs 289,054 184,111 233,690 402,503 620,411
Mortgage securities 128,080 - - -
Securitized master servicing fees 103,700 124,975 121,441 - -
Revolving warehouse lines of credit, net 251,032 190,705 69,591 92,058 -
Total assets 3,356,059 2,643,360 1,999,541 1,396,738 714,225
Short-term borrowings 2,531,509 2,037,834 1,534,189 770,334 21,944
Collateralized mortgage obligations 264,080 164,760 202,259 365,886 571,857
Senior unsecured notes 59,759 59,649 - - -
Shareholders' equity 478,424 362,731 257,917 250,608 119,995
Number of shares outstanding 50,200,146 42,413,842 32,281,156 32,020,484 13,980,387
Book value per share $ 9.53 $ 8.55 $ 7.99 $ 7.83 $ 8.58
OPERATING DATA
- --------------
Mortgage and manufactured housing
loans acquired $ 4,185,789 $ 4,186,392 $ 5,985,466 $ 3,420,263 $ -
Indy Mac master servicing portfolio 11,131,000 9,419,000 6,818,000 1,977,000 -
</TABLE>
15
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- ------------------------------------------------------------------------
RESULTS OF OPERATIONS
- ---------------------
GENERAL
CWM Mortgage Holdings, Inc. was incorporated in the state of Maryland in July
1985 and reincorporated in the state of Delaware in March 1987. References to
"CWM" mean either the parent company alone or the parent company and the
entities consolidated for financial reporting purposes, while references to the
"Company" mean the parent company, its consolidated subsidiaries and Independent
National Mortgage Corporation (Indy Mac), and its subsidiary, which are 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. 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. 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 conduit operations were expanded during 1995 through the
commencement of operations of two divisions of Indy Mac: the Subprime Mortgage
Division and the Manufactured Housing Division. The Subprime Mortgage Division
operations include the purchase, securitization and sale of subprime mortgage
loans (i.e., "A- through D" paper mortgages). The Manufactured Housing Division
operations include the purchase or origination, securitization and sale of
consumer and mortgage loans secured by manufactured housing.
The Company's principal sources of income from its conduit operations are gains
recognized on the sale or securitization of 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 sale or securitization, and
master servicing fee income.
In addition to its conduit operations, the Company earns fee income and net
interest income through its construction and warehouse lending programs and its
investment portfolio of mortgage and manufactured housing loans, mortgage
securities available for sale and securitized master servicing fees. The
construction lending operation consists of two distinct divisions: (i) the
Builder Division, which provides tract construction, builder custom home, model
home, land acquisition and development and certain condominium loan financing on
a nationwide basis to builders, and (ii) the Consumer Division, which provides
construction-to-permanent, home improvement and residential 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.
16
<PAGE>
FINANCIAL CONDITION
CONDUIT OPERATIONS: During 1996, CWM purchased $4.1 billion of non-conforming
mortgage loans, including $365 million of subprime mortgage loans. In addition,
the Company purchased $105 million of manufactured housing loans. These loans
were financed on an interim basis using equity and short-term financing in the
form of repurchase agreements and other credit facilities. 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 1996, Indy Mac sold $3.5 billion of mortgage loans
through the issuance of 16 series of multiple-class MBS in the form of REMIC
securities and sold $9.6 million of mortgage loans in the form of a whole loan
transaction. At December 31, 1996, the Company was committed to purchase $741
million of mortgage loans from various mortgage originators. The Indy Mac master
servicing portfolio at year end had an aggregate outstanding principal balance
of $11.1 billion with a weighted average coupon of 8.51%.
CWM and Indy Mac had previously accounted for their portfolios of subordinated
securities and securitized master servicing fees, acquired in connection with
the securitization of mortgage loans held for sale, as securities available for
sale and held to maturity, respectively. Indy Mac has restated its financial
statements for each of the three years in the period ended December 31, 1996 to
reflect the restatement of such securities as trading securities. The cumulative
effect of this change on Indy Mac's earnings for the three years is a net loss
of $207,000, and the results of operations for Indy Mac set forth below give
effect to this restatement. CWM has restated its financial statements to
reclassify and account for certain subordinated securities and securitized
master servicing fees acquired in connection with the securitization of mortgage
loans held for sale as trading. Other excess master servicing fees sold by Indy
Mac to CWM and subsequently securitized by CWM have been reclassified as
available for sale. Because the effect of these changes is not material to CWM's
earnings, CWM has not restated its earnings for any of the periods presented.
MORTGAGE LOANS HELD FOR INVESTMENT: The $1.2 billion portfolio of mortgage
loans held for investment at December 31, 1996 consisted of $871 million of
varying types of adjustable-rate products which contractually reprice in
monthly, semi-annual or annual periods; $225 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 $126 million of fixed-rate mortgage loans. The weighted average coupon of
the mortgage loans held for investment at December 31, 1996 was 8.69%. The
Company finances mortgage loans held for investment with repurchase agreements
and other credit facilities which had maturities ranging from overnight to five
months as of December 31, 1996. The Company, from time to time, also utilizes
interest rate swap agreements to help mitigate the interest rate exposure on its
portfolio of mortgage loans held for investment. As of December 31, 1996 the
national amount of interest rate swaps totaled $200 million. The allowance for
losses related to mortgage loans held for investment totaled $11.5 million at
year end. Charge-offs related to mortgage loans held for investment totaled $2.1
million for the year ended December 31, 1996.
17
<PAGE>
CONSTRUCTION LENDING OPERATIONS: At December 31, 1996, the Builder Division had
commitments to fund construction loans of $763 million with outstanding
principal balances of $347 million. The Consumer Division had commitments to
fund construction-to-permanent and home improvement loans of $188 million at
December 31, 1996 with outstanding principal balances of $114 million. The
allowance for losses related to construction loans totaled $2.3 million at
December 31, 1996. There were no charge-offs against such allowance during the
year ended December 31, 1996. The Company had outstanding borrowings under a
revolving credit facility totaling $216 million at December 31, 1996 associated
with the financing of construction loans.
WAREHOUSE LENDING OPERATIONS: At December 31, 1996, CWM had extended commitments
to make warehouse and related lines of credit in an aggregate amount of $597
million, of which $251 million was outstanding, net of reserves. The allowance
for loan losses related to warehouse lines of credit totaled $1.2 million at
December 31, 1996. There were no charge-offs against such allowance during the
year ended December 31, 1996. Repurchase debt outstanding associated with CWM's
financing of warehouse lines of credit totaled $219 million at December 31,
1996.
CMO PORTFOLIO: As of December 31, 1996, CWM had a portfolio comprised of 11
series of CMOs (the CMO Portfolio). Collateral for CMOs increased to $289
million at December 31, 1996 from $184 million at December 31, 1995. This
increase of $105 million is primarily the result of the addition of $155 million
of collateral related to the issuance of a CMO in January 1996 and an increase
in accrued interest receivable of $376,000, offset by repayments (including
prepayments and premium and discount amortization) of $50 million and a decrease
in guaranteed investment contracts (GICs) held by trustees of $98,000. The fair
value of the collateral for CMOs totaled $282 million and $185 million at
December 31, 1996 and December 31, 1995, respectively. CWM's CMOs outstanding
increased to $264 million at December 31, 1996 from $165 million at December 31,
1995. This increase of $99 million resulted from issuance proceeds of $146
million in January 1996, offset by principal payments and discount amortization
on CMOs of $47 million and an increase in accrued interest payable on CMOs of
$534,000.
RESULTS OF OPERATIONS 1996 COMPARED TO 1995
NET EARNINGS: CWM's net earnings were $69.0 million, or $1.51 per share, based
on 45,643,885 weighted average shares outstanding for 1996, compared to $50.0
million, or $1.25 per share, based on 39,902,680 weighted average shares
outstanding for 1995. The increase in net earnings is principally due to an
increase in net interest income and equity in earnings of Indy Mac of $34.4
million and $5.7 million, respectively, offset by increases in the provision for
loan losses and expenses of $9.0 million and $13.2 million, respectively.
INTEREST INCOME: Total interest income was $242.3 million for 1996 and $180.5
million for 1995. The increase of $61.8 million in interest income was primarily
the result of increases of $23.6 million and $23.0 million in interest on
construction loans and mortgage loans held for sale, respectively, with
additional increases in interest earned on warehouse lines of credit, collateral
for CMOs, manufactured housing loans held for sale, securitized master servicing
fees and manufactured housing loans held for investment of $5.5 million, $5.4
million, $2.3 million, $2.1 million and $1.3 million, respectively. These
increases were offset by a reduction in the interest income related to mortgage
loans held for investment of $3.5 million.
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Interest income earned on mortgage loans held for investment, consisting
primarily of adjustable-rate mortgages, totaled $94.2 million and $97.7 million,
resulting in effective yields of 8.12% and 8.08%, for the years ended December
31, 1996 and December 31, 1995, respectively.
Interest income earned on mortgage loans held for sale totaled $57.7 million and
$34.7 million, resulting in effective yields of 8.76% and 9.22%, respectively,
for the years ended December 31, 1996 and 1995. The average outstanding balance
of such loans increased to $659 million for the year ended December 31, 1996,
from $377 million for the year ended December 31, 1995.
Interest income earned on manufactured housing loans held for sale totaled $2.3
million during 1996, resulting in an effective yield of 9.75% for the year ended
December 31, 1996. There were no manufactured housing loans outstanding during
1995.
Interest income earned on manufactured housing loans held for investment totaled
$1.3 million during 1996, resulting in an effective yield of 10.40% for the year
ended December 31, 1996. There were no manufactured housing loans outstanding
during 1995. Interest income on construction loans totaled $30.2 million and
$6.5 million during 1996 and 1995, respectively. The average principal balance
of construction loans outstanding totaled $240 million during 1996, representing
an increase of $191 million from the average principal balance of $49 million
outstanding during 1995. Interest was earned at an effective yield of 12.55% and
13.24% in 1996 and 1995, respectively.
Interest income on mortgage securities available for sale totaled $1.0 million
for the year ended December 31, 1996. Mortgage securities consisted primary of
adjustable-rate agency securities and certain subordinated and inverse-floater
securities. CWM did not invest in mortgage securities available for sale during
1995.
Interest income on revolving warehouse lines of credit totaled $15.5 million and
$10.0 million with interest earned at an effective yield of 8.74% and 9.50% for
the years ended December 31, 1996 and 1995, respectively.
Interest income on collateral for CMOs was $22.6 million and $17.3 million for
the years ended December 31, 1996 and 1995, respectively. The increase was
attributable to an increase in the average aggregate principal amount of
collateral for CMOs outstanding to $300 million for 1996 from $213 million for
1995, offset by a decrease in the effective yield earned on the collateral from
8.09% in 1995 to 7.56% in 1996. Interest income on collateral for CMOs includes
the impact of amortization of net 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.
Investments in securitized master servicing fees have characteristics comparable
to "excess servicing" insofar as their values tend to decline as market interest
rates decline and prepayment rates increase. Accordingly, the yield on such
investments could decline considerably as a result of rapid actual or projected
future 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 such circumstances, the Company would
write down its securitized master servicing fees asset so that the remaining
asset does not exceed the estimated present value of future net master servicing
income.
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INTEREST EXPENSE: For 1996 and 1995, total interest expense was $159.4 million
and $131.9 million, respectively. The increase of $27.5 million in interest
expense was the result of increases in the interest expense on repurchase
agreements and other credit facilities, collateral for CMOs, and senior
unsecured notes of $18.0 million, $4.9 million, and $4.5 million, respectively.
Interest expense on repurchase agreements and other credit facilities used to
finance mortgage assets and warehouse lines of credit totaled $131.4 million
during 1996 compared to $113.4 million during 1995. The increase of $18 million
was primarily the result of an increase in the aggregate average balance of
indebtedness outstanding for the year to $2.1 billion in 1996 from $1.7 billion
in 1995, partially offset by a decrease in the weighted average effective
interest rate to 6.27% in 1996 from 6.74% in 1995.
Interest expense on CMOs was $22.5 million and $17.5 million for 1996 and 1995,
respectively. This increase was primarily attributable to an increase in average
aggregate CMOs outstanding to $275 million for 1996 from $185 million for 1995,
combined with a decrease in the weighted average cost of CMOs to 8.17% in 1996
from 9.47% in 1995. The increase in the average balance of CMOs was directly
related to the issuance of CMO 1996-1 in January, 1996.
Interest expense on senior unsecured notes totaled $5.5 million and $1.0 million
for the years ended December 31, 1996 and December 31, 1995, respectively. The
senior unsecured notes were issued in October 1995 at an effective rate,
including issuance costs, of 9.22%.
EQUITY IN EARNINGS OF INDY MAC: The 1996 earnings of $18.1 million for Indy
Mac, in which CWM has a 99% economic interest, resulted principally from net
interest income of $11.4 million and gain on sale of mortgage loans and
securities of $51.7 million, offset by salaries, general and administrative
expenses of $31.2 million, management fee expense of $2.1 million and income
taxes of $13.5 million. During 1995, earnings of Indy Mac resulted principally
from net interest income of $18.1 million and gains on sales of mortgage loans
and securities of $35.8 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 $12.5 million.
Indy Mac master serviced loans with principal balances aggregating $11.1 billion
at December 31, 1996, compared to $9.4 billion at December 31, 1995. The growth
in the master servicing portfolio during 1996 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, 1996 and 1995
was 8.51% and 8.35%, respectively. The mix of fixed-rate product and adjustable-
rate product in the master servicing portfolio was 84% and 16%, respectively, at
December 31, 1996.
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PROVISION FOR LOAN LOSSES: The Company has established a loan loss reserve to
an extent sufficient to cover anticipated losses in its portfolio of mortgage
loans, construction loans and warehouse lines of credit. The reserve is based
upon management's assessment of possible credit losses. 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. The
provision has increased over the past two years due to normal seasoning of the
Company's mortgage loan portfolio (and consequently projected increases in
losses) and not due to any unusual characteristics or significant credit losses.
SALARIES, GENERAL AND ADMINISTRATIVE EXPENSES: The increase in salaries,
general and administrative expenses of $10.0 million for the period ended
December 31, 1996 compared to the period ended December 31, 1995 is primarily
the result of the increased personnel and expenses required to support the
growth in the operations of CWM and its qualified REIT subsidiaries.
MANAGEMENT FEES: For 1996, management fees were $8.8 million compared to $5.5
million for 1995. The increase in the management fees was primarily due to an
increase in incentive compensation payable to Countrywide Asset Management
Corporation (the "Manager") in 1996, directly related to the increase in CWM's
earnings during 1996 in comparison to 1995.
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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 net interest income and equity in earnings of Indy Mac of $23.1 million and
$8.2 million, respectively, offset by increases in management fee expense,
provision for loan losses, and salaries, general and administrative expenses of
$4.3 million, $3.5 million and $1.8 million, respectively.
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 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 $273 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 $49
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, from $290 million for 1994 to $213 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.
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<PAGE>
Gross securitized master servicing income for CWM was $27.2 million and $14.7
million 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, and $7.5 million for the years ended December 31, 1995 and 1994,
respectively. As of December 31, 1995, securitized master servicing fees of $120
million were pledged to secure borrowings totaling $62 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 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 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.
CWM recognized interest expense totaling $999,000 related to the senior
unsecured notes during 1995. There were no senior unsecured notes outstanding
during 1994. 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 million for 1995 from $264 million for 1994,
combined with 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 CMOs.
EQUITY IN EARNINGS OF INDY MAC:. During 1995, earnings of Indy Mac resulted
principally from net interest income of $18.1 million and gains on sales of
mortgage loans and securities of $35.8 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 $12.5 million. During 1994, earnings of Indy
Mac resulted principally from net interest income of $6.4 million, gains on
sales of mortgage loans and securities of $7.3 million, 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 $2.8 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 in the master servicing portfolio was 74% and 26%, respectively, at
December 31, 1995.
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Net interest 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.
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 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.
LIQUIDITY AND CAPITAL RESOURCES
The Company uses proceeds from the issuance of CMOs, repurchase agreements, bank
debt, other borrowings and common stock to meet its liquidity requirements. In
addition, in connection with its mortgage conduit operations, Indy Mac issues
REMIC securities from time to time to help meet such requirements.
The Company has established three repurchase facilities and one revolving credit
facility with Merrill Lynch, Pierce, Fenner & Smith Inc. and certain of its
affiliates, in an aggregate principal amount of $725 million. All four such
agreements are committed for a period of at least two years from their
respective dates of execution and currently permit the Company to finance its
mortgage conduit, mortgage portfolio, warehouse lending, consumer construction
lending and manufactured housing lending assets and operations. All of the three
repurchase agreements and the revolving credit facility carry floating rates of
interest based on LIBOR, plus an applicable margin, which varies by the type of
asset financed.
The Company has entered into a repurchase facility with Nomura Asset Capital
Corporation in an aggregate principal amount of $300 million. Such repurchase
facility is committed for a two-year period from the date of execution and
currently permits the Company to finance its mortgage conduit, mortgage
portfolio, warehouse lending and consumer construction lending assets and
operations. This repurchase facility carries a floating rate of interest based
on LIBOR, plus an applicable margin, which varies by the type of asset financed.
The Company has entered into a repurchase facility with Lehman Commercial Paper,
Inc. in an aggregate principal amount of $500 million. Such repurchase facility
is committed until May, 1997, and currently permits the Company to finance
certain mortgage loan assets. This repurchase facility carries a floating rate
of interest based on LIBOR, plus an applicable margin, which varies by the type
of asset financed.
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The Company has entered into a repurchase facility with Paine Webber Real Estate
Securities, Inc. in an aggregate principal amount of $500 million. Such
repurchase facility is committed for a one-year period from the date of
execution and currently permits the Company to finance its mortgage conduit,
warehouse lending and mortgage portfolio assets and operations. Such repurchase
facility carries a floating rate of interest based on LIBOR, plus an applicable
margin, which varies by the type of asset financed.
In May, 1995, the Company entered into a two-year committed credit facility with
a syndicate of commercial banks led by First Union National Bank of North
Carolina. This facility primarily finances mortgage loans, builder construction
loans, and master servicing assets. In 1996, the Company amended this credit
facility to expand the number of lenders and the available committed borrowings
from $300 million to $405 million and to increase financing available for
builder construction loans. The interest rates under this credit facility are
based, at the Company's election, on LIBOR or the federal funds rate, plus an
applicable margin, which varies by the type of asset financed.
During the fourth quarter of 1995, the Company raised $59.6 million in
connection with the private placement of senior notes with certain institutional
lenders. These senior notes are unsecured, and the proceeds are utilized by the
Company in connection with its working capital needs. The effective rate of
interest on such senior notes is fixed at 9.22% for a period of seven years from
the date of issuance. The senior notes were rated "BBB-" by Duff & Phelps Credit
Rating Co. at the time of issuance and, in December 1996, were rated "BBB-" by
Fitch Investors Service, L.P.
The Company has from time to time raised additional capital through secondary
public offerings. Since the inception of its new business plan in 1993, the
Company has raised $205 million in connection with such secondary offerings. The
Company also raises new equity capital primarily through the optional cash
payment feature of its Dividend Reinvestment Plan. During 1996 and 1995, the
Company raised $133 million and $25 million, respectively, through such Dividend
Reinvestment Plan.
During the first quarter of 1996, the Company issued one series of CMOs in an
aggregate principal amount of $146 million, secured by collateral consisting of
mortgage loans with an aggregate principal balance of $155 million.
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, conduit, commercial lending and other operations by requiring CWM to
distribute to its shareholders substantially all of its taxable income from
operations. Certain of the Company's material businesses, including its mortgage
conduit and commercial lending operations, are known to require significant and
continuing commitments of capital resources.
The Company's liquidity and its ability to raise working capital has generally
improved during recent periods, and management believes that the Company's cash
flow from operations and the Company's existing financing arrangements are
sufficient to meet the Company's current short-term liquidity requirements. To
the extent the Company possesses working capital in excess of its current
liquidity requirements, such working capital is as a general matter utilized to
repay borrowings under those tranches of the Company's lines of credit which
carry higher rates of interest, which borrowings would typically remain
available for reborrowing by the Company pursuant to the terms and conditions of
the applicable credit facility.
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The Company's ability to meet its long-term liquidity requirements is subject to
the renewal of its repurchase and credit facilities and/or obtaining other
sources of financing, including issuing additional debt or equity from time to
time. Any decision by the Company's lenders and/or investors to make additional
funds available to the Company in the future will depend upon a number of
factors, such as the Company's compliance with the terms of its existing credit
arrangements, the Company's financial performance, industry and market trends in
the Company's various businesses, the general availability of and rates
applicable to financing and investments, such lenders' and/or investors' own
resources and policies concerning loans and investments, and the relative
attractiveness of alternative investment or lending opportunities.
CASH FLOWS
- ----------
During the year ended December 31, 1996, the Company's operating activities
required cash of approximately $227 million. The primary operating activity
for which cash was used during the year ended December 31, 1996 was the
acquisition of mortgage loans and manufactured housing loans held for sale.
The primary investing activity for which cash was used during the year ended
December 31, 1996 was the funding of construction loans receivable and
acquisition of mortgage loans held for investment and mortgage securities
available for sale. The net cash used in investing activities totaled $430
million for the year ended December 31, 1996.
Net cash provided by financing activities amounted to $661 million for the year
ended December 31, 1996. The cash provided by financing activities was primarily
the result of new borrowings under repurchase agreements and other credit
facilities combined with proceeds from issuance of common stock and CMOs during
the year ended December 31, 1996.
EFFECT OF INTEREST RATE CHANGES
Due to the characteristics of certain of the financial assets and liabilities of
the Company, and the nature of the Company's business activities, the Company's
financial position and results of operations may be affected by changes in
market interest rates. With respect to its financial assets and liabilities,
the Company has devised and implemented a general asset/liability investment
management strategy which seeks, on an economic basis, to mitigate significant
fluctuations in the financial position and results of operations of the Company
caused by changes in interest rates. This strategy attempts, among other
things, to balance investments in various types of financial instruments whose
values are expected to move inversely to each other in response to movements in
market interest rates. However, there can be no assurance that this strategy
(including assumptions concerning the correlation thought to exist between
different types of instruments) or its implementation will be successful in
every interest rate environment.
Financial assets of the Company that tend to increase in value as interest rates
increase, and decline in value as interest rates decrease, include securitized
master servicing and master servicing fees receivable. These financial assets
carry an implicit yield that is based upon estimates of future cash flows on an
underlying pool of mortgage loans. As interest rates increase, the prepayments
on the underlying pool of mortgage loans tends to slow, resulting in higher
residual cash flows than would otherwise have been obtained, and therefore
results in higher implicit yields. As of December 31, 1996, CWM and Indy Mac on
a combined basis held $357 million of securitized master servicing fees and
master
26
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EFFECT OF INTEREST RATE CHANGES - CONTINUED
servicing fees receivable. Of the $357 million aggregate amount, $235 million
of such assets are classified as trading securities in accordance with the
requirements of SFAS 115 since they were acquired in connection with the
securitization of loans held for sale by Indy Mac.
Financial instruments of the Company that tend to decrease in value as interest
rates increase, and increase in value as interest rates decline, include fixed
rate subordinated securities, principal-only securities and inverse-floater
securities. Similar to the securitized master servicing fees, the principal-
only and inverse floater securities carry an implicit yield based upon estimates
of future cash flows on an underlying pool of mortgage loans. However, the
principal-only and inverse-floater securities generally sell at a discount,
similar to a "zero-coupon" bond, in order to yield an estimated return. If
interest rates increase and prepayments slow in comparison to assumed prepayment
rates, the repayment rate of the principal-only and inverse-floater security
would tend to lengthen and thus reduce the implicit yield on the security.
Conversely, if interest rates decrease, the rate of prepayment on the underlying
pool of loans would tend to increase, resulting in a more rapid rate of
repayment on the principal-only security and inverse floater security and
therefore a higher implicit yield. To a lesser extent, any mortgage securities
held by the Company and supported by adjustable rate mortgage loans may decline
in value as interest rates increase, if the timing or absolute level of interest
rate adjustments on the underlying loans do not correspond to any increases in
market interest rates. As of December 31, 1996, CWM and Indy Mac on a combined
basis held $461 million of fixed and adjustable rate mortgage securities,
principal-only and inverse floater securities. Of the $461 million aggregate
amount, $207 million of such securities are classified as trading securities in
accordance with the requirements of SFAS 115 since they were acquired in
connection with the securitization of loans held for sale by Indy Mac.
In addition to the inherent risks in seeking to manage fluctuations in the value
of certain assets due to interest rate changes, there may be timing differences
in the recognition of the offsetting effects of gains and losses which are
attributable to specific instruments depending upon whether a security is
classified as trading or available for sale. As discussed more fully in the
Company's accounting policies found in Note A to the CWM financial statements
and Note A to the Indy Mac financial statements, the unrealized holding gains
and losses on trading securities are recognized in earnings of the period for
the reporting entity. By comparison, the unrealized holding gains and losses of
securities available for sale are excluded from earnings of the reporting entity
and included as a separate component of shareholders' equity. Therefore, to the
extent that the Company is required under GAAP to classify certain securities as
trading, such classification and the resulting accounting could cause in
additional volatility in the Company's future reported earnings in periods where
interest rates fluctuate.
The Company is also subject to certain business and credit risks in connection
with interest rate changes. Increases in interest rates may 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. Additionally, with respect to adjustable rate
loans, the rate of delinquency may increase in periods of increasing interest
rates as borrowers face higher mortgage payments.
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EFFECT OF INTEREST RATE CHANGES - CONTINUED
The Company's liquidity position and net interest income could also be adversely
impacted by significant interest rate fluctuations. Each of the Company's
collateralized borrowing facilities described above in Liquidity and Capital
Resources permit the lender thereunder to require the Company to repay amounts
outstanding and/or pledge additional assets in the event that the value of the
pledged collateral declines due to changes in market interest rates. In the
event of such a decrease in collateral values, it could be necessary for the
Company to provide additional funds and/or 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. In addition, increases in short-term
borrowing rates relative to rates earned on asset holdings that have not been
financed to maturity through the issuance of CMOs or other debt securities may
also adversely affect the Company's "spread income" on such assets and thus
reduce the Company's earnings.
ITEM 8. FINANCIAL STATEMENTS 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-1 of this form 10-K.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
- -------------------------------------------------------------
None.
28
<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
Company's 1996 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 Company's 1996 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 Company's 1996 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 Company's 1996 fiscal year.
29
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
- -------- ---------------------------------------------------------------
(a) (1) and (2) - Financial Statements and Schedules
The information called for by this section of item 14 is set forth in the
Index to Financial Statements and Schedules at page F-1 of this Form 10 - K.
(3) - Exhibits
Exhibit
No. Description
- ------- -----------
3.1* Certificate of Incorporation for CWM, as amended (incorporated by reference
to Exhibit 3.1 to the Company's Form 10-Q, for the quarter ended 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 B Supplement, dated as of February 1, 1986, to the Indenture
(incorporated by reference to Exhibit 4.1 to CMO, Inc.'s Form 8-K filed
with the SEC on March 31, 1986).
4.4* Series C Supplement, dated as of April 1, 1986, to the Indenture
(incorporated by reference to Exhibit 4.4 to CMO, Inc.'s Amendment No. 1 to
S-11 Registration Statement (No. 33-3274) filed with the SEC on May 13,
1986).
4.5* Series D Supplement, dated as of May 1, 1986, to the Indenture
(incorporated by reference to Exhibit 4.5 to the Company's S-11
Registration Statement (No. 33-6787) filed with the SEC on June 26, 1986).
4.6* Series E Supplement, dated as of June 1, 1986, to the Indenture
(incorporated by reference to Exhibit 4.6 to the Company's Amendment No. 1
to S-11 Registration Statement (No. 33-6787) filed with the SEC on July 30,
1986).
4.7* Series F Supplement, dated as of August 1, 1986, to the Indenture
(incorporated by reference to Exhibit 4.1 to CMO, Inc.'s Form 8-K filed
with the SEC on August 14, 1986).
4.8* Series G Supplement, dated as of August 1, 1986, to the Indenture
(incorporated by reference to Exhibit 4.8 to CMO, Inc.'s S-11 Registration
Statement (No.33-8705) filed with the SEC on September 12, 1986).
30
<PAGE>
4.9* Series H Supplement, dated as of September 1, 1986, to the Indenture
(incorporated by reference to Exhibit 4.1 to CMO, Inc's Form 8-K filed
with the SEC on October 7, 1986).
4.10* Series I Supplement, dated as of October 1, 1986, to the Indenture
(incorporated by reference to Exhibit 4.11 to CMO, Inc.'s Amendment No. 1
to S-11 Registration Statement (No. 33-8705) filed with the SEC on
October 27, 1986).
4.11* Series J Supplement, dated as of October 15, 1986, to the Indenture
(incorporated by reference to Exhibit 4.1 to CMO, Inc.'s Form 8-K filed
with the SEC on November 12, 1986).
4.12* Series K Supplement, dated as of December 1, 1986, to the Indenture
(incorporated by reference to 4.1 to CMO, Inc.'s Form 8-K filed with the
SEC on March 16, 1987).
4.13* Series 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).
4.14* 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).
4.15* Series W-1 Supplement, dated as of December 1, 1986, to the SPNB
Indenture (incorporated by reference to Exhibit 4.2 to CMO, Inc.'s
Form 8-K filed with the SEC on January 9, 1987).
4.16* Series N Supplement, dated as of February 1, 1987, to the SPNB Indenture
(incorporated by reference to Exhibit 4.1 to CMO, Inc.'s Form 8-K filed
with the SEC on March 16, 1987).
4.17* 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).
4.18* 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).
4.19* 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).
4.20* Indenture dated as of November 20, 1990, between the Countrywide Cash
Flow Bond Trust ("CCFBT") and BTC (incorporated by referenced to Exhibit
4.22 to the Company's Form 10-K for the year ended December 31, 1990).
4.21* 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).
4.22* 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).
31
<PAGE>
4.23 First Supplemental Indenture dated as of May 24, 1993 betwen the 1993-II
Trust and the Bond Trustee. (incorporated by reference to Exhibit 4.25 to
CWM's 10-K for the year ended December 31, 1994.)
4.24* 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).
4.25* 1996 Stock Incentive Plan adopted May 29, 1996 (incorporated by reference
to Exhibit 4 to CWM's form S-8 filed with the SEC on July 26, 1996).
10.1* 1996 Amended and Extended Management Agreement, extended as of June 1,
1996, 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, 1996).
10.2* 1987 Amended and Restated Servicing Agreement, dated as of May 15, 1987,
between CMI and Countrywide Funding Corporation ("CFC") (incorporated by
reference to Exhibit 10.2 to the Company's Form 10-Q filed for the
quarter ended June 30, 1987).
10.3* 1996 Amended and Extended Loan Purchase and Administrative Services
Agreement, dated as of June 1, 1996, between CWM and CFC (incorporated by
reference to Exhibit 10.1 to the Company's Form 10-Q for the quarter
ended June 30, 1996).
10.4* 1988 Amended and Restated Submanagement Agreement, dated as of May 15,
1988, between CFC and the Manager (incorporated by reference to Exhibit
10.4 to CMI's Form 10-Q for the quarter ended March 31, 1988).
10.5* 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).
10.6* 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).
10.7* Servicing Agreement, dated as of November 15, 1986, among CMO, Inc., SPNB
and CFC (incorporated by reference to Exhibit 10.1 to CMO, Inc.'s Form 8-
K filed with the SEC on January 9, 1987).
10.8* 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).
10.9* 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).
10.10* Servicing Agreement, dated as of February 1, 1987, among the 1987-I
Trust, SPNB and CFC (incorporated by reference to Exhibit 10.18 to CMI's
Form 10-K filed for the year ended December 31, 1985).
10.11* 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).
32
<PAGE>
10.12* Agreement among CMO II, Inc., the Manager and CFC, dated as of February
1, 1987, regarding certain bankruptcy matters (incorporated by reference
to Exhibit 10.20 to CMI's Form 10-K for the year ended December 31,
1986).
10.13* 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).
10.14* 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).
10.15* 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).
10.16* Management Agreement, dated as of June 1, 1987, between Wilmington Trust
Company, as Owner Trustee of the 1987-II Trust, and the Manager
(incorporated by reference to Exhibit 10.10 to CMI's Form 10-Q for the
quarter ended June 30, 1987).
10.17* Servicing Agreement, dated as of June 1, 1987, among the 1987-II Trust,
SPNB and CFC (incorporated by reference to Exhibit 10.11 to CMI's Form
10-Q for the quarter ended June 30, 1987).
10.18* 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).
10.19* 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).
10.20* 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).
10.21* 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).
10.22* 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).
10.23* 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).
10.24* 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).
33
<PAGE>
10.25* 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).
10.26* Deposit Trust Agreement dated as of March 24, 1993 between Countrywide
Mortgage Obligations II, Inc. and Wilmington Trust Company (incorporated
by reference to Exhibit 10.1 to CMI's 10-Q for the quarter ended March
31, 1993).
10.27* 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).
10.28* Servicing Agreement dated as of March 30, 1993 by and among the 1993-I
Trust, Countrywide Funding Corporation and the Bond Trustee (incorporated
by reference to Exhibit 10.3 to CMI's 10-Q for the quarter ended March
31, 1993).
10.29* Management Agreement, dated as of March 30, 1993 between Countrywide
Asset Management Corporation and the 1993-I Trust (incorporated by
reference to Exhibit 10.4 to CMI's 10-Q for the quarter ended March 31,
1993).
10.30* First Amendment dated as of March 30, 1993 to Agreement between
Countrywide Mortgage Obligations II, Inc. and CMI (incorporated by
reference to Exhibit 10.5 to CMI's 10-Q for the quarter ended March 31,
1993).
10.31* First Amendment dated as of March 30, 1993 to Agreement between
Countrywide Mortgage Obligations II, Inc., Countrywide Asset Management
Corporation and Countrywide Funding Corporation (incorporated by
reference to Exhibit 10.6 to CMI's 10-Q for the quarter ended March 31,
1993).
10.32* Deposit Trust Agreement dated as of April 7, 1993 between Countrywide
Mortgage Obligations II, Inc. and Wilmington Trust Company (incorporated
by reference to Exhibit 10.7 to CMI's 10-Q for the quarter ended March
31, 1993).
10.33* 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).
10.34* Servicing Agreement dated as of April 14, 1993 by and among the 1993-II
Trust, Countrywide Funding Corporation and the Bond Trustee (incorporated
by reference to Exhibit 10.9 to CMI's 10-Q for the quarter ended March
31, 1993).
10.35* Management Agreement, dated as of April 14, 1993 between Countrywide
Asset Management Corporation and the 1993-II Trust (incorporated by
reference to Exhibit 10.10 to CMI's 10-Q for the quarter ended March 31,
1993).
10.36* First Amendment to Deposit Trust Agreement dated as of April 13, 1993
between Countrywide Mortgage Obligations II, Inc. and Wilmington Trust
Company, as Owner Trustee (incorporated by reference to Exhibit 10.11 to
CMI's 10-Q for the quarter ended March 31, 1993).
10.37* Contribution and Mortgage Loan Acquisition Agreement dated as of April
19, 1993 between CMI and Countrywide Funding Corporation (incorporated by
reference to Exhibit
34
<PAGE>
10.2 to CMI's Amendment No. 3 to S-3 Registration Statement (No. 33-
63034) filed with the SEC on July 16, 1993).
10.38* First Amendment to Deposit Trust Agreement dated as of April 16, 1993
between Countrywide Mortgage Obligations II, Inc. and Wilmington Trust
Company (incorporated by reference to Exhibit 10.8 to CMI's 10-Q for the
quarter ended June 30, 1993).
10.39* Custody Agreement dated as of April 5, 1993 among CMI, Merrill Lynch
Mortgage Capital, Inc. and State Street Bank and Trust Company of
California, N.A., Custodian (incorporated by reference to Exhibit 10.10
to CMI's 10-Q for the quarter ended June 30, 1993).
10.40 Employment agreement for Michael Perry dated November, 1996.
10.41* First Amendment to 1996 Amended and Extended Management Agreement dated
as of July 25, 1996 between CWM Mortgage Holdings, Inc. ("CWM") and
Countrywide Asset Management Corporation. (incorporated by reference to
Exhibit 10.1 to CWM's 10-Q for the quarter ended September 30, 1996.)
10.42* Master Forward Commitment and Services Agreement effective January 1,
1996 between CWM Mortgage Holdings, Inc. and Independent National
Mortgage Corporation. (incorporated by reference to Exhibit 10.8 to CWM's
10-Q for the quarter ended March 31, 1996.)
10.43* Independent National Mortgage Corporation Capitalization Agreement,
effective as of January 1, 1996, by and among CWM Mortgage Holdings,
Inc., Countrywide Funding Corporation and Independent National Mortgage
Corporation. (incorporated by reference to Exhibit 10.8 to CWM's 10-Q for
the quarter ended March 31, 1996.)
10.44* Revolving Working Capital Credit Facility and Credit Support Agreement,
effective as of January 1, 1996, between CWM Mortgage Holdings, Inc. and
Independent National Mortgage Corporation. (incorporated by reference to
Exhibit 10.8 to CWM's 10-Q for the quarter ended March 31, 1996.)
35
<PAGE>
21.1 List of Subsidiaries.
23.1 Consent of Grant Thornton LLP
27 Financial Data Schedule
*Incorporated by reference.
(b) - Reports on Form 8-K
None.
36
<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 May 20, 1997.
CWM MORTGAGE HOLDINGS, INC.
BY: /s/ DAVID S. LOEB
----------------------------------
David S. Loeb
Chairman of the Board of Directors
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 of May 20, 1997
- --------------------------- Directors
David S. Loeb
/s/ ANGELO R. MOZILO Director, Vice Chairman of the Board May 20, 1997
- --------------------------- of Directors and Chief Executive Officer
Angelo R. Mozilo (Principal Executive Officer)
/s/ MICHAEL W. PERRY President and Chief Operating Officer May 20, 1997
- ---------------------------
Michael W. Perry
/s/ JAMES P. GROSS Senior Vice President May 20, 1997
- --------------------------- and Chief Financial Officer
James P. Gross (Principal Accounting Officer)
(Principal Financial Officer)
/s/ LYLE E. GRAMLEY Director May 20, 1997
- ---------------------------
Lyle E. Gramley
/s/ THOMAS J. KEARNS Director May 20, 1997
- ---------------------------
Thomas J. Kearns
/s/ FREDERICK J. NAPOLITANO Director May 20, 1997
- ---------------------------
Frederick J. Napolitano
</TABLE>
37
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS AND
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
CWM MORTGAGE HOLDINGS, INC.
AND SUBSIDIARIES
December 31, 1996, 1995 and 1994
F-1
<PAGE>
CWM MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
December 31, 1996, 1995, 1994
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-25
</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-26
Financial Statements
Balance Sheet F-27
Statement of Earnings F-28
Statement of Shareholders' Equity F-29
Statement of Cash Flows F-30
Notes to Financial Statements F-31
</TABLE>
F-2
<PAGE>
REPORTS OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Shareholders
CWM Mortgage Holdings, Inc.
We have audited the accompanying consolidated balance sheets of CWM Mortgage
Holdings, Inc. and subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of earnings, shareholders' equity, and cash
flows for each of the three years in the period ended December 31, 1996. 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, 1996 and 1995, and the
consolidated results of their operations and their consolidated cash flows for
each of the three years in the period ended December 31, 1996, 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, 1996. 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 21, 1997
F-3
<PAGE>
CWM MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
------------------ -----------------
<S> <C> <C>
ASSETS
Mortgage assets
Mortgage loans held for investment, net $1,210,891 $1,424,583
Mortgage loans held for sale - prime 404,346 379,363
Mortgage loans held for sale - subprime 177,913 30,221
Manufactured housing loans held for sale 74,949 -
Manufactured housing loans held for investment 25,822 -
Construction loans receivable, net 460,546 129,323
Collateral for CMOs 289,054 184,111
------------------ -----------------
Securitized master servicing fees 103,700 124,975
------------------ -----------------
MORTGAGE SECURITIES 128,080 -
------------------ -----------------
Revolving warehouse lines of credit, net 251,032 190,705
------------------ -----------------
Investment in and advances to Indy Mac 170,609 140,590
------------------ -----------------
Cash and cash equivalents 12,450 8,049
Other assets 46,667 31,440
------------------ -----------------
Total assets $3,356,059 $2,643,360
================== =================
LIABILITIES AND SHAREHOLDERS' EQUITY
Repurchase agreements and other credit facilities $2,531,509 $2,037,834
Collateralized mortgage obligations 264,080 164,760
Senior unsecured notes 59,759 59,649
Accounts payable and accrued liabilities 22,287 18,386
------------------ -----------------
Total liabilities 2,877,635 2,280,629
Commitments and contingencies -
Shareholders' equity
Common stock - authorized, 100,000,000 shares of
$.01 par value; issued and outstanding, 50,200,146 shares
at December 31, 1996 and 42,413,842 at December 31, 1995 502 424
Additional paid-in capital 490,695 353,965
Net unrealized gain (loss) on mortgage securities available for sale:
------------------ -----------------
held by CWM (7,166) 4,694
------------------ -----------------
held by Indy Mac (8,427) 2,898
------------------ -----------------
Cumulative earnings 219,135 150,148
Cumulative distributions to shareholders (216,315) (149,398)
------------------ -----------------
Total shareholders' equity 478,424 362,731
------------------ -----------------
Total liabilities and shareholders' equity $3,356,059 $2,643,360
================== =================
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
CWM MORTGAGE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------------------
1996 1995 1994
--------------- --------------- ----------------
<S> <C> <C> <C>
REVENUES
Interest income
Mortgage loans held for investment $ 94,237 $ 97,720 $ 20,161
Mortgage loans held for sale 57,746 34,733 34,238
Manufactured housing loans held for sale 2,259 - -
Manufactured housing loans held for investment 1,308 - -
Construction Loans 30,158 6,548 93
Collateral for CMOs 22,648 17,257 21,679
Securitized master servicing fees, net 9,502 7,405 7,203
Mortgage securities 1,002 - -
Revolving warehouse lines of credit 15,523 10,024 4,363
Advances to Indy Mac 7,676 6,502 4,279
Other 244 276 103
---------- ---------- ----------
Total interest income 242,303 180,465 92,119
Interest expense
Repurchase agreements and other credit facilities 131,389 113,379 39,585
Collateralized mortgage obligations 22,478 17,532 27,115
Senior unsecured notes 5,498 999 -
---------- ---------- ----------
Total interest expense 159,365 131,910 66,700
Net interest income 82,938 48,555 25,419
Provision for loan losses 12,991 4,037 500
---------- ---------- ----------
Net interest income after provision for loan losses 69,947 44,518 24,919
Equity in earnings of Indy Mac 19,533 13,801 5,624
Other 2,470 1,427 885
---------- ---------- ----------
Net revenues 91,950 59,746 31,428
EXPENSES
Salaries, general and administrative 14,202 4,213 2,402
Management fees to affiliate 8,761 5,522 1,195
---------- ---------- ----------
Total expenses 22,963 9,735 3,597
---------- ---------- ----------
NET EARNINGS $ 68,987 $ 50,011 $ 27,831
========== ========== ==========
EARNINGS PER SHARE $ 1.51 $ 1.25 $ 0.86
========== ========== ==========
Weighted average shares outstanding 45,643,885 39,902,680 32,183,850
========== ========== ==========
</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
mortgage securities
available for sale
Capital -----------------------------
Number of Common in excess of Held by Held By
Three years ended December 31, 1996 shares stock par CWM Indy Mac
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1993 32,020,484 $320 $256,587 - -
Common stock issued 922 - 9 - -
Common stock options exercised 259,750 3 1,339 - -
Capital contribution by manager - - 305 - -
Unrealized gain on mortgage securities and
securitized master servicing available for sale - - - 487 520
Net earnings for the year - - - - -
Dividends paid - $0.72
per share - - - - -
---------------------------------------------------------------------------
Balance at December 31, 1994 32,281,156 323 258,240 487 520
Common stock issued 9,801,686 98 93,565 - -
Common stock options exercised 331,000 3 2,160 - -
Unrealized gain on mortgage securities and
securitized master servicing available for sale - - - 4,207 2,378
Net earnings for the year - - - - -
Dividends paid - $1.17
per share - - - - -
---------------------------------------------------------------------------
Balance at December 31, 1995 42,413,842 424 353,965 4,694 2,898
Common stock issued 7,382,883 74 132,982 - -
Common stock options exercised 403,421 4 3,748 - -
Unrealized loss on mortgage securities and
securitized master servicing available for sale - - - (11,860) (11,325)
Net earnings for the year - - - - -
Dividends paid - $1.47
per share - - - - -
---------------------------------------------------------------------------
Balance at December 31, 1996 50,200,146 $502 $490,695 ($7,166) ($8,427)
===========================================================================
<CAPTION>
Cumulative
Cumulative distributions
Three years ended December 31, 1996 earnings to shareholders Total
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at December 31, 1993 $72,306 ($78,605) $250,608
Common stock issued - - 9
Common stock options exercised - - 1,342
Capital contribution by manager 305
Unrealized gain on mortgage securities and
securitized master servicing available for sale - - 1,007
Net earnings for the year 27,831 - 27,831
Dividends paid - $0.72
per share - (23,185) (23,185)
-------------------------------------------------------
Balance at December 31, 1994 100,137 (101,790) 257,917
Common stock issued - - 93,663
Common stock options exercised - - 2,163
Unrealized gain on mortgage securities and
securitized master servicing available for sale - - 6,585
Net earnings for the year 50,011 - 50,011
Dividends paid - $1.17
per share - (47,608) (47,608)
-------------------------------------------------------
Balance at December 31, 1995 150,148 (149,398) 362,731
-------------------------------------------------------
Common stock issued - - 133,056
Common stock options exercised - - 3,752
Unrealized loss on mortgage securities and
securitized master servicing available for sale - - (23,185)
Net earnings for the year 68,987 - 68,987
Dividends paid - $1.47
per share - (66,917) (66,917)
-------------------------------------------------------
Balance at December 31, 1996 $219,135 ($216,315) $478,424
=======================================================
</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,
------------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 68,987 $ 50,011 $ 27,831
Adjustments to reconcile net earnings
to net cash (used in) provided by operating activities:
Amortization and depreciation 24,911 22,456 12,226
Provision for loan losses 12,991 4,037 500
Equity in earnings of Indy Mac (19,533) (13,801) (5,624)
Purchases of mortgage loans held for sale (3,872,783) (3,779,914) (5,073,475)
Principal repayments and proceeds from sale of mortgage loans 3,646,046 3,670,576 5,259,367
Purchases of manufactured housing loans held for sale, net of repayments (74,949) - -
Investment in securitized master servicing fees (9,931) (19,118) (8,979)
Investment in mortgage securities classified as trading, net (7,438) - -
Change in accrued assets and liabilities 4,775 2,913 (10,922)
----------- ----------- -----------
Net cash (used in) provided by operating activities (226,924) (62,840) 200,924
CASH FLOWS FROM INVESTING ACTIVITIES:
Collateral for CMOs:
Principal payments on collateral 46,106 28,975 147,429
Net change in GICs held by trustees 98 953 17,810
Proceeds from sale of collateral for CMOs, net - 9,205 -
----------- ----------- -----------
46,204 39,133 165,239
Net increase in construction loans receivable (333,011) (111,646) (6,670)
Purchases of mortgage loans held for investment (207,825) (406,478) (909,895)
Investment in mortgage securities available for sale (118,783) - -
Net (increase) decrease in revolving warehouse lines of credit (60,927) (121,606) 22,267
Advances to Indy Mac, net of cash repayments (46,561) (67,128) 62,002
Purchases of manufactured housing loans held for investment, net of repayments (25,822) - -
Investment in securitized master servicing fees - - (119,501)
Principal payments on mortgage loans held for investment 297,709 183,200 12,750
Investment in Indy Mac, net of dividends received 24,750 (15,840) (6,905)
Change in other assets (5,758) (8,911) (1,526)
----------- ----------- -----------
Net cash used in investing activities (430,024) (509,276) (782,239)
CASH FLOWS FROM FINANCING ACTIVITIES:
Collateralized mortgage obligations:
Proceeds from issuance of securities 146,152 - -
Principal payments on securities (48,566) (39,309) (165,059)
----------- ----------- -----------
97,586 (39,309) (165,059)
Net increase in repurchase agreements and other credit facilities 493,675 503,642 763,855
Net proceeds from issuance of unsecured debt - 59,623 -
Net proceeds from issuance of common stock 136,808 95,827 1,656
Cash dividends paid (66,917) (47,608) (23,185)
Change in other liabilities 197 5,385 (446)
----------- ----------- -----------
Net cash provided by financing activities 661,349 577,560 576,821
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents 4,401 5,444 (4,494)
Cash and cash equivalents at beginning of period 8,049 2,605 7,099
----------- ----------- -----------
Cash and cash equivalents at end of period $ 12,450 $ 8,049 $ 2,605
=========== =========== ===========
Supplemental cash flow information:
Cash paid for interest $ 156,880 $ 121,288 $ 56,885
=========== =========== ===========
</TABLE>
Supplemental disclosure of non-cash activity:
$154.6 million of mortgage loans held for investment were transferred to
collateral for CMOs in 1996 in association with the issuance of a CMO.
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, 1996, 1995 AND 1994
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.
Accordingly, CWM's investment in Indy Mac is accounted for under a method
similar to the equity method because CWM has the ability to exercise
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.
CWM and Indy Mac had previously accounted for their portfolios of
subordinated securities and securitized master servicing fees, retained in
connection with the securitization of loans held for sale, as securities
available for sale and held to maturity, respectively. Indy Mac has restated
its financial statements for each of the three years in the period ended
December 31, 1996 to reflect the classification of and accounting for such
securities as trading securities. The cumulative effect of this change on
Indy Mac's earnings for the three years is a net loss of $207,000. CWM has
restated its financial statements to reclassify certain subordinated
securities and securitized master servicing fees acquired in connection with
the securitization of loans held for sale as trading. Other excess master
servicing fees sold by Indy Mac to CWM and subsequently securitized by CWM
have been reclassified as available for sale. Because the effect of these
changes (including the change in CWM's equity in earnings of Indy Mac) are
not material to CWM's earnings, CWM has not restated its earnings for any of
the periods presented.
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, 1995 and 1994 to conform to the December 31, 1996
presentation.
F-8
<PAGE>
CWM MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
2. Mortgage Loans Held for Investment, Net and Manufactured Housing Loans Held
For Investment
CWM purchases certain mortgage and manufactured housing loans to be held as
long-term investments. In addition CWM may, pursuant to its forward
commitment contract with Indy Mac, transfer 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 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. Loans held for investment are carried at the
principal amount outstanding, adjusted for net unamortized premiums or
discounts, and net of the allowance for loan losses.
3. Mortgage Loans Held for Sale and Manufactured Housing Loans Held for Sale
Mortgage and manufactured housing loans held for sale, consisting primarily
of one to four family residential units, are carried at the lower of cost or
market, computed by the aggregate method. Premiums paid and discounts
obtained on such 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 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, securitization 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. Fair value is therefore
equal to the commitment price which is the carrying value of the loans. At
present, CWM does not sell any loans to entities other than Indy Mac.
4. 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 loan losses.
5. Collateral for CMOs
Collateral for CMOs, consisting of mortgage loans and mortgage-backed
securities, 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.
F-9
<PAGE>
CWM MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
6. Securitized Master Servicing Fees
Securitized master servicing fees primarily represent AAA rated interest-only
(I/O) REMIC regular interests related to Indy Mac's securitization of
mortgage loans held for sale. Interest income on securitized master
servicing fees is recognized at the effective yield based upon current
estimates of prepayment rates. Cash received in excess of the effective yield
is applied to amortize the asset. Securitized master servicing fees issued
in security form at settlement of an Indy Mac REMIC transaction are
classified and accounted for as trading securities in accordance with SFAS
115. Accordingly, such securities are recorded at fair value with material
unrealized gains and losses included in earnings of the period. Securitized
master servicing fees not originally issued in security form at settlement of
an Indy Mac REMIC transaction, and subsequently purchased from Indy Mac by
CWM, are classified and accounted for as available for sale in accordance
with SFAS 115. Accordingly, such securities are recorded at fair value with
material unrealized gains and losses excluded from earnings and included as a
separate component of shareholders equity.
CWM evaluates the recoverability of securitized master servicing fees
classified as available for sale 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 value of securitized master servicing fees is 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.
7. Mortgage Securities
Mortgage securities which are identified as available for sale consist
primarily of adjustable-rate agency securities. Securities are classified at
acquisition as available for sale when CWM intends to hold the securities for
a period of time, but not necessarily to maturity. Mortgage securities
available for sale are carried at estimated fair value with unrealized gains
and losses excluded from earnings and included in shareholders' equity. In
addition, CWM has invested in certain securities issued in connection with
Indy Mac's REMIC transactions and inverse-floater securities. Mortgage
securities invested in at settlement of an Indy Mac REMIC transaction are
classified and accounted for as trading securities in accordance with SFAS
115. Accordingly, such securities are recorded at fair value with material
unrealized gains and losses included in earnings of the period. Estimated
fair value is determined based on market quotes.
F-10
<PAGE>
CWM MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
8. Revolving Warehouse Lines of Credit, Net
Revolving warehouse lines of credit are carried at their outstanding
principal balances, net of allowance for losses.
9. 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 allowance 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, borrower credit
quality, maturity and delinquency. 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.
10. Collateralized Mortgage Obligations (CMOs) and Deferred Issuance Costs
CMOs 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 an effective interest
method or methods which approximate the effective interest method.
Unamortized deferred issuance costs are included in Other Assets in CWM'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.
11. Interest Rate Swap Agreements
CWM utilizes interest rate swap agreements to synthetically fix the interest
rate and term of certain repurchase 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.
12. 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.
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.
F-11
<PAGE>
CWM MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
13. Earnings Per Share
Earnings per share are computed on the basis of the weighted average number
of common shares outstanding which was 45,643,885, 39,902,680 and 32,183,850
for 1996, 1995 and 1994, 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 1996 and 1995, approximately $0.18 per share and $0.20 per share,
respectively, represented a return of capital. There was no return of
capital included in dividends paid per share in 1994.
14. Stock Based Compensation
CWM grants stock options for a fixed number of shares to officers and
employees with an exercise price equal to the average market price of the
shares at the date of grant. The Company accounts for stock option grants in
accordance with Accounting Principles Board Opinion (APB) No. 25, Accounting
for Stock Issued to Employees and, accordingly, recognizes no compensation
expense for the stock option grants. SFAS No. 123, Accounting for Stock-
Based Compensation, issued in 1995, allows companies to continue to
recognize earnings pursuant to APB No. 25 but requires companies to disclose
the effect on earnings of compensation expense for stock options based on
the fair value of the options at the grant date. The effect on net income
and earnings per share, had the Company adopted the expense recognition
provisions of SFAS 123, would not have been material.
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) 1996 1995
------------------------------------------------------------------
Principal Weighted Principal Weighted
Product Type Amount Average Coupon Amount Average Coupon
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Adjustable-rate Mortgages:
Monthly LIBOR $ 183,851 8.23% $ 238,639 8.68%
Monthly COFI 108,761 7.96 138,465 8.23
6-Month LIBOR 241,442 9.00 298,848 9.18
1-Year CMT 336,903 8.30 212,476 8.76
3/1 CMT 135,653 8.89 118,822 8.85
5/1 CMT 70,542 8.76 71,994 8.88
10/1 CMT 5,963 8.28 163,341 7.28
Other adjustable-rate mortgages 12,707 7.65 15,213 8.25
------------------------------------------------------------------
Fixed-Rate Mortgages 125,544 10.34 171,791 10.41
------------------------------------------------------------------
1,221,366 8.69% 1,429,589 8.82%
Unamortized net premium (discount) 1,016 - (2,087) -
Allowance for loan losses (11,491) - (2,919) -
------------------------------------------------------------------
Total $1,210,891 $1,424,583
==================================================================
</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.
F-12
<PAGE>
CWM MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE B - MORTGAGE LOANS HELD FOR INVESTMENT - CONTINUED
Included in mortgage loans held for investment at December 31, 1996 are $40.9
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 $3.5 million for
the year ended December 31, 1996. Non-accrual loans at December 31, 1995 totaled
$18.1 million and would have resulted in an additional $931,000 of interest
income for the year then ended.
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 33 percent of the principal amount
of mortgage loans held for sale at December 31, 1996 was collateralized by
properties located in California. In 1996, CWM purchased mortgage loans held for
sale with an aggregate principal balance of $3.9 billion and sold mortgage loans
with an aggregate principal balance of $3.5 billion to Indy Mac.
NOTE D - MORTGAGE SECURITIES
The following summarizes the amortized cost and estimated fair value of mortgage
securities classified as available for sale and the fair value of mortgage
securities classified and accounted for as trading as of December 31, 1996.
There were no mortgage securities as of December 31, 1995. Contractual
maturities on the mortgage securities range from 10 to 30 years.
<TABLE>
<CAPTION>
(Dollar amounts in thousands) December 31, 1996
-----------------------------------------
Trading Available-for-sale
------- -------------------
<S> <C> <C>
Amortized cost $7,438 $118,481
Gross unrealized gains -- 2,209
Gross unrealized losses -- (48)
------ --------
Estimated fair value $7,438 $120,642
====== ========
</TABLE>
During the year ended December 31, 1996, CWM purchased certain inverse-floater
securities totaling $8 million from Indy Mac at fair value on the date of
transfer.
As of December 31, 1996, all of CWM's mortgage securities were pledged as
collateral under repurchase agreements.
F-13
<PAGE>
CWM MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE E - ALLOWANCE FOR LOAN LOSSES
Transactions in the allowance for loan losses were as follows:
<TABLE>
<CAPTION>
(Dollars amounts in thousands) 1996 1995
------- -------
<S> <C> <C>
Balance at January 1 $ 4,331 $ 500
Provision for the year 12,991 4, 037
Charge-offs (2,058) (249)
Recoveries - 43
------- -------
Balance at December 31 $15,264 $ 4,331
======= =======
</TABLE>
The allowance for loan losses at December 31, 1996 is comprised of the
following: (1) $11.5 million for mortgage loans held for investment, (2) $1.2
million for warehouse lines of credit, (3) $2.3 million for construction loans
receivable and (4) $267,000 for CMO collateral.
NOTE F - COLLATERAL FOR CMOS
Collateral for CMOs consists primarily 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. Credit Risk on the mortgage loans is minimized to an extent,
under a pool insurance policy provided by a private mortgage insurer on certain
of the CMOs. 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 Freddie Mac. 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,
------------------------
1996 1995
--------- --------
<S> <C> <C>
Mortgage loans $217,483 $ 88,457
Mortgage-backed securities 67,609 89,014
GICs held by trustees 2,809 2,907
Accrued Interest receivable 2,325 1,949
-------- --------
290,226 182,327
Unamortized net premiums
(discount) and reserves (1,172) 1,784
-------- --------
Collateral for CMOs $289,054 $184,111
======== ========
</TABLE>
The mortgage loans and mortgage-backed securities, together with GICs, which are
all held by trustees, collateralized 11 series of CMOs at December 31, 1996. 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-14
<PAGE>
CWM MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE F - COLLATERAL FOR CMOS - CONTINUED
The weighted average coupon on collateral for CMOs, net of the related servicing
fees, was 7.64% and 8.50% at December 31, 1996 and 1995, 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 recognized a loss of
approximately $46,000.
NOTE G - SECURITIZED MASTER SERVICING FEES
The following summarizes the amortized cost and estimated fair value of
securitized master servicing fees classified as available for sale and the fair
value of securitized master servicing fees classified and accounted for as
trading as of December 31, 1996 and 1995. Maturities of the securitized master
servicing fees are dependent upon the contractual maturities of the underlying
mortgage loans, which exceed 10 years as of December 31, 1996 and 1995.
<TABLE>
<CAPTION>
(Dollar amounts in thousands) December 31, 1996 December 31, 1995
---------------------------- ----------------------------
Trading Available-for-sale Trading Available-for-sale
------- ------------------ ------- ------------------
<S> <C> <C> <C> <C>
Amortized cost $25,570 $ 87,457 $21,819 $ 98,462
Gross unrealized gains -- $ 1,159 -- 9,719
Gross unrealized losses -- (10,486) -- (5,025)
------- -------- ------- --------
Estimated fair value $25,570 $ 78,130 $21,819 $103,156
======= ======== ======= ========
</TABLE>
F-15
<PAGE>
CWM MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE H - REPURCHASE AGREEMENTS AND OTHER CREDIT FACILITIES
Repurchase agreements and other credit facilities consisted of the following at
December 31, 1996 and 1995.
<TABLE>
<CAPTION>
December 31,
--------------------------
(Dollar amounts in thousands) 1996 1995
------------- ----------
<S> <C> <C>
Repurchase agreements $2,302,752 $1,871,057
Revolving credit facilities 228,757 166,777
------------- ----------
$2,531,509 $2,037,834
============= ==========
</TABLE>
REPURCHASE AGREEMENTS
CWM has established committed and renewable repurchase facilities with Merrill
Lynch, Pierce, Fenner & Smith Inc. and certain of its affiliates in aggregate
amounts up to $500 million to finance its mortgage conduit, mortgage portfolio,
warehouse lending, consumer construction lending and manufactured housing assets
and operations. These agreements are committed for a period of at least two
years from their dates of execution.
CWM has entered into two additional committed and renewable repurchase
facilities, with Nomura Asset Capital Corporation and Lehman Commercial Paper,
Inc., in aggregate amounts of $300 million and $500 million, respectively, to
finance the Company's mortgage conduit and warehouse lending operations,
mortgage asset portfolio and consumer construction lending. The Nomura facility
is committed for a two-year period from the date of execution and the Lehman
facility is scheduled to mature in May 1997.
The Company has also entered into a repurchase facility with Paine Webber Real
Estate Securities, Inc. in an aggregate principal amount of $500 million. Such
repurchase facility is committed for a one-year period from the date of
execution and currently permits the Company to finance its mortgage conduit,
warehouse lending and mortgage portfolio assets and operations.
Indy Mac may borrow under each of CWM's agreements as a co-borrower. As of
December 31, 1996, Indy Mac had $366 million outstanding in overnight borrowings
under repurchase agreements.
At December 31, 1996, substantially all of the Company's mortgage loans,
manufactured housing loans and revolving warehouse lines of credit were pledged
to secure the Company's borrowings under repurchase facilities. The amount
outstanding under CWM's repurchase facilities had maturities ranging from
overnight, less than 30 days and less than six months of $663 million, $1.5
billion and $175 million, respectively. The carrying amount of the assets
pledged as collateral exceeded the repurchase liability by $185 million and $68
million under the facilities with Merrill Lynch and Nomura, respectively, as of
December 31, 1996.
These repurchase agreements bear interest at rates indexed to the London
Interbank Offered Rates ("LIBOR"), plus an applicable margin in each case. For
the months ending December 31, 1996 and 1995, the weighted average borrowing
rate on these repurchase agreements was 5.96% and 6.49%, respectively. None of
the counterparties is affiliated with the Company. At December 31, 1996, the
Company was in compliance with all material representations, warranties and
covenants under its repurchase agreements.
F-16
<PAGE>
CWM MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE H - REPURCHASE AGREEMENTS AND OTHER CREDIT FACILITIES - CONTINUED
REVOLVING CREDIT FACILITY
In 1995, CWM entered into a two-year committed credit facility with a syndicate
of commercial banks. This facility finances mortgage loans, builder construction
loans, and master servicing assets. In 1996, the Company amended this credit
facility to increase the number of lenders and expand the available committed
borrowings from $300 million to $405 million. Indy Mac may borrow under this
facility as a co-borrower. As of December 31, 1996, Indy Mac had $50 million
outstanding in borrowings under this facility. 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. For the months ending December 31, 1996
and 1995, the weighted average borrowing rate on borrowings under this facility
was 6.09% and 6.42%, respectively. At December 31, 1996, the Company was in
compliance with all material representations, warranties and covenants under
this revolving credit facility.
CWM has also established a committed and renewable lending facility with Merrill
Lynch Mortgage Capital Inc. in an aggregate committed amount of $225 million to
finance certain mortgage related securities. As of December 31, 1996 and 1995,
CWM had no borrowings outstanding under this facility. This facility is
committed for a two-year period from the date of execution. Indy Mac may borrow
under this facility as a co-borrower. As of December 31, 1996, Indy Mac had $80
million outstanding in borrowings under this facility. At December 31, 1996, the
Company was in compliance with all material representations, warranties and
covenants under this facility.
NOTE I - 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 $2.8 million and $2.9 million on the CMO collateral as of
December 31, 1996 and 1995, 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, reinvest such amounts in the
GICs, and make corresponding principal and interest payments on the CMOs to the
bondholders.
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 7.38% and 8.10% at December 31, 1996 and
1995, respectively.
CWM's investment in CMO residuals amounted to $23 million and $20 million at
December 31, 1996 and 1995, respectively.
F-17
<PAGE>
CWM MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE I - COLLATERALIZED MORTGAGE OBLIGATIONS - CONTINUED
CMOs are summarized as follows:
<TABLE>
<CAPTION>
(Dollar amounts in thousands)
December 31,
----------------------------
1996 1995
---------- ----------
<S> <C> <C>
Collateralized mortgage obligations $267,740 $167,831
Accrued interest payable 1,928 1,394
---------- ----------
269,668 169,225
Unamortized discounts, net (5,588) (4,465)
---------- ----------
Collateralized mortgage obligations, net $264,080 $164,760
========== ==========
Range of weighted average interest 6.75%-11.00% 6.84%-11.00%
rates, by series
Range of stated maturities 1998 - 2025 1998 - 2023
Number of series 11 12
</TABLE>
NOTE J - 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 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%.
NOTE K - 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, 1996 and 1995. 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 inherently 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.
F-18
<PAGE>
CWM MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE K - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS - CONTINUED
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
---------------------------------------------------------------------
(Dollar amounts in thousands) Carrying Estimated Carrying Estimated
amount fair value amount fair value
---------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets:
Mortgage and manufactured housing loans $1,236,713 $1,258,346 $1,424,583 $1,439,560
held for investment
Mortgage and manufactured housing loans 657,208 657,208 409,584 409,584
held for sale
Construction loans receivable 460,546 460,546 129,323 129,323
Collateral for CMO's 289,054 282,353 184,111 185,198
Securitized master servicing fees 103,700 101,038 124,975 123,090
Mortgage securities 128,080 129,372 - -
Revolving warehouse lines of credit 251,032 251,032 190,705 190,705
Liabilities:
Repurchase agreements 2,531,509 2,531,509 2,037,834 2,039,458
Collateralized mortgage obligations 264,080 269,424 164,760 174,467
Senior unsecured notes 59,759 61,310 59,649 62,874
Off-Balance Sheet gains (losses):
Interest rate swaps - (1,106) - (2,066)
</TABLE>
The fair value estimates as of December 31, 1996 and 1995 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 and Manufactured Housing 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 and Manufactured Housing Loans Held for Sale The fair value of
mortgage and manufactured housing loans held for sale is equivalent to the
carrying value. All loans purchased by CWM for which a REMIC transaction,
securitization 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.
Construction Loans Receivable and Revolving Warehouse Lines of Credit 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.
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.
F-19
<PAGE>
CWM MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE K - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS - CONTINUED
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.
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 prepayment expectations.
Repurchase Agreements and Other Credit Facilities Fair values approximate the
carrying amounts for repurchase agreements with remaining maturities of one year
or less. Fair value for repurchase agreements with longer maturities is
estimated using discounted cash flow analyses based on current market rates.
Collateralized Mortgage Obligations Fair value is estimated using cash flow
analyses 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 maturities.
Short-Term Commitments to Extend Credit There are currently 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 and Sell 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 analyses
based on current market yields for similar instruments and remaining maturities.
NOTE L - 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 losses 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.
CWM also uses interest rate swaps to help manage interest rate risk. While CWM
does not anticipate nonperformance by the counterparties, the Company manages
credit risk with respect to such financial instruments by entering into
agreements with entities approved by senior management and initially having a
long-term credit rating of single A or better (by one or more nationally
recognized credit rating agencies) at the time the relevant swap is consummated.
These entities are Wall Street firms having primary dealer status. The
Company's exposure to credit risk in the event of default by the counterparty is
the difference between the contract price
F-20
<PAGE>
CWM MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE L - COMMITMENTS AND CONTINGENCIES - FINANCIAL INSTRUMENTS WITH OFF-BALANCE
SHEET RISK - CONTINUED
and the current market price of the instrument being utilized. Unless noted
otherwise, Indy Mac does not require collateral or other security to support
financial instruments with credit risk with approved counterparties.
The following various types of commitments were outstanding at year end:
Commitments to Purchase and Sell Loans As of December 31, 1996 and 1995, CWM
had entered into commitments to purchase mortgage loans totaling $741 million
and $436 million, respectively, subject to origination or acquisition of such
loans by various approved mortgage originators. In addition, as of December 31,
1996 and 1995, CWM had committed to sell $1.4 billion and $846 million,
respectively, of mortgage loans to Indy Mac. After the 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 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 they are sold to permanent investors. At December 31, 1996 and 1995, CWM
had extended lines of credit under this program in the aggregate amount of $597
million and $343 million, respectively, of which $251 million and $191 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, model home, land acquisition and development and certain condominium loan
financing, and a Consumer Division which provides construction-to-permanent
financing as well as financing for home improvement and residential lot loans to
individuals. At December 31, 1996 and 1995, CWM had undisbursed construction
loan commitments totaling $481 million and $172 million, respectively.
Interest Rate Swaps As of December 31, 1996 and 1995, CWM had two interest
rate swap agreements with certain securities dealers with a combined notional
amount of $200 million. The effect of these agreements is to convert a portion
of short-term repurchase agreement financing to a medium-term fixed rate
borrowing facility. CWM pays a weighted average fixed interest rate of 6.22%
and receives a floating interest rate based on one month LIBOR. The weighted
average floating rate at December 31, 1996 was 5.438%. These contracts expire
between June 1997 and June 1998.
NOTE M - STOCK OPTION PLANS
The Company has three 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, vest over varying periods beginning
at least one year from the date of grant, and expire five years from date of
grant.
As of December 31, 1996, options to purchase 264,870 shares were exercisable and
3,669,353 shares were reserved for future grants under the plans. Stock option
transactions for the years ended December 31, 1996, 1995 and 1994, respectively,
are summarized as follows:
F-21
<PAGE>
CWM MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE M - STOCK OPTION PLANS - CONTINUED
<TABLE>
<CAPTION>
---------------------------------------
Number Shares
---------------------------------------
1996 1995 1994
---------------------------------------
<S> <C> <C> <C>
Options outstanding at beginning of 801,965 612,125 552,875
year
Options granted 1,163,047 521,440 324,000
Options exercised (403,421) (331,000) (259,750)
Options canceled (24,140) (600) (5,000)
---------------------------------------
Options outstanding at end of year 1,537,451 801,965 612,125
=======================================
<CAPTION>
---------------------------------------
Weighted Average Exercise Price
---------------------------------------
1996 1995 1994
---------------------------------------
<S> <C> <C> <C>
Options outstanding at beginning of $10.29 $ 6.97 $5.11
year
Options granted 18.04 10.84 8.47
Options exercised 9.44 6.53 5.13
Options canceled 13.22 11.63 8.38
---------------------------------------
Options outstanding at end of year $16.33 $10.29 $6.97
=======================================
</TABLE>
The weighted average fair value of options granted during 1996 was $2.39 per
share. The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model modified to consider cash dividends
to be paid. The following weighted average assumptions were used for grants in
1996 and 1995, respectively: dividend yield of 9% for both years; expected
volatility of 30% for both years, risk-free interest rates of 6.3% and 6% for
1996 and 1995, respectively; and expected lives of three years for options
granted in both years.
The following summarizes information about fixed stock options outstanding at
December 31, 1996:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------
Options Outstanding Options Exercisable
--------------------------------------------------------------------------------------------
Weighted
Average
Number Remaining Weighted Number Weighted
Range Of Outstanding Contractual Average Exercisable Average
Exercise Prices At Period End Life Exercise Price At Period End Exercise Price
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$6.19 - $9.00 72,198 3.00 $ 7.46 72,198 $ 7.46
$9.01 - $13.50 279,272 3.42 11.66 185,472 11.63
$13.51 - $20.75 1,185,981 4.51 17.97 7,200 14.38
--------------------------------------------------------------------------------------------
Totals 1,537,451 4.24 $16.33 264,870 $10.56
============================================================================================
</TABLE>
F-22
<PAGE>
CWM MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE M - STOCK OPTION PLANS - CONTINUED
Twenty officers and members of CWM's Board of Directors exercised options
totaling 397,326 shares during 1996. 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, 1996 and 1995, the total principal balances of
notes receivable relating to the 1996 and prior option exercises by directors
and officers were $.7 million and $2.6 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, 1996 and 1995.
NOTE N - RELATED PARTY TRANSACTIONS
Indy Mac has a revolving credit facility and term borrowings up to one-year 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 9.75% at December 31, 1996 and 9.00% at December 31, 1995.
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.
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 25% of incentive compensation earned in 1994. Such waived
amount is reflected as an expense and a corresponding capital contribution in
the accompanying financial statements. The Manager earned management fees
totaling $8.8 million, $5.5 million and $1.2 million for the years ended
December 31, 1996, 1995 and 1994, respectively. The Management Agreement is
renewable annually by affirmative vote of CWM's independent directors and is
terminable upon sixty days prior notice. See Note O, Subsequent Events.
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 incurs the majority of
the conduit's costs and CWM incurs the other operations' costs.
The Company reimburses CHL for direct and indirect expenses incurred by CHL on
behalf of the Company. Since the allocation of indirect expenses involves some
judgment, the following highlights the amounts allocated and the methods of
allocating:
F-23
<PAGE>
CWM MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE N - RELATED PARTY TRANSACTIONS - CONTINUED
<TABLE>
<CAPTION>
Dollar amounts in thousands
1996 1995 1994
------------------------
<S> <C> <C> <C>
Data processing 1,549 729 509
Occupancy 1,268 1,018 559
Human resources 100 100 50
2,917 1,847 1,118
========================
</TABLE>
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 1996 and 1995, CWM purchased approximately $30.7 million and $74.6
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 $78.5 million at December 31, 1996. 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 $200,000, $250,000, and $282,000 in 1996, 1995 and
1994, 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
1,120,000 shares, or 2.2%, of CWM's common stock at December 31, 1996. See Note
O, Subsequent Events. CHL owns all of the common stock and has a 1% economic
interest in Indy Mac.
The Company, through CLCA, has, from time to time, made loans to builders of
residential construction projects secured by real property purchased by such
builders from a company doing business as Loeb Enterprises, LLC, in which CWM's
chairman and former chief executive officer is a major investor together with
his family. The non-family executive managers of Loeb Enterprises, LLC, who run
the day-to-day operations of Loeb Enterprises, LLC, own approximately 34% of the
equity and profits of that company. Each project is part of a master planned
community being developed by Loeb Enterprises, LLC, which includes various
amenities, including an 18 hole golf course.
In the case of each project financed by CLCA, the builder is not affiliated with
either the Company or Loeb Enterprises, LLC, the general risk characteristics of
the construction loan are comparable to those for similar projects funded by
CLCA, and the construction loan facility between CLCA and the builder has been
negotiated at arms length on terms consistent with those of similar loans made
by CLCA to other unaffiliated builders. Moreover, the terms of each credit
facility have been disclosed to and approved by the disinterested members of the
Board of Directors of CWM.
F-24
<PAGE>
CWM MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE N - RELATED PARTY TRANSACTIONS - CONTINUED
As of December 31, 1996, CLCA had extended three construction loan facilities to
builders secured by property originally purchased from Loeb Enterprises, LLC,
with total dollar commitments of $11,457,445, and total loan outstandings of
$4,485,484. Loeb Enterprises, LLC, has posted a bond for the completion of
certain infrastructure improvements such as arterial roads, drainage, and
utilities in the portion of the master planned community in which builders are
currently building, and these improvements have been substantially completed. In
addition, the builders are contractually responsible to the city of Sparks,
Nevada for certain other improvements such as roads, drainage, and utilities,
within the specific subdivisions of property they have purchased.
NOTE O - SUBSEQUENT EVENTS
On January 22, 1997, the Board of Directors declared a $0.40 cash dividend per
share to be paid on March 3, 1997 to shareholders of record on January 31, 1997.
On November 4, 1996, CWM and CCI announced that they reached a preliminary
Agreement and Plan of Merger whereby CWM will acquire all of the outstanding
stock of the Manager from CCI in exchange for 3.6 million new shares of common
stock of CWM (subject to certain adjustments). Subsequent to year end, the
Agreement and Plan of Merger, and a related Registration Rights Agreement were
approved by the boards of directors of both CWM and CCI and executed and
delivered by the respective parties thereto. If the transaction is consummated,
the Manager will be merged into CWM, and CWM will become a self-managed REIT.
Assuming receipt of regulatory approvals, the merger will be presented to CWM's
shareholders for final approval pursuant to a definitive proxy statement. The
transaction will be accounted for as the settlement of a contract with a one
time charge to earnings in the quarter the transaction is effective.
NOTE P - QUARTERLY FINANCIAL DATA - UNAUDITED
Selected quarterly financial data follows:
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------------------------
March 31 June 30 September 30 December 31
--------------------------------------------------
<S> <C> <C> <C> <C>
Dollar amounts in thousands
except per share data
Year ended December 31, 1996
Net revenues $19,844 $21,215 $23,682 $27,209
Net earnings 15,360 16,368 17,890 19,369
Earnings per share (1) 0.36 0.37 0.39 0.40
Dividends declared for earnings
of the period 0.36 0.37 0.39 0.40
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 declared for earnings
of the period 0.27 0.30 0.33 0.35
</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-25
<PAGE>
CWM MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE
(DOLLAR AMOUNTS IN THOUSANDS)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
- ---------------------------- --------- --------------------- --------------- ---------------- ---------------------
PRINCIPAL
AMOUNT
OF LOANS
(1)(2)(3)(4)(5)(7)(9) SUBJECT TO AMOUNT OF
RANGE OF NUMBER CARRYING DELINQUENT MORTGAGE
CARRYING AMOUNTS OF PRIOR AMOUNT OF PRINCIPAL BEING RANGE OF
OF MORTGAGES LOANS (1) LIENS (1) MORTGAGES OR INTEREST (1) FORECLOSED (1)(8) INTEREST RATES (1)(6)
- ---------------------------- --------- --------------------- --------------- ----------------- ---------------------
<S> <C> <C> <C> <C> <C>
$0-$50 1,285 $0 $48,117 $2,098 $298 5.500-14.990
50-100 3,884 0 292,867 13,190 2,422 5.375-15.000
101-150 2,870 0 354,029 19,983 5,320 5.375-14.500
151-200 1,548 0 268,460 14,390 4,597 5.625-13.750
201 - 250 1,266 0 283,924 15,543 4,600 5.750-12.375
251 - 300 822 0 225,484 9,839 3,864 5.750-14.375
301 - 350 511 0 165,331 7,381 1,653 5.500-13.250
351 - 400 279 0 104,717 3,785 1,155 6.250-12.625
401 - 450 151 0 63,791 2,554 438 5.500-11.375
451 - 500 140 0 67,000 3,878 2,410 5.625-12.875
501 - 550 44 0 23,031 1,553 509 7.000-10.250
551 - 600 64 0 36,759 1,740 1,149 6.125-10.750
601 - 650 65 0 41,235 5,095 0 6.625-12.500
651 - 700 18 0 12,213 0 659 6.000-9.750
701 - 750 25 0 18,141 744 0 7.100-10.875
751 - 800 12 0 9,208 774 0 6.850-10.500
801 - 850 11 0 9,013 849 816 7.625-10.750
851 - 900 12 0 10,556 3,522 0 7.450.9.500
901 - 950 5 0 4,673 0 948 7.750-8.500
951 - 1,000 12 0 11,789 0 996 6.950-9.500
over 1,000 36 0 60,971 2,787 5,757 7.000-10.375
-------- --------- --------------------- --------------- -----------------
13,060 0 $2,111,309 $109,705 $37,591
======== ========= =============== =================
Premium $ 11,960
---------------------
$2,123,269
=====================
</TABLE>
- ------------------------------
(1) The above amounts are for the Company including both CWM and Indy Mac
(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 $672,460 of mortgage loans held for sale,
$1,221,366 of mortgage loans held for investment and $217,483 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, 1996 is as follows:
California 51% with no other state comprising more than 4%.
(5) The aggregate cost for federal income tax purposes is $2,123,269.
(6) Interest earned on mortgages by range of carrying amounts is not reasonably
obtainable.
(7) $30.7 million of mortgage loans purchased during 1996 were acquired from
CFC, an affiliate of the Company's Manager.
(8) Of the total amount of mortgages being foreclosed, $32.5 million is related
to mortgage loans held for investment and $5.1 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 $2,021,475 $1,892,745
Additions during period:
New mortgage loans 4,201,805 4,224,269
---------- ----------
6,223,280 6,117,014
Deductions during period:
Sales of mortgage loans 3,696,631 3,715,160
Collections of principal 415,340 4,111,971 390,326 4,105,486
------------ ---------- --------- ----------
Balance at close of period $2,111,309 $2,011,528
========== ==========
</TABLE>
F-26
<PAGE>
Board of Directors and Shareholders
Independent National Mortgage Corporation
We have audited the accompanying balance sheets of Independent National Mortgage
Corporation as of December 31, 1996 and 1995, and the related statements of
earnings, shareholders' equity, and cash flows for each of the three years in
the period ended December 31, 1996. 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, 1996 and 1995, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
1996, in conformity with generally accepted accounting principles.
As explained in Note B, these financial statements have been restated to account
for securitized master servicing fees and certain mortgage securities as trading
securities.
GRANT THORNTON LLP
Los Angeles, California
February 21, 1997
F-27
<PAGE>
INDEPENDENT NATIONAL MORTGAGE CORPORATION
BALANCE SHEETS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1996 1995
-------- --------
<S> <C> <C>
ASSETS
Mortgage loans held for sale, net $ 86,962 $ 92,088
Mortgage securities 332,482 350,752
Securitized master servicing fees 209,190 110,744
Master servicing fees receivable 44,239 36,570
Other assets 38,232 22,953
-------- --------
Total assets $711,105 $613,107
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Repurchase agreements and other credit facilities $496,052 $441,305
Due to CWM 130,153 83,592
Accounts payable and accrued liabilities 44,243 29,182
-------- --------
Total liabilities 670,448 554,079
-------- --------
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 32,476
Net unrealized gain (loss) on mortgage securities available for sale,
net of related taxes (8,512) 2,927
Retained earnings 16,693 23,625
-------- --------
Total shareholders' equity 40,657 59,028
-------- --------
Total liabilities and shareholders' equity $711,105 $613,107
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-28
<PAGE>
INDEPENDENT NATIONAL MORTGAGE CORPORATION
STATEMENTS OF EARNINGS
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
Year ended December 31,
as adjusted (Note B)
---------------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
REVENUES
Interest income
Mortgage loans held for sale $ 4,855 $36,862 $25,179
Mortgage securities 27,059 19,862 4,781
Securitized master servicing fees, net 12,121 3,623 91
Master servicing fees receivable, net 5,253 5,565 1,004
-------- -------- --------
Total interest income 49,288 65,912 31,055
Interest expense
Repurchase agreements and other credit facilities 30,204 41,345 20,398
Advances from CWM 7,676 6,502 4,279
-------- -------- --------
Total interest expense 37,880 47,847 24,677
-------- -------- --------
Net interest income 11,408 18,065 6,378
Provision for loan losses - 2,168 -
-------- -------- --------
Net interest income after provision for loan losses 11,408 15,897 6,378
Gain on sale of mortgage loans and securities 51,692 35,799 7,332
Gain on sale of servicing and other income 1,809 36 7,251
-------- -------- --------
Net revenues 64,909 51,732 20,961
EXPENSES
Salaries and related expenses 20,562 12,979 7,916
General and administrative expenses 10,656 7,750 5,554
Management fees to affiliate 2,075 1,769 334
-------- -------- --------
Total expenses 33,293 22,498 13,804
-------- -------- --------
Earnings before income tax provision 31,616 29,234 7,157
Income tax provision 13,548 12,477 2,838
-------- -------- --------
NET EARNINGS $18,068 $16,757 $4,319
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-29
<PAGE>
INDEPENDENT NATIONAL MORTGAGE CORPORATION
STATEMENT OF SHAREHOLDERS' EQUITY
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
Three Years Ended December 31, 1996
as adjusted (Note B)
-------------------------------------------------------------------------------------
Unrealized
gain (loss) on
mortgage
securities
Number of Common Preferred Capital in available Retained
shares stock stock excess of par for sale earnings Total
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993 10,000 $ - $ - $ 9,500 $ - $ 2,549 $ 12,049
Additional capital contribution - - - 6,976 - - 6,976
Unrealized gain on mortgage securities
available for sale, net of tax - - - - 525 - 525
Net earnings for the year - - - - - 4,319 4,319
-------------------------------------------------------------------------------------
Balance at December 31, 1994 10,000 - - 16,476 525 6,868 23,869
Additional capital contribution - - - 16,000 - - 16,000
Unrealized gain on mortgage securities
available for sale net of tax - - - - 2,402 - 2,402
Net earnings for the year - - - - - 16,757 16,757
-------------------------------------------------------------------------------------
Balance at December 31, 1995 10,000 - - 32,476 2,927 23,625 59,028
Unrealized loss on mortgage securities
available for sale net of tax - - - - (11,439) - (11,439)
Net earnings for the year - - - - - 18,068 18,068
Dividends paid - - - - - (25,000) (25,000)
-------------------------------------------------------------------------------------
Balance at December 31, 1996 10,000 $ - $ - $32,476 $ (8,512) $ 16,693 $ 40,657
=====================================================================================
</TABLE>
The accompanying notes are an integral part of these statements.
F-30
<PAGE>
INDEPENDENT NATIONAL MORTGAGE CORPORATION
STATEMENTS OF CASH FLOWS
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
Year ended December 31,
as adjusted (Note B)
---------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities
Net earnings $ 18,068 $ 16,757 $ 4,319
Adjustments to reconcile net earnings
to net cash provided by (used in) operating activities:
Amortization and depreciation 57,626 16,098 10,844
Gain on sale of mortgage loans and securities (51,692) (35,891) (7,332)
Gain on sale of purchased servicing - (36) (7,251)
Provision for loan losses - 2,168 -
Purchases of mortgage loans from CWM (3,523,655) (3,641,760) (5,243,278)
Principal repayments and sale of mortgage loans 3,578,966 3,748,787 5,150,510
Investment in mortgage securities classified as trading (139,575) (333,502) (170,964)
Investment in securitized master servicing fees (137,371) (124,838) -
Principal repayments and sale of mortgage securities classified as trading 223,784 168,197 39,715
Change in accrued assets and liabilities 7,008 (8,640) 6,474
----------- ----------- -----------
Net cash provided by (used in) operating activities 33,159 (192,660) (216,963)
Cash flows from investing activities
Investment in mortgage securities available for sale (134,526) (40,402) (7,674)
Investment in master servicing fees receivable (15,292) (13,033) (113,006)
Purchase of servicing (7,984) (7,581) (30,398)
Sale of securitized master servicing fees to CWM - - 122,313
Principal repayments and sale of mortgage securities available for sale 45,551 16,187 -
Proceeds from sale of servicing - 6,982 33,921
Change in other assets (13,331) (2,462) (4,191)
----------- ----------- -----------
Net cash used in investing activities (125,582) (40,309) 965
----------- ----------- -----------
Cash flows from financing activities
Advances from CWM, net of cash repayments 46,561 67,128 (62,002)
Net proceeds from repurchase agreements 54,747 137,225 267,857
Proceeds from additional capital contribution - 16,000 6,976
Cash dividends paid (25,000) - -
Change in other liabilities 16,115 12,616 3,167
----------- ----------- -----------
Net cash provided by financing activities 92,423 232,969 215,998
----------- ----------- -----------
Net change in cash - - -
Cash at beginning of period - - -
----------- ----------- -----------
Cash at end of period $ - $ - $ -
=========== =========== ===========
Supplemental cash flow information:
Cash paid for interest $ 30,216 $ 40,510 $ 19,757
Cash paid for income taxes 259 1,097 4
</TABLE>
The accompanying notes are an integral part of these statements.
F-31
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
F-32
<PAGE>
INDEPENDENT NATIONAL MORTGAGE CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
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
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 from 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-floater
securities. These securities consist of securities retained upon the
issuance of Indy Mac's REMIC securities and securities issued by other
financial institutions and purchased by Indy Mac. Securities retained upon
the issuance of Indy Mac's REMIC securities are classified and accounted
for as trading securities. Accordingly, pursuant to Statement of Financial
Accounting Standards (SFAS) 115, such securities classified as trading are
carried at fair value with unrealized gains and losses included in earnings
of the period. Purchased securities are classified 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 classified and accounted for as available-for-sale are carried
at fair value with unrealized gains and losses excluded from earnings and
included as 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.
F-33
<PAGE>
INDEPENDENT NATIONAL MORTGAGE CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
3. Securitized Master Servicing Fees
Securitized master servicing fees primarily represent AAA rated interest-
only (I/O) REMIC regular interests retained in connection with Indy Mac's
securitization of mortgage loans held for sale related to Indy Mac's master
servicing portfolio. Securitized master servicing fees are classified and
accounted for as trading securities. Accordingly, pursuant to SFAS 115,
such securities classified as trading securities are carried at fair value
with unrealized holding gains and losses included in earnings of the
period. Gross unrealized holding gains were $7.3 million and $4.9 million
for the years ended December 31. 1996 and 1995, respectively. Gross
unrealized holding losses were $8.2 million and $11.0 million for the years
ended December 31. 1996 and 1995, respectively.
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.
Estimated fair value is determined based on discounted cash flow techniques
using assumptions for prepayments rates and market yield requirements. The
securitized master servicing fair values are sensitive to variations in
estimates of prepayment rates and changes in interest rates. 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.
4. Master Servicing Fees Receivable
Indy Mac retains 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 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.
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.
F-34
<PAGE>
INDEPENDENT NATIONAL MORTGAGE CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
5. Call Options and Interest Rate Floors
To protect the value of securitized master servicing fees and master
servicing fees receivable from the effects of increased prepayment
activity, Indy Mac has acquired financial instruments, including derivative
contracts, that tend to increase in value when interest rates decline.
These financial instruments include call options on U.S. Treasury
securities and interest rate floors and are entered into for purposes other
than trading. The value of call options and interest rate floors are
derived from an underlying instrument or index, however, the notional or
contractual amount is not recognized in the balance sheet. Indy Mac had
$300 million notional amount of interest rate floors outstanding as of
December 31, 1996 and 1995, and $670 million notional amount of call
options on U.S. Treasury bonds at December 31, 1995. 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. Indy Mac is not exposed to loss or additional cash outlays
beyond its initial cost to acquire the hedge instruments. Realized gains
related to these financial instruments are recognized first as an offset to
the unscheduled amortization. To the extent the realized gains exceed the
unscheduled amortization, the Company reduces the carrying amount of the
securitized master servicing fees and master servicing fees receivable by
such excess through additional amortization. For the years ended December
31, 1996 and 1995, Indy Mac recognized $128,000 and $503,000 respectively
as an offset to amortization.
While Indy Mac does not anticipate nonperformance by the counterparties,
the Company manages credit risk with respect to such financial instruments
by entering into agreements with entities approved by senior management and
initially having a long term credit rating of single A or better (by one or
more nationally recognized credit rating agencies) at the time the relevant
contract is consummated. These entities include Wall Street firms having
primary dealer status. The Company'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 of the instrument being utilized. Unless noted
otherwise, Indy Mac does not require collateral or other security to
support financial instruments with credit risk with approved
counterparties.
6. Purchased Servicing Rights
Indy Mac from, time to time, acquires the rights to service, as opposed to
master service, mortgage loans in connection with the purchase of such
loans. Indy Mac capitalizes the cost of bulk purchases of servicing rights,
not to exceed the present value of future net servicing income from such
purchases. Purchased servicing rights are amortized over the lives of the
underlying mortgages in proportion to estimated net servicing revenues. As
of December 31, 1996 and 1995, Indy Mac's purchased servicing portfolio
totaled $1.1 billion and $439.6 million, respectively. Capitalized costs
associated with acquiring these portfolios totaled $10.2 million and $3.6
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.
F-35
<PAGE>
INDEPENDENT NATIONAL MORTGAGE CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
7. 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.
8. Income Taxes
For income tax purposes, Indy Mac files a separate tax return and is not
consolidated with CWM or CCI. 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.
9. 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.
10. Recent Accounting Pronouncement
The Financial Accounting Standards Board (FASB) issued SFAS No. 125,
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" in June 1996. SFAS No. 125 is effective
for transfers and servicing of financial assets and extinguishments of
liabilities occurring after December 31, 1996. Management does not
anticipate that the implementation of SFAS No. 125 will have a material
effect on the Company's results of operations when adopted.
F-36
<PAGE>
INDEPENDENT NATIONAL MORTGAGE CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
NOTE B - RESTATEMENT
Indy Mac had previously accounted for its portfolios of subordinated securities
and securitized master servicing fees, retained in connection with the
securitization of loans, as securities available for sale and held to maturity,
respectively. Indy Mac has restated its financial statements for each of the
three years in the period ended December 31, 1996 to reflect the classification
of and accounting for such securities as trading securities. The cumulative
effect of this change on Indy Mac's earnings for the three years is a net loss
of $207,000. The effect on reported earnings for each year follows.
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------
1996 1995 1994
-------------------------
<S> <C> <C> <C>
Net earnings as previously reported 19,730 13,940 5,681
Adjustments, net of tax effect (1,662) 2,817 (1,362)
-------------------------
Net earnings as adjusted 18,068 16,757 4,319
=========================
</TABLE>
NOTE C - MORTGAGE LOANS HELD FOR SALE
Substantially all of the mortgage loans purchased by Indy Mac from CWM are
fixed-rate and adjustable-rate jumbo and nonconforming mortgage loans secured by
first liens on single-family residential properties. Approximately 46% of the
principal amount of mortgage loans held for sale at December 31, 1996 was
collateralized by properties located in California.
In 1996 and 1995, Indy Mac purchased mortgage loans from CWM with an aggregate
principal balance of $3.5 billion and $3.6 billion, respectively, and sold
mortgage loans in the form of REMIC securities or bulk whole loan sales with an
aggregate principal balance of $3.5 billion and $3.7 billion, respectively.
During 1996 and 1995, Indy Mac recognized gains on these securitizations
totaling $51.1 million and $22.7 million, respectively, net of related expenses,
losses, and hedging costs.
NOTE D - ALLOWANCE FOR LOAN LOSSES
Transactions in Indy Mac's allowance for loan losses were as follows.
<TABLE>
<CAPTION>
(Dollar amounts in thousands) 1996 1995
- -----------------------------------------------------
<S> <C> <C>
Balance at January 1 $1,791 $ -
Provision for the year - 2,168
Chargeoffs (18) (377)
Recoveries - -
-----------------
Balance at December 31 $1,773 $1,791
=================
</TABLE>
F-37
<PAGE>
INDEPENDENT NATIONAL MORTGAGE CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
NOTE E - MORTGAGE SECURITIES
The following is a disclosure of the amortized cost and estimated fair value of
mortgage securities as of December 31,1996 and 1995. Contractual maturities on
the mortgage securities range from 10 to 30 years.
<TABLE>
<CAPTION>
(Dollar amounts in thousands) December 31, 1996 December 31, 1995
----------------------------- ----------------------------
Trading Available-for- Trading Available-for-
sale sale
------- -------------- -------- -------------
<S> <C> <C> <C> <C>
Amortized cost $199,676 $147,482 $273,305 $72,401
Gross unrealized gains -- 2,815 -- 5,128
Gross unrealized losses -- (17,491) -- (82)
----------------------------- -----------------------------
Estimated fair value $199,676 $132,806 $273,305 $77,447
============================= =============================
</TABLE>
For the mortgage securities classified as trading, there was a $2.0 million net
holding loss and a $11.0 million net holding gain during the years ended
December 31, 1996 and 1995, respectively. Additionally, during the year
ended December 31, 1996, Indy Mac sold mortgage securities with a net book value
of $210.0 million (based on specific identification) for proceeds of $213.4
million, resulting in gross realized gains of $8.0 million and gross realized
losses of $4.6 million included in gains on sales of mortgage loans and
securities. As of December 31, 1996, all of Indy Mac's mortgage securities were
pledged as collateral under repurchase agreements.
F-38
<PAGE>
INDEPENDENT NATIONAL MORTGAGE CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
NOTE F - MASTER SERVICING FEES RECEIVABLE
The changes in master servicing fees receivable during 1996 and 1995 are as
follows:
<TABLE>
<CAPTION>
(Dollar amounts in thousands)
- -------------------------------------------------------
1996 1995
------- -------
<S> <C> <C>
Balance at January 1 $36,570 $29,444
Additions 15,292 13,034
Amortization
Scheduled (5,939) (5,073)
Unscheduled (1,684) (835)
------- -------
Balance at December 31 $44,239 $36,570
======= =======
</TABLE>
NOTE G - REPURCHASE AGREEMENTS AND OTHER CREDIT FACILITIES
Indy Mac is a co-borrower under the Company's repurchase agreements and other
credit facilities, subject to CWM's continuing to remain jointly and severally
liable for repayment. 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 1996 and 1995, borrowings
under such agreements had original maturities of less than 30 days and five
days, respectively.
The agreements bear interest at rates indexed to the London Interbank Offered
Rates ("LIBOR") plus an applicable margin. For the months ending December 31,
1996 and 1995, the weighted average borrowing rates on these repurchase
agreements were 5.8% and 6.2%, respectively. None of the lenders is affiliated
with CWM or Indy Mac.
F-39
<PAGE>
INDEPENDENT NATIONAL MORTGAGE CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
NOTE H - INCOME TAXES
The income tax provision for the years ended December 31, 1996, 1995 and 1994
consist of the following:
<TABLE>
<CAPTION>
(Dollar amounts in thousands)
1996 1995 1994
---------------------------
<S> <C> <C> <C>
Current expense (benefit)
Federal $ (992) $ 164 $ -
State 365 110 932
---------------------------
Total current expense (benefit) (627) 274 932
---------------------------
Deferred expense
Federal 9,883 9,025 1,804
State 4,292 3,178 102
---------------------------
Total deferred expense 14,175 12,203 1,906
---------------------------
Total income tax expense $13,548 $12,477 $2,838
===========================
</TABLE>
The tax effect of temporary differences that gave rise to significant portions
of deferred tax assets and liabilities as of December 31, 1996 and 1995 are
presented below:
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
1996 1995
-----------------------
<S> <C> <C>
Deferred tax asset
State tax expense $ (2,791) $(1,130)
Allowance for loan losses (816) (814)
Net operating loss carryforward (10,533) (1,879)
Unrealized losses on securities (6,312) -
Other (518) -
-------- -------
Deferred tax liability
Master servicing fees receivable 42,067 18,629
Unrealized gains on securities - 3,174
Mark-to-market loss 2,815 -
Other - 38
-------- -------
Net deferred tax liability $ 23,912 $18,018
======== =======
</TABLE>
At December 31, 1996, Indy Mac had a net operating loss carryforward for federal
income tax purposes of approximately $27.7 million, which begins to expire in
the year 2009. Indy Mac also had a net operating loss carryforward for state
income tax purposes of approximately $7.5 million, which begins to expire in the
year 2000.
The effective income tax rate differed from the federal statutory rate as
follows:
<TABLE>
<CAPTION>
(DOLLAR AMOUNTS IN THOUSANDS)
1996 1995 1994
--------------------
<S> <C> <C> <C>
Federal statutory rate 35.0% 34.0% 34.0%
State income taxes, net of federal tax effect 7.6 7.0 7.6
Other items, net 0.3 1.7 (1.9)
--------------------
Effective income tax rate 42.9% 42.7% 39.7%
====================
</TABLE>
F-40
<PAGE>
INDEPENDENT NATIONAL MORTGAGE CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
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, 1996 and 1995. 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. These estimates are inherently subjective in nature and involve
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.
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
--------------------------------------------------------------------
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 $103,823 $103,823 $ 91,767 $ 91,767
Commitments to purchase mortgage loans (17,142) (17,142) 321 321
Commitments to sell mortgage loans and securities 281 281 - -
Total mortgage loans held for sale 86,962 86,962 92,088 92,088
Mortgage securities 332,482 332,482 350,752 350,752
Securitized master servicing fees 209,190 209,190 110,744 110,744
Master servicing fees receivable 44,239 42,661 36,570 38,302
Liabilities:
Repurchase agreements and other borrowings 496,052 496,052 441,305 441,305
Off Balance Sheet
Call Options and interest rate floors
Interest rate floors 677 66 1,031 1,190
Call options - - 2,106 3,583
</TABLE>
The fair value estimates as of December 31, 1996 and 1995 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
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.
F-41
<PAGE>
INDEPENDENT NATIONAL MORTGAGE CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
NOTE I - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS - CONTINUED
Commitments to Sell Mortgage Loans and Securities Indy Mac utilizes forward
commitments to sell private-label mortgage-backed securities, Fannie Mae
mortgage-backed securities and two-year, five-year and ten-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.
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 expected future 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 expected future prepayment rates and discount rates that approximate
current discount rates used for similar investments such as excess servicing.
Repurchase Agreements and Other Borrowings Fair values approximate the
carrying amounts because of the short term to maturity of the liabilities.
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 are entered into for purposes other than trading.
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 As discussed below, Indy Mac's
exposure to credit risk with respect to the master servicing portfolio in the
event of nonperformance by mortgagors 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 of the instrument being utilized. Unless
noted otherwise, Indy Mac does not require collateral or other security to
support financial instruments with credit risk with approved counterparties.
Master Loan Servicing As of December 31, 1996 and 1995, Indy Mac master
serviced loans totaling $11.1 billion and $9.4 billion, respectively, associated
with its issuance of REMIC securities and whole loan sales.
F-42
<PAGE>
INDEPENDENT NATIONAL MORTGAGE CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
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, losses in excess of the credit
enhancement obtained are 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, 1996, approximately 51% 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 5% of the mortgage loans collateralized by properties in any other
state.
Commitments to Purchase Loans As of December 31, 1996 and 1995, Indy Mac had
entered into commitments to purchase mortgage loans from CWM totaling $1.4
billion and $846 million, respectively, including loans subject to purchase from
sellers by CWM. After the purchase and sale of the mortgage loans, Indy Mac's
exposure to credit loss in the event of nonperformance by mortgagors is limited
as described above.
Commitments to Sell Loans and Securities Indy Mac hedges its inventory and
committed pipeline of jumbo mortgage loans by using temporary cross hedges with
forward commitments to sell Fannie Mae mortgage-backed securities and U.S.
Treasury futures contracts. As of December 31, 1996, commitments to sell
mortgage loans approximated $200 million. Indy Mac had no open commitments to
sell mortgage loans as of December 31, 1995. Indy Mac had forward commitments to
sell $510.0 million and $601.5 million of Fannie Mae mortgage-backed securities
as of December 31, 1996 and 1995, respectively, and $175.0 million and $70.0
million of two-year, five-year and ten-year U.S. Treasury futures contracts as
of December 31, 1996 and 1995, respectively. The commitments to sell securities
had a net unrealized gain of approximately $6.2 million and a net unrealized
loss of $6.6 million as of December 31, 1996 and December 31, 1995,
respectively. The net unrealized gains and losses were deferred as part of Indy
Mac's lower of cost or market analysis on its mortgage loans held for sale.
Cash requirements related to forward commitments and futures contracts are
limited to the interest rate risk exposure resulting from having fewer closed
loans at the committed price than anticipated under the forward commitments and
futures contracts.
NOTE K - RELATED PARTY TRANSACTIONS
As of December 31, 1996 and 1995, advances due by Indy Mac to CWM totaled $130.2
million and $83.6 million, respectively. Such funds were advanced by CWM, under
a revolving credit facility arrangement and certain one-year term borrowing
arrangements, to finance assets of Indy Mac. Such advances bear interest at
rates indexed to LIBOR. The interest rate charged on such advances was 9.75% and
9.0% at December 31, 1996 and 1995, respectively.
F-43
<PAGE>
INDEPENDENT NATIONAL MORTGAGE CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
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%. 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 paid by
Indy Mac amounted to $2.0 million, $1.8 million and $334,000 in 1996, 1995 and
1994, respectively. The Management Agreement is renewable annually by vote of
the independent directors and is terminable upon sixty days prior notice. See
CWM Note O, Subsequent Events.
The Manager incurs many of the operating expenses of the Company, including
personnel and related expenses. The Company's conduit operations are primarily
conducted by Indy Mac and all other operations are conducted by CWM.
Accordingly, Indy Mac is charged with the majority of the conduit's costs, and
CWM is charged with the other operations' costs.
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 1996 or 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, 1996 CHL
was subservicing $342.1 million in mortgage loans associated with the Company's
purchased servicing rights. Indy Mac paid CHL $1.1 million, $461,000 and $94,000
in subservicing fees during 1996, 1995 and 1994, 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-44
