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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
FOR FISCAL YEAR ENDED DECEMBER 31, 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
------------------- -------------------
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 15, 1997, there were ___________ 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
$______________. 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
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 26
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 26
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFCERS OF THE REGISTRANT 27
ITEM 11. EXECUTIVE COMPENSATION 27
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL 27
OWNERS AND MANAGEMENT
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 27
PART IV
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K 28
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PART 1
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ITEM 1. BUSINESS
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GENERAL
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
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
resepect to the contractural rate 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 Companys 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
predominately senior securities but, in conjunction with providing credit
enhancement, may be subordinated to the rights of other regular interests. The
residual interest represents the remainder of the cash flows from the mortgage
loans (including, in some instances, reinvestment income) over the amounts
required to be distributed to the regular interests. In some cases, the regular
interests may be structured so that there is no significant residual cash flow,
thereby allowing the Company to sell its entire interest in the mortgage loans.
As a result, in some cases the capital originally invested in the mortgage loans
by the Company may be redeployed in the mortgage conduit operations. The Company
may also retain regular and residual interests on a short-term or long-term
basis. The creation of REMIC securities through Indy Mac is the Company's
preferred method of securitizing mortgage loans, because this method provides
the maximum flexibility in structuring securities for sale to the broadest group
of investors and may permit the redeployment of a portion of the capital of the
Company. Beginning in the third quarter of 1993, the Company began issuing all
of its REMIC securities utilizing a shelf registration statement established by
CWMBS, Inc., a wholly owned limited purpose finance subsidiary of CCI. Neither
CWMBS, Inc. nor CCI derived any financial benefit from such issuances, 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 region 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 total $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>
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
CWM has elected to be taxed as a REIT under the Internal Revenue Code and
intends to continue to do so. Indy Mac is not a qualified REIT subsidiary and is
not consolidated with CWM for either tax or financial reporting purposes.
Consequently, Indy Mac is subject to applicable federal and state income taxes.
CWM will include in taxable income amounts earned by Indy Mac only when Indy Mac
remits its after-tax earnings by dividend to 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
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
11
<PAGE>
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 the merger transaction
described above is consumated, 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. 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
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<PAGE>
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, GSE's, 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 GSE's have made and will continue to make significant technological and
economic advances to broaden their customer bases. There has been much debate
and discussion in Congress and in the news media as to the proper role of these
agencies. If the GSEs contract or expand, there may a positive or negative
impact on the Company's conduit operations. The Company seeks to address these
competitive pressures by making a strong effort to maximize its use of
technology, by diversifying into other lines of business that are less impacted
by GSEs and by operating in a more cost-effective manner compared to its
competitors, but there can be no assurance that these efforts will succeed.
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 the 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
- --------------------------------
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
Dollar amounts in thousands, ====================================================================
except per share data 1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
SELECTED STATEMENT
OF EARNINGS DATA
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 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 available for sale 129,372 -- -- -- --
Securitized master servicing fees 113,027 120,281 120,954 -- --
Revolving warehouse lines
of credit, net 251,032 190,705 69,591 92,058 --
Total assets 3,370,485 2,643,613 1,997,644 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 492,850 362,984 256,020 250,608 119,995
Number of shares outstanding 50,200,146 42,413,842 32,281,156 32,020,484 13,980,387
Book value per share $ 9.82 $ 8.56 $ 7.93 $ 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>
CWM Mortgage
Holdings, Inc.
and Subsidiaries
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.
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
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
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%.
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 notional 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.
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
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
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.
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.
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
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. Gross securitized master servicing income for CWM was $26.7 million and
$27.2 for the years ended December 31, 1996 and 1995, respectively. This gross
income was offset by amortization of the securitized master servicing fees of
$17.2 million, and $19.8 million for the years ended December 31, 1996 and 1995,
respectively. As of December 31, 1996, securitized master servicing fees of $113
million were pledged to secure borrowings totaling $61 million.
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.
CWM Mortgage
Holdings, Inc.
and Subsidiaries
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
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 $19.7 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 $54.6 million, offset by
salaries, general and administrative expenses of $31.2 million, management fee
expense of $2.1 million and income taxes of $14.8 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 $30.9 million, offset by a
provision for loan losses of $2.2 million, expenses of $20.7 million, management
fee expense of $1.8 million and income taxes of $10.4 million.
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.
Net income related to Indy Mac's securitized master servicing fees totaled $12.1
million in 1996, including gross income of $50.1 million, offset by amortization
of the related asset balances of $38.0 million. Net income related to master
servicing fees receivable totaled $5.3 million in 1996, including gross income
of $12.9 million, offset by amortization of the related asset balances totaling
$7.6 million. Net income related to the securitized master servicing fees and
master servicing fees receivable totaled $9.2 million in 1995, including gross
income of $23.1 million, offset by amortization of the related asset balances of
$13.9 million.
The portfolio of mortgage securities available for sale held by Indy Mac
includes subordinated securities and principal-only and inverse-floater
securities with market values which tend to perform inversely to the master
servicing assets. Indy Mac's investments in subordinated securities are
comprised of $214 million of securities issued by Indy Mac with ratings ranging
from "AA" to non-rated. At December 31, 1996, 66% of these securities were
investment grade (i.e., rated "BBB" or better). The pre-tax unrealized loss
associated with the mortgage securities available for sale totaled $8.0 million
at December 31, 1996.
In an effort to further reduce the Company's sensitivity to interest rates with
respect to the master servicing assets, the Company, from time to time, acquires
other financial instruments, including derivative contracts such as call options
on U.S. Treasury bonds and interest rate floors, that react inversely to changes
in interest rates in relation to the master servicing fees receivable assets.
There can be no assurance that this strategy will be successful.
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.
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
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.
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.
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
CWM Mortgage
Holdings, Inc.
and Subsidiaries
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
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.
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.
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 $30.9
million, offset by a provision for loan losses of $2.2 million, expenses of
$20.7 million, management fee expense of $1.8 million and income taxes of $10.4
million. During 1994, earnings of Indy Mac resulted principally from net
interest income of $6.4 million, gains on sales of mortgage loans and securities
of $9.6 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 $3.8 million.
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
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.
Net income related to the securitized master servicing fees and master servicing
fees receivable totaled $9.2 million in 1995, including gross income of $23.1
million, offset by amortization of the related asset balances of $13.9 million.
Net master servicing income in 1994 totaled $1.1 million, including gross income
of $7.6 million, offset by amortization of the asset balances totaling $6.5
million.
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.
CWM Mortgage
Holdings, Inc.
and Subsidiaries
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
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.
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
24
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
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.
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
OPERATING ACTIVITIES
During the year ended December 31, 1996, the Company's operating activities
required cash of approximately $210 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.
INVESTING ACTIVITIES
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 $447
million for the year ended December 31, 1996.
FINANCING ACTIVITIES
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
The Company's financial position and results of operations may be affected by
changes in interest rates in a variety of ways. For example, higher interest
rates may depress the market value of the Company's investment portfolio, to an
extent, if the yield on such holdings does not keep pace with increases in
interest rates. As a result of decreased market values it could be necessary for
the Company to borrow additional funds and pledge additional assets to maintain
financing for its holdings that have not been financed to maturity through the
issuance of CMOs or other debt securities. Increases in short-term borrowing
rates relative to rates earned on 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 earnings. However, the Company has implemented a
hedging strategy which is designed, to an extent, to mitigate this adverse
effect. In addition, high levels of interest rates tend to decrease the rate at
which mortgages prepay. A decrease in the rate of prepayments may lengthen the
estimated average lives of the underlying mortgages supporting securitized
master servicing fees and master servicing fees receivable and for classes of
the CMOs issued by the Company and may result in higher residual cash flows from
such assets than would otherwise have been obtained. However, higher rates of
interest may also discourage potential mortgagors from borrowing or refinancing
mortgage loans, thus decreasing the volume of loans available to be purchased
through the
25
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
Company's mortgage conduit operations or financed through the Company's
construction and warehouse lending operations.
Conversely, lower interest rates tend to increase the rate at which mortgages
prepay, which may have an adverse effect on the value of the Company's
securitized master servicing fees and master servicing fees receivable. However,
lower interest rates also tend to improve the Company's mortgage origination and
production volumes and increase the market value, to an extent, of the Company's
mortgage loan and mortgage securities investment portfolio.
ITEM 8. FINANCIAL 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.
26
<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.
27
<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).
28
<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).
29
<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).
30
<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).
31
<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 10.2 to CMI's Amendment No. 3 to S-3
Registration Statement (No. 33-63034) filed with the SEC on July 16,
1993).
32
<PAGE>
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 10.9 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 10.10 to CWM's 10-Q for the quarter ended March
31, 1996).
33
<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.
34
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Pasadena,
State of California, on March 25, 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 March 25, 1997
- ---------------------------
David S. Loeb
/s/ ANGELO R. MOZILO Director, Vice Chairman of the Board March 25, 1997
- --------------------------- Officer (Principal Executive Officer)
Angelo R. Mozilo
/s/ MICHAEL W. PERRY President and Chief Operating Officer March 25, 1997
- ---------------------------
Michael W. Perry
/s/ JAMES P. GROSS Senior Vice President March 25, 1997
- --------------------------- and Chief Financial Officer
James P. Gross (Principal Accounting Officer)
(Principal Financial Officer)
/s/ LYLE E. GRAMLEY Director March 25, 1997
- ---------------------------
Lyle E. Gramley
/s/ THOMAS J. KEARNS Director March 25, 1997
- ---------------------------
Thomas J. Kearns
/s/ FREDERICK J. NAPOLITANO Director March 25, 1997
- ---------------------------
Frederick J. Napolitano
</TABLE>
35
<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>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
Dollar amounts in thousands, =============================
except per share data 1996 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 113,027 120,281
Mortgage securities available for sale 129,372 --
Revolving warehouse lines of credit, net 251,032 190,705
Investment in and advances to Indy Mac 174,416 145,537
Cash and cash equivalents 12,450 8,049
Other assets 46,667 31,440
-----------------------------
Total assets $3,370,485 $2,643,613
=============================
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 3,453 --
held by Indy Mac (4,620) 7,845
Cumulative earnings 219,135 150,148
Cumulative distributions to shareholders (216,315) (149,398)
-----------------------------
Total shareholders' equity 492,850 362,984
-----------------------------
Total liabilities and shareholders' equity $3,370,485 $2,643,613
=============================
</TABLE>
The accompanying notes are an integral part of these statements.
CWM Mortgage
Holdings, Inc.
and Subsidiaries
F-4
<PAGE>
CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
Dollar amounts in thousands, =======================================
except per share data 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 available for sale 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.
CWM Mortgage
Holdings, Inc.
and Subsidiaries
F-5
<PAGE>
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
THREE YEARS ENDED DECEMBER 31, 1996
Dollar amounts in thousands, =======================================================================================
except per share data UNREALIZED
GAIN (LOSS) ON
MORTGAGE SECURITIES
AVAILABLE FOR SALE CUMULATIVE
CAPITAL ---------------------- DISTRIBUTIONS
NUMBER COMMON IN EXCESS HELD BY HELD BY CUMULATIVE TO SHARE-
OF SHARES STOCK OF PAR CWM INDY MAC EARNINGS HOLDERS TOTAL
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at
December 31, 1993 32,020,484 $320 $256,587 $ -- $ -- $ 72,306 $ (78,605) $250,608
Common stock issued 922 -- 9 -- -- -- -- 9
Common stock options
exercised 259,750 3 1,339 -- -- -- -- 1,342
Capital contribution
by manager -- -- 305 -- -- -- -- 305
Unrealized loss on
mortgage securities
available for sale -- -- -- -- (890) -- -- (890)
Net earnings for the year -- -- -- -- 27,831 -- 27,831
Dividends paid --
$0.72 per share -- -- -- -- -- -- (23,185) (23,185)
----------------------------------------------------------------------------------------------------
Balances at
December 31, 1994 32,281,156 323 258,240 -- (890) 100,137 (101,790) 256,020
Common stock issued 9,801,686 98 93,565 -- -- -- -- 93,663
Common stock options
exercised 331,000 3 2,160 -- -- -- -- 2,163
Unrealized gain on
mortgage securities
available for sale -- -- -- -- 8,735 -- -- 8,735
Net earnings for the year -- -- -- -- -- 50,011 -- 50,011
Dividends paid --
$1.17 per share -- -- -- -- -- -- (47,608) (47,608)
----------------------------------------------------------------------------------------------------
Balances at
December 31, 1995 42,413,842 424 353,965 -- 7,845 150,148 (149,398) 362,984
Common stock issued 7,382,883 74 132,982 -- -- -- -- 133,056
Common stock options
exercised 403,421 4 3,748 -- -- -- -- 3,752
Unrealized gain (loss) on
mortgage securities
available for sale -- -- -- 3,453 (12,465) -- -- (9,012)
Net earnings for the year -- -- -- -- -- 68,987 -- 68,987
Dividends paid --
$1.47 per share -- -- -- -- -- -- (66,917) (66,917)
Balances at ---------------------------------------------------------------------------------------------------
December 31, 1996 50,200,146 $502 $490,695 $3,453 $ (4,620) $219,135 $(216,315) $492,850
===================================================================================================
</TABLE>
The accompanying notes are an integral part of this statement.
CWM Mortgage
Holdings, Inc.
and Subsidiaries
F-6
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
=========================================
Dollar amounts in thousands
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) -- --
Change in accrued assets and liabilities 4,775 2,913 (10,922)
Net cash (used in) provided by operating activities (209,555) (43,722) 209,903
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 (126,221) -- --
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 (9,931) (19,118) (128,480)
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 (447,393) (528,394) (791,218)
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 (39,909 (165,059)
Net proceeds from issuance of unsecured debt 493,675 503,642 763,855
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.
CWM Mortgage
Holdings, Inc.
and Subsidiaries
F-7
<PAGE>
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.
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.
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 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.
F-8
<PAGE>
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. 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.
6. SECURITIZED MASTER SERVICING FEES
CWM from time to time invests in securitized master servicing fees related to
the REMIC securities issued by Indy Mac.
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. CWM evaluates
the recoverability of securitized master servicing fees by computing the present
value of the asset, given current estimates for prepayment rates, using a risk-
free rate of return. An impairment write-down to fair value is recorded for
those securities whose amortized cost exceeds the present value at the risk-free
rate. The 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. CWM holds
securitized master servicing fees for investment.
Effective January 1, 1997, CWM will reclassify securitized master servicing fees
to available for sale pursuant to the requirements of Statement of Financial
Accounting Standards (SFAS) NO. 125. Accordingly, securitized master servicing
fees will be carried at estimated for value with unrealized gains or losses
excluded from earnings and included in shareholders' equity, net of related
taxes.
7. MORTGAGE SECURITIES AVAILABLE FOR SALE
Mortgage securities available for sale consist primarily of adjustable-rate
agency securities. In addition, CWM has invested in certain securities issued in
connection with Indy Mac's REMIC transactions and inverse-floater 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. Estimated fair value is determined based on market quotes.
CWM Mortgage
Holdings, Inc.
and Subsidiaries
F-9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (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 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-10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (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 (APBO) 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 APBO 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.
F-11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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, 1996 DECEMBER 31, 1995
Dollar amounts =================================================
in thousands WEIGHTED WEIGHTED
PRINCIPAL AVERAGE PRINCIPAL AVERAGE
PRODUCT TYPE AMOUNT COUPON AMOUNT 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.
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
AVAILABLE FOR SALE
The following summarizes the amortized cost and estimated fair value of mortgage
securities available for sale as of December 31, 1996. There were no mortgage
securities available for sale as of December 31, 1995. Contractual maturities on
the mortgage securities range from 10 to 30 years.
F-12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
Dollar amounts =================================================
in thousands ESTIMATED GROSS GROSS
AMORTIZED FAIR UNREALIZED UNREALIZED
COST VALUE GAINS LOSSES
<S> <C> <C> <C> <C>
December 31, 1996 $125,919 $129,372 $3,501 $48
</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.
Note E ALLOWANCE FOR
LOAN LOSSES
Transactions in the allowance for loan losses were as follows:
<TABLE>
<CAPTION>
Dollar 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.
F-13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Collateral for CMOs is summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31
Dollar amounts in thousands ====================
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 (discount)
premium 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.
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 changes in CWM's securitized master servicing fees for the years ended
December 31, 1996 and 1995, respectively, are as follows.
<TABLE>
<CAPTION>
Dollar amounts in thousands ====================
1996 1995
<S> <C> <C>
Balance at January 1 $120,281 $120,954
Additions 9,931 19,118
Amortization (17,185) (19,791)
--------------------
Balance at December 31 $113,027 $120,281
====================
</TABLE>
The estimated fair value of the securitized master servicing fees asset was
$101.0 million at December 31, 1996. The estimated fair value includes gross
gains of $1.4 million and gross losses of $13.4 million. Contractual maturities
of the securitized master servicing fees asset exceeded 10 years as of December
31, 1996.
F-14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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,
ware house 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-15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
REVOLVING CREDIT FACILITIES
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-16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CMOs are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31
Dollar amounts in thousands =================================
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 rates, by series 6.75% - 11.00% 6.84% - 11.00%
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-17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (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
held for
investment $1,236,713 $1,258,346 $1,424,583 $1,439,560
Mortgage and
manufactured
housing loans
held for sale 657,208 657,208 409,584 409,584
Construction
loans receivable 460,546 460,546 129,323 129,323
Collateral for
CMOs 289,054 282,353 184,111 185,198
Securitized master
servicing fees 113,027 101,038 120,281 123,090
Mortgage securities 129,372 129,372 -- --
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,
REVOLVING WAREHOUSE LINES OF CREDIT,
AND ADVANCES TO INDY MAC
Fair values approximate the carrying amounts of each of the aforementioned
assets and liabilities due to their respective short-term nature or short-term
repricing characteristics.
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-18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (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. 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.
F-19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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:
<TABLE>
<CAPTION>
NUMBER OF SHARES
===========================================
1996 1995 1994
<S> <C> <C> <C>
Options outstanding
at beginning of year 801,965 612,125 552,875
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 year $10.29 $ 6.97 $5.11
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>
F-20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 WEIGHTED WEIGHTED
RANGE OF NUMBER REMAINING AVERAGE NUMBER AVERAGE
EXERCISE OUTSTANDING CONTRAC- EXERCISE EXERCISABLE EXERCISE
PRICES AT PERIOD END TUAL LIFE PRICE AT PERIOD END 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>
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.
F-21
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For performing these services, the Manager receives a base management fee of
0.125% per annum of average-invested mortgage-related assets not pledged to
secure CMOs, and excluding mortgage loans held for sale. The Manager also
receives a separate management fee equal to 0.2% per annum of the average
amounts outstanding under traditional warehouse lines of credit. In addition,
the Manager receives incentive compensation equal to 25% of the amount by which
CWM's annualized return on equity exceeds the ten-year U.S. Treasury Rate plus
2%. The Manager waived 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:
<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.
F-22
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 of 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.
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 adjustment). 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.
On March 28, 1997, the Company received a comment letter from the Securities and
Exchange Commission (SEC) concerning the Company's confidential filing of its
preliminary Proxy Statement pursuant to Section 14(a) of the Securities Exchange
Act of 1934, as amended. The preliminary Proxy Statement is intended to be
furnished to CWM's shareholders in connection with CWM's 1997 Annual Meeting,
and solicits shareholder approval of various proposals, including the proposed
merger of the Manager into CWM.
F-23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The comment letter states, among other things, the SEC's opinion that the
Company should account for CWM's proposed merger with the Manager as the
settlement of a contract, instead of as a business combination that would
involve the utilization of purchase accounting (which in turn would require
allocation of the consideration paid to the assets acquired and amortization of
those assets over their expected useful lives). The accounting effect of the
Company's conforming to the SEC's expressed position would be to treat the value
of the stock to be issued by CWM to CCI as consideration for the merger as an
expense in the period in which the proposed transaction occurs. In addition,
the SEC's comment letter addresses certain other issues with respect to the
Company's preliminary Proxy Statement and financial statements. The Company is
engaged in discussions with the SEC on these matters, and due to the timing of
the Company's receipt of the SEC's comment letter, these discussions are not
concluded as of the date of the Company's filing of its Form 10-K for 1996.
However, based on its preliminary review of these issues, management believes
that any adjustments, if required, will not result in a material change in CWM's
reported earnings for 1996 or earlier periods.
Note P - QUARTERLY FINANCIAL
DATA -- UNAUDITED
Selected quarterly financial data follows:
<TABLE>
<CAPTION>
Three months ended
Dollar amounts =======================================================================================
in thousands, March 31 June 30 Sept 30 Dec 31
except per share data -------- ------- ------- -------
<S> <C> <C> <C> <C>
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.
Independent
National Mortgage
Corporation
F-24
<PAGE>
CWM MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE
(Dollar amounts in thousands)
December 31, 1995
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E Column F
- -------------------------------------------------- ---------------------- ------------------- ------------------- ---------------
Principal
Amount
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> <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 5.750-14.375
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 6.625-10.750
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 INMC.
(2) All mortgage loans are fixed or adjustable-rate, conventional mortgage
loans secured by single (one-to-four) family residential properties with
initial maturities of 15 to 30 years.
(3) Total mortgage loans comprised of $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, 1995 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 1994 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-25
<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.
/s/ Grant Thornton LLP
GRANT THORNTON LLP
Los Angeles, California
February 21, 1997
F-26
<PAGE>
Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31,
Dollar amounts in thousands, ====================
except per share data 1996 1995
<S> <C> <C>
ASSETS
Mortgage loans held for sale, net $ 86,962 $ 92,088
Mortgage securities available for sale 332,482 350,752
Securitized master servicing fees 216,177 116,851
Master servicing fees receivable 44,239 36,570
Other assets 38,232 22,953
--------------------
Total assets $718,092 $619,214
====================
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 47,177 31,746
--------------------
Total liabilities 673,382 556,643
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 (4,666) 7,925
Retained earnings 16,900 22,170
--------------------
Total shareholders' equity 44,710 62,571
--------------------
Total liabilities and shareholders' equity $718,092 $619,214
====================
</TABLE>
The accompanying notes are an integral part of these statements.
Independent
National Mortgage
Corporation
F-27
<PAGE>
Statements of Earnings
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
Dollar amounts in thousands ===========================
1996 1995 1994
<S> <C> <C> <C>
REVENUES
Interest income
Mortgage loans held for sale $ 4,855 $36,862 $25,179
Mortgage securities available for sale 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 54,558 30,942 9,680
Gain on sale of servicing and other income 1,809 36 7,251
---------------------------
Net revenues 67,775 46,875 23,309
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 34,482 24,377 9,505
Income tax provision 14,752 10,437 3,824
---------------------------
NET EARNINGS $19,730 $13,940 $ 5,681
===========================
</TABLE>
The accompanying notes are an integral part of these statements.
Independent
National Mortgage
Corporation
F-28
<PAGE>
Statement of Shareholders' Equity
<TABLE>
<CAPTION>
THREE YEARS ENDED DECEMBER 31, 1996
Dollar amounts in thousands ==================================================================================
UNREALIZED
GAIN (LOSS)
ON MORTGAGE
NUMBER CAPITAL IN SECURITIES
OF COMMON PREFERRED EXCESS OF AVAILABLE RETAINED
SHARES STOCK STOCK 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 loss on
mortgage securities
available for sale,
net of tax -- -- -- -- (899) -- (899)
Net earnings for the year -- -- -- -- -- 5,681 5,681
---------------------------------------------------------------------------------------
Balance at
December 31, 1994 10,000 -- -- 16,476 (899) 8,230 23,807
Additional capital
contribution -- -- -- 16,000 -- -- 16,000
Unrealized gain on
mortgage securities
available for sale,
net of tax -- -- -- -- 8,824 -- 8,824
Net earnings for the year -- -- -- -- -- 13,940 13,940
---------------------------------------------------------------------------------------
Balance at
December 31, 1995 10,000 -- -- 32,476 7,925 22,170 62,571
Unrealized loss on
mortgage securities
available for sale,
net of tax -- -- -- -- (12,591) -- (12,591)
Net earnings for the year -- -- -- -- -- 19,730 19,730
Dividends paid -- -- -- -- -- (25,000) (25,000)
---------------------------------------------------------------------------------------
Balance at
December 31, 1996 10,000 $ -- $ -- $32,476 $ (4,666) $ 16,900 $ 44,710
=======================================================================================
</TABLE>
The accompanying notes are an integral part of these statements.
Independent
National Mortgage
Corporation
F-29
<PAGE>
Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
Dollar amounts in thousands ============================================
1996 1995 1994
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $ 19,730 $ 13,940 $ 5,681
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 (54,558) (31,034) (9,680)
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
Change in accrued assets and liabilities 8,212 (10,680) 7,460
--------------------------------------------
Net cash provided by (used in) operating activities 86,321 97,483 (85,714)
--------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in mortgage securities available for sale (274,101) (373,904) (178,638)
Investment in securitized master servicing fees (137,371) (124,838) --
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 269,335 184,384 39,715
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 (178,744) (330,452) (130,284)
--------------------------------------------
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.
Independent
National Mortgage
Corporation
F-30
<PAGE>
Notes to Financial Statements
YEARS ENDED 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 primarily consist of securities retained upon the
issuance of Indy Mac's REMIC securities. Securities are classified at
acquisition as available for sale when Indy Mac intends to hold the securities
for a period of time, but not necessarily to maturity. A decision to sell a
security classified as available for sale is based on a variety of factors
including movements in interest rates and other changes in economic conditions.
Mortgage securities available for sale are carried at estimated fair value with
unrealized gains and losses excluded from earnings and included 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-31
<PAGE>
3. SECURITIZED MASTER SERVICING FEES
Indy Mac retains securitized master servicing fees associated with the issuance
of mortgage securities. In determining the initial carrying amount, Indy Mac
considers the effective yield inherent in the fair values of similar
investments. Interest income on the securitized master servicing fees is
recognized at an effective yield based upon current estimates of prepayment
rates. Cash received in excess of the effective yield is applied to amortize the
asset. Indy Mac evaluates the recoverability of securitized master servicing
fees by computing the present value of the asset using current estimates for
prepayment rates and a risk-free rate of return. An impairment write-down to
fair value is recorded for those securities whose amortized cost exceeds the
present value at the risk free rate. The securitized master servicing values are
sensitive to variations in estimates of prepayment rates and changes in the
risk-free rate. Indy Mac estimates future prepayment rates based upon current
interest rate levels, economic conditions, and market forecasts as well as
relevant characteristics of the collateral underlying the assets, such as loan
types, interest rates and past prepayment experience. The estimates of
prepayment rates may change in the near term due to changes in interest rates
and market conditions. Indy Mac intends to hold securitized master servicing
fees for investment.
To protect the value of securitized master servicing fees from the effects of
increased prepayment activity, Indy Mac has acquired financial instruments,
including derivative contracts, that tend to increase in value when interest
rates decline. These financial instruments include call options on U.S. Treasury
bonds and interest rate floors. The cost of these financial instruments is
amortized to expense over the contractual life of the contracts. Unamortized
costs are included in other assets on the accompanying balance sheets.
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-32
<PAGE>
5. 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.
6. REVENUE RECOGNITION
Interest is recognized as revenue when earned according to the terms of the
mortgage loans and securities and when, in the opinion of management, it is
collectible. Premiums paid and discounts obtained on mortgage loans held for
sale are deferred as an adjustment to the carrying value of the loans until the
loans are sold. Gains on sale of mortgage loans and securities are recognized
upon settlement.
7. INCOME TAXES
For income tax purposes, Indy Mac files a separate tax return and is not
consolidated with CWM or 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.
8. ALLOWANCE FOR LOAN LOSSES
Indy Mac maintains an allowance for possible credit losses on mortgage loans
held for sale. Additions to the reserve are based on an assessment of certain
factors, including but not limited to, estimated future losses on the loans,
general economic conditions, and trends in portfolio volume, composition,
maturity, and delinquency statistics. Additions to the reserve are provided
through a charge to earnings. Actual losses on loans are recorded as a charge-
off or a reduction to the loan loss reserve. Subsequent recoveries of amounts
previously charged off are credited back to the reserve.
F-33
<PAGE>
9. RECENT ACCOUNTING PRONOUNCEMENT
In June 1996, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." SFAS No. 125
requires a securitization transaction to be accounted for as a sale when legal
and effective control over transferred receivables is surrendered. SFAS No. 125
is effective for transfers and servicing of financial assets and extinguishments
of liabilities occurring after December 31, 1996 and is to be applied
prospectively.
Indy Mac will adopt SFAS No. 125 on January 1, 1997, as required. In connection
with the adoption of SFAS No. 125, Indy Mac will reclassify its portfolio of
securitized master servicing fees to mortgage securities. SFAS No. 125 is not
expected to have a material effect on results of operations when adopted.
Securitization transactions entered into after December 31, 1996 are expected to
be structured in a manner that qualifies for sale accounting under SFAS No. 125.
Gains or losses from securitization transactions occurring after December 31,
1996 may vary from historical results due to, among other things, adoption of
SFAS No. 125, the level of securitization activity, changes in interest rates,
and the market for Indy Mac's various classes of mortgage-backed securities.
F-34
<PAGE>
Note B MORTGAGE LOANS
HELD FOR SALE
Substantially all of the mortgage loans purchased by Indy Mac from CWM are
fixed-rate and adjustable-rate 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 C 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
Charge-offs (18) (377)
Recoveries -- --
----------------
Balance at December 31 $1,773 $1,791
================
</TABLE>
Note D MORTGAGE SECURITIES
AVAILABLE FOR SALE
The following is a disclosure of the amortized cost and estimated fair value of
mortgage securities available for sale 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 ESTIMATED GROSS GROSS
AMORTIZED FAIR UNREALIZED UNREALIZED
COST VALUE GAINS LOSSES
<S> <C> <C> <C> <C>
December 31, 1996 $340,527 $332,482 $14,348 $22,393
December 31, 1995 $337,088 $350,752 $17,158 $ 3,494
</TABLE>
During the year ended December 31, 1996, Indy Mac sold mortgage securities
classified as available for sale 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.
F-35
<PAGE>
During the first quarter of 1995, Indy Mac transferred its entire portfolio of
mortgage securities classified as held to maturity to available for sale. The
unrealized gain as of the date of transfer was $1.2 million. The decision to
transfer these securities to available for sale was based on a reassessment of
the purpose of such investments. Indy Mac considers the category of available
for sale to more properly reflect Indy Mac's intentions with respect to the
mortgage securities.
As of December 31, 1996, all of Indy Mac's mortgage securities were pledged as
collateral under repurchase agreements.
Note E SECURITIZED MASTER
SERVICING FEES
The changes in securitized master servicing fees during 1996 and 1995 were as
follows:
<TABLE>
<CAPTION>
Dollar amounts in thousands ====================
1996 1995
<S> <C> <C>
Balance at January 1 $116,851 $ --
Additions 137,371 124,838
Amortization (38,045) (7,987)
--------------------
Balance at December 31 $216,177 $116,851
====================
</TABLE>
The estimated fair value of the securitized master servicing fees was $209.2
million and $110.7 million at December 31, 1996 and 1995, respectively. The
estimated fair value at December 31, 1996 included gross gains of $12.2 million
and gross losses of $19.2 million. Contractual maturities of the securitized
master servicing fees asset exceed 10 years. As of December 31, 1996 and 1995,
Indy Mac had $300 million notional amount of interest rate floors outstanding
and at December 31, 1995, had $670 million notional amount of call options on
U.S. Treasury bonds to hedge the securitized master servicing fees.
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 (7,623) (5,908)
------------------
Balance at December 31 $44,239 $36,570
==================
</TABLE>
F-36
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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.
Note H INCOME
TAXES
The income tax provision for the years ended December 31, 1996, 1995 and 1994
consists of the following:
<TABLE>
<CAPTION>
Dollar amounts in thousands ===========================
1996 1995 1994
<S> <C> <C> <C>
Current expense
Federal $ (992) $ 164 $ --
State 365 110 932
---------------------------
Total current expense (627) 274 932
---------------------------
Deferred expense
Federal 10,726 7,515 2,731
State 4,653 2,648 161
---------------------------
Total deferred expense 15,379 10,163 2,892
---------------------------
Total income tax expense $14,752 $10,437 $3,824
===========================
</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:
<TABLE>
<CAPTION>
Dollar amounts in thousands ====================
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 available
for sale securities (3,379) --
Other (518) --
Deferred tax liability
Master servicing fees receivable 42,067 18,629
Unrealized gains on available
for sale securities -- 5,739
Mark-to-market loss 2,815 --
Other -- 38
-------------------
Net deferred tax liability $ 26,845 $20,583
===================
</TABLE>
F-37
<PAGE>
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 2010.
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 statutory rate 7.6 7.0 7.6
Other items, net 0.2 0.7 (1.3)
--------------------
Effective income tax rate 42.8% 41.7% 40.3%
====================
</TABLE>
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
Dollar amounts ===============================================
in thousands CARRYING ESTIMATED CARRYING ESTIMATED
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 216,177 209,190 116,851 110,744
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
INSTRUMENTS
Call options and
interest rate floors 677 66 3,137 4,773
</TABLE>
F-38
<PAGE>
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.
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. There were no
call options at December 31, 1996.
F-39
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Note J COMMITMENTS AND
CONTINGENCIES
FINANCIAL INSTRUMENTS WITH
OFF-BALANCE SHEET RISK
Indy Mac is a party to financial instruments with off-balance sheet risk in the
normal course of business through the acquisition and sale of mortgage loans and
the management of interest rate risk. These instruments include short-term
commitments to purchase and sell loans and option contracts. The instruments
involve, to varying degrees, elements of credit and interest rate risk. Indy Mac
is exposed to credit loss in the event of nonperformance by the counterparties
to the various agreements. However, Indy Mac does not anticipate nonperformance
by the counterparties. As discussed below, Indy Mac's exposure to credit risk
with respect to the master servicing portfolio in the event of nonperformance by
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.
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
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
F-40
<PAGE>
losses were deferred as part of Indy Mac's lower of cost or market analysis
on its mortgage loans held for sale.
Note K RELATED PARTY
TRANSACTIONS
As of December 31, 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.
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.
F-41
<PAGE>
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-42
<PAGE>
EXHIBIT 10.40
11/14/96
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") has been executed as of [Date] 1996
by and between Countrywide Asset Management Corporation ("Employer") and Michael
Perry ("Officer").
WITNESSETH:
WHEREAS, Employer desires to obtain the benefit of continued services of Officer
and Officer desires to continue to render services to Employer and its
affiliates.
WHEREAS, Employer and Officer desire to set forth the terms and conditions of
Officer's employment with Employer and its affiliates under this Agreement.
NOW, THEREFORE, in consideration of the mutual promises and covenants herein
contained, the parties hereto agree as follows:
1. TERM. Employer agrees to employ Officer and Officer agrees to serve
Employer and its affiliates, in accordance with the terms hereof, for a
term beginning on the date first written above and ending on December
31, 2000, unless earlier terminated in accordance with the provisions
hereof.
2. POSITION, DUTIES AND RESPONSIBILITIES. Employer and Officer hereby agree
that, subject to the provisions of this Agreement, Employer will employ
Officer and Officer will serve Employer as President and a director of
Employer, as President and Chief Operating Officer of CWM Mortgage
Holdings, Inc. ("Holdings") and as President and Chief Executive Officer
of Independent National Mortgage Corporation ("Indy Mac") and
Independent Lending Corporation. Employer agrees that Officer's duties
hereunder shall be the usual and customary duties of such office and
such further duties shall not be inconsistent with the provisions of
applicable law. Officer shall have such executive power and authority as
shall reasonably be required to enable him to discharge his duties in
the offices which he may hold. All compensation paid to Officer by
Employer or any of its affiliates shall be aggregated in determining
whether Officer has received the benefits provided for herein, but
without prejudice to the allocation of costs among the entities to which
Officer renders services hereunder. Employer and
<PAGE>
Officer hereby agree that the portion of Officer's services which are
provided to Indy Mac are to be treated for federal income tax purposes
as services provided by Officer as an employee of Indy Mac. Officer
agrees that Employer and Indy Mac shall make a determination as to the
portion of the total compensation payable to Officer hereunder which
shall be allocated to and deemed paid by Indy Mac for purposes of
section 162(m) and related provisions of the Internal Revenue Code.
3. SCOPE OF THIS AGREEMENT AND OUTSIDE AFFILIATIONS. During the term of
this Agreement, Officer shall devote his full business time and energy,
except as expressly provided below, to the business, affairs and
interests of Employer and its affiliates, and matters related thereto,
and shall use his best efforts and abilities to promote their respective
interests. Officer agrees that he will diligently endeavor to promote
the business, affairs and interests of Employer and its affiliates and
perform services contemplated hereby, in accordance with the policies
established by the Board, which policies shall be consistent with this
Agreement. Officer agrees to serve without additional remuneration as an
officer or director of Holdings or of one or more (direct or indirect)
subsidiaries or affiliates of Employer or Holdings as the Board may from
time to time request, subject to appropriate authorization by the
affiliate or subsidiary involved and any limitation under applicable
law. Officer's failure to discharge an order or perform a function
because Officer reasonably and in good faith believes such would violate
a law or regulation or be dishonest shall not be deemed a breach by him
of his obligations or duties pursuant to any of the provisions of this
Agreement, including without limitation pursuant to Section 5(c) hereof.
During the course of Officer's employment as a full-time officer
hereunder, Officer shall not, without the consent of the Board, compete,
directly or indirectly, with Employer in the business then conducted by
Employer or any of its affiliates.
Officer may make and manage personal business investments of his choice
and serve in any capacity with any civic, educational or charitable
organization, or any governmental entity or trade association, without
seeking or obtaining approval by the Board, provided such activities and
services do not materially interfere or conflict with the performance of
his duties hereunder.
4. COMPENSATION AND BENEFITS.
a. BASE SALARY. Employer shall pay to Officer a base salary in respect of
the portion of the fiscal year of Employer (a "Fiscal Year") beginning
July 1, 1996 at the annual rate of $550,000 (the "Annual
<PAGE>
Rate"). In respect of the Fiscal Years ending in 1997, 1998, 1999, and
2000, the Compensation Committee of the Board (the "Compensation
Committee") may, based upon the recommendation of Angelo R. Mozilo and
the performance of Officer and Employer, increase the Annual Rate.
While any such increase shall be at the discretion of the Compensation
Committee, it is anticipated that, for any Fiscal Year, a 15% increase
in Employer's reported earnings per share over the preceding Fiscal
Year normally would result in an increase in the Annual Rate of 10%,
but could exceed such percentage if warranted.
b. INCENTIVE COMPENSATION. Employer shall pay to Officer for each of the
Fiscal Years ending during the term of this Agreement an incentive
compensation award in an amount determined pursuant to the Annual
Incentive Plan and the Incentive Matrix attached hereto as Appendix A.
The incentive compensation award payable to Officer for any Fiscal
Year shall be paid no later than thirty (30) days after completion of
the applicable audited financial statements for such Fiscal Year. In
the event of a material one-time charge against earnings by Holdings
associated with Holdings' buyout of Employer as manager of Holdings,
the earnings of Holdings shall not be decreased for such charge in the
calculation of EPS in connection with the determination of Officer's
base and incentive compensation hereunder. For the purpose of any
allocation of Officer's incentive compensation pursuant to Section 2
above, it is understood that the calculation of earnings of Holdings
includes Holdings' equity interest in the earnings of Indy Mac.
c. STOCK OPTIONS. As soon as practicable after the date first written
above, Holdings shall grant to Officer a stock option in respect of
200,000 shares of the Holdings' common stock, such option to become
exercisable as to 66,667 shares, 66,666 shares and 66,667 shares on
each of the first three (3) anniversaries of the date of grant.
Beginning with the 1997 Fiscal Year and in respect of each of the
following Fiscal Years during the term of this Agreement, Holdings may
also grant to Officer stock options for such number of shares of
Holdings' common stock as the Compensation Committee in its sole
discretion determines, taking into account Officer's and Holdings'
performance and the competitive practices then prevailing regarding
the granting of stock options. Subject to the foregoing, it is
anticipated that the number of shares in respect of each annual stock
option grant shall be between 100,000 and 150,000, with the annual
grant normally targeted at 125,000 shares for "good performance," as
determined by the Compensation Committee. The stock options
<PAGE>
described in this Section 4(c) in respect of a Fiscal Year shall be
granted at the same time as Holdings grants stock options to its other
senior executives in respect of such Fiscal Year.
All stock options granted in accordance with this Section 4(c): (i)
shall be granted pursuant to Holdings' current stock option plan, or
such other stock option plan or plans as may be or come into effect
during the term of this Agreement, (ii) shall have a per share
exercise price equal to the fair market value (as defined in the
current Plan or such other plan or plans) of the common stock at the
time of grant, (iii) shall become exercisable in three equal
installments on each of the first three anniversaries of the date of
grant, (iv) shall become immediately and fully exercisable in the
event of a Change in Control (as defined in Appendix B) or in the
event that Officer's employment is terminated due to death or
Disability or by Employer other than for Cause (as defined in Section
5(c)), and (v) shall be subject to such other reasonable and
consistent terms and conditions as may be determined by the
Compensation Committee and set forth in the agreement evidencing the
award.
d. ADDITIONAL BENEFITS. Officer shall also be entitled to all rights and
benefits for which he is otherwise eligible under any bonus plan,
stock purchase plan, participation or extra compensation plan,
executive compensation plan, pension plan, profit-sharing plan, life
and medical insurance policy, or other plans or benefits, which
Employer or its subsidiaries may provide for him, or provided he is
eligible to participate therein, for senior officers generally or for
employees generally, during the term of this Agreement (collectively,
"Additional Benefits"). This Agreement shall not affect the provision
of any other compensation, retirement or other benefit program or plan
of Employer. If Officer's employment is terminated hereunder, pursuant
to Section 5(a), 5(b) or 5(d), Employer shall continue for the period
specified in Section 5(a), 5(b) or 5(d) hereof, to provide benefits
substantially equivalent to Additional Benefits (other than qualified
pension or profit sharing plan benefits and option, equity or stock
appreciation or other incentive plan benefits as distinguished from
health, disability and welfare type benefits) on behalf of Officer and
his dependents and beneficiaries which were being provided to them
immediately prior to Officer's Termination Date, but only to the
extent that Officer is not entitled to comparable benefits from other
employment.
e. DEFERRAL OF AMOUNTS PAYABLE HEREUNDER. In the event Officer should
desire to defer receipt of any cash payments to which he
<PAGE>
would otherwise be entitled hereunder, he may present such a written
request to the Compensation Committee which, in its sole discretion,
may enter into a separate deferred compensation agreement with
Officer.
f. CERTAIN PERQUISITES.
(i) CLUB MEMBERSHIPS. Employer shall pay standard annual and monthly
membership fees and any business related charges for Officer's
participation in the Young Presidents' Organization, the San
Gabriel Country Club, the California Club, and such other
memberships as may be approved by Angelo Mozilo and the Board of
Directors.
(ii) CAR ALLOWANCE. Employer shall either provide Officer with an
appropriate luxury automobile for Officer's exclusive use or pay
Officer an equivalent monthly automobile allowance, such
automobile or amount to be mutually agreed to by the Employer
and Officer.
(iii) TRAVEL. In connection with business travel, Officer shall be
permitted to travel first class and to be reimbursed by Employer
for such travel expenses.
5. TERMINATION. The compensation and benefits provided for herein and the
employment of Officer by Employer shall be terminated only as provided
for below in this Section 5:
a. DISABILITY. In the event that Officer shall fail, because of illness,
injury or similar incapacity ("Disability"), to render for four (4)
consecutive calendar months, or for shorter periods aggregating
eighty (80) or more business days in any twelve (12) month period,
services contemplated by this Agreement, Officer's full-time
employment hereunder may be terminated, by written Notice of
Termination from Employer to Officer; and thereafter, Employer shall
continue, from the Termination Date until Officer's death or December
31, 2000, whichever first occurs (the "Disability Payment Period"),
(i) to pay compensation to Officer, in the same manner as in effect
immediately prior to the Termination Date, in an amount equal to (1)
fifty percent (50%) of the then existing base salary payable
immediately prior to the termination, minus (2) the amount of any
cash payments to him under the terms of Employer's disability
insurance or other disability benefit plans or employer's tax-
qualified Defined Benefit Pension Pan, and any compensation he may
receive pursuant to any other employment, and (ii) to provide
<PAGE>
during the Disability Payment period the benefits specified in the
last sentence of Section 4(d) hereof.
The determination of Disability shall be made only after 30 days
notice to Officer and only if Officer has not returned to performance
of his duties during such 30-day period. In order to determine
Disability, both employer and Officer shall have the right to provide
medical evidence to support their respective positions, with the
ultimate decision regarding Disability to be made by a majority of
Employer's disinterested directors.
b. DEATH. In the event that Officer shall die during the term of this
Agreement, Employer shall pay Officer's base salary for a period of
twelve (12) months following the date of Officer's death and in the
manner otherwise payable hereunder, to such person or persons as
Officer shall have directed in writing or, in the absence of a
designation, to his estate (the "Beneficiary"). Employer shall also
(1) pay to such Beneficiary (x) an amount equal to the incentive
compensation that would have been payable to Officer pursuant to
Section 4(b) in respect of the Fiscal Year in which the Officer's
death occurs multiplied by a fraction, the numerator of which is the
number of days in such Fiscal Year through the date of Officer's death
and the denominator of which is 365 and (y) any unpaid incentive
compensation payable to Officer pursuant to Section 4(b) in respect of
the Fiscal Year immediately preceding the Fiscal Year in which his
death occurs and (2) provide during the twelve-month period following
the date of Officer's death the benefits specified in the last
sentence of Section 4(d) hereof. If Officer's death occurs while he is
receiving payments for Disability under Section 5(a) above, such
payments shall cease and the Beneficiary shall be entitled to the
payments and benefits under this Subsection 5(b), which shall continue
for a period of twelve months thereafter at the full rate of base
salary in effect immediately prior to the Disability. This Agreement
in all other respects will terminate upon the death of Officer;
provided, however, that (i) the termination of the Agreement shall not
affect Officer's entitlement to all other benefits in which he has
become vested or which are otherwise payable in respect of periods
ending prior to its termination, and (ii) to the extent not otherwise
vested, all outstanding stock options granted to Officer pursuant to
Section 4(c) will vest upon his death.
c. CAUSE. Employer may terminate Officer's employment under this
Agreement for "Cause." A termination for Cause is a termination by
reason of (i) a material breach of this Agreement by Officer (other
than as a result of incapacity due to physical or mental illness)
which
<PAGE>
is committed in bad faith or without reasonable belief that such
breach is in the best interests of Employer and which is not remedied
within a reasonable period of time after receipt of written notice
from Employer specifying such breach, or (ii) Officer's conviction by
a court of competent jurisdiction of a felony, or (iii) entry of an
order duly issued by any federal or state regulatory agency having
jurisdiction in the matter removing Officer from office of Employer or
its affiliates or permanently prohibiting him from participation in
the conduct of the affairs of Employer of any of its affiliates. If
Officer shall be convicted of a felony or shall be removed from office
and/or temporarily prohibited from participating in the conduct of
Employer's or any of its affiliates' affairs by any federal or state
regulatory authority having jurisdiction in the matter, Employer's
obligations under Sections 4(a), 4(b), 4(c), and 4(f) hereof shall be
automatically suspended; provided, however, that if the charges
resulting in such removal or prohibition are finally dismissed or if a
final judgment on the merits of such charges is issued in favor of
Officer, or if the conviction is overturned on appeal, then Officer
shall be reinstated in full with back pay for the removal period plus
accrued interest at the rate then payable on judgments. During the
period that Employer's obligations under Sections 4(a), 4(b), 4(c),
and 4(f) hereof are suspended, Officer shall continue to be entitled
to receive Additional Benefits under Section 4(d) until the conviction
of the felony or removal from office has become final and non-
appealable. When the conviction of the felony or removal from office
has become final and non-appealable, all of Employer's obligations
hereunder shall terminate; provided, however, that the termination of
Officer's employment pursuant to this Section 5(c) shall not affect
Officer's entitlement to all benefits in which he has become vested or
which are otherwise payable in respect of periods ending prior to his
termination of employment. Anything herein to the contrary
notwithstanding, termination for Cause shall not include termination
by reason of Officer's job performance or a job performance rating
given to Officer for his job performance or the financial performance
of Holdings or any affiliated company.
d. SEVERANCE.
(i) Except as provided in Section 5(d)(ii), if during the term of
this Agreement, Officer's employment shall be terminated by
Employer other than for Cause, then Employer shall (1) pay
Officer in a single payment as soon as practicable after the
Termination Date, but in no event later than thirty (30) days
thereafter, (A) an amount in cash equal to one year of Officer's
base salary at the Annual Rate at the Termination Date and (B)
an amount equal to the incentive compensation paid or payable to
Officer pursuant to Section 4(b) in respect
<PAGE>
of the Fiscal Year immediately preceding the Fiscal
Year in which Officer's Termination Date occurs (the "Bonus
Rate"); provided, however, that in the event the first
anniversary of the Termination Date occurs on a date prior to
the end of a Fiscal Year, Employer shall also pay Officer an
amount equal to the product of (x) the Bonus Rate and (y) a
fraction, the numerator of which is (I) the number of days
elapsed since the end of the immediately preceding Fiscal Year
through the end of the Severance Period and (II) the
denomination of which is 365, and (2) until the first
anniversary of the Termination Date, provide the benefits
specified in the last sentence of Section 4(d) hereof. Employer
shall also pay in a single payment as soon as practicable after
the Termination Date, but in no event later than thirty (30)
days thereafter, any unpaid incentive compensation payable to
Officer pursuant to Section 4(b) in respect of the Fiscal Year
immediately preceding the Fiscal Year in which Officer's
Termination Date occurs.
(ii) If within two (2) years after a "Change in Control" (as defined
in Appendix B to this Agreement) and during the term of this
Agreement, Officer's employment shall be terminated by Employer
other than for Cause or by Officer for Good Reason, then (A)
Employer shall pay Officer in a single payment as soon as
practicable after the Termination Date, but in no event later
than thirty (30) days thereafter, (x) as severance pay and in
lieu of any further salary and incentive compensation for
periods subsequent to the Termination Date, an amount in cash
equal to two times the sum of (1) Officer's base salary at the
Annual Rate at the Termination Date and (2) the incentive
compensation paid or payable to Officer pursuant to Section 4(b)
in respect of the Fiscal Year immediately preceding the Fiscal
Year in which Officer's Termination Date occurs and (y) any
unpaid incentive compensation payable to Officer pursuant to
Section 4(b) in respect of the Fiscal Year immediately preceding
the Fiscal Year in which Officer's Termination Date occurs, and
(B) Employer shall continue to provide for two years from the
Termination Date the benefits specified in the last sentence of
Section 4(d) hereof. For purposes of this Agreement, "Good
Reason" shall be deemed to occur if Employer (x) breaches this
Agreement in any material respect or (y) takes any other action
which results in the
<PAGE>
diminution in Officer's status, title, position, authority and
responsibilities other than an insubstantial action not taken in
bad faith and which is remedied by Employer promptly after
receipt of notice by Officer.
Notwithstanding anything in this Agreement to the contrary, in
the event it shall be determined that any payment or
distribution by Employer or any other person or entity to or for
the benefit of Officer (within the meaning of Section 280G(b)(2)
of the Internal Revenue Code of 1986, as amended (the "Code"),
whether paid or payable or distributed or distributable pursuant
to the terms of this Agreement or otherwise in connection with,
or arising out of, his employment with Employer or a change in
ownership or effective control of Employer or a substantial
portion of its assets (a "Payment"), would be subject to the
excise tax imposed by Section 4999 of the Code (the "Excise
Tax"), the Payments shall be reduced (but not below zero) to the
extent necessary so that no Excise Tax would be imposed. If the
application of the preceding sentence should require a reduction
in Payments or other "parachute payment" (within the meaning of
Section 280G of the Code), unless Officer shall have designated
otherwise, such reduction shall be implemented, first, by
reducing any non-cash benefits (other than stock options) to the
extent necessary, second, by reducing any cash benefits to the
extent necessary and, third, by reducing any stock options to
the extent necessary. In each case, the reductions shall be made
starting with the payment or benefit to be made on the latest
date following the Termination Date and reducing payments or
benefits in reverse chronological order therefrom. All
determinations concerning the application of this paragraph
shall be made by a nationally recognized firm of independent
accountants, selected by Officer and satisfactory to Employer,
whose determination shall be conclusive and binding on all
parties. The fees and expenses of such accountants shall be
borne by Employer.
e. RESIGNATION. Except as provided in Section 5(d)(ii) hereof, if during
the term of this Agreement, Officer shall resign voluntarily, all of
his rights to payment or benefits hereunder shall immediately
terminate; provided, however, that the termination of Officer's
employment pursuant to this Section 5(e) shall not affect Officer's
entitlement to all benefits in which he has become vested or which are
otherwise
<PAGE>
payable in respect of periods ending prior to his termination of
employment.
f. NOTICE OF TERMINATION. Any purported termination by Employer or by
Officer shall be communicated by a written Notice of Termination to
the other party hereto which indicates the specific termination
provision in this Agreement, if any, relied upon and which sets forth
in reasonable detail the facts and circumstances, if any, claimed to
provide a basis for termination of Officer's employment under the
provision so indicated. For purposes of this Agreement, no such
purported termination shall be effective without such Notice of
Termination. The "Termination Date" shall mean the date specified in
the Notice of Termination, which shall be no less than 30 or more than
60 days from the date of the Notice of Termination. Notwithstanding
any other provision of this Agreement, in the event of any termination
of Officer's employment hereunder for any reason, Employer shall pay
Officer his full base salary through the Termination Date, plus any
Additional Benefits which have been earned or become payable, but
which have not yet been paid as of such Termination Date.
6. REIMBURSEMENT OF BUSINESS EXPENSES. During the term of this Agreement,
Employer shall reimburse Officer promptly for all business expenditures
to the extent that such expenditures meet the requirements of the Code
for deductibility by Employer for federal income tax purposes or are
otherwise in compliance with the rules and policies of Employer and are
substantiated by Officer as required by the Internal Revenue Service and
rules and policies of Employer.
7. INDEMNITY. To the extent permitted by applicable law, the Certificate of
Incorporation and the By-Laws of Employer (as from time to time in
effect) and any indemnity agreements entered into from time to time
between Employer and Officer, Employer shall indemnify Officer and hold
him harmless for any acts or decisions made by him in good faith while
performing services for Employer, and shall use reasonable efforts to
obtain coverage for him under liability insurance policies now in force
or hereafter obtained during the term of this Agreement covering the
other officers or directors of Employer.
8. MISCELLANEOUS.
a. SUCCESSION. This Agreement shall inure to the benefit of and shall be
binding upon Employer, its successors and assigns, but without the
prior written consent of Officer, this Agreement may not be assigned
<PAGE>
other than in connection with a merger or sale of substantially all
the assets of Employer or similar transaction. Notwithstanding the
foregoing, Employer may assign, whether by assignment agreement,
merger, operation of law or otherwise, this Agreement to Holdings or
Independent National Mortgage Corporation, or to any successor of
either of them, subject to such assignee's express assumption of all
obligations of Employer hereunder, and Officer hereby consents to any
such assignment. The failure of any successor to or assignee of the
Employer's business and/or assets in such transaction to expressly
assume all obligations of Employer hereunder shall be deemed a
material breach of this Agreement by Employer. The obligations and
duties of Officer hereby shall be personal and not assignable.
b. NOTICES. Any notices provided for in this Agreement shall be sent to
Employer at its corporate headquarters, Attention: Corporate
Counsel/Secretary, with a copy to the Chairman of the Compensation
Committee at the same address, or to such other address as Employer
may from time to time in writing designate, and to Officer at such
address as he may from time to time in writing designate (or his
business address of record in the absence of such designation). All
notices shall be deemed to have been given two (2) business days after
they have been deposited as certified mail, return receipt requested,
postage paid and properly addressed to the designated address of the
party to receive the notices.
c. ENTIRE AGREEMENT. This instrument contains the entire agreement of the
parties relating to the subject matter hereof, and it replaces and
supersedes any prior agreements between the parties relating to said
subject matter. No modifications or amendments of this Agreement shall
be valid unless made in writing and signed by the parties hereto.
d. WAIVER. The waiver of the breach of any term or of any condition of
this Agreement shall not be deemed to constitute the waiver of any
other breach of the same or any other term or condition.
e. CALIFORNIA LAW. This Agreement shall be construed and interpreted in
accordance with the laws of California.
f. ATTORNEYS' FEES IN ACTION ON CONTRACT. If any litigation shall occur
between the Officer and Employer, which litigation arises out of our
as a result of this Agreement or the acts of the parties hereto
pursuant to this Agreement, or which seeks an interpretation of this
Agreement, the prevailing party in such litigation, in addition to any
<PAGE>
other judgment or award, shall be entitled to receive such sums as the
court hearing the matter shall find to be reasonable as and for the
attorneys' fees of the prevailing party.
g. CONFIDENTIALITY. Officer agrees that he will not divulge or otherwise
disclose, directly or indirectly, any trade secret or other
confidential information concerning the business or policies of
Employer or any of its subsidiaries which he may have learned as a
result of his employment during the term of this Agreement or prior
thereto as an employee, officer or director of or consultant to
Employer or any of its subsidiaries, except to the extent such use or
disclosure is (i) necessary or appropriate to the performance of this
Agreement and in furtherance of Employer's best interests, (ii)
required by applicable law or in response to a lawful inquiry from a
governmental or regulatory authority, (iii) lawfully obtainable from
other sources, or (iv) authorized by Employer. The provisions of this
subsection shall survive the expiration, suspension or termination,
for any reason, of this Agreement.
h. REMEDIES OF EMPLOYER. Officer acknowledges that the services he is
obligated to render under the provisions of this Agreement are of a
special, unique, unusual, extraordinary and intellectual character,
which gives this Agreement peculiar value to Employer. The loss of
these services cannot be reasonably or adequately compensated in
damages in an action at law and it would be difficult (if not
impossible) to replace these services. By reason thereof, Officer
agrees and consents that if he violates any of the material provisions
of this Agreement, Employer, in addition to any other rights and
remedies available under this Agreement or under applicable law, shall
be entitled during the remainder of the term to seek injunctive
relief, from a tribunal of competent jurisdiction, restraining Officer
from committing or continuing any violation of this Agreement.
i. SEVERABILITY. If any provision of this Agreement is held invalid or
unenforceable, the remainder of this Agreement shall nevertheless
remain in full force and effect, and if any provision is held invalid
or unenforceable with respect to particular circumstances, it shall
nevertheless remain in full force and effect in all other
circumstances.
j. NO OBLIGATION TO MITIGATE. Officer shall not be required to mitigate
the amount of any payment provided for in this Agreement by seeking
other employment or otherwise and, except as provided in Section
5(a)(i)(2) hereof, no payment hereunder shall be offset or
<PAGE>
reduced by the amount of any compensation or benefits provided to
Officer in any subsequent employment.
<PAGE>
k. COVENANT NOT TO COMPETE
(i) IN GENERAL. Officer agrees that while he is employed by Employer
during the term of this Agreement and for a period of one year
after the termination of such employment for whatever reason
other than any termination by Employer, either for Cause or
other than for Cause (the "Non-Compete Period"), he shall not,
within North America:
(A) engage in any business, whether as an employee, consultant,
partner, principal, agent, representative or stockholder
(other than as a stockholder of less than a one percent (1%)
equity interest) or in any other corporate or representative
capacity with any other business whether in corporate,
proprietorship, or partnership form or otherwise, where such
business is engaged in any activity which competes with the
business of Employer (or its subsidiaries or affiliates) as
conducted on the date Officer's employment terminated or
which will compete with any proposed business activity of
Employer (or its subsidiaries or affiliates) in the planning
stage on such date;
(B) solicit business from, or perform services for, any company
or other business entity which at any time during the two-
year period immediately preceding Officer's termination of
employment with Employer was a client of Employer (or its
subsidiaries or affiliates) (including without limitation any
lessee, vendor or supplier); or
(C) offer, or cause to be offered, employment, either on a full-
time, part-time or consulting basis, to any person who was
employed by Employer (or its subsidiaries or affiliates) on
the date Officer's employment terminated, unless Officer
shall have received the prior written consent of Employer.
(ii) CONSIDERATION. The consideration for the foregoing covenant not
to compete, the sufficiency of which is hereby acknowledged, is
Employer's agreement to continue to employ Officer and provide
compensation and benefits
<PAGE>
pursuant to this Agreement, including but not limited to Section
5(d).
(iii) EQUITABLE RELIEF AND OTHER REMEDIES. Officer acknowledges and
agrees that Employer's remedies at law for a breach or threatened
breach of any of the provisions of this Section would be
inadequate and, in recognition of this fact, Officer agrees that,
in the event of such a breach or threatened breach, in addition
to any remedies at law, Employer, without posting any bond, shall
be entitled to obtain equitable relief in the form of specific
performance, a temporary restraining order, a temporary or
permanent injunction or any other equitable remedy which may then
be available.
(iv) REFORMATION. If the foregoing covenant not to compete would
otherwise be determined invalid or unenforceable by a court of
competent jurisdiction, such court shall exercise its discretion
in reforming the provisions of this Section to the end that
Officer be subject to a covenant not to compete, reasonable under
the circumstances, enforceable by Employer.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
EMPLOYER
By: ____________________
Title: ____________________
OFFICER:
___________________________
in his individual capacity
<PAGE>
APPENDIX A
ANNUAL INCENTIVE PLAN
INCENTIVE MATRIX *
<TABLE>
<CAPTION>
ANNUAL INCENTIVE EARNED ($000)
- -----------------------------------------------------------------------------------------------------------------------
PERCENT CHANGE IN EPS OVER PRIOR YEAR
-30% 30% OR
EPS ACHIEVED OR LESS -20% -10% 0% 10% 20% MORE
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Less than $1.10 0 0 0 0 0 0 0
- -----------------------------------------------------------------------------------------------------------------------
1.10 $ 0 $100 $250 $400 $ 550 $ 700 $ 850
- -----------------------------------------------------------------------------------------------------------------------
1.30 50 150 300 450 600 750 900
- -----------------------------------------------------------------------------------------------------------------------
1.50 100 200 350 500 650 800 950
- -----------------------------------------------------------------------------------------------------------------------
1.70 150 250 400 550 700 850 1,000
- -----------------------------------------------------------------------------------------------------------------------
1.90 200 300 450 600 750 900 1,050
- -----------------------------------------------------------------------------------------------------------------------
2.10 250 350 500 650 800 950 1,100
- -----------------------------------------------------------------------------------------------------------------------
2.30 300 400 550 700 850 1,000 1,150
- -----------------------------------------------------------------------------------------------------------------------
2.50 300 450 600 750 900 1,050 1,200
- -----------------------------------------------------------------------------------------------------------------------
2.70 300 500 650 800 950 1,100 1,300
- -----------------------------------------------------------------------------------------------------------------------
2.90 300 500 700 850 1,000 1,200 1,400
- -----------------------------------------------------------------------------------------------------------------------
3.10 300 500 750 900 1,100 1,300 1,500
- -----------------------------------------------------------------------------------------------------------------------
3.30 or more 300 500 800 950 1,200 1,400 1,600
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
- ----------------
* INTERPOLATE BETWEEN INDICATED AMOUNTS.
<PAGE>
APPENDIX B
A "Change in Control" shall mean the occurrence during the term of the
Agreement, of any one of the following events:
A. An acquisition (other than directly from Employer) of any common stock
or other "Voting Securities" (as hereinafter defined) of Employer by any
"Person" (as the term person is used for purposes of Section 13(d) or
14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act")), immediately after which such Person has "Beneficial Ownership"
(within the meaning of Rule 13d-3 promulgated under the Exchange Act) of
twenty five percent (25%) or more of the then outstanding shares of
Employer's common stock or the combined voting power of Employer's then
outstanding Voting Securities; provided, however, in determining whether
a Change in Control has occurred, Voting Securities which are acquired
in a "Non-Control Acquisition" (as hereinafter defined) shall not
constitute an acquisition which would cause a Change in Control. For
purposes of this Agreement, (1) "Voting Securities" shall mean
Employer's outstanding voting securities entitled to vote generally in
the election of directors and (2) a "Non-Control Acquisition" shall mean
an acquisition by (i) an employee benefit plan (or a trust forming a
part thereof) maintained by (A) Employer or (B) any corporation or other
Person of which a majority of its voting power or its voting equity
securities or equity interest is owned, directly or indirectly, by
Employer (for purposes of this definition, a "Subsidiary"), (ii)
Employer or any of its Subsidiaries, (iii) any Person in connection with
a "Non-Control Transaction" (as hereinafter defined) or (iv) Countrywide
Credit Industries, Inc. or any of its affiliates or subsidiaries
("Countrywide Credit").
B. The individuals who, as of the date of the Agreement are members of the
Board (the "Incumbent Board"), cease for any reason to constitute at
least two-thirds of the members of the Board; provided, however, that if
the election, or nomination for election by Employer's common
stockholders, of any new director was approved by a vote of at least
two-thirds of the Incumbent Board, such new director shall, for purposes
of this Agreement, be considered as a member of the Incumbent Board;
provided further, however, that no individual shall be considered a
member of the Incumbent Board if such individual initially assumed
office as a result of either an actual or threatened "Election Contest"
(as described in Rule 14a-11 promulgated under the Exchange Act) or
other actual or threatened solicitation of proxies or consents by or on
behalf of a Person other than the
<PAGE>
Board (a "Proxy Contest") including by reason of any agreement intended
to avoid or settle any Election Contest or Proxy Contest; or
C. The consummation of:
(i) A merger, consolidation or reorganization involving Employer,
unless such merger, consolidation or reorganization is a "Non-
Control Transaction." A "Non-Control Transaction" shall mean a
merger, consolidation or reorganization of Employer into, with or
involving Countrywide Credit, Holdings or where:
a. the stockholders of Employer, immediately before such merger,
consolidation or reorganization, own directly or indirectly
immediately following such merger, consolidation or
reorganization, at least seventy percent (70%) of the combined
voting power of the outstanding Voting Securities of the
corporation resulting from such merger, consolidation or
reorganization (the "Surviving Corporation") in substantially
the same proportion as their ownership of the Voting Securities
immediately before such merger, consolidation or reorganization;
b. the individuals who were members of the Incumbent Board
immediately prior to the execution of the agreement providing
for such merger, consolidation or reorganization constitute at
least two-thirds of the members of the board of directors of the
Surviving Corporation, or in the event that, immediately
following the consummation of such transaction, a corporation
beneficially owns, directly or indirectly, a majority of the
Voting Securities of the Surviving Corporation, the board of
directors of such corporation; and
c. no Person other than (i) Employer, (ii) any Subsidiary, (iii)
any employee benefit plan (or any trust forming a part thereof)
maintained by Employer, the Surviving Corporation, or any
Subsidiary, (iv) Countrywide Credit, or (v) any Person who,
immediately prior to such merger, consolidation or
reorganization had Beneficial Ownership of twenty five percent
(25%) or more of the combined voting power of the Surviving
Corporation's then outstanding Voting Securities or its common
stock;
(ii) A complete liquidation or dissolution of Employer; or
<PAGE>
(iii) The sale or other disposition of all or substantially all of the
assets of Employer to any Person (other than a transfer to a
Subsidiary or Countrywide Credit).
Notwithstanding the foregoing, a Change in Control shall not be deemed to occur
solely because any Person (the "Subject Person") acquired Beneficial Ownership
of more than the permitted amount of the then outstanding common stock or Voting
Securities as a result of the acquisition of common stock or Voting Securities
by Employer which, by reducing the number of shares of common stock or Voting
Securities then outstanding, increases the proportional number of shares
Beneficially Owned by the Subject Person; provided, however, that if a Change of
Control would occur (but for the operation of this sentence) as a result of the
acquisition of common stock or Voting Securities by Employer, and after such
share acquisition by Employer, the Subject Person becomes the Beneficial Owner
of any additional common stock or Voting Securities which increases the
percentage of the then outstanding common stock or Voting Securities
Beneficially Owned by the Subject Person, then a Change in Control shall occur.
<PAGE>
SUBSIDIARIES OF
CWM MORTGAGE HOLDINGS, INC.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
SUBSIDIARY STATE OF INCORPORATION OR OWNERSHIP
ORIGINATION
- --------------------------------------------------------------------------------
<S> <C> <C>
CWM MORTGAGE DELAWARE DIRECT
OBLIGATIONS II, INC.
- --------------------------------------------------------------------------------
CWM MORTGAGE DELAWARE DIRECT
OBLIGATIONS III, INC.
- --------------------------------------------------------------------------------
INDEPENDENT NATIONAL MORTGAGE DELAWARE DIRECT
CORPORATION
- --------------------------------------------------------------------------------
COUNTRYWIDE MORTGAGE TRUST DELAWARE BUSINESS TRUST INDIRECT
1987-I
- --------------------------------------------------------------------------------
COUNTRYWIDE MORTGAGE TRUST DELAWARE BUSINESS TRUST INDIRECT
1987-II
- --------------------------------------------------------------------------------
COUNTRYWIDE CASH FLOW BOND DELAWARE BUSINESS TRUST INDIRECT
TRUST
- --------------------------------------------------------------------------------
COUNTRYWIDE MORTGAGE TRUST DELAWARE BUSINESS TRUST INDIRECT
1993-I
- --------------------------------------------------------------------------------
COUNTRYWIDE MORTGAGE TRUST DELAWARE BUSINESS TRUST INDIRECT
1993-II
- --------------------------------------------------------------------------------
</TABLE>
EXHIBIT 21.1
<PAGE>
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated February 21, 1997, accompanying the consolidated
financial statements and schedules included in the Annual Report of CWM Mortgage
Holdings, Inc. (formerly Countrywide Mortgage Investments, Inc.) on Form 10-K
for the year ended December 31, 1996. We hereby consent to the incorporation by
reference of said report in the Registration Statements of CWM Mortgage
Holdings, Inc. on Form S-8 (File No. 33-8442, effective August 25, 1986, File
No. 33-32562, effective December 15, 1989 and File No. 33-56267, effective
October 31, 1994) and on Form S-3 (File No. 33-48159, effective June 14, 1992
and File No. 33-60137, effective August 8, 1995).
GRANT THORNTON LLP
Los Angeles, California
February 21, 1997
Exhibit 23.1
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 12,450
<SECURITIES> 0
<RECEIVABLES> 3,373,063
<ALLOWANCES> (15,028)
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 3,370,485
<CURRENT-LIABILITIES> 0
<BONDS> 264,080
0
0
<COMMON> 502
<OTHER-SE> 492,348
<TOTAL-LIABILITY-AND-EQUITY> 3,370,485
<SALES> 0
<TOTAL-REVENUES> 91,950
<CGS> 0
<TOTAL-COSTS> 22,963
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 12,991
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 68,987
<INCOME-TAX> 0
<INCOME-CONTINUING> 68,987
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 68,987
<EPS-PRIMARY> 1.51
<EPS-DILUTED> 1.51
</TABLE>
