SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the period ended March 31, 1994
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to ______________
Commission File Number 1-8972
COUNTRYWIDE MORTGAGE INVESTMENTS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 95-3983415
(State or other jurisdiction of (I. R. S. Employer Identification No.)
incorporation or organization)
35 NORTH LAKE AVENUE, PASADENA, 91101-1857
CALIFORNIA (Zip Code)
(Address of principal executive
offices)
Registrant's telephone number, including area code (800) 669-2300
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
requirements for the past 90 days. Yes X No
-------- --------
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the close of the period covered by this report.
Common stock outstanding as of March 31, 1994: 32,132,044 shares
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Countrywide Mortgage Investments, Inc. and Subsidiaries
Consolidated Balance Sheets
(Dollar amounts in thousands)
March 31, 1994 December 31, 1993
---------------- ------------------
(Unaudited)
ASSETS
Mortgage assets
Mortgage loans held for sale $913,441 $872,490
Collateral for CMOs (market value $320,967 in 1994 and
$413,000 in 1993) 323,974 402,503
Revolving warehouse lines of credit 67,160 92,058
Cash 5,700 6,866
Master servicing fees receivable 93,453 45,237
Other assets 26,005 20,999
---------------- ----------------
Total assets $ 1,429,733 $ 1,440,153
================ ================
LIABILITIES AND SHAREHOLDERS' EQUITY
Reverse-repurchase agreements $867,830 $806,557
Collateralized mortgage obligations 289,882 365,886
Accounts payable and accrued liabilities 19,640 17,102
---------------- ----------------
Total liabilities 1,177,352 1,189,545
Commitments and contingencies - -
Shareholders' equity
Common stock - authorized, 60,000,000 shares of
$.01 par value; issued and outstanding, 32,132,044 shares
in 1994 and 32,020,484 in 1993 321 320
Additional paid-in capital 257,162 256,587
Cumulative earnings 77,359 72,306
Cumulative distributions to shareholders (82,461) (78,605)
---------------- ----------------
Total shareholders' equity 252,381 250,608
---------------- ----------------
Total liabilities and shareholders' equity $ 1,429,733 $ 1,440,153
================ ================
The accompanying notes are an integral part of these statements.
Countrywide Mortgage Investments, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF EARNINGS
(Dollar amounts in thousands, except per share data)
(Unaudited)
Three Months Ended March 31,
-----------------------------
1994 1993
------------ ------------
REVENUES
Interest income
Mortgage loans held for sale $ 18,320 $ 1,455
Collateral for CMOs 6,249 11,481
Revolving warehouse lines of credit 1,641 -
Adjustable-rate mortgage-backed securities - 674
----------- -----------
Total interest income 26,210 13,610
Interest expense
Reverse-repurchase agreements 10,973 504
Collateralized mortgage obligations 8,643 13,421
----------- -----------
Total interest expense 19,616 13,925
Net interest income (expense) 6,594 (315)
Master servicing income 3,450 -
Master servicing and servicing hedge amortization (5,097) -
----------- -----------
Net master servicing expense (1,647) -
Gain on sale of mortgage loans and securities 4,677 917
----------- -----------
Net revenues 9,624 602
EXPENSES
Salaries and related expenses 1,712 -
General and administrative 1,439 376
Management fees to affiliate 112 108
----------- -----------
Total expenses 3,263 484
----------- -----------
Earnings before income taxes 6,361 118
Provision for income taxes 1,308 -
----------- -----------
NET EARNINGS $ 5,053 $ 118
=========== ===========
EARNINGS PER SHARE $0.16 $0.01
=========== ===========
Weighted average shares outstanding 32,107,771 13,980,792
=========== ===========
The accompanying notes are an integral part of these statements.
2
Countrywide Mortgage Investments, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar amounts in thousands)
(Unaudited)
Three Months Ended March 31,
------------------------------
1994 1993
-------------- -----------
Cash flows from operating activities:
Net earnings $ 5,053 $ 118
Adjustments to reconcile net earnings
to net cash provided by operating activities:
Amortization 7,812 1,537
Gain on sale of mortgage loans and securities (4,677) (917)
Change in other assets and liabilities (4,285) (5,613)
------------ -----------
Net cash provided by (used in) operating activities 3,903 (4,875)
Cash flows from investing activities:
Collateral for CMOs:
Purchases of mortgage loans subsequently securitized - (145,746)
Principal payments on collateral 70,417 93,560
Net change in GICs held by trustees 6,374 20,441
Proceeds from sale of collateral for CMOs, net - 2,641
------------ -----------
76,791 (29,104)
Decrease in short term investments - (24,000)
Purchases of mortgage loans held for sale (1,760,228) (105,291)
Proceeds from sale of mortgage loans and securities 1,695,372 86,669
Principal payments on mortgage loans and securities 28,584 -
Net increase in revolving warehouse lines of credit 24,898 -
Investment in master servicing fees receivable (51,980) -
------------ -----------
Net cash provided by (used in) investing activities 13,437 (42,622)
Cash flows from financing activities:
Collateralized mortgage obligations:
Proceeds from issuance of securities - 143,160
Principal payments on securities (76,499) (109,977)
------------ -----------
(76,499) 33,183
Net proceeds of reverse-repurchase agreements 61,273 45,477
Net proceeds from issuance of common stock 576 -
Cash dividends paid (3,856) (1,678)
------------ -----------
Net cash (used in) provided by financing activities (18,506) 76,982
------------ -----------
Net (decrease) increase in cash (1,166) 29,485
Cash at beginning of period 6,866 27
------------ -----------
Cash at end of period $ 5,700 $ 29,512
============ ===========
Supplemental cash flow information:
Cash paid for interest $ 16,261 $ 14,282
============ ===========
Cash paid for income taxes $ 800 -
============ ===========
The accompanying notes are an integral part of these statements.
3
COUNTRYWIDE MORTGAGE INVESTMENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1994
(UNAUDITED)
NOTE A - BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Rule 10-01 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. The consolidated financial statements include the accounts of
Countrywide Mortgage Investments, Inc. ("CMI") and each of the entities that is
consolidated with CMI for financial reporting purposes (collectively, the
"Company"). The Company's mortgage loan conduit operations are primarily
conducted through Countrywide Mortgage Conduit, Inc. ("CMC"), a taxable
corporation that is consolidated with CMI for financial reporting purposes but
is not consolidated for income tax purposes. All significant intercompany
balances and transactions have been eliminated in consolidation. Certain
reclassifications have been made to the financial statements for the period
ended March 31, 1993 to conform to the March 31, 1994 financial statement
presentation.
In the opinion of management, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation have been included.
Operating results for the three months ended March 31, 1994 are not necessarily
indicative of the results that may be expected for the year ending December 31,
1994. For further information, refer to the consolidated financial statements
and footnotes thereto included in the Company's annual report on Form 10-K for
the year ended December 31, 1993.
NOTE B - NEW OPERATION
During February and July of 1993, the Company commenced operations of its
mortgage loan conduit, CMC, and its warehouse lending program respectively.
Through its mortgage loan conduit operations, the Company purchases jumbo and
other non-conforming loans from mortgage bankers and other financial
institutions which generally retain the mortgage loan servicing rights. During
the first three months of 1994, the Company purchased $1.8 billion of such
mortgage loans. The loans purchased were financed on an interim basis using
short-term borrowings in the form of reverse-repurchase agreements which
borrowings amounted to $867.8 million at March 31, 1994. In general, the
Company ultimately sells the loans in the form of real estate mortgage
investment conduits ("REMICs") or, alternatively, invests in the loans on a
long-term basis using financing provided by collateralized mortgage obligations
("CMOs"). During the first three months of 1994, the Company sold $1.7 billion
of mortgage loans through the issuance of REMIC securities. At March 31, 1994,
the Company was committed to sell approximately $460.0 million of mortgage loans
in connection with the issuance of REMIC securities and whole loan sales in the
second quarter of 1994.
The Company's warehouse lending program provides secured short-term revolving
financing to small and medium size mortgage bankers to finance mortgage loans
from the closing of the loan until it is sold to a permanent investor. At March
31, 1994, the Company had extended committed lines of credit under this program
in the aggregate amount of $256.5 million, of which $67.2 million was
outstanding.
4
NOTE C - MORTGAGE LOANS HELD FOR SALE
Mortgage loans held for sale are carried at the lower of cost or estimated
market value determined on an aggregate basis. The cost of mortgage loans is
adjusted by gains and losses generated from corresponding hedging transactions
entered into to protect the inventory value from increases in interest rates.
Hedge positions are also used to protect the pipeline of loan purchases in
process 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. At
March 31, 1994, these investments had an approximate market value of $913.4
million and a cost of $930.4 million.
NOTE D - COLLATERAL FOR CMOS
Collateral for CMOs consists of fixed-rate mortgage loans secured by first liens
(enforceable through foreclosure proceedings) on one-to-four family residential
real estate and of mortgage-backed securities supported by pools of such
mortgage loans. All principal and interest on the collateral is remitted to a
trustee and, together with any reinvestment income earned thereon, is available
for payment on the CMOs. Generally, any default on a mortgage loan which is
the basis for a foreclosure action is covered (up to an aggregate benefit limit)
under a pool insurance policy provided by a private mortgage insurer.
Furthermore, the Company's mortgage-backed securities are guaranteed as to the
repayment of principal and interest of the underlying mortgages by the Federal
Home Loan Mortgage Corporation. The maximum amount of credit risk related to
the Company's investment in mortgage loans is represented by the outstanding
principal balance of the mortgage loans plus accrued interest.
Collateral for CMOs is summarized as follows:
(Dollar amounts in thousands)
March 31, December 31,
1994 1993
-------- -----------
Mortgage loans $122,517 $154,152
Mortgage-backed securities 179,076 217,856
GICs held by trustees 15,295 21,670
Accrued interest receivable 3,350 4,337
-------- --------
320,238 398,015
Unamortized premiums, net 3,736 4,488
-------- --------
Collateral for CMOs $323,974 $402,503
======== ========
The mortgage loans and mortgage-backed securities, together with guaranteed
investment contracts ("GICs"), which are all held by trustees, collateralized 17
series of CMOs at March 31, 1994. A time lag of 24 to 45 days exists from the
date the underlying mortgage is prepaid to the date the Company actually
receives the cash related to the prepayment. During this interim period, the
Company does not earn interest income on the portion of the mortgage loan or
mortgage-backed security that has been prepaid.
As of March 31, 1994 and December 31, 1993, the aggregate market value of
collateral for CMOs was estimated to be $321.0 million and $413.0 million,
respectively. This estimate was determined based upon quoted market prices from
dealers and brokers 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 real estate investment trust ("REIT"), the
Company's ability to sell these assets for gain also is subject to
5
restrictions under the Internal Revenue Code and any such sale may result in
substantial additional tax liability.
NOTE E - MASTER SERVICING FEES RECEIVABLE
The Company sells substantially all of the mortgage loans it purchases and
retains the master servicing rights thereto. These master servicing rights
entitle the Company to a future stream of cash flows based on the outstanding
principal balance of the mortgage loans and the related contractual master
service 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 service fee
rate over the estimated servicing lives of the loans. The adjustment results in
a receivable that is realized through receipt of excess master servicing fees
over time. Master servicing fees receivable are amortized into income over the
lives of the underlying mortgages using the effective yield method adjusted for
the effects of prepayments. The Company intends to hold the master servicing
fees receivable for investment.
NOTE F - INCOME TAXES
The Company intends to operate so as to continue to qualify as a REIT under the
requirements of the Internal Revenue Code. Requirements for qualification as a
REIT include various restrictions on ownership of its stock, requirements
concerning distribution of taxable income and certain restrictions on the nature
of its assets and sources of income. A REIT must distribute at least 95% of its
taxable income to its shareholders, the distribution of which may extend until
timely filing of its tax return in its subsequent taxable year. Qualifying
distributions of its taxable income are deductible by a REIT in computing its
taxable income. Accordingly, no provision for income taxes has been made for
the parent company and its qualified REIT subsidiaries. If in any tax year the
Company 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 the Company would 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.
The provision for income taxes in the accompanying financial statements is
computed using the liability method and relates only to the earnings of CMC, a
taxable corporation that is consolidated with CMI for financial reporting
purposes but is not consolidated for income tax purposes. Taxable earnings of
CMC are subject to state and federal income taxes at the applicable statutory
rates.
NOTE G - SUBSEQUENT EVENTS
On April 19, 1994, the Board of Directors declared a cash dividend of $0.16 per
share to be paid on May 24, 1994 to shareholders of record on May 2, 1994.
6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
During the first quarter of 1993, the Company commenced operations of a mortgage
loan conduit which purchases mortgage loans from eligible sellers who generally
retain the servicing rights. These activities are primarily conducted through
the Company's taxable subsidiary, Countrywide Mortgage Conduit, Inc. ("CMC").
The Company generally purchases mortgage loans originated in regions of the
country with higher volumes of jumbo and non-conforming mortgage loans,
including California. As the mortgage loans are accumulated, they are generally
financed through short-term borrowing sources such as reverse-repurchase
agreements. When a sufficient volume of mortgage loans with similar
characteristics has been accumulated, the loans are securitized through the
issuance of mortgage-backed securities in the form of real estate mortgage
investment conduits ("REMICS") or collateralized mortgage obligations ("CMOs")
or resold in bulk whole loan sales. The Company's principal sources of revenue
from its new mortgage conduit operations are the net interest income earned from
holding the mortgage loans during the accumulation phase and gains or losses on
the REMIC or whole loan sale transactions. Alternatively, if the Company elects
to invest in the mortgage loans on a long-term basis using financing provided by
CMOs, the Company recognizes a net yield on these investments over time. In
addition, the Company earns fee income and net interest income through its
warehouse lending program which provides warehouse lines of credit to third
party mortgage loan originators.
Historically, the Company's principal source of earnings has been net interest
income generated from its mortgage portfolio which was primarily financed
through the issuance of CMOs (the "CMO Portfolio"). The amount of net interest
earned on the CMO Portfolio is directly affected by the rate of principal
repayment (including prepayments) of the related mortgage loans as discussed
below.
During all of 1993 and the first quarter of 1994, low mortgage interest rates
resulted in continued high prepayment rates which adversely impacted the net
interest earned on the CMO Portfolio. When prevailing mortgage interest rates
are low relative to interest rates of existing mortgage loans, prepayments on
the underlying mortgage loans generally tend to increase as mortgagors refinance
their existing loans. The cash flow generated by these prepayments is used to
repay the CMOs which are collateralized by these mortgage loans. The CMO
Portfolio experienced substantial prepayments which resulted in significantly
decreased net earnings, and since mortgage loan premiums, original issue
discount and bond issuance costs were required to be amortized, losses were
ultimately realized on the portfolio. Continued negative performance of the CMO
Portfolio will adversely impact the future earnings of the Company. Although an
increase in interest rates may decrease prepayments and mitigate the negative
impact on the Company's earnings from its CMO Portfolio, higher interest rates
may otherwise adversely affect the Company's new mortgage conduit and warehouse
lending operations.
FINANCIAL CONDITION
CONDUIT AND WAREHOUSE LENDING OPERATIONS: Through its mortgage loan conduit
operations, the Company purchases jumbo and other nonconforming loans from
mortgage bankers and other financial institutions which generally retain the
mortgage loan servicing rights. During the quarter ended March 31, 1994, the
Company purchased $1.8 billion of such mortgage loans, which were financed on an
interim basis using equity and short-term borrowings in the form of reverse-
repurchase agreements. In general, the Company sells the loans in the form of
REMICs or whole loan sales or alternatively, invests in the loans on a long-term
basis using financing provided by CMOs. During the quarter ended March 31,
1994, the Company sold $1.7 billion of mortgage loans through the issuance of
REMIC securities and the bulk sale of whole loans. At March 31, 1994, the
Company was committed to sell approximately $460.0 million of mortgage loans in
connection with the issuance of REMIC securities and the sale of whole loans in
the second quarter of 1994.
7
The Company's warehouse lending program provides secured short-term revolving
financing to small- and medium-size mortgage bankers to finance mortgage loans
from the closing of the loan until it is sold to a permanent investor. At March
31, 1994, the Company had extended committed lines of credit under this program
in the aggregate amount of $256.5 million, of which $67.2 million was
outstanding. Reverse-repurchase agreements associated with the financing of
warehouse lines of credit and mortgage loans held for sale totaled $867.8
million at March 31, 1994.
CMO PORTFOLIO: As of March 31, 1994, the CMO Portfolio was comprised of 15
series of CMOs issued from the Company's inception through 1990 ("Pre-1993 CMO
Portfolio"). In 1993, two new series of CMOs were issued in connection with the
Company's new mortgage conduit operation. Disclosures relative to the CMO
Portfolio include both groups of CMOs.
Collateral for CMOs decreased from $402.5 million at December 31, 1993 to $324.0
million at March 31, 1994. This decrease of $78.5 million included repayments
(including prepayments and premium and discount amortization) of $71.1 million
and a decrease in guaranteed investment contracts ("GICs") held by trustees and
accrued interest receivable of $6.4 million and $987,000 respectively. The
Company's CMOs outstanding decreased to $289.9 million at March 31, 1994 from
$365.9 million at December 31, 1993. This decrease of $76.0 million resulted
from principal payments (including discount amortization) on CMOs of $75.2
million and a decrease in accrued interest payable on CMOs of $800,000.
When interest rates decline, prepayments on the underlying mortgage loans
generally tend to increase as mortgagors refinance their existing loans. The
cash flow generated by these unanticipated prepayments is ultimately used by the
Company to repay the CMOs since they are collateralized by these mortgages.
When interest rates decline and prepayments increase, the net yield achieved
from the Company's net investment in the CMO Portfolio is adversely impacted due
to factors which are explained below.
RESULTS OF OPERATIONS
QUARTER ENDED MARCH 31, 1994 COMPARED TO QUARTER ENDED MARCH 31, 1993
NET EARNINGS: The Company's net earnings were $5.1 million or $0.16 per share,
based on 32,107,771 weighted average shares outstanding for the quarter ended
March 31, 1994 compared to $118,000 or $0.01 per share, based on 13,980,792
weighted average shares outstanding for the quarter ended March 31, 1993. The
increase in net earnings of $4.9 million was due to an increase in earnings of
$6.1 million associated with the Company's new mortgage conduit and warehouse
lending operations offset by a decrease in earnings of $1.2 million primarily
associated with the Pre-1993 CMO Portfolio. In addition, the Company's fixed
organizational expenses decreased by $66,000.
The decrease in net earnings on the Pre-1993 CMO and ARM Portfolios was
primarily due to decreases in net interest income and gains of approximately
$200,000 and $900,000, respectively. The increase in earnings associated with
the operation of the Company's new mortgage loan conduit and warehouse lending
program were primarily due to an increase in net interest income and net master
servicing expense of $5.7 million and an increase in gains of $4.4 million,
offset by an increase in expenses of $2.7 million and a provision for income
taxes of $1.3 million. The provision for income taxes for the three months
ended March 31, 1994 was made because the earnings of CMC are subject to state
and federal income tax.
The net earnings of the Company for the quarter ended March 31, 1993 did not
include certain personnel and other operating expenses which were absorbed by
Countrywide Asset Management Corporation, the manager of the Company (the
"Manager"), under the terms of its Management Agreement. The Company began
paying all expenses of its new operations in June 1993.
8
INTEREST INCOME: Total interest income was $26.2 million for the quarter ended
March 31, 1994 and $13.6 million for the quarter ended March 31, 1993. This
increase in interest income of $12.6 million is due to an increase in interest
on mortgage loans held for sale and interest on revolving warehouse lines of
credit of $16.9 million and $1.6 million, respectively, offset by a decrease in
interest income on collateral for CMOs and adjustable-rate mortgage-backed
securities of $5.2 million and $700,000 respectively.
Interest income earned on mortgage loans held for sale and revolving warehouse
lines of credit was $18.3 million and $1.6 million, respectively, for the first
quarter of 1994. The average principal balance of mortgage loans held for sale
and revolving warehouse lines of credit outstanding approximated $1.1 billion
and $88.3 million, respectively, for the first quarter of 1994 and earned
interest at an effective yield of approximately 6.50% and 7.44%, respectively.
The conduit and warehouse lending operations commenced in February and July of
1993, respectively; therefore, there was an insignificant amount of income in
the first quarter of 1993 related to these operations.
Interest income on collateral for CMOs was $6.2 million and $11.5 million for
the quarters ended March 31, 1994 and 1993, respectively. The decline was
primarily attributable to a decrease in the average aggregate principal amount
of collateral for CMOs outstanding, from $529.4 million for the quarter ended
March 31, 1993 to $340.9 million for the quarter ended March 31, 1994, combined
with a decrease in the effective yield earned on the collateral from 8.68% in
the first quarter of 1993 to 7.33% in the first quarter of 1994. The decrease
in the average balance of collateral for CMOs and the effective interest yield
earned thereon was due to the continued low interest rate environment
experienced throughout 1993 and the first quarter of 1994. This low interest
rate environment resulted in significant prepayment activity. In a declining
interest rate environment, loans with higher interest rates prepay faster than
loans with lower interest rates, resulting in a lower overall effective yield.
In addition, the interest income was reduced on collateral for CMOs by the
amortization of premiums paid in connection with acquiring the portfolio and a
delay in the receipt of prepayments and temporary investment in lower yielding
short-term investments (GICs) until such amounts were used to repay CMOs.
Interest income on adjustable-rate mortgage securities amounted to $674,000 in
the first quarter of 1993. These securities were liquidated during that same
quarter. The net proceeds from the sale of these securities were deployed in
the new mortgage loan conduit and warehouse lending operations.
INTEREST EXPENSE: For the three months ended March 31, 1994 and 1993, total
interest expense was $19.6 million and $13.9 million, respectively. This
increase in interest expense of $5.7 million was due to an increase in interest
expense on reverse-repurchase agreements of $10.5 million offset by a decrease
in interest expense on CMOs of $4.8 million.
Interest expense on reverse-repurchase agreements financing mortgage loans held
for sale and revolving warehouse lines of credit was $11.0 million or 4.29% of
the average balance outstanding for the three months ended March 31, 1994.
Interest expense on CMOs was $8.6 million and $13.4 million for the three months
ended March 31, 1994 and 1993, respectively. This decrease was primarily
attributable to a decrease in average aggregate CMOs outstanding from $500.4
million for the quarter ended March 31, 1993 to $330.2 million for the quarter
ended March 31, 1994 and a decrease in the weighted average cost of CMOs from
10.73% in the first quarter of 1993 to 10.47% in the first quarter of 1994. The
decrease in the average balance of CMOs was directly related to the prepayment
activity on collateral for CMOs discussed above. The prepayments are ultimately
used to repay the related CMOs. In general, the class of each series of CMO
with the shortest maturity receives all principal payments until it is repaid in
full. After the first class is
9
retired, the second class will receive all principal payments until retired and
so forth. The CMO bonds issued prior to 1993 were structured with the shortest
maturity class generally having the lowest interest rate and interest rates
increasing as the maturity of the class increased. Therefore, prepayments
generally must be applied to the class with the lowest interest rate, resulting
in repayment of CMO classes with relatively low interest rates and increasing
the weighted average interest rate of the remaining outstanding CMOs. However,
the two CMOs issued in March and April of 1993 have much lower interest rates
than the Pre-1993 CMO Portfolio and represent a higher portion of the average
CMO balance for the first quarter of 1994 compared to 1993, resulting in a
decrease in the weighted average cost of the CMO Portfolio.
MASTER SERVICING EXPENSE, NET: During 1993, as a result of the new mortgage
conduit operations, the Company began earning master servicing fee income. At
March 31, 1994, the Company master serviced loans with principal balances
aggregating $4.6 billion. The growth in the Company's master servicing
portfolio during the first quarter of 1994 was the result of loan production
volume from the Company's new conduit operations, partially offset by
prepayments of mortgage loans. The weighted average interest rate of the
mortgage loans in the Company's master servicing portfolio at March 31, 1994 was
7.17%. It is the Company's strategy to build and retain its master servicing
portfolio because of the returns the Company can earn from such investment and
because the Company believes that master servicing income is countercyclical to
loan production income. In periods of rising interest rates, prepayments tend
to decline and income from the master servicing portfolio should increase. In
periods of decreasing interest rates, prepayments tend to increase. To mitigate
the effect on earnings of higher amortization (which is deducted from master
servicing income) resulting from increased prepayment activity, the Company
purchases call options that increase in value when interest rates decline.
Master servicing income was $3.5 million for the three months ended March 31,
1994. This was offset by amortization of master servicing fees and servicing
hedge of $5.1 million resulting in a net master servicing expense of $1.6
million for the first quarter of 1994.
SALARIES AND RELATED EXPENSES: Salaries and related expenses were $1.7 million
for the three months ended March 31, 1994. The Company incurred no salaries and
related expense during the three months ended March 31, 1993. This increase
was associated with the implementation of the Company's new mortgage conduit and
warehouse lending operations. As of March 31, 1994, the Manager employed
approximately 92 employees dedicated to the Company's operations whereas in the
prior year there were approximately two. Prior to the implementation of the new
business plan, personnel costs were minimal due to the passive nature of
operations and were absorbed by the Manager as a component of the management
fee.
GENERAL AND ADMINISTRATIVE EXPENSES: General and administrative expenses for
the three months ended March 31, 1994 and 1993 were $1.4 million and $400,000,
respectively. This increase of $1.0 million was primarily attributed to costs
related to the new mortgage conduit and warehouse lending operations. The
Company anticipates that expenses will continue to increase as the new
operations expand and develop. Included in the above amounts are approximately
$160,000 and $46,000 attributable to the administration of CMOs for the three
months ended March 31, 1994 and 1993, respectively. The increase is primarily
attributable to two additional CMOs that were issued during the first half of
1993.
MANAGEMENT FEES: For the three months ended March 31, 1994, management fees
were $112,000 compared to $108,000 for the three months ended March 31, 1993.
Under the agreement with the Company's Manager, management fees for 1993 were
waived. Accordingly, such fees were reflected as an expense and a corresponding
capital contribution for the quarter ended March 31, 1993.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has used proceeds from the issuance of CMOs, reverse-
repurchase agreements, other borrowings and proceeds from the issuance of common
stock to meet its working capital needs. In connection with new mortgage
conduit operations, the Company has begun to issue REMIC securities through CMC
to help meet such needs. The Company may also borrow collateral or funds from
Countrywide Funding Corporation ("CFC") to meet collateral maintenance
requirements under reverse-repurchase agreements or margin calls on forward
securities sales. These borrowings are made pursuant to a $10.0 million one-
year, unsecured line of credit which expires on September 30,
10
1994 subject to extension by CFC and the Company. As of March 31, 1994, the
Company had no outstanding borrowings under this agreement. The Company has
established a committed reverse-repurchase facility with an aggregate amount of
up to $100.0 million for its mortgage conduit operations, which is in the
process of being renewed, and an additional facility in the aggregate amount of
up to $100.0 million for its warehouse lending program that expires in September
1994. The Company also has obtained credit approval from the same lender to
enter into additional reverse repurchase agreements associated with the mortgage
conduit operations, under which individual transactions and their terms will be
subject to agreement by the parties based upon market conditions at the time of
each transaction. The maximum balance outstanding during the first quarter of
1994 was $1.4 billion and as of March 31, 1994 the Company had entered into
reverse-repurchase agreements with an aggregate of $867.8 million outstanding.
In February 1994, the Company signed a commitment letter for a master repurchase
agreement to provide a committed short-term credit line in the amount of $500.0
million and an additional $300.0 million on an uncommitted basis. The agreement
expires in January 1996. In May 1994, the Company signed another commitment
letter for a master repurchase agreement to provide a committed short-term
credit line in the amount of $300.0 million. The agreement expires in May 1996.
The Company, to the extent permitted by its by-laws, may issue other debt
securities or incur other types of indebtedness from time to time.
The collateral maintenance requirements under reverse-repurchase agreements
could adversely affect the Company's liquidity in the event of a significant
decrease in the market value of the mortgage portfolio financed under such
reverse-repurchase agreements. However, the Company has implemented a hedging
strategy for its mortgage portfolio which to some extent may mitigate the effect
of adverse market movement.
The REIT provisions of the Internal Revenue Code restrict the Company's ability
to retain earnings and thereby replenish the capital committed to its mortgage
portfolio by requiring the Company to distribute to its shareholders
substantially all of its income from operations.
Management believes that the cash flow from operations and the current and
potential financing arrangements are sufficient to meet current liquidity
requirements.
INFLATION
Interest rates often increase during periods of rising inflation. Higher
interest rates may depress the market value of the Company's investment
portfolio if the yield on such investments does not keep pace with increases in
interest rates. As a result of decreased market values it could be necessary
for the Company to borrow additional funds and pledge additional assets to
maintain financing for its investments that have not been financed to maturity
through the issuance of CMOs or other debt securities. Increases in short-term
borrowing rates relative to rates earned on investments that have not been
financed to maturity through the issuance of CMOs or other debt securities may
also adversely affect the Company's earnings. However, the Company has
implemented a hedging strategy which may mitigate this adverse effect. In
addition, high levels of interest rates tend to decrease the rate at which
mortgages prepay. A decrease in the rate of prepayments may lengthen the
estimated average lives of the underlying mortgages supporting master servicing
fees receivable and for classes of the CMOs issued by the Company and may result
in higher residual cash flows from the CMOs than would otherwise have been
obtained. However, higher rates of interest may also discourage potential
mortgagors from borrowing or refinancing mortgage loans, thus decreasing the
volume of loans available to be purchased through the company's mortgage conduit
operations.
11
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
Exhibits
--------
None
Reports on Form 8-K.
--------------------
None
12
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Pasadena, State of California, on May 12, 1994.
COUNTRYWIDE MORTGAGE INVESTMENTS, INC.
By: /Michael W. Perry
-----------------
Michael W. Perry
Senior Vice President and Chief Operating
Officer
By: /Carmella L. Grahn
-------------------
Carmella L. Grahn
Chief Accounting Officer
13