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 June 30, 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
CWM MORTGAGE HOLDINGS, INC.
(Formerly Countrywide Mortgage Investments, Inc.)
(Exact name of registrant as specified in its charter)
DELAWARE 95-3983415
(State or other jurisdiction of (I. R. S. Employer
incorporation or organization) 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
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 June 30, 1994: 32,145,031 shares
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CWM Mortgage Holdings, Inc. and Subsidiaries
Consolidated Balance Sheets
(Dollar amounts in thousands)
(Unaudited)
June 30, 1994 December 31, 1993
--------------- ------------------
ASSETS
Mortgage assets
Mortgage loans held for sale $ 680,324 $ 872,490
Mortgage loans held for investment 167,143 -
Collateral for CMOs (market value $272,958 in 1994 and
$413,000 in 1993) 276,538 402,503
Revolving warehouse lines of credit 49,502 92,058
Cash 8,527 6,866
Master servicing fees receivable 124,430 45,237
Due from affiliate 19,400 -
Other assets 57,106 20,999
--------------- ---------------
Total assets $ 1,382,970 $ 1,440,153
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Reverse-repurchase agreements $ 867,417 $ 806,557
Collateralized mortgage obligations 244,223 365,886
Accounts payable and accrued liabilities 18,302 17,102
-------------- --------------
Total liabilities 1,129,942 1,189,545
Commitments and contingencies - -
Shareholders' equity
Common stock - authorized, 60,000,000 shares of
$.01 par value; issued and outstanding, 32,145,031 shares
in 1994 and 32,020,484 in 1993 321 320
Additional paid-in capital 257,241 256,587
Cumulative earnings 83,070 72,306
Cumulative distributions to shareholders (87,604) (78,605)
-------------- --------------
Total shareholders' equity 253,028 250,608
-------------- --------------
Total liabilities and shareholders' equity $ 1,382,970 $ 1,440,153
============== ==============
The accompanying notes are an integral part of these statements.
2
CWM Mortgage Holdings, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF EARNINGS
(Dollar amounts in thousands, except per share data)
(Unaudited)
Quarter Ended June 30, Six Months Ended June 30,
------------------------- --------------------------
1994 1993 1994 1993
---------- ---------- ---------- -----------
REVENUES
Interest income
Mortgage loans held for sale $12,935 $4,255 $31,080 $5,710
Mortgage loans held for investment 2,709 - 2,709 -
Collateral for CMOs 5,497 12,359 11,746 23,840
Revolving warehouse lines of credit 838 157 2,479 157
Other 543 - 746 674
---------- ---------- ---------- ----------
Total interest income 22,522 16,771 48,760 30,381
Interest expense
Reverse-repurchase agreements 10,298 1,926 21,271 2,430
Collateralized mortgage obligations 7,047 15,377 15,690 28,798
---------- ---------- ---------- ----------
Total interest expense 17,345 17,303 36,961 31,228
Net interest income (expense) 5,177 (532) 11,799 (847)
Master servicing income 6,451 - 10,224 -
Master servicing and servicing hedge amortization (4,272) - (9,720) -
---------- ---------- ---------- ----------
Net master servicing income 2,179 - 504 -
(Loss) gain on sale of mortgage loans and securities (3,931) 1,112 746 2,029
Gain on sale of servicing 5,834 - 5,834 -
---------- ---------- ---------- ----------
Net revenues 9,259 580 18,883 1,182
EXPENSES
Salaries and related expenses 2,072 - 3,783 -
General and administrative 1,818 431 3,259 807
Management fees to affiliate 92 95 203 203
---------- ---------- ---------- ----------
Total expenses 3,982 526 7,245 1,010
---------- ---------- ---------- ----------
Earnings before income taxes 5,277 54 11,638 172
Income tax (benefit) provision (434) - 874 -
---------- ---------- ---------- ----------
NET EARNINGS $ 5,711 $ 54 $ 10,764 $ 172
========== ========== ========== ==========
EARNINGS PER SHARE $ 0.18 $ 0.00 $ 0.34 $ 0.01
========== ========== ========== ==========
Weighted average shares outstanding 32,141,443 13,981,537 32,123,456 13,981,293
========== ========== =========== ==========
The accompanying notes are an integral part of these statements.
3
CWM Mortgage Holdings, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar amounts in thousands)
(Unaudited)
Six Months Ended June 30,
-------------------------------
1994 1993
---------- -----------
Cash flows from operating activities:
Net earnings $ 10,764 $ 172
Adjustments to reconcile net earnings
to net cash provided by operating activities:
Amortization 14,047 4,712
Gain on sale of mortgage loans and securities (746) (2,029)
Gain on sale of servicing (5,834) -
Change in other assets and liabilities (43,486) (10,703)
------------ ----------
Net cash provided by (used in) operating activities (25,255) (7,848)
Cash flows from investing activities:
Collateral for CMOs:
Purchases of mortgage loans subsequently securitized - (244,108)
Principal payments on collateral 116,999 178,863
Net change in GICs held by trustees 6,162 24,429
Proceeds from sale of collateral for CMOs, net - 2,641
------------ ----------
123,161 (38,175)
Purchases of mortgage loans held for sale (2,920,500) (635,453)
Purchases of mortgage loans held for investment (37,682) -
Proceeds from sale of mortgage loans and securities 2,951,531 270,352
Principal payments on mortgage loans and securities 32,506 3,441
Net decrease (increase) in revolving warehouse lines of credit 42,556 (16,698)
Investment in master servicing fees receivable (84,992) -
Purchase of servicing (14,573) -
Proceeds from sale of servicing 5,168 -
------------ ---------
Net cash provided by (used in) investing activities 97,175 (416,533)
Cash flows from financing activities:
Collateralized mortgage obligations:
Proceeds from issuance of securities - 239,936
Principal payments on securities (122,775) (194,737)
------------ ---------
(122,775) 45,199
Net increase in reverse-repurchase agreements 60,860 391,322
Net proceeds from issuance of common stock 655 -
Cash dividends paid (8,999) (3,383)
------------ ---------
Net cash (used in) provided by financing activities (70,259) 433,138
----------- ---------
Net increase in cash 1,661 8,757
Cash at beginning of period 6,866 27
----------- ----------
Cash at end of period $ 8,527 $ 8,784
=========== =========
Supplemental cash flow information:
Cash paid for interest $ 31,465 $ 29,484
=========== ==========
Cash paid for income taxes $ 1 -
=========== ==========
The accompanying notes are an integral part of these statements.
4
CWM MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 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 Company has elected to qualify as a real estate investment
trust ("REIT") under the requirements of the Internal Revenue Code, and the
Company intends to operate so as to continue to so qualify.
On May 17, 1994, the shareholders approved a change in the Company's name from
Countrywide Mortgage Investments, Inc. to CWM Mortgage Holdings, Inc. ("CWM").
In addition, the name of the Company's subsidiary, Countrywide Mortgage Conduit,
has been changed to Independent National Mortgage Corporation ("INMC"). The
Company's warehouse lending operation, formerly a division of CWM, was
separately incorporated as a Delaware corporation. This wholly owned subsidiary
was named Warehouse Lending Corporation of America, Inc. ("WLCA").
The consolidated financial statements include the accounts of CWM and each of
the entities that is consolidated with CWM for financial reporting purposes
(collectively, the "Company"). The Company's mortgage loan conduit operations
are primarily conducted through INMC, a taxable corporation that is consolidated
with CWM for financial reporting purposes but is not consolidated for income tax
purposes. The Company's warehouse lending operations are conducted through WLCA,
a wholly owned qualified REIT subsidiary that is consolidated for both financial
reporting and 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 June 30, 1993 to
conform to the June 30, 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 six months ended June 30, 1994 are not necessarily
indicative of the results that may be expected for the year ending December 31,
1994. For further information with respect to financial reporting, 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 - MORTGAGE LOANS HELD FOR INVESTMENT
In April of 1994, the Company began a program to acquire mortgage loans to be
held as long-term investments. In conjunction with this program, the Company
transferred certain mortgage loans held for sale to mortgage investments to be
held as long-term investments. The loans were transferred to mortgage loans
held for investment at a value that approximated the market value at the time of
the transfer. The Company has the intent and ability to hold these loans until
maturity. These mortgage investments are loans secured by mortgages on single-
family residential real estate. The premiums and discounts and the market
valuation related to these loans are amortized over the estimated life of the
loan using the level-yield method.
NOTE C - RELATED PARTY TRANSACTIONS
The Company has entered into an agreement (the "Management Agreement") with
Countrywide Asset Management Corporation, a subsidiary of Countrywide Credit
Industries, (the "Manager"), to advise the Company on various facets of its
business and manage its operations, subject to supervision by the Company's
Board of Directors. The Manager has entered into a subcontract with its
affiliate, Countrywide Funding Corporation ("CFC"), to perform such services for
the Company as the Manager deems necessary.
5
During June 1994 the Company sold approximately $1.8 billion of its purchased
servicing portfolio to CFC. The Company recorded a gain on the sale of these
servicing rights of $5.8 million. Total proceeds from the sale amounted to
$24.6 million of which $19.4 million was outstanding as of June 30, 1994. This
balance is receivable in installments with the final payment due within 30 days
of the transfer date, in September 1994.
NOTE D - SUBSEQUENT EVENT
On July 20, 1994, the Board of Directors declared a cash dividend of $0.18 per
share to be paid on August 23, 1994 to shareholders of record on August 2,
1994.
6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
On May 17, 1994, the shareholders approved a change in the Company's name from
Countrywide Mortgage Investments, Inc. to CWM Mortgage Holdings, Inc. In
addition, the name of the Company's subsidiary, Countrywide Mortgage Conduit has
been changed to Independent National Mortgage Corporation. The Company's
warehouse lending was formally incorporated as a Delaware Corporation and named
Warehouse Lending Corporation of America, Inc.
During the first quarter of 1993, the Company commenced operations of a mortgage
loan conduit which purchases mortgage loans from mortgage bankers and financial
institutions which generally retain the servicing rights. 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 generally are securitized through the issuance of mortgage-backed
securities in the form of REMIC securities or CMOs or resold in bulk whole loan
sales. The Company's principal sources of revenue from its 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 securities 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 or
other sources, 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.
Prior to 1993, 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. However, the
remaining loans typically carry a lower coupon, and the interest spread between
these loans and the underlying financing thus narrows. The CMO Portfolio
experienced substantial prepayments during all of 1993 and the beginning of
1994, and since mortgage loan premiums, original issue discount and bond
issuance costs were required to be amortized, losses were ultimately realized on
the portfolio. Due to a decrease in the size of the CMO portfolio and the
decrease in prepayment activity during the quarter ended June 30, 1994, there
was a decrease in the net interest expense realized on the portfolio during the
second quarter of 1994 compared to the second quarter of 1993. Although the
recent increase in interest rates has decreased prepayment activity and the
negative impact on the Company's earnings from its CMO Portfolio, higher
interest rates have had an adverse affect on the Company's new mortgage conduit
and warehouse lending operations. Higher interest rates have resulted in
increased competition in the market for mortgage-backed securities, increased
hedging costs and lower margins. Higher interest rates have also resulted in a
decrease in the volume of mortgage loans purchased and warehouse lines
outstanding. In addition, the increase in interest rates has affected the
types of loans currently being purchased, as the market shifted from primarily
fixed rate mortgages to adjustable rate mortgages, which has resulted in the
reduction of net interest income earned during the loan accumulation phase.
7
FINANCIAL CONDITION
CONDUIT AND WAREHOUSE LENDING OPERATIONS: During the six months ended June 30,
1994, the Company purchased $2.9 billion of mortgage loans through its mortgage
loan conduit operations, which were financed on an interim basis using equity
and short-term borrowings in the form of reverse-repurchase agreements. During
the six months ended June 30, 1994, the Company sold $3.0 billion of mortgage
loans through the issuance of REMIC securities and bulk whole loan sales. At
June 30, 1994, the Company was committed to sell approximately $526.9 million of
mortgage loans in the third quarter of 1994. In addition, the Company held
$167.1 million in mortgage loans as long term-investments at June 30, 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. In
addition, financing is also provided for the retention or acquisition of
servicing rights as well as the carrying of mortgage loans pending foreclosure
and/or repurchase from an investor. At June 30, 1994, the Company had extended
committed lines of credit under this program in the aggregate amount of $264.5
million, of which $49.5 million was outstanding. Reverse-repurchase agreements
associated with the financing of warehouse lines of credit totaled $40.9 million
at June 30, 1994.
CMO PORTFOLIO: As of June 30, 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 $276.5
million at June 30, 1994. This decrease of $126.0 million included repayments
(including prepayments and premium and discount amortization) of $118.4 million
and a decrease in guaranteed investment contracts ("GICs") held by trustees and
accrued interest receivable of $6.2 million and $1.4 million, respectively. The
Company's CMOs outstanding decreased to $244.2 million at June 30, 1994 from
$365.9 million at December 31, 1993. This decrease of $121.7 million resulted
from principal payments (including discount amortization) on CMOs of $120.4
million and a decrease in accrued interest payable on CMOs of $1.3 million.
When interest rates decline, prepayments on the underlying mortgage loans
generally tend to increase as mortgagors refinance their existing loans. The
cash flow generated by these unanticipated prepayments is ultimately used by 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 JUNE 30, 1994 COMPARED TO QUARTER ENDED JUNE 30, 1993
NET EARNINGS: The Company's net earnings were $5.7 million or $0.18 per share,
based on 32,141,443 weighted average shares outstanding for the quarter ended
June 30, 1994, as compared to $54,000 or $0.00 per share, based on 13,981,537
weighted average shares outstanding for the quarter ended June 30, 1993. The
increase in net earnings of $5.7 million was primarily due to an increase in
earnings of $4.2 million associated with the Company's new mortgage conduit and
warehouse lending operations combined with a decrease in the loss of $1.5
million associated with the CMO Portfolio.
The increase in earnings associated with the operation of the Company's new
mortgage loan conduit and warehouse lending program were primarily due to a gain
on the sale of servicing of $5.8 million during the quarter, an increase in net
interest income and net master servicing income of $6.4 million, and an income
tax benefit of $434,000, offset by losses on the sale of mortgage loans and
securities of $3.9 million and an increase in expenses of $3.5 million. The
income tax benefit for the three months ended June 30, 1994 resulted from an
operating loss recorded by INMC, the Company's taxable subsidiary, primarily due
to the loss on the sale of purchased mortgage loans.
8
The net earnings of the Company for the quarter ended June 30, 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.
INTEREST INCOME: Total interest income was $22.5 million for the quarter ended
June 30, 1994 and $16.8 million for the quarter ended June 30, 1993. This
increase in interest income of $5.7 million is due to an increase in interest on
mortgage loans held for sale, mortgage loans held for investment and revolving
warehouse lines of credit of $8.7 million, $2.7 million and $681,000,
respectively, and an increase in other interest of $543,000. These increases in
interest income were partially offset by a decrease in interest income on
collateral for CMOs of $6.9 million.
Interest income earned on mortgage loans held for sale, mortgage loans held for
investment and revolving warehouse lines of credit was $12.9 million, $2.7
million and $838,000, respectively, for the second quarter of 1994. The average
principal balance of mortgage loans held for sale, mortgage loans held for
investment and revolving warehouse lines of credit outstanding approximated
$753.1 million, $156.6 million and $37.1 million, respectively, for the second
quarter of 1994 and earned interest at an effective yield of approximately
6.87%, 6.92% and 9.04%, respectively. For the second quarter of 1993, $4.3
million of interest income was earned on mortgage loans held for sale with an
average principal balance of $230.5 million and at an effective yield of 7.38%.
The Company did not own any mortgage loans held for investment during 1993, and
therefore no interest was earned during that period. The warehouse lending
operations commenced in May of 1993; therefore, there was an insignificant
amount of income in the second quarter of 1993 related to this operation.
Interest income on collateral for CMOs was $5.5 million and $12.4 million for
the quarters ended June 30, 1994 and 1993, respectively. The decline was
primarily attributable to a decrease in the average aggregate principal amount
of collateral for CMOs outstanding, from $620.0 million for the quarter ended
June 30, 1993 to $285.3 million for the quarter ended June 30, 1994, combined
with a decrease in the effective yield earned on the collateral from 8.0% in the
second quarter of 1993 to 7.7% in the second 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 EXPENSE: Total interest expense was $17.3 million in both the three
months ended June 30, 1994 and June 30, 1993. The $8.4 million increase in
interest expense on reverse-repurchase agreements was offset by a $8.3 million
decrease in interest expense on CMOs.
Interest expense on reverse-repurchase agreements was $10.3 million for the
three months ended June 30, 1994 on average balances of $914.8 million,
representing 4.50% of the average balance outstanding for the three months ended
June 30, 1994. For the three months ended June 30, 1993, interest expense on
such reverse-repurchase agreements was $1.9 million on average balances of
$195.6 million, representing 3.94% of the average balance.
9
Interest expense on CMOs was $7.0 million and $15.4 million for the three months
ended June 30, 1994 and 1993, respectively. This decrease was primarily
attributable to a decrease in average aggregate CMOs outstanding from $621.5
million for the quarter ended June 30, 1993 to $277.9 million for the quarter
ended June 30, 1994 partially offset by an increase in the weighted average cost
of CMOs from 9.91% in the second quarter of 1993 to 10.14% in the second 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 retired, the second class will
receive all principal payments until retired and so forth. In general, the CMO
bonds 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. In addition, interest expense is increased by the
amortization of bond issuance costs and original issue discounts. Accelerated
amortization associated with increased prepayment activity has the effect of
increasing the weighted average cost of CMOs.
NET MASTER SERVICING INCOME: During 1993, as a result of the new mortgage
conduit operations, the Company began earning master servicing fee income. At
June 30, 1994, the Company master serviced loans with principal balances
aggregating $4.8 billion, which represents a $1.2 billion increase from March
31, 1994. The growth in the Company's master servicing portfolio during the
second 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 June 30, 1994 was 7.21%. 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 purchased call
options that increase in value when interest rates decline. As of June 30,
1994, all of these call options had expired. Master servicing income was $6.5
million for the three months ended June 30, 1994. This was offset by
amortization of master servicing fees and the servicing hedge call options of
$4.3 million resulting in net master servicing income of $2.2 million for the
second quarter of 1994. The Company began earning income on its master
servicing portfolio in July of 1993 and purchased the call options beginning in
December of 1993. Therefore, no income or expense was recognized from these
activities during the three months ended June 30, 1993.
GAIN ON SALE OF SERVICING: The Company recorded a gain on the sale of servicing
of $5.8 million during the quarter ended June 30, 1994. The gain resulted from
the sale of approximately $1.8 billion of the Company's purchased servicing
portfolio to CFC. Total proceeds amounted to $24.6 million of which $19.4
million was outstanding at June 30, 1994. This balance is receivable in
installments with the final payment due within 30 days of the transfer date, in
September, 1994.
SALARIES AND RELATED EXPENSES: Salaries and related expenses were $2.1 million
for the three months ended June 30, 1994. The Company incurred no salaries and
related expenses during the three months ended June 30, 1993. This increase
was associated with the implementation of the Company's new mortgage conduit and
warehouse lending operations. As of June 30, 1994, the Manager employed
approximately 116 employees dedicated to the Company's operations. All
personnel costs associated with these employees were paid for by the Company.
As of June 30, 1993 there were approximately 31 employees. Personnel costs
associated with these employees 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 June 30, 1994 and 1993 were $1.8 million and $431,000,
respectively. This increase of $1.4 million was primarily attributed to costs
related to the new mortgage conduit and warehouse lending operations. Included
in the above amounts are approximately $82,000 and $95,000 attributable to the
administration of CMOs for the three months ended June 30, 1994 and June 30,
1993, respectively.
10
MANAGEMENT FEES: For the three months ended June 30, 1994, management fees
were $92,000 compared to $95,000 for the three months ended June 30, 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 June 30, 1993.
SIX MONTHS ENDED JUNE 30, 1994 COMPARED TO SIX MONTHS ENDED JUNE 30, 1993
NET EARNINGS: The Company's net earnings were $10.8 million or $0.34 per share,
based on 32,123,456 weighted average shares outstanding for the six months ended
June 30, 1994 compared to $172,000 or $0.01 per share, based on 13,981,293
weighted average shares outstanding for the six months ended June 30, 1993. The
increase in net earnings of $10.6 million was almost entirely associated with
the earnings of the Company's mortgage conduit and warehouse lending operations
and included a gain on the sale of servicing amounting to $5.8 million. Net
earnings for the CMO portfolio remained relatively stable for the six months
ended June 30, 1994 and June 30, 1993.
The increase in earnings associated with the operation of the Company's new
mortgage loan conduit and warehouse lending program was due to an increase in
net interest income and net master servicing income of $12.1 million and an
increase in gains of $5.5 million, offset by an increase in expenses of $6.1
million and a provision for income taxes of $874,000. The provision for income
taxes for the six months ended June 30, 1994 is associated with earnings of
INMC, the taxable subsidiary.
The net earnings of the Company for the six months ended June 30, 1993 did not
include certain personnel and other operating expenses which were absorbed by
the Manager of the Company, under the terms of its Management Agreement. The
Company began paying all expenses of its new operations in June 1993.
INTEREST INCOME: Total interest income was $48.8 million and $30.4 million for
the six months ended June 30, 1994 and June 30, 1993, respectively. This
increase in interest income of $18.4 million is primarily due to an increase in
interest on mortgage loans held for sale and revolving warehouse lines of credit
of $25.4 million and $2.3 million, respectively, offset by a decrease in
interest income on collateral for CMOs of $12.1 million. Additionally, since
the Company began investing in mortgage loans in April 1994, $2.7 million in
interest income on these portfolio loans has been earned for the three months
ended June 30, 1994.
Interest income earned on mortgage loans held for sale, mortgage loans held for
investment and revolving warehouse lines of credit was $31.1 million, $2.7
million and $2.5 million, respectively, for the six months ended June 30, 1994.
The average principal balance of mortgage loans held for sale, mortgage loans
held for investment and revolving warehouse lines of credit outstanding
approximated $915.5 million, $78.3 million and $58.0 million, respectively, for
the first six months of 1994 and earned interest at an effective yield of
approximately 6.79%, 6.92% and 8.62%, respectively. Interest income earned on
mortgage loans held for sale was $5.7 million on an average principal balance
outstanding of $154.6 representing an effective yield of 7.37% for the six
months ended June 30, 1993. The warehouse lending operations commenced in May of
1993; therefore, there was an insignificant amount of income during the six
months ended June 30, 1993 related to this operation.
Interest income on collateral for CMOs was $11.7 million and $23.8 million for
the six months ended June 30, 1994 and June 30, 1993, respectively. The decline
was primarily attributable to a decrease in the average aggregate principal
amount of collateral for CMOs outstanding from $553.0 million for the first six
months of June 30, 1993 to $315.7 million for the same period in 1994, combined
with a decrease in the effective yield earned on the collateral from 8.6% for
the six months ended June 30, 1993 to 7.4% for the six months ended June 30,
1994. As previously discussed above, 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
1994, which resulted in significant prepayment activity and 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.
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INTEREST EXPENSE: For the six months ended June 30, 1994 and June 30, 1993,
total interest expense was $37.0 million and $31.2 million, respectively. This
increase in interest expense of $5.8 million was due to an increase in interest
expense on reverse-repurchase agreements of $18.9 million offset by a decrease
in interest expense on CMOs of $13.1 million.
Interest expense on reverse-repurchase agreements was $21.3 million on average
balances of $995.9 million representing 4.27% of the average balance outstanding
for the six months ended June 30, 1994. For the six months ended June 30, 1993,
interest expense on such reverse-repurchase agreements was $2.4 million on
average balances of $127.2 million, representing 3.82% of the average balance.
For the six months ended June 30, 1994 and 1993, interest expense on CMOs was
$15.7 million and $28.8 million, respectively. This decrease was primarily
attributable to a decrease in average aggregate CMOs outstanding from $561.0
million for the six months ended June 30, 1993 to $308.2 million for the six
months ended June 30, 1994 and a decrease in the weighted average cost of CMOs
from 10.26% in the first half of 1993 to 10.19% over the same period. The
decrease in the average balance of CMOs was directly related to the prepayment
activity on collateral for CMOs discussed above.
NET MASTER SERVICING INCOME: During the six months ended June 30, 1994, the
Company's master servicing portfolio grew from $3.0 billion at December 31, 1993
to $4.8 billion at June 30, 1994. This growth was the result of loan production
volume from the Company's new conduit operations, partially offset by
prepayments of mortgage loans. Master servicing income was $10.2 million for
the six months ended June 30, 1994. This was offset by amortization of master
servicing fees and servicing hedge of $9.7 million resulting in a net master
servicing income of $504,000 for the first six months of 1994. The Company
began earning income on its master servicing portfolio in July of 1993 and
purchased the call options beginning in December of 1993. Therefore, no income
or expense was recognized from these activities during the six months ended June
30, 1993.
GAIN ON SALE OF SERVICING: The Company recorded a gain on the sale of servicing
of $5.8 million during the six months ended June 30, 1994. The gain resulted
from the sale of approximately $1.8 billion of the Company's purchased servicing
portfolio to CFC. Total proceeds from the sale amounted to $24.6 million of
which $19.4 million was outstanding as of June 30, 1994. This balance is
receivable in installments with the final payment due within 30 days of the
transfer date, in September, 1994.
SALARIES AND RELATED EXPENSES: Salaries and related expenses were $3.8 million
for the six months ended June 30, 1994. The Company incurred no salaries and
related expense during the six months ended June 30, 1993. This increase was
associated with the implementation of the Company's new mortgage conduit and
warehouse lending operations. As of June 30, 1994, the Manager employed
approximately 116 employees dedicated to the Company's operations whereas as of
June 30, 1993 there were approximately 31 employees. As discussed above,
personnel costs were absorbed by the Manager as a component of the management
fee for the six months ended June 30, 1993.
GENERAL AND ADMINISTRATIVE EXPENSES: General and administrative expenses for
the six months ended June 30, 1994 and 1993 were $3.3 million and $807,000,
respectively. This increase of $2.5 million was primarily attributed to costs
related to the new mortgage conduit and warehouse lending operations. Included
in the above amounts are approximately $242,000 and $141,000 attributable to the
administration of CMOs for the six months ended June 30, 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 each of the six months ended June 30, 1994 and 1993,
management fees were $203,000. 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 six months ended
June 30, 1993.
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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 mortgage conduit
operations, the Company issues REMIC securities through INMC to help meet such
needs. The Company may also borrow collateral or funds from 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, 1994 subject to extension by CFC and the Company. As of June 30, 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 $500.0 million (with a decreasing annual credit limit)
for its mortgage conduit operations and warehouse lending program that expires
in April 1996. 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 under reverse-
repurchase agreements during the second quarter of 1994 was $1.2 billion and as
of June 30, 1994 the Company had entered into reverse-repurchase agreements with
an aggregate of $857.9 million outstanding. In August 1994 the Company signed
another master repurchase agreement with a different lender to provide a
committed short-term credit line in the amount of $300.0 million for its
mortgage conduit and warehouse lending operations. This agreement expires in
August 1996.
In May 1994, the Company signed a commitment letter with a third lender for a
two year master repurchase agreement to provide a committed short-term credit
line in the amount of $300 million. In July 1994, the Company signed another
commitment letter for a master repurchase agreement in the amount of $75 million
to provide financing for certain mortgage-related securities which have been
retained or purchased. This agreement expires in July 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. The Company's ability to meet future liquidity requirements is
subject to the renewal of credit facilities or obtaining other sources of
financing.
INFLATION
Interest rates often increase during periods of rising inflation. Higher
interest rates may depress the market value of the Company's mortgage assets if
the yield on such mortgage assets 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.
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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.
With respect to mortgage loans held for investment, higher interest rates
generally will negatively affect the net interest earned on these loans, as the
interest earned on the mortgage loans may be fixed for various periods of time
while financing related to these loans floats to a short-term index and
therefore increases more rapidly with rising interest rates.
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PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
At the annual meeting of the Company's stockholders held on May 17, 1994, the
stockholders voted on several proposals in addition to the election of the
Company's directors. The stockholders voted to amend the Company's Certificate
of Incorporation to change the Company's name from "Countrywide Mortgage
Investments, Inc." to "CWM Mortgage Holdings, Inc." The votes cast on this
proposal were as follows: 29,721,420 in favor; 547,114 opposed; 235,719
abstaining; and 0 broker non-vote. The stockholders voted to amend the
Company's Certificate of Incorporation for the purpose of preventing ownership
of the Company's stock by governmental and other tax exempt entities. The votes
cast on this proposal were as follows: 21,137,645 in favor; 465,578 opposed;
169,516 abstaining; and 0 broker non-vote. The stockholders voted to approve
the Company's 1994 Stock Incentive Plan. The votes cast on this proposal were
as follows: 27,768,054 in favor, 2,415,083 opposed; 321,116 abstaining; and 0
broker non-vote.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
--------
10.1 1994 Amended and Extended Management Agreement dated as of May 15,
1994, between the Company and Countrywide Asset Management Corporation.
10.2 Financing Facility dated as of August 3, 1994 among CWM, INMC, WLCA
and Nomura Asset Capital Corp.
Reports on Form 8-K.
--------------------
None
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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 August 11, 1994.
CWM MORTGAGE HOLDINGS, INC.
By: /Michael W. Perry
-----------------
Michael W. Perry
Executive Vice President and Chief Operating Officer
By: /Carmella L. Grahn
--------------------
Carmella L. Grahn
Chief Accounting Officer
16