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 September 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 Identification No.)
incorporation or organization)
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 September 30, 1994: 32,256,156 shares
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CWM MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLAR AMOUNTS IN THOUSANDS)
(UNAUDITED)
SEPTEMBER 30, 1994 DECEMBER 31, 1993
------------------- ------------------
ASSETS
Mortgage assets
Mortgage loans held for sale $ 599,845 $ 872,490
Mortgage loans held for investment 307,566 -
Collateral for CMOs (market value $243,600 in 1994 and
$413,000 in 1993) 245,871 402,503
Mortgage securities 89,203 52
Master servicing fees receivable 146,221 45,237
Revolving warehouse lines of credit 60,500 92,058
Cash 8,746 6,866
Other assets 24,253 20,947
------------------- ------------------
Total assets $1,482,205 $1,440,153
=================== ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
Reverse-repurchase agreements $ 991,152 $ 806,557
Collateralized mortgage obligations 214,112 365,886
Accounts payable and accrued liabilities 20,674 17,102
------------------- ------------------
Total liabilities 1,225,938 1,189,545
Commitments and contingencies - -
Shareholders' equity
Common stock - authorized, 60,000,000 shares of
$.01 par value; issued and outstanding, 32,256,156
shares in 1994 and 32,020,484 in 1993 323 320
Additional paid-in capital 257,815 256,587
Net unrealized gain on available-for-sale mortgage
securities 166 -
Cumulative earnings 91,367 72,306
Cumulative distributions to shareholders (93,404) (78,605)
------------------- ------------------
Total shareholders' equity 256,267 250,608
------------------- ------------------
Total liabilities and shareholders' equity $1,482,205 $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 September 30, Nine Months Ended September 30,
--------------------------- -------------------------------
1994 1993 1994 1993
------------ ------------ -------------- --------------
REVENUES
Interest income
Mortgage loans held for sale $14,647 $10,170 $45,509 $15,880
Mortgage loans held for investment 3,412 - 6,121 674
Collateral for CMOs 5,152 9,860 16,899 33,701
Mortgage securities, net 2,010 - 2,385 -
Master servicing, net 3,585 244 4,415 244
Revolving warehouse lines of credit 913 276 3,055 434
Other 231 1 830 1
------------ ------------ -------------- --------------
Total interest income 29,950 20,551 79,214 50,934
Interest expense
Reverse-repurchase agreements 15,578 4,793 36,849 7,223
Collateralized mortgage obligations 5,917 14,610 21,607 43,409
------------ ------------ -------------- --------------
Total interest expense 21,495 19,403 58,456 50,632
Net interest income 8,455 1,148 20,758 302
Gain on sale of mortgage loans and securities 7,036 2,584 7,782 4,613
Gain on sale of servicing - - 5,834 -
------------ ------------ -------------- --------------
Net revenues 15,491 3,732 34,374 4,915
EXPENSES
Salaries and related expenses 2,140 727 5,924 727
General and administrative 2,196 648 5,450 1,455
Management fees to affiliate 495 111 702 315
------------ ------------ -------------- --------------
Total expenses 4,831 1,486 12,076 2,497
------------ ------------ -------------- --------------
Earnings before income taxes 10,660 2,246 22,298 2,418
Income tax provision 2,363 1,682 3,237 1,682
------------ ------------ -------------- --------------
NET EARNINGS $ 8,297 $ 564 $ 19,061 $ 736
============ ============ ============== ==============
EARNINGS PER SHARE $0.26 $0.03 $0.59 $0.04
============ ============ ============== ==============
Weighted average shares outstanding 32,216,505 21,055,213 32,156,094 16,369,689
============ ============ ============== ==============
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)
Nine Months Ended September 30,
----------------------------------------
1994 1993
---------------- ----------------
Cash flows from operating activities:
Net earnings $ 19,061 $ 736
Adjustments to reconcile net earnings
to net cash provided by (used in) operating activities:
Amortization 19,236 10,586
Gain on sale of mortgage loans and securities (7,782) (4,613)
Gain on sale of servicing (5,834) -
Change in other assets and liabilities (3,200) (8,091)
---------------- ----------------
Net cash provided by (used in) operating activities 21,481 (1,382)
Cash flows from investing activities:
Collateral for CMOs:
Purchases of mortgage loans subsequently securitized - (248,269)
Principal payments on collateral 136,841 288,277
Net change in GICs held by trustees 16,532 15,855
Proceeds from sale of collateral for CMOs, net - 33,452
---------------- ----------------
153,373 89,315
Purchases of mortgage loans held for sale (4,314,818) (1,637,838)
Purchases of mortgage loans held for investment (178,787) -
Investment in mortgage securities (116,302) -
Investment in master servicing fees receivable (110,495) -
Proceeds from sale of mortgage loans and securities 4,452,382 1,136,950
Principal payments on mortgage loans and securities 41,539 4,931
Net decrease (increase) in revolving warehouse lines of credit 31,558 (41,481)
Purchase of servicing (18,385) -
Proceeds from sale of servicing 22,281 -
---------------- ----------------
Net cash used in investing activities (37,654) (448,123)
Cash flows from financing activities:
Collateralized mortgage obligations:
Proceeds from issuance of securities - 239,659
Principal payments on securities (152,974) (297,919)
Redemption of securities - (32,689)
---------------- ----------------
(152,974) (90,949)
Net increase in reverse-repurchase agreements 184,595 476,451
Net proceeds from issuance of common stock 1,231 74,802
Cash dividends paid (14,799) (6,270)
---------------- ----------------
Net cash provided by financing activities 18,053 454,034
---------------- ----------------
Net increase in cash 1,880 4,529
Cash at beginning of period 6,866 27
---------------- ----------------
Cash at end of period $ 8,746 $ 4,556
================ ================
Supplemental cash flow information:
Cash paid for interest $ 40,192 $ 44,995
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
SEPTEMBER 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 such that it continues 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").
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 a taxable subsidiary that is consolidated with
CWM 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 September 30, 1993 to conform to the
September 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 nine months ended September 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
The Company purchases certain mortgage loans to be held as long-term
investments. In addition, mortgage loans transferred from mortgage loans held
for sale to mortgage loans held for investment are recorded at market value on
the date of transfer. Mortgage loans held for investment include various
adjustable rate 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 loans using the level-yield
method.
NOTE C - MORTGAGE SECURITIES
The Company's mortgage securities consist of mortgage derivatives which
primarily include subordinated securities and principal-only securities retained
upon the issuance of the Company's REMIC securities. In connection with these
investments, the Company has adopted Statement of Financial Accounting Standards
No. 115, Accounting for Certain Investments in Debt and Equity Securities ("SFAS
115"). SFAS 115 requires the classification of debt and equity securities into
one of three categories: held-to-maturity, available-for-sale or trading
securities. Held-to-maturity securities are defined as securities that the
Company has the positive intent and ability to hold to maturity. Trading
securities are defined as securities that are bought and held principally for
the purpose of selling in the near term and are measured at fair value, with
unrealized gains and losses included in earnings. Securities not classified as
either held-to-maturity securities or trading securities are deemed to be
available-for-sale securities and are measured at fair value, with unrealized
gains and losses, net of the related tax effect, reported as a separate
component of stockholders' equity. As of September 30, 1994 mortgage securities
held-to-maturity totaled $33.4 million with an estimated fair value of $32.8
million. Mortgage securities categorized as available-for-sale had a book value
of $55.8 million which is net of an unrealized gain of $166,000, net of a
$120,000 tax effect. The Company had no trading securities at September 30,
1994. As of September 30, 1994, $95.3 million of the Company's mortgage
securities were pledged as collateral under reverse-repurchase agreements.
5
NOTE D - RELATED PARTY TRANSACTIONS
The Company has entered into an agreement (the "Management Agreement") with
Countrywide Asset Management Corporation, a subsidiary of Countrywide Credit
Industries, Inc., (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.
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.
NOTE E - SUBSEQUENT EVENT
On October 10, 1994, the Board of Directors declared a cash dividend of $.26 per
share to be paid on November 15, 1994 to shareholders of record on October 25,
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 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 programs which provide warehouse and other types of credit
to third-party mortgage loan originators. Through the warehouse lending
programs, financing is provided for the origination and sale of mortgage loans,
the retention or acquisition of servicing rights, receivables generated through
the sale of servicing rights, and the carrying of mortgage loans pending
foreclosure and/or repurchase from an investor.
In August 1994, the Company commenced its construction lending operation,
through a division of its lending subsidiary named "Construction Lending
Corporation of America". The Company offers both single-family subdivision
construction lending to small-to-medium size builders (tract construction) and
construction-to-permanent financing to individual borrowers who wish to
construct or remodel their principal or second residences. Under the
construction-to-permanent program, one set of documents supports both the
construction and permanent phases of the loan. As of September 30, 1994,
$350,000 and $200,000 were outstanding under the tract construction and
construction-to-permanent programs, respectively. The company earns fee income
and net interest income from these programs.
Prior to 1993, the Company's principal source of earnings had been net interest
income generated from its mortgage portfolio which was primarily financed
through the issuance of CMOs (the "CMO Portfolio"). The amount of net interest
earned on the CMO Portfolio is directly affected by the rate of principal
repayment (including prepayments) of the related mortgage loans 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 September 30, 1994,
there was a decrease in the net interest expense realized on the portfolio
during the quarter ended September 30, 1994 compared to the quarter ended
September 30, 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 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
7
mortgages. This trend has resulted in the reduction of net interest income
earned during the loan accumulation phase due to the lower interest rates
typically applicable during the initial phases of an adjustable rate loan.
FINANCIAL CONDITION
CONDUIT AND WAREHOUSE LENDING OPERATIONS: During the nine months ended
September 30, 1994, the Company purchased $4.5 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 nine months ended September 30, 1994, the Company sold
$4.4 billion of mortgage loans through the issuance of REMIC securities and bulk
whole loan sales. At September 30, 1994, the Company was committed to sell
approximately $175 million of mortgage loans in the fourth quarter of 1994. In
addition, at September 30, 1994, the Company held $307.6 million in mortgage
loans as long term-investments.
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, receivables generated through the sales of servicing rights,
and the carrying of mortgage loans pending foreclosure and/or repurchase from an
investor. At September 30, 1994, the Company had extended committed lines of
credit under these programs in the aggregate amount of $328.3 million, of which
$60.5 million was outstanding. Reverse-repurchase agreements associated with
the financing of these lines of credit totaled $36.9 million at September 30,
1994.
CMO PORTFOLIO: As of September 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 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 $245.9
million at September 30, 1994. This decrease of $156.6 million included
repayments (including prepayments and premium and discount amortization) of
$138.5 million and a decrease in guaranteed investment contracts ("GICs") held
by trustees and accrued interest receivable of $16.5 million and $1.6 million,
respectively. The Company's CMOs outstanding decreased to $214.1 million at
September 30, 1994 from $365.9 million at December 31, 1993. This decrease of
$151.8 million resulted from principal payments (including discount
amortization) on CMOs of $150.2 million and a decrease in accrued interest
payable on CMOs of $1.6 million.
RESULTS OF OPERATIONS
QUARTER ENDED SEPTEMBER 30, 1994 COMPARED TO QUARTER ENDED SEPTEMBER 30, 1993
NET EARNINGS: The Company's net earnings were $8.3 million or $.26 per share,
based on 32,216,505 weighted average shares outstanding for the quarter ended
September 30, 1994, as compared to $564,000 or $.03 per share, based on
21,055,213 weighted average shares outstanding for the quarter ended September
30, 1993. The increase in net earnings of $7.7 million was primarily due to an
increase in earnings of $3.7 million associated with the Company's mortgage
conduit and warehouse lending operations combined with a decrease in the loss
associated with the CMO Portfolio of $4.0 million.
The increase in earnings associated with the operation of the Company's mortgage
loan conduit and warehouse lending program was primarily due to an increase in
gains on the sale of mortgage loans and securities of $4.5 million, an increase
in net interest income of $3.3 million, offset by an increase in expenses of
$3.4 million and an increase in income taxes of $.7 million for the three months
ended September 30, 1994. The increase in income taxes resulted from an
operating profit recorded by the Company's taxable subsidiary, primarily due to
the gain on the sale of mortgage loans and securities.
INTEREST INCOME: Total interest income was $30.0 million and $20.6 million for
the quarters ended September 30, 1994 and 1993, respectively. This increase of
$9.4 million is due to an increase in interest on mortgage loans held for sale
of $4.5 million and an increase in interest on mortgage loans held for
investment of $3.4 million, and an increase in net master servicing income of
$3.3 million. In addition, interest income on mortgage
8
securities and revolving warehouse lines of credit increased $2.0 million and
$.6 million, respectively. These increases in interest income were partially
offset by a decrease in interest income on collateral for CMOs of $4.7 million.
Interest income earned on mortgage loans held for sale, mortgage loans held for
investment and mortgage securities was $14.6 million, $3.4 million and $2.0
million, respectively, for the quarter ended September 30, 1994. Interest was
earned on average principal balances of $898.9 million, $215.7 million and $67.5
million, respectively at an effective yield of 6.52%, 6.33% and 11.91%,
respectively. For the third quarter of 1993, $10.2 million of interest income
was earned on mortgage loans held for sale with an average principal balance of
$619.7 million and an effective yield of 6.56%. The Company did not own any
mortgage loans held for investment or mortgage securities during the three
months ended September 30, 1993, and therefore no interest was earned thereon
during that period.
Interest income earned on revolving warehouse lines of credit was $913,000 for
the third quarter of 1994. The average principal balance outstanding on
revolving warehouse lines of credit approximated $45.7 million for the third
quarter of 1994 and earned interest at an effective yield of approximately
7.99%.
Interest income on collateral for CMOs was $5.2 million and $9.9 million for the
quarters ended September 30, 1994 and 1993, respectively. The decline was
primarily attributable to a decrease in the average aggregate principal amount
of collateral for CMOs outstanding, to $246.5 million for the quarter ended
September 30, 1994 from $569.3 million for the quarter ended September 30, 1993.
This was offset by an increase in the effective yield earned on the collateral
to 8.36% in the third quarter of 1994 from 6.93% in the third quarter of 1993.
The decrease in the average balance of collateral for CMOs was due to the
continued low interest rate environment experienced throughout 1993 and the
first quarter of 1994 which resulted in significant prepayment activity.
Interest income on collateral is reduced by the amortization of premiums paid in
connection with acquiring the portfolio. The acceleration of prepayments
experienced during 1993 required an increase in the amortization of premiums,
resulting in a decrease in the effective yield. During the third quarter of
1994, prepayments slowed significantly, resulting in a lower amount of premium
amortization. In addition, for most of the CMO series, 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 a result,
the increase in prepayments during 1993 resulted in a higher balance of
nonearning and lower-earning investments (GICs) which resulted in a lower yield
on the overall CMO collateral. Accordingly, a decrease in prepayments in 1994
has had the effect of decreasing this nonearning asset, which resulted in an
increase in the effective yield earned on the collateral.
INTEREST EXPENSE: Total interest expense was $21.5 million and $19.4 million
for the three months ended September 30, 1994 and 1993, respectively. This
increase of $2.1 million is due to a $10.8 million increase in interest expense
on reverse-repurchase agreements which was offset by a $8.7 million decrease in
interest expense on CMOs.
Interest expense on reverse-repurchase agreements was $15.6 million for the
three months ended September 30, 1994 on average balances of $1.1 billion,
representing 5.43% of the average balance outstanding. For the three months
ended September 30, 1993, interest expense on such reverse-repurchase agreements
was $4.8 million on average balances of $433.5 million, representing 4.42% of
the average balance.
Interest expense on CMOs was $5.9 million and $14.6 million for the three months
ended September 30, 1994 and 1993, respectively. This decrease of $8.7 million
was primarily attributable to a decrease in average aggregate CMOs outstanding
from $528.3 million for the quarter ended September 30, 1993 to $234.2 million
for the quarter ended September 30, 1994 and a decrease in the weighted average
cost of CMOs from 11.06% in the third quarter of 1993 to 10.11% in the third
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. During the quarter
ended September 30, 1993, prepayments were significantly higher than during the
quarter ended September 30, 1994. Interest expense is increased by the
amortization of bond issuance costs and original issue discounts. During the
quarter ended September 30, 1993, the accelerated amortization associated with
increased prepayment activity resulted in a higher weighted average
9
cost of CMOs. The decrease in prepayment activity during the quarter ended
September 30, 1994 resulted in a decrease in the amortization of these costs and
a decrease in the weighted average cost of the CMOs.
NET MASTER SERVICING INCOME: In July 1993, as a result of the mortgage conduit
operations, the Company began earning master servicing fee income. At
September 30, 1994, the Company master serviced loans with principal balances
aggregating $6.3 billion, which represents a $1.5 billion increase from the
balances of the loans master serviced at June 30, 1994. The growth in the
Company's master servicing portfolio during the third quarter of 1994 was the
result of loan production and related sales volume from the Company's conduit
operations, partially offset by repayments and prepayments of mortgage loans.
The weighted average interest rate of the mortgage loans in the Company's master
servicing portfolio at September 30, 1994 was 7.22%. 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, resulting in a decrease
in the master servicing portfolio and a decrease in the respective income.
Master servicing income was $7.4 million and $1.0 million for the three months
ended September 30, 1994 and 1993, respectively. This income was offset by
amortization of master servicing fees receivable of $3.8 million and $.7
million for the three months ended September 30, 1994 and 1993, respectively.
Net master servicing income amounted to $3.6 million and $.3 million for the
three months ended September 30, 1994 and 1993, respectively.
In September 1994, the Company began securitizing master servicing fees
receivable in order to allow for financing of this asset. As of September 30,
1994, $110.8 million of master servicing fees receivable was securitized and
$105.9 million was pledged as collateral for borrowings under reverse-
repurchase agreements.
SALARIES AND RELATED EXPENSES: Salaries and related expenses were $2.1 million
and $727,000 for the three months ended September 30, 1994 and 1993,
respectively. This increase of $1.4 million was associated with the growth of
the Company's mortgage conduit and warehouse and construction lending
operations. As of September 30, 1994, the Manager employed approximately 113
employees dedicated to the Company's operations. All personnel costs associated
with these employees were reimbursed by the Company. As of September 30, 1993
there were approximately 47 employees.
GENERAL AND ADMINISTRATIVE EXPENSES: General and administrative expenses for
the three months ended September 30, 1994 and 1993 were $2.2 million and
$648,000, respectively. This increase of $1.6 million was primarily attributed
to costs related to the growth experienced in the mortgage conduit and warehouse
and construction lending operations. Included in the above amounts are
approximately $82,000 and $96,000 attributable to the administration of CMOs for
the three months ended September 30, 1994 and September 30, 1993, respectively.
MANAGEMENT FEES: For the three months ended September 30, 1994, management
fees were $495,000 compared to $111,000 for the three months ended September 30,
1993. This increase is primarily due to an incentive management fee payable to
the Manager in accordance with the management agreement. The incentive
management fee represents a percentage of the Company's earnings that exceed a
specified return on equity. The increase in the incentive management fee is
directly related to the increase in the Company's earnings. Based on the
Company's 1993 earnings, no incentive fee was incurred in the prior year.
10
NINE MONTHS ENDED SEPTEMBER 30, 1994 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1993
NET EARNINGS: The Company's net earnings were $19.1 million or $.59 per share,
based on 32,156,094 weighted average shares outstanding for the nine months
ended September 30, 1994 compared to $736,000 or $.04 per share, based on
16,369,689 weighted average shares outstanding for the nine months ended
September 30, 1993. The increase in net earnings of $18.3 million was due to a
$14.9 million increase in the earnings of the Company's mortgage conduit and
warehouse lending operations. The results of these operations included an
increase in net interest income of $16.1 million, an increase in gains on the
sale of mortgage loans and securities of $4.1 million and a gain on the sale of
servicing amounting to $5.8 million. These increases were offset by an increase
in expenses of $9.5 million and an increase in income tax expense of $1.6
million. Losses recognized on the CMO portfolio decreased $3.4 million, from
$8.4 million for the nine months ended September 30, 1993 to $5.0 million for
the nine months ended September 30, 1994.
The net earnings of the Company for the nine months ended September 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 operations in June 1993.
INTEREST INCOME: Total interest income was $79.2 million and $50.9 million for
the nine months ended September 30, 1994 and 1993, respectively. This increase
in interest income of $28.3 million is primarily due to an increase in interest
on mortgage loans held for sale, mortgage loans held for investment, mortgage
securities and revolving warehouse lines of credit of $29.6 million, $5.4
million, $2.4 million and $2.6 million, respectively. This increase is offset
by a decrease in interest income on collateral for CMOs of $16.8 million.
Interest income earned on mortgage loans held for sale, mortgage loans held for
investment, mortgage securities and revolving warehouse and related lines of
credit was $45.5 million, $6.1 million, $2.4 million and $3.1 million,
respectively, for the nine months ended September 30, 1994. The average
principal balance of mortgage loans held for sale, mortgage loans held for
investment, mortgage securities and revolving warehouse lines of credit
outstanding approximated $935.8 million, $124.4 million, $26.7 million and $54.1
million, respectively, for the first nine months of 1994 and earned interest at
an effective yield of approximately 6.48%, 6.56%, 11.92% and 7.52%,
respectively. Interest income earned on mortgage loans held for sale was $15.9
million on an average principal balance outstanding of $311.7 million
representing an effective yield of 6.79% for the nine months ended September 30,
1993. The warehouse lending operations commenced in May 1993 and generated
$434,000 in interest income during the period ended September 30, 1993. The
Company held no mortgage loans for investment or mortgage securities during the
nine months ended September 30, 1993 and therefore no interest was earned
thereon during that period.
Interest income on collateral for CMOs was $16.9 million and $33.7 million for
the nine months ended September 30, 1994 and September 30, 1993, respectively.
The decline was primarily attributable to a decrease in the average aggregate
principal amount of collateral for CMOs outstanding to $292.6 million for the
first nine months of September 30, 1994 from $582.8 million for the same period
in 1993. The effective yield earned on the collateral decreased slightly to
7.70% for the nine months ended September 30, 1994 from 7.71% for the nine
months ended September 30, 1993. As previously discussed above, the decrease in
the average balance of collateral for CMOs was due to the continued low interest
rate environment experienced throughout 1993 and the beginning of 1994, which
resulted in significant prepayment activity.
INTEREST EXPENSE: For the nine months ended September 30, 1994 and 1993, total
interest expense was $58.5 million and $50.6 million, respectively. This
increase in interest expense of $7.9 million was due to an increase in interest
expense on reverse-repurchase agreements of $29.6 million offset by a decrease
in interest expense on CMOs of $21.7 million.
Interest expense on reverse-repurchase agreements was $36.8 million on average
balances of $1.0 billion representing 4.69% of the average balance outstanding
for the nine months ended September 30, 1994. For the nine months ended
September 30, 1993, interest expense on such reverse-repurchase agreements was
$7.2 million on average balances of $229.3 million, representing 4.20% of the
average balance.
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For the nine months ended September 30, 1994 and 1993, interest expense on CMOs
was $21.6 million and $43.4 million, respectively. This decrease was primarily
attributable to a decrease in average aggregate CMOs outstanding to $282.5
million for the nine months ended September 30, 1994 from $550.1 million for the
nine months ended September 30, 1993 and a decrease in the weighted average cost
of CMOs to 10.20% in the first nine months of 1994 from 10.52% for the nine
months ended September 30, 1993. The decrease in the average balance and cost
of CMOs was directly related to the decrease in prepayment activity on
collateral for CMOs discussed above.
NET MASTER SERVICING INCOME: The Company began earning income on its master
servicing portfolio in July of 1993. During the nine months ended September 30,
1994, the Company's master servicing portfolio grew from $3.0 billion at
December 31, 1993 to $6.3 billion at September 30, 1994. This growth was the
result of loan production and related sales volume from the Company's conduit
operations, partially offset by repayments and prepayments of mortgage loans.
Master servicing income was $17.9 million for the nine months ended September
30, 1994 compared to $1.0 million for the nine months ended September 30, 1993.
This was offset by amortization of master servicing fees receivable and
servicing hedges of $13.5 million and $.7 million for the nine months ended
September 30, 1994 and 1993, respectively. Net master servicing income was $4.4
million for the first nine months of 1994 compared to $.3 million for the nine
months ended September 30, 1993.
In September 1994, the Company began securitizing master servicing fees
receivable in order to allow for financing of this asset. As of September 30,
1994, $110.8 million of master servicing fees receivable was securitized and
$105.9 million was pledged as collateral for borrowings under reverse-repurchase
agreements.
SALARIES AND RELATED EXPENSES: Salaries and related expenses were $5.9 million
and $727,000 for the nine months ended September 30, 1994 and 1993,
respectively. This increase was associated with the growth of the Company's
mortgage conduit and warehouse and construction lending operations. As of
September 30, 1994, the Manager employed approximately 113 employees dedicated
to the Company's operations whereas as of September 30, 1993 there were
approximately 47 employees. Personnel costs were absorbed by the Manager until
June 1993 under the terms of the Management Agreement.
GENERAL AND ADMINISTRATIVE EXPENSES: General and administrative expenses for
the nine months ended September 30, 1994 and 1993 were $5.5 million and $1.5,
respectively. This increase of $4.0 million was primarily attributed to costs
related to the growth of the mortgage conduit and warehouse lending operations.
Included in the above amounts are approximately $324,000 and $237,000
attributable to the administration of CMOs for the nine months ended September
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 the nine months ended September 30, 1994 and 1993,
management fees were $702,000 and $315,000, respectively. This increase of
$387,000 is due primarily to a quarterly incentive management fee payable to the
Manager in accordance with the management agreement. The incentive management
fee represents a percentage of the Company's earnings that exceed a specified
return on equity. The increase in the incentive management fee is directly
related to the increase in the Company's earnings. Based on the Company's 1993
earnings, no incentive fee was incurred in the prior year.
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 its mortgage
conduit operations, the Company issues REMIC securities and CMOs 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 or for other corporate purposes. These
borrowings are made pursuant to a $10.0 million one-year, unsecured line of
credit which expires on September 30, 1995 subject to extension by CFC and the
Company. As of September 30, 1994, the Company had no outstanding borrowings
under this agreement.
12
The Company has established a committed reverse-repurchase facility in 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 uncommitted 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 third quarter of 1994
was $1.5 billion. 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 the second quarter of 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 $500 million. In November 1994, the
Company signed an agreement for a committed reverse-repurchase facility in the
amount of $225 million to provide financing for certain mortgage-related
securities which have been retained or purchased by the Company. This agreement
expires in November 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 or securities portfolio financed
under such reverse-repurchase agreements. However, the Company has implemented
a hedging strategy for its mortgage loans held for sale which to some extent may
mitigate the effect of adverse market movements.
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, including raising additional equity from time to time.
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 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. 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 certain 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 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
--------
3.1 Certificate of Incorporation for the Company, as amended.
4.1 1994 Stock Incentive Plan adopted May 17, 1994.
10.1 1994 Amended and Extended Loan Purchase and Administrative Services
Agreement, dated as May 15, 1994, by and between the Company and
Countrywide Funding Corporation ("CFC").
10.2 Amended and Restated Credit Agreement, dated as of September 30, 1994,
by and among the Company, Independent National Mortgage Corporation,
Independent Lending Corporation of America, Inc., and CFC.
10.3 First Amendment to 1994 Amended and Extended Management Agreement,
dated as of October 1, 1994, by and between the Company and Countrywide
Asset Management Corporation.
10.4 Master Assignment Agreement dated as of October 28, 1994 between the
Company and Merrill Lynch Mortgage Capital, Inc. and Master Repurchase
Agreement dated as of October 28, 1994 between the Company and Merrill
Lynch, Pierce, Fenner and Smith, Incorporated.
27 Financial Data Schedule of CWM Mortgage Holdings, Inc.
(b) 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 November 14, 1994.
CWM MORTGAGE HOLDINGS, INC.
By: /s/ Michael W. Perry
__________________________
Michael W. Perry
Executive Vice President and Chief Operating Officer
By: /s/ Carmella L. Grahn
___________________________
Carmella L. Grahn
Senior Vice President and Chief Accounting Officer
15