SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q/A
AMENDMENT NO. 2
[ 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, 91101-1857
CALIFORNIA
(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
----------------------------- -----------------------------
(RESTATED)
ASSETS
Mortgage assets
Mortgage loans held for sale $ 514,712 $ 794,132
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 8,596 7,099
Master servicing fees receivable 74,862 -
Investment in and advances to INMC 109,270 90,394
Other assets 8,153 10,552
----------------------------- -----------------------------
Total assets $ 1,208,776 $ 1,396,738
============================= =============================
LIABILITIES AND SHAREHOLDERS' EQUITY
Reverse-repurchase agreements $ 706,716 $ 770,334
Collateralized mortgage obligations 244,223 365,886
Accounts payable and accrued liabilities 4,809 9,910
----------------------------- -----------------------------
Total liabilities 955,748 1,146,130
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 $ 1,208,776 $ 1,396,738
============================= =============================
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
------------- ------------- -------------- -------------
(RESTATED) (RESTATED)
REVENUES
Interest income
Mortgage loans held for sale $8,285 $4,255 $19,495 $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
Advances to INMC 912 - 1,529 -
Other 23 - 48 674
------------- ------------- ------------- -------------
Total interest income 18,264 16,771 38,006 30,381
Interest expense
Reverse-repurchase agreements 6,573 1,926 13,685 2,430
Collateralized mortgage obligations 7,047 15,377 15,690 28,798
------------- ------------- ------------- -------------
Total interest expense 13,620 17,303 29,375 31,228
Net interest income (expense) 4,644 (532) 8,631 (847)
------------- ------------- ------------- -------------
Master servicing income 3,827 - 3,827 -
Master servicing amortization (1,443) - (1,443) -
------------- ------------- ------------- -------------
Net master servicing inc 2,384 - 2,384 -
Gain on sale of mortgage loans and securities - - - 917
Equity in earnings of INMC (592) 1,044 1,196 1,044
Other, net (68) - (118) -
------------- ------------- ------------- -------------
Net revenues 6,368 512 12,093 1,114
EXPENSES
General and administrative 579 363 1,151 739
Management fees to affiliate 78 95 178 203
------------- ------------- ------------- -------------
Total expenses 657 458 1,329 942
------------- ------------- ------------- -------------
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
---------------------- ----------------------
(RESTATED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 10,764 $ 172
Adjustments to reconcile net earnings
to net cash provided by operating activities:
Amortization 4,254 4,712
Gain on sale of mortgage securities - (917)
Equity in earnings of INMC (1,196) (1,044)
Change in other assets and liabilities (3,115) (6,024)
------------------------ ---------------------
Net cash provided by (used in) operating activities 10,707 (3,101)
CASH FLOWS FROM INVESTING ACTIVITIES:
Collateral for CMOs:
Purchases of mortgage loans subsequently securitized - (244,108)
Principal payments on collateral 117,005 178,863
Net change in GICs held by trustees 6,162 24,429
Proceeds from sale of collateral for CMOs, net - 2,641
------------------------ ---------------------
123,167 (38,175)
Purchases of mortgage loans held for sale and investment (2,964,075) (635,453)
Proceeds from sale of mortgage loans 3,066,440 270,352
Principal payments on mortgage loans 9,911 2,329
Net decrease (increase) in revolving warehouse lines of credit 42,556 (16,698)
Investment in master servicing fees receivable (74,862)
Investment in INMC (4,541) (2,475)
Net advances to INMC (13,069) (1,151)
------------------------ ---------------------
Net cash provided by (used in) investing activities 185,527 (421,271)
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 (decrease) increase in reverse-repurchase agreements (63,618) 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 (194,737) 433,138
------------------------ ---------------------
Net increase in cash 1,497 8,766
Cash at beginning of period 7,099 27
------------------------ ---------------------
Cash at end of period $ 8,596 $ 8,793
======================== =====================
Supplemental cash flow information:
Cash paid for interest $ 23,965 $ 29,484
Cash paid for income taxes ======================== =====================
- -
======================== =====================
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
On May 17, 1994, the shareholders approved a change in name from Countrywide
Mortgage Investments, Inc. to CWM Mortgage Holdings, Inc. In addition, the name
of CWM Mortgage Holdings, Inc.'s investee, Countrywide Mortgage Conduit, Inc.
has been changed to Independent National Mortgage Corporation ("INMC").
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Rule 10-01 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. The consolidated financial statements include the accounts of CWM
Mortgage Holdings, Inc. and its qualified REIT subsidiaries ("CWM"). The
mortgage loan conduit operations are primarily conducted through INMC, a taxable
corporation. Previously, INMC was consolidated with CWM for financial reporting
purposes; the financial statements have been restated to account for INMC on a
method similar to the equity method. INMC is not consolidated for income tax
purposes. As used herein, the "Company" includes CWM and INMC.
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 CWM'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, CWM began a program to acquire mortgage loans to be held as
long-term investments. In conjunction with this program, certain mortgage loans
held for sale were transferred 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. CWM
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. Loans greater than ninety days past due are evaluated for
collectibility and, if appropriate, previously accrued interest is reversed. As
of June 30, 1994, no loans were on nonaccrual status and CWM had no allowance
for loan losses.
5
NOTE C - INVESTMENT IN INMC
Summarized financial information for INMC is as follows:
(Dollar amounts in thousands)
Quarter ended June 30, Six months ended June 30,
----------------------------- -----------------------------------
1994 1993 1994 1993
----------- ----------- ----------- -----------
Interest income $ 5,025 $ - $11,960 -
Interest expense 4,636 - 9,115 -
------- ------ ------- ------
Net interest income 389 - 2,845 -
Master servicing, net (61) - (1,557) -
Gain (loss) on sale of loans and
securities (3,862) 1,112 863 1,112
Gain on sale of servicing 5,834 - 5,834 -
Expenses (2,898) (57) (6,776) (57)
------- ------ ------- ------
Net earnings $ (598) $1,055 $ 1,209 $1,055
------- ====== ======= ======
Related party transaction. During June 1994, INMC sold approximately $1.8
billion of its purchased servicing portfolio to Countrywide Funding Corporation
("CFC"). INMC 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 the $1.8
billion purchased servicing portfolio sold to CFC, $580.4 million was already
being subserviced by CFC.
NOTE D - RELATED PARTY TRANSACTIONS
CWM 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 CWM's Board of Directors. The
Manager has entered into a subcontract with its affiliate, CFC, to perform such
services for the Company as the Manager deems necessary.
NOTE E - 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
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. As a mortgage loan
conduit, the Company is an intermediary between the originators of mortgage
loans which have outstanding principal balances in excess of or differ from the
guidelines of the government and government sponsored enterprises that guarantee
mortgage-backed securities ("jumbo or nonconforming mortgage loans") and
permanent investors in mortgage-backed securities secured by or representing an
ownership interest in such mortgage loans. All loans purchased by CWM, for
which a REMIC transaction or whole loan sale is contemplated, are committed for
sale to INMC at the same price at which the loans were acquired by CWM. INMC
does not purchase any loans from entities other than CWM. Sellers generally
retain the rights to service the mortgage loans purchased by the Company. The
Company's principal sources of income from its mortgage conduit operations are
gains recognized on the sale of mortgage loans, the net spread between interest
earned on mortgage loans and the interest costs associated with the borrowings
used to finance such loans pending their securitization and the net interest
earned on its long-term investment portfolio and master servicing fee income.
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 to small and medium-size mortgage bankers for the
origination and sale of mortgage loans, the retention or acquisition of
servicing rights, and the carrying of mortgage loans pending foreclosure and/or
repurchase from an investor.
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 CWM'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, CWM 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, through INMC, $3.0 billion of
mortgage loans through the issuance of REMIC securities and bulk whole loan
sales. At June 30, 1994, CWM was committed to purchase $526.9 million of
mortgage loans from various seller/servicers and committed to sell approximately
$514.7 million of mortgage loans to INMC. In addition, CWM held $167.1 million
in mortgage loans as long-term investments at June 30, 1994.
CWM'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, CWM had extended committed lines of credit
under its warehouse lending programs 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.
The Financial Accounting Standards Board issued Statement No. 114, Accounting by
Creditors for Impairment of a Loan, which is required to be adopted by the
Company in 1995. As it affects the Company, the Statement is applicable only to
its revolving warehouse lines of credit and is not expected to have any material
impact on the Company's financial results.
CMO PORTFOLIO: As of June 30, 1994, the CMO Portfolio was comprised of 15
series of CMOs issued from CWM's inception through 1990 ("Pre-1993 CMO
Portfolio"). In 1993, two new series of CMOs were issued in connection with
CWM'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.
CWM'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.
RESULTS OF OPERATIONS
QUARTER ENDED JUNE 30, 1994 COMPARED TO QUARTER ENDED JUNE 30, 1993
NET EARNINGS: CWM'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.
INTEREST INCOME: Total interest income was $18.3 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 $1.5 million is primarily due to an increase in
interest on mortgage loans held for sale, mortgage loans held for investment and
revolving warehouse lines of credit of $4.0 million, $2.7 million and $681,000,
respectively. These increases in interest income were partially offset by a
decrease in interest income on collateral for CMOs of $6.9 million.
8
Interest income earned on mortgage loans held for sale, mortgage loans held for
investment and revolving warehouse lines of credit was $8.3 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
$437.2 million, $157.6 million and $37.1 million, respectively, for the second
quarter of 1994 and earned interest at an effective yield of approximately
7.58%, 6.88% 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%.
CWM 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 $649.6 million for the quarter ended
June 30, 1993 to $285.3 million for the quarter ended June 30, 1994, offset by
an increase in the effective yield earned on the collateral from 7.64% 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 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.
INTEREST EXPENSE: Total interest expense was $13.6 million and $17.3 million
for the three months ended June 30, 1994 and June 30, 1993, respectively. The
$3.7 million decrease resulted from a $4.6 million increase in interest expense
on reverse repurchase agreements used to finance the conduit and warehouse
lending operations and an $8.3 million decrease in interest expense on CMO's as
a result of the declining CMO portfolio .
Interest expense on reverse-repurchase agreements was $6.6 million for the three
months ended June 30, 1994 on average balances of $554.0 million, representing
an effective yield of 4.75%. 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.
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.
MASTER SERVICING, NET: Beginning in the second quarter of 1994, INMC began to
repay its debt to CWM by the transfer of its master servicing fees receivable
asset from INMC to CWM at its then carrying value which approximated market
value. Accordingly, as of June 30, 1994, CWM had master servicing fees
receivable totaling $74.9 million.
Gross master servicing income for CWM was $3.8 million for the three months
ended June 30, 1994. This gross income was offset by amortization of master
servicing fees receivable of $1.4 million for the three months ended June 30,
1994.
9
EQUITY IN EARNINGS OF INMC: The earnings of INMC, which was formed in April 1993
and in which the Company has a 99% economic interest, resulted principally from
net interest income of $389,000 and net master servicing expense of $61,000 for
the second quarter of 1994; gains from the sale of loans and securities totaled
$3.9 million and expenses totaled $2.9 million for the third quarter of 1994.
In the second quarter of 1993, equity in earnings of INMC totaled $1.0 million
which resulted principally from gains from the sale of loans and securities of
$1.1 million and expenses of $57,000.
MANAGEMENT FEES: For the three months ended June 30, 1994, management fees
were $78,000 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: CWM'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 an increase
in the earnings of the Company's mortgage conduit and warehouse lending
operations. Net loss from the CMO portfolio remained relatively stable for the
six months ended June 30, 1994 compared to 1993.
INTEREST INCOME: Total interest income was $38.0 million and $30.4 million for
the six months ended June 30, 1994 and June 30, 1993, respectively. This
increase in interest income of $7.6 million is primarily due to an increase in
interest on mortgage loans held for sale and revolving warehouse lines of credit
of $13.8 million and $2.3 million, respectively, offset by a decrease in
interest income on collateral for CMOs of $12.1 million. Additionally, since
CWM 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 $19.5 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 $541.6 million, $78.8 million and $58.0 million, respectively, for
the first six months of 1994 and earned interest at an effective yield of
approximately 7.20%, 6.88% 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 million 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.
INTEREST EXPENSE: For the six months ended June 30, 1994 and June 30, 1993,
total interest expense was $29.4 million and $31.2 million, respectively. This
decrease in interest expense of $1.8 million was due to an increase in interest
expense on reverse-repurchase agreements of $11.3 million offset by a decrease
in interest expense on CMOs of $13.1 million.
10
Interest expense on reverse-repurchase agreements was $13.7 million on average
balances of $620.7 million representing a 4.41% effective yield 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 an effective yield of 3.82%.
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.
Master Servicing, Net: Gross master servicing income for CWM was $3.8 million
for the six months ended June 30, 1994. This gross income was offset by
amortization of master servicing fees receivable of $1.4 million for the six
months ended June 30, 1994.
EQUITY IN EARNINGS OF INMC: The earnings of INMC, which was formed in April 1993
and in which the Company has a 99% economic interest, resulted principally from
net interest income of $2.8 million and net master servicing expense of $1.6
million; gains from the sale of loans and securities and gains from the sale of
servicing totaled $863,000 and $5.8 million, respectively and expenses totaled
$6.8 million for the six months ended June 30, 1994. For the six months ended
June 30, 1993, equity in earnings for INMC totaled $1.0 million. INMC's
earnings resulted principally from gains from the sale of loans and securities
of $1.1 million and expenses of $57,000 for the six months ended June 30, 1993.
MANAGEMENT FEES: For the six months ended June 30, 1994 and 1993, management
fees were $178,000 and $203,000, respectively. 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.
LIQUIDITY AND CAPITAL RESOURCES
Historically, CWM 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 CMOs or, through INMC, issues REMIC securities to
help meet such needs. CWM 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 CWM. As of June 30, 1994, CWM had no
outstanding borrowings under this agreement.
CWM 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 for both CWM and
INMC. (INMC may borrow under CWM's agreement). 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. Repayment of any borrowings by INMC under either of these
facilities is guaranteed by CWM.
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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. CWM and INMC, to
the extent permitted by its by-laws, may issue other debt securities or incur
other types of indebtedness from time to time.
The REIT provisions of the Internal Revenue Code restrict CWM's ability to
retain earnings and thereby replenish the capital committed to its mortgage
portfolio by requiring CWM 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. 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 CWM's stockholders held on May 17, 1994, the
stockholders voted on several proposals in addition to the election of CWM's
directors. The stockholders voted to amend CWM's Certificate of Incorporation
to change CWM'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 CWM's Certificate of Incorporation for the
purpose of preventing ownership of CWM'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 CWM'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 CWM 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 February 1, 1995.
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
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