SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the period ended March 31, 1995
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.
- --------------------------------------------------------------------------------
(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 March 31, 1995: 40,393,656 shares
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CWM Mortgage Holdings, Inc. and Subsidiaries
Consolidated Balance Sheets
(Dollar amounts in thousands)
(Unaudited)
March 31, 1995 December 31, 1994
-------------- -----------------
ASSETS
Mortgage assets
Mortgage loans held for sale $ 627,359 $ 608,240
Mortgage loans held for investment 1,023,285 899,672
Collateral for CMOs 226,285 233,690
Master servicing fees receivable 136,438 120,954
Construction loans receivable 19,227 6,370
Revolving warehouse lines of credit 63,694 69,591
Cash 5,082 2,605
Investment in and advances to INMC 95,164 40,032
Other assets 20,353 16,490
-------------- --------------
Total assets $ 2,216,887 $ 1,997,644
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Reverse-repurchase agreements $ 1,690,162 $ 1,534,189
Collateralized mortgage obligations 195,030 202,259
Accounts payable and accrued liabilities 5,366 5,176
-------------- --------------
Total liabilities 1,890,558 1,741,624
Commitments and contingencies - -
Shareholders' equity
Common stock - authorized, 60,000,000 shares of
$.01 par value; issued and outstanding, 40,393,656 shares
in 1995 and 32,281,156 in 1994 404 323
Additional paid-in capital 327,157 258,240
Net unrealized gain (loss) on available-for-sale securities
held by INMC 1,098 (890)
Cumulative earnings 110,366 100,137
Cumulative distributions to shareholders (112,696) (101,790)
-------------- --------------
Total shareholders' equity 326,331 256,020
-------------- --------------
Total liabilities and shareholders' equity $ 2,216,887 $ 1,997,644
============== ==============
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)
Three Months Ended March 31,
----------------------------------------
1995 1994
---------- ----------
REVENUES
Interest income
Mortgage loans held for sale $ 10,635 $ 11,058
Mortgage loans held for investment 20,206 -
Collateral for CMOs 4,681 6,249
Master servicing, net 2,915 -
Revolving warehouse lines of credit 1,205 1,422
Advances to INMC 1,395 617
Other 493 23
--------- ---------
Total interest income 41,530 19,369
Interest expense
Reverse-repurchase agreements 24,111 7,109
Collateralized mortgage obligations 4,876 8,643
---------- ----------
Total interest expense 28,987 15,752
Net interest income 12,543 3,617
Equity in earnings (losses) of INMC (623) 1,789
Other, net 162 324
---------- ----------
Net revenues 12,082 5,730
EXPENSES
General and administrative 1,086 576
Management fees to affiliate 767 101
---------- ----------
Total expenses 1,853 677
---------- ----------
NET EARNINGS $ 10,229 $ 5,053
========== ==========
EARNINGS PER SHARE $0.28 $0.16
========== ==========
Weighted average shares outstanding 36,979,444 32,107,771
========== ==========
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)
Three Months Ended March 31,
------------------------------------
1995 1994
----------- -----------
Cash flows from operating activities:
Net earnings $ 10,229 $ 5,053
Adjustments to reconcile net earnings
to net cash provided by operating activities:
Amortization 2,597 2,325
Provision for loan losses 200 -
Equity in earnings of INMC 623 (1,789)
Purchases of mortgage loans held for sale (1,145,320) (1,755,462)
Principal repayments and sale of mortgage loans
held for sale and mortgage securities 1,126,201 1,764,772
Change in other assets and liabilities (4,252) 1,226
----------- -----------
Net cash (used in) provided by operating activities (9,722) 16,125
Cash flows from investing activities:
Collateral for CMOs:
Principal payments on collateral 7,037 70,417
Net change in GICs held by trustees 163 6,374
----------- -----------
7,200 76,791
Purchases of mortgage loans held for investment (138,807) 0
Principal payments on mortgage loans held for investment 16,957 5,466
Investment in master servicing fees receivable (19,051) -
Net decrease in revolving warehouse lines of credit 5,897 24,898
Net increase in construction loans receivable (12,857) -
Investment in INMC (3,961) (1,310)
Advances to INMC, net of cash repayments (49,808) (13,613)
----------- -----------
Net cash (used in) provided by investing activities (194,430) 92,232
Cash flows from financing activities:
Collateralized mortgage obligations:
Principal payments on securities (7,435) (76,499)
----------- -----------
(7,435) (76,499)
Net increase (decrease) in reverse-repurchase agreement 155,972 (29,652)
Net proceeds from issuance of common stock 68,998 576
Cash dividends paid (10,906) (3,856)
----------- -----------
Net cash provided by (used in) financing activities 206,629 (109,431)
----------- -----------
Net increase (decrease) in cash 2,477 (1,074)
Cash at beginning of period 2,605 7,099
----------- -----------
Cash at end of period $ 5,082 $ 6,025
=========== ===========
Supplemental cash flow information:
Cash paid for interest $ 26,564 $ 11,792
=========== ===========
The accompanying notes are an integral part of these statements.
4
CWM MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1995
(UNAUDITED)
NOTE A - BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Rule 10-01 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. The consolidated financial statements include the accounts of CWM
Mortgage Holdings, Inc. and its qualified REIT subsidiaries ("CWM"). The
mortgage loan conduit operations are primarily conducted through Independent
National Mortgage Corporation, Inc. ("INMC"), a taxable corporation. CWM owns
all the preferred stock and a 99% economic interest in INMC. CWM's investment
in INMC is accounted for under a method similar to the equity method. In
addition, 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 of CWM. Certain reclassifications have been made to the financial
statements for the period ended March 31, 1994 to conform to the March 31, 1995
financial statement presentation.
In the opinion of management, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation have been included.
Operating results for the three months ended March 31, 1995 are not necessarily
indicative of the results that may be expected for the year ending December 31,
1995. For further information, refer to the consolidated financial statements
and footnotes thereto included in the CWM's annual report on Form 10-K for the
year ended December 31, 1994.
NOTE B - INVESTMENT IN INMC
- ---------------------------
Summarized financial information for INMC follows (in thousands).
March 31, 1995 December 31, 1994
-------------- -----------------
Mortgage loans held for sale $349,140 $180,602
Mortgage securities 186,782 138,472
Master servicing fees receivable 31,504 29,444
Other assets 21,148 16,045
-------- --------
Total Assets $588,574 $364,563
======== ========
Reverse-repurchase agreements $477,750 $304,080
Other liabilities 15,368 20,212
Advances from CWM 66,270 16,464
Shareholders' equity 29,186 23,807
-------- --------
Total liabilities and shareholders'
equity $588,574 $364,563
======== ========
Quarter ended March 31,
----------------------------
1995 1994
-------- --------
Interest income
Mortgage loans held for sale $ 11,861 $ 6,935
Master Servicing, net 1,224 (1,498)
Mortgage securities 3,404 -
-------- --------
16,489 5,437
Interest expense 12,355 4,481
-------- --------
Net interest income 4,134 956
Gain (loss) on sale of loans &
securities (813) 4,727
Salaries and related 2,582 1,624
General and administrative 1,824 944
-------- --------
Earnings (loss) before income taxes (1,085) 3,115
Income tax provision (benefit) (456) 1,308
-------- --------
Net earnings (loss) $ (629) $ 1,807
======== ========
5
Mortgage Securities. Mortgage securities consist of mortgage derivative products
including subordinated securities and principal-only securities retained upon
the issuance of INMC's REMIC securities and one inverse floater. Contractual
maturities on the mortgage securities range from 10 to 30 years. The following
is a disclosure of the estimated fair value of mortgage securities as of March
31, 1995 and December 31, 1994 (in thousands):
NET ESTIMATED GROSS GROSS
BOOK FAIR UNREALIZED UNREALIZED
CLASSIFICATION VALUE VALUE GAINS LOSSES
- ------------------------ -------- --------- ---------- ----------
March 31, 1995:
Available-for-sale $184,869 $186,782 $4,214 $2,301
-------- -------- ------ ------
Total $184,869 $186,782 $4,214 $2,301
======== ======== ====== ======
December 31, 1994:
Available-for-sale $106,928 $105,378 $ 512 $2,062
Held-to-maturity 33,094 33,201 1,463 1,356
-------- -------- ------ ------
Total $140,022 $138,579 $1,975 $3,418
======== ======== ====== ======
During the quarter ended March 31, 1995, INMC sold mortgage securities
classified as available-for-sale with a net book value of $34.7 million (based
on specific identification) for proceeds of $36.6 million, resulting in a net
gain of $1.9 million. This net gain was comprised of gross realized gains and
gross realized losses of $1.9 million and $25,000, respectively. All securities
sold by INMC during the quarter ended March 31, 1994 occurred simultaneously
with the trade of the REMIC security. Accordingly, such assets and the related
gains and losses are not reported separately in the Consolidated Balance Sheet
and Statement of Earnings as of and for the three months ended March 31, 1994.
INMC had no trading securities at March 31, 1995 and December 31, 1994.
During the first quarter of 1995, INMC transferred its entire portfolio of
mortgage securities classified as held-to-maturity to available-for-sale. The
unrealized gain as of the date of transfer was $1.2 million. The decision to
transfer these securities to available-for-sale was based on a reassessment of
the purpose of such investments. INMC considers the category of available-for-
sale to more properly reflect INMC's intentions with respect to the mortgage
securities.
NOTE C - SUBSEQUENT EVENT
On April 19, 1995, the Board of Directors declared a cash dividend of $0.27 per
share to be paid on May 22, 1995 to shareholders of record on May 1, 1995.
6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
In its mortgage loan conduit business, the Company acts as an intermediary
between the originators of mortgage loans and permanent investors in mortgage-
backed securities secured by or representing an ownership interest in such
mortgage loans. The Company purchases "jumbo" and other "nonconforming" mortgage
loans from mortgage originators who generally retain the servicing rights. 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. 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, mortgage securities 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, acquisition or 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 operations. 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 secondary residences. Under the construction-to-permanent program,
one set of documents supports both the construction and permanent phases of the
loan. The Company earns fee income and net interest income from these programs.
In February 1995 the Company introduced a new division, Independent National
Finance Corporation (INFC), to purchase, securitize and sell mortgage loans to
borrowers with higher debt-to-income ratios and/or prior adverse credit
circumstances (i.e., "B and C" paper mortgages). The Company will recognize
gains from the sale of such loans and earn fee income and net interest income
from this program as well. As of March 31, 1995 the Company had not purchased
any loans associated with this new division.
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. 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 mortgage loans
typically carry a lower coupon, and the interest spread between these loans and
the underlying financing thus narrows. The CMO Portfolio experienced
accelerated prepayments during 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. As mortgage rates
rose during the latter part of 1994, principal prepayments on the underlying
mortgage loans declined and the Company experienced stabilization of the CMO
Portfolio resulting in a decrease in the net interest expense on the CMO
Portfolio in the first quarter of 1995 compared to the first quarter of 1994.
7
FINANCIAL CONDITION
CONDUIT AND WAREHOUSE LENDING OPERATIONS: Through INMC's mortgage loan conduit
operations, the Company purchases jumbo and other nonconforming loans from
mortgage originators who generally retain the servicing rights. During the
quarter ended March 31, 1995, CWM purchased $1.3 billion of such mortgage loans,
which were financed on an interim basis using equity and short-term borrowings
in the form of reverse-repurchase agreements. In general, the Company, through
INMC, sells the loans in the form of real estate mortgage investment conduit
("REMICs") or whole loan sales or alternatively, through CWM, invests in the
loans on a long-term basis using financing provided by CMOs and reverse-
repurchase agreements. During the quarter ended March 31, 1995, INMC sold $960
million of mortgage loans through the issuance of REMIC securities. At March
31, 1995, CWM was committed to purchase $425.4 million of mortgage loans from
various seller/servicers.
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.
Financing is also provided for 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. At March
31, 1995, CWM had extended committed lines of credit under this program in the
aggregate amount of $341.3 million, of which $63.9 million was outstanding.
The reserve for loan losses related to warehouse loans totaled $200,000 at March
31, 1995. Reverse-repurchase agreements associated with CWM's financing of
these lines of credit totaled $27 million at March 31, 1995.
The Company's construction lending program provides tract construction loans to
small-to-medium size builders and construction-to-permanent financing to
individual borrowers. At March 31, 1995 CWM had loan commitments totaling $39.8
million for tract construction and $22.7 million for construction-to-permanent
financing, of which $9.0 million and $10.5 million was outstanding,
respectively. In addition, the reserve for loan losses totaled $300,000 at
March 31, 1995.
CMO PORTFOLIO: As of March 31, 1995, the CMO Portfolio was comprised of 14
series of CMOs issued from CWM's inception through 1990 ("Pre-1993 CMO
Portfolio") and two series of CMOs which were issued in 1993 by CWM in
connection with its mortgage conduit operation. Disclosures relative to the CMO
Portfolio include both groups of CMOs.
Collateral for CMOs decreased from $233.7 million at December 31, 1994 to $226.3
million at March 31, 1995. This decrease of $7.4 million included repayments
(including prepayments and premium and discount amortization) of $7.1 million
and a decrease in guaranteed investment contracts ("GICs") held by trustees and
accrued interest receivable of $163,000 and $99,000 respectively. The fair
value of the collateral for CMOs totaled $223.9 million and $224.2 million at
March 31, 1995 and December 31, 1994, respectively. CWM's CMOs outstanding
decreased to $195.0 million at March 31, 1995 from $202.3 million at December
31, 1994. This decrease of $7.3 million resulted from principal payments
(including discount amortization) on CMOs of $7.2 million and a decrease in
accrued interest payable on CMOs of $69,000.
8
RESULTS OF OPERATIONS
QUARTER ENDED MARCH 31, 1995 COMPARED TO QUARTER ENDED MARCH 31, 1994
NET EARNINGS: CWM's net earnings were $10.2 million or $0.28 per share, based on
36,979,444 weighted average shares outstanding for the quarter ended March 31,
1995 compared to $5.1 million or $0.16 per share, based on 32,107,771 weighted
average shares outstanding for the quarter ended March 31, 1994. The increase
in net earnings of $5.1 million was primarily due to a $2.9 million increase
associated with CWM's mortgage conduit activities, including CWM's equity in
earnings (losses) of INMC, and its warehouse lending and construction lending
operations combined with a $2.2 million decrease in net interest expense
associated with the CMO portfolio.
The increase in net earnings related to CWM's mortgage conduit activities of
$2.9 million is principally due to an increase in net interest income of $6.7
million, offset by an increase in expenses of $1.2 million and a decrease in the
equity in earnings of INMC and other revenue of $2.6 million.
INTEREST INCOME: Total interest income was $41.5 million for the quarter ended
March 31, 1995 and $19.4 million for the quarter ended March 31, 1994. This
increase in interest income of $22.1 million is primarily due to an increase in
interest on mortgage loans held for investment and interest on master servicing
of $20.2 million and $2.9 million, respectively, offset by a decrease in
interest income on collateral for CMOs of $1.5 million.
Interest income on mortgage loans held for investment totaled $20.2 million on
aggregate average principal approximating $991 million with interest earned at
an effective yield of 8.27% for the quarter ended March 31, 1995. For the
quarter ended March 31, 1994, there were no mortgage loans held for investment.
Interest income earned on mortgage loans held for sale and revolving warehouse
lines of credit was $10.6 million and $1.2 million, respectively, for the first
quarter of 1995, compared to $11.1 million and $1.4 million, respectively, for
the corresponding quarter of 1994. The weighted average principal balance
outstanding of mortgage loans held for sale and revolving warehouse lines of
credit approximated $455.3 million and $49.0 million, respectively, for the
first quarter of 1995 and earned interest at an effective yield of approximately
9.47% and 9.97%, respectively, compared to average principal balances of $694.8
million and $88.3 million, respectively for the first quarter of 1994 with
interest earned at an effective yield of 6.36% and 6.45%, respectively.
Interest income on collateral for CMOs was $4.7 million and $6.2 million for the
quarters ended March 31, 1995 and 1994, respectively. The decline was primarily
attributable to a decrease in the average aggregate principal amount of
collateral for CMOs outstanding, from $364.8 million for the quarter ended March
31, 1994 to $227.8 million for the quarter ended March 31, 1995, partially
offset by an increase in the effective yield earned on the collateral from 6.85%
in the first quarter of 1994 to 8.33% in the first quarter of 1995. Interest
income on collateral for CMOs includes the impact of 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 holdings
(GICs) until such amounts are used to repay CMOs. Accordingly, as interest
rates increase and prepayments decline, as in the first quarter of 1995,
amortization of premium declines and the amount of the non-earning asset
associated with the delay in the receipt of prepayments combined with the lower
yielding GICs are reduced relative to the portfolio, resulting in a higher
effective yield.
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. In addition, in October 1994, CWM began investing in master servicing
fees receivable associated with REMIC securities issued by INMC. Accordingly,
as of March 31, 1995, CWM had master servicing fees receivable totaling $136.4
million. Gross master servicing income for CWM was $6.5 million for the quarter
ended March 31, 1995. This gross income was offset by amortization of master
servicing fees receivable of $3.6 million for the quarter ended March 31, 1995.
9
INTEREST EXPENSE: For the three months ended March 31, 1995 and 1994, total
interest expense was $29.0 million and $15.8 million, respectively. This
increase in interest expense of $13.2 million was due to an increase in interest
expense on reverse-repurchase agreements of $17.0 million offset by a decrease
in interest expense on CMOs of $3.8 million.
Interest expense on reverse-repurchase agreements financing mortgage loans held
for sale, revolving warehouse lines of credit and master servicing fees
receivable was $24.1 million which resulted in a 6.70% effective rate based upon
average balance outstanding of $1.5 billion for the first quarter of 1995.
Interest expense on reverse-repurchase agreements financing mortgage loans held
for sale and revolving warehouse lines of credit was $7.1 million which resulted
in a 4.14% effective rate based upon average balance outstanding of $687 million
for the three months ended March 31, 1994.
Interest expense on CMOs was $4.9 million and $8.6 million for the three months
ended March 31, 1995 and 1994, respectively. This decrease was primarily
attributable to a decrease in average aggregate CMOs outstanding from $330.2
million for the quarter ended March 31, 1994 to $198.5 million for the quarter
ended March 31, 1995 and a decrease in the effective rate on the CMOs from
10.47% in the first quarter of 1994 to 9.96% in the first quarter of 1995. 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. As interest rates increase and prepayments
decline on the underlying collateral, the amortization of original issue
discount and bond issue costs also decreases resulting in a lower effective rate
on the portfolio.
EQUITY IN EARNINGS OF INMC: The 1995 first quarter $629,000 loss for INMC, in
which CWM has a 99% economic interest, resulted principally from net interest
income of $4.1 million, including net master servicing income of $1.2 million,
loss on sale of loans and securities of $813,000, expenses of $4.4 million, and
income tax benefit of $456,000. During the first quarter of 1994, the earnings
of INMC resulted principally from net interest income of $956,000, including net
master servicing expense of $1.7 million, gain on sale of loans and securities
of $4.7 million, expenses of $2.6 million and income taxes of $1.3 million.
GENERAL AND ADMINISTRATIVE EXPENSE: The increase in general and administrative
expense in the first quarter of 1995 compared to the first quarter of 1994 is
primarily the result of salaries and operating costs related to the expansion of
the warehouse lending operation and the start up of the construction lending
operation in August 1994.
MANAGEMENT FEES: For the three months ended March 31, 1995, management fees
were $767,000 compared to $101,000 for the three months ended March 31, 1994.
This increase was primarily due to incentive compensation of $725,000 for the
first quarter of 1995, directly related to the increase in CWM's earnings in the
first quarter of 1995. No incentive fee was incurred relative to the first
quarter of 1994.
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 CMOs or, through INMC, issues REMIC
securities to help meet such needs. CWM may also borrow collateral or funds
from Countrywide Funding Corporation ("CFC") to meet collateral maintenance
requirements under reverse-repurchase agreements or margin calls on forward
securities sales. These borrowings are made pursuant to a $10.0 million one-
year, unsecured line of credit which expires on September 30, 1995 subject to
extension by CFC and CWM. As of March 31, 1995, CWM had no outstanding
borrowings under this agreement.
In February 1995, the Company completed an additional public offering in which
8.05 million shares of the Company's common stock were issued at an offering
price of $9.125 per share. The offering increased the total capitalization of
the Company to approximately $315 million. The net proceeds from this offering
of $69 million will be used to continue the Company's mortgage loan acquisition
and securitization activities, to expand its construction lending operations and
to fund INFC. Pending
10
deployment of the proceeds to these various activities, such funds have been
used to reduce the Company's outstanding indebtedness. Additionally during the
first quarter of 1995, the Company signed a two year commitment letter with
First Union National Bank for a revolving multi-tranche line of credit in the
amount of $100 million to finance its tract construction lending activities,
master servicing fees receivable, and other assets of the Company which it was
not able to previously finance.
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 taxable 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 debt or 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 investment
portfolio if the yield on such holdings does not keep pace with increases in
interest rates. As a result of decreased market values it could be necessary
for the Company to borrow additional funds and pledge additional assets to
maintain financing for its holdings that have not been financed to maturity
through the issuance of CMOs or other debt securities. Increases in short-term
borrowing rates relative to rates earned on holdings that have not been financed
to maturity through the issuance of CMOs or other debt securities may also
adversely affect the Company's earnings. However, the Company has implemented a
hedging strategy which 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 such assets than would otherwise have been obtained. However, higher
rates of interest may also discourage potential mortgagors from borrowing or
refinancing mortgage loans, thus decreasing the volume of loans available to be
purchased through the 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.
11
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
Exhibits
--------
27 Financial Data Schedule
Reports on Form 8-K.
--------------------
None
12
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Pasadena, State of California, on May 15, 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
13