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, 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 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, 1995: 40,887,037 shares
1
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CWM Mortgage Holdings, Inc. and Subsidiaries
Consolidated Balance Sheets
(Dollar amounts in thousands)
(Unaudited)
September 30, 1995 December 31, 1994
------------------ -----------------
ASSETS
Mortgage assets
Mortgage loans held for sale $ 291,416 $ 608,240
Mortgage loans held for investment 1,352,982 899,672
Collateral for CMOs 201,750 233,690
Master servicing fees receivable 127,817 120,954
Construction loans receivable 71,286 6,370
Revolving warehouse lines of credit 143,138 69,591
Cash and cash equivalents 17,308 2,605
Investment in and advances to INMC 108,512 40,032
Other assets 20,715 16,490
------------------ ----------------
Total assets $ 2,334,924 $ 1,997,644
================== ================
LIABILITIES AND SHAREHOLDERS' EQUITY
Reverse-repurchase agreements and other borrowings $ 1,813,366 $ 1,534,189
Collateralized mortgage obligations 172,171 202,259
Accounts payable and accrued liabilities 14,864 5,176
------------------ ----------------
Total liabilities 2,000,401 1,741,624
Commitments and contingencies - -
Shareholders' equity
Common stock - authorized,100,000,000 shares of
$.01 par value; issued and outstanding, 40,887,037 shares
in 1995 and 32,281,156 in 1994 409 323
Additional paid-in capital 332,212 258,240
Net unrealized gain (loss) on available-for-sale securities
held by INMC 1,874 (890)
Cumulative earnings 135,819 100,137
Cumulative distributions to shareholders (135,791) (101,790)
------------------ ----------------
Total shareholders' equity 334,523 256,020
------------------ ----------------
Total liabilities and shareholders' equity $ 2,334,924 $ 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)
QUARTER ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
------------------------------- ---------------------------------
1995 1994 1995 1994
-------------- -------------- --------------- --------------
REVENUES
Interest income
Mortgage loans held for sale $ 8,313 $ 7,010 $ 29,083 $ 26,290
Mortgage loans held for investment 26,849 3,412 68,033 6,121
Collateral for CMOs 4,191 5,152 13,434 16,899
Master servicing, net 2,246 2,194 8,257 4,578
Construction loans 1,911 8 3,421 8
Revolving warehouse lines of credit 3,254 913 6,596 3,055
Advances to INMC 1,380 1,435 4,683 2,964
Other 118 30 182 72
-------------- -------------- --------------- --------------
Total interest income 48,262 20,154 133,689 59,987
Interest expense
Reverse-repurchase agreements & other
borrowings 31,253 8,394 82,070 22,077
Collateralized mortgage obligations 4,206 5,917 13,602 21,607
-------------- -------------- --------------- --------------
Total interest expense 35,459 14,311 95,672 43,684
-------------- -------------- --------------- --------------
Net interest income 12,803 5,843 38,017 16,303
Provision for loan losses 1,082 - 2,399 -
-------------- -------------- --------------- --------------
Net interest income after
provision for loan losses 11,721 5,843 35,618 16,303
Equity in earnings of INMC 4,435 3,229 6,305 4,426
Other, net 296 139 841 575
-------------- -------------- --------------- --------------
Net revenues 16,452 9,211 42,764 21,304
EXPENSES
General and administrative 1,184 612 2,951 1,762
Management fees to affiliate 1,777 302 4,130 481
-------------- -------------- --------------- --------------
Total expenses 2,961 914 7,081 2,243
-------------- -------------- --------------- --------------
NET EARNINGS $ 13,491 $ 8,297 $ 35,683 $ 19,061
============== ============== =============== ==============
EARNINGS PER SHARE $0.33 $0.26 $0.91 $0.59
============== ============== =============== ==============
Weighted average shares outstanding 40,634,237 32,216,505 39,370,204 32,156,094
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,
-----------------------------------
1995 1994
--------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 35,683 $ 19,061
Adjustments to reconcile net earnings
to net cash provided by operating
activities:
Amortization and depreciation 13,193 6,290
Provision for loan losses 2,399 -
Equity in earnings of INMC (6,305) (4,426)
Purchases of mortgage loans held
for sale (3,008,363) (4,330,619)
Principal repayments and
proceeds from sale of mortgage
loans 2,939,883 4,703,896
Change in accrued income and
expense 5,605 (4,871)
--------------- ---------------
Net cash provided by operating
activities (17,905) 389,331
--------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Collateral for CMOs:
Principal payments on collateral 21,210 136,841
Proceeds from sale of collateral 9,205 -
Net change in GICs held by trustees 974 16,532
--------------- ---------------
31,389 153,373
Purchases of mortgage loans held for
investment (157,529) (318,296)
Principal payments on mortgage loans
held for investment 88,734 10,731
Investment in master servicing fees
receivable (19,117) (99,603)
Net (increase) decrease in
revolving warehouse lines of credit (73,889) 31,558
Net increase in construction loans
receivable (65,183) (486)
Investment in INMC (15,841) (4,541)
Advances to INMC, net of cash
repayments (43,570) (16,618)
Increase in other assets (2,992) (1,354)
--------------- ---------------
Net cash used in investing (257,998) (245,236)
activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Collateralized mortgage obligations:
Principal payments on securities (21,824) (152,974)
Redemption of CMO (9,022) -
--------------- ---------------
(30,846) (152,974)
Net increase in reverse-repurchase 279,176 23,035
agreements
Net proceeds from issuance of common
stock 74,058 1,231
Cash dividends paid (34,001) (14,799)
Increase in other liabilities 2,219 1,226
--------------- ---------------
Net cash provided by (used in) 290,606 (142,281)
financing activities --------------- ---------------
Net increase in cash 14,703 1,814
Cash at beginning of period 2,605 7,099
--------------- ---------------
Cash at end of period $ 17,308 $ 8,913
=============== ===============
Supplemental cash flow information:
Cash paid for interest $ 86,800 $ 40,990
=============== ===============
The accompanying notes are an integral part of these statements.
4
CWM MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 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 September 30, 1994 to conform to the September
30, 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 nine months ended September 30, 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 CWM's annual report on Form 10-K
for the year ended December 31, 1994.
NOTE B - RESERVE FOR CREDIT LOSSES
- ----------------------------------
The Company maintains a reserve for possible credit losses on mortgage loans
held for sale and investment, construction loans and warehouse lines of credit.
Additions to the reserve are based on an assessment of certain factors,
including but not limited to estimated future losses on the loans, general
economic conditions and trends in portfolio volume, composition, maturity and
delinquency statistics. Additionally, since the Company's various loan
portfolios are relatively immature, the Company looks at historical statistics
of loan portfolios with similar characteristics at other financial institutions.
Additions to the reserve are provided through a charge to earnings. Actual
losses on loans are recorded as a charge-off or a reduction to the loan loss
reserve. The balance in the reserve at December 31, 1994 totaled $500,000.
During the nine months ended September 30, 1995, CWM and INMC provided $2.4
million and $1.4 million, respectively, to the allowance for credit losses and
recorded charge-offs of $42,000 and $376,000, respectively, during the nine
months ended September 30, 1995. The reserve is allocated to mortgage loans held
for investment, construction loans and warehouse lines of credit in the amounts
of $1.8 million, $567,000 and $500,000, respectively. The reserve for credit
losses related to mortgage loans held for sale maintained by INMC totaled $1.0
million at September 30, 1995.
5
NOTE C - INVESTMENT IN INMC
- ---------------------------
Summarized financial information for INMC follows (in thousands).
September 30, 1995 December 31, 1994
--------------------------------------
Mortgage loans held for sale $ 201,261 $ 180,602
Mortgage securities 271,838 138,472
Master servicing fees receivable 119,976 29,444
Other assets 24,050 16,045
--------------------------------------
Total assets $ 617,125 $ 364,563
======================================
Reverse-repurchase agreements $ 489,766 $ 304,080
Other liabilities 18,358 20,212
Advances from CWM 60,034 16,464
Shareholders' equity 48,967 23,807
--------------------------------------
Total liabilities and
shareholders' equity $ 617,125 $ 364,563
======================================
Quarter ended Nine months ended
September 30, September 30,
------------------------ ------------------------
1995 1994 1995 1994
Interest income
Mortgage loans held for sale $ 8,693 $ 7,636 $ 33,975 $ 19,221
Mortgage securities 5,372 2,012 13,445 2,368
Master servicing, net 2,937 1,389 6,349 (168)
------------------------ ------------------------
Total interest income 17,002 11,037 53,769 21,439
Interest expense 11,713 8,619 39,020 17,737
------------------------ ------------------------
Net interest income 5,289 2,418 14,749 3,702
Provision for loan losses 767 - 1,417 -
------------------------ ------------------------
Net interest income after 4,522 2,418 13,332 3,702
provision for loan losses
Gain on sale of mortgage 9,133 7,090 13,393 7,955
loans & securities
Gain on sale of servicing - - - 5,834
------------------------ ------------------------
Net revenues 13,655 9,508 26,725 17,491
Salaries and related expenses 3,241 2,105 9,081 5,798
General and administrative 2,056 1,581 5,797 3,763
expenses
Management fees to affiliate 463 197 695 222
------------------------ ------------------------
Total expenses 5,760 3,883 15,573 9,783
------------------------ ------------------------
Earnings before income 7,895 5,625 11,152 7,708
taxes
Income tax provision 3,416 2,363 4,784 3,237
------------------------ ------------------------
Net earnings $ 4,479 $ 3,262 $ 6,368 $ 4,471
======================== ========================
6
Mortgage Securities. Mortgage securities consist of mortgage derivative products
including subordinated securities, principal-only securities and inverse
floaters primarily invested in or retained in connection with the issuance of
INMC's REMIC securities. 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 September 30, 1995 and December 31, 1994 (in
thousands):
NET ESTIMATED GROSS GROSS
BOOK FAIR UNREALIZED UNREALIZED
CLASSIFICATION VALUE VALUE GAINS LOSSES
- -------------- ----- ----- ----- ------
September 30, 1995:
Available-for-sale $268,574 $271,838 $8,338 $5,074
======================================================
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 September 30, 1995, INMC sold mortgage securities
classified as available-for-sale with a net book value of $42.6 million (based
on specific identification) for proceeds of $44.2 million, resulting in a gross
realized gain of $1.6 million. For the nine month period ended September 30,
1995, INMC sold mortgage securities classified as available-for-sale with a net
book value of $107.1 million for proceeds of $113.3 million, resulting in a net
gain of $6.1 million. This net gain was comprised of gross realized gains and
gross realized losses of $6.2 million and $89,000, respectively. The estimated
fair value as of September 30, 1995 in the above table reflects the impact of
lower overall interest rates during the quarter, offset by a widening of spreads
on certain types of securities. All mortgage securities sold by INMC during the
nine months ended September 30, 1994 occurred simultaneously with the trade of
the related 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 nine months ended September 30, 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 D - SUBSEQUENT EVENT
On October 17, 1995, the Board of Directors declared a cash dividend of $0.33
per share to be paid on December 1, 1995 to shareholders of record on October
27, 1995.
In August, 1995, the Company's registration statement relating to the Company's
amended and restated Dividend Reinvestment and Stock Purchase Plan was declared
effective. In September and October, 1995 the Company raised $3.4 million and
$4.6 million, respectively, of capital through the issuance of 254,881 and
347,429 shares of common stock, respectively, in connection with this Plan.
On October 27, 1995 the Company completed the private placement of senior
unsecured notes in the aggregate amount of $60.5 million with institutional
lenders. The notes bear interest at rates of 8.86% to 8.91% and mature on
October 15, 2002. The notes require principal repayment in three equal annual
installments beginning on October 15, 2000.
7
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, the net interest earned on its long-term investment portfolio
and mortgage securities, and master servicing fee income. In addition, the
Company earns fee income and net interest income through its construction and
warehouse lending programs. The construction lending operation provides tract
financing on a nationwide basis to small-to-medium size builders (tract
construction) and consumer construction and lot financing to individual
borrowers who wish to construct or remodel their principal or secondary
residences. The warehouse lending operation provides financing to small and
medium-size mortgage originators 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 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 earns fee income
and net interest income from this program and will recognize gains or losses
from the sale of such loans once adequately sized pools of loans have been
purchased for securitization.
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 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 nine months of 1995 compared to the same period of 1994.
8
FINANCIAL CONDITION
CONDUIT OPERATIONS: Through the mortgage loan conduit operations, the Company
purchases jumbo and other nonconforming loans from mortgage originators who
generally retain the servicing rights. During the nine months ended September
30, 1995, the Company purchased $3.2 billion of non-conforming mortgage loans,
which were financed on an interim basis using equity and short-term borrowings
in the form of reverse-repurchase agreements and other borrowings. 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,
reverse-repurchase agreements and other borrowings. During the nine months
ended September 30, 1995, INMC sold $2.9 billion of mortgage loans through the
issuance of 17 series of multiple-class mortgage-backed securities in the form
of REMICs and sold $17 million of non-conforming mortgage loans as whole loans.
At September 30, 1995, CWM was committed to purchase $416.5 million of mortgage
loans from various mortgage originators. The master servicing portfolio at
September 30, 1995 had an aggregate outstanding principal balance of $9.0
billion with a weighted average coupon of 8.23% compared to $6.3 billion at
September 30, 1994 with a weighted average coupon of 7.22%. Additionally,
during the nine months ended September 30, 1995, $12.6 million in "B and C"
paper mortgage loans were purchased by the Company.
CONSTRUCTION LENDING OPERATIONS: The Company's construction lending program
provides tract construction loans to small-to-medium size builders and consumer
construction financing to individual borrowers. At September 30, 1995 CWM had
loan commitments totaling $139.1 million for tract construction and $66.1
million for consumer construction financing, of which $39.7 million and $32.2
million was outstanding, respectively. The reserve for loan losses related to
construction loans totaled $567,000 at September 30, 1995. The Company had
outstanding borrowings under a revolving credit facility totaling $48.8 million
at September 30, 1995 associated with the financing of construction loans.
WAREHOUSE LENDING OPERATIONS: The Company's warehouse lending program provides
secured short-term revolving financing to small- and medium-size mortgage
originators 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 September 30, 1995, CWM had extended committed
lines of credit under these programs to 110 borrowers in the aggregate amount of
$337.0 million, of which $143.6 million was outstanding. The aggregate
committed lines of credit totaled $328.3 million at September 30, 1994 with
outstanding balances of $60.5 million. The reserve for loan losses related to
warehouse lines totaled $500,000 and $0 at September 30, 1995 and 1994,
respectively. Reverse-repurchase agreements associated with CWM's financing of
these lines of credit totaled $115.5 million and $36.9 million at September 30,
1995 and 1994, respectively.
CMO PORTFOLIO: As of September 30, 1995, the CMO Portfolio was comprised of 12
series of CMOs issued from CWM's inception. Collateral for CMOs decreased from
$233.7 million at December 31, 1994 to $201.8 million at September 30, 1995.
This decrease of $31.9 million included repayments (including prepayments and
premium and discount amortization) of $21.4 million, the sale and transfer of
mortgage securities in connection with the redemption of one series totaling
$9.1 million and a decrease in guaranteed investment contracts ("GICs") held by
trustees and accrued interest receivable of $974,000 and $427,000, respectively.
The fair value of the collateral for CMOs totaled $199.9 million and $224.2
million at September 30, 1995 and December 31, 1994, respectively. CWM's CMOs
outstanding decreased to $172.2 million at September 30, 1995 from $202.3
million at December 31, 1994. This decrease of $30.1 million resulted from
principal payments (including the early redemption of one series in the amount
of $9.0 million and discount amortization) on CMOs of $29.7 million and a
decrease in accrued interest payable on CMOs of $371,000.
9
RESULTS OF OPERATIONS
QUARTER ENDED SEPTEMBER 30, 1995 COMPARED TO QUARTER ENDED SEPTEMBER 30, 1994
NET EARNINGS: CWM's net earnings were $13.5 million or $0.33 per share, based on
40,634,237 weighted average shares outstanding for the quarter ended September
30, 1995, compared to $8.3 million or $0.26 per share, based on 32,216,505
weighted average shares outstanding for the quarter ended September 30, 1994.
The increase in net earnings of $5.2 million was due to a $4.5 million increase
associated with CWM's mortgage conduit, warehouse and construction lending
activities, including CWM's equity in earnings of INMC, combined with a $750,000
decrease in net interest expense associated with the CMO Portfolio.
The increase in net earnings related to CWM's mortgage conduit, warehouse and
construction lending activities of $4.5 million is principally due to an
increase in net interest income of $6.2 million and an increase in CWM's equity
in earnings of INMC of $1.2 million, offset by a provision for loan losses of
$1.1 million and an increase in management fee expense of $1.5 million.
INTEREST INCOME: Total interest income was $48.2 million for the quarter ended
September 30, 1995 and $20.1 million for the quarter ended September 30, 1994.
This increase in interest income of $28.1 million is primarily due to an
increase in interest on mortgage loans held for investment of $23.4 million with
additional increases in mortgage loans held for sale, warehouse lines of credit
and construction loans of $1.3 million, $2.3 million and $1.9 million,
respectively, offset by a decrease of $1.0 million in the interest income on CMO
collateral.
Interest income on mortgage loans held for investment, consisting primarily of
adjustable rate mortgages, totaled $26.8 million and $3.4 resulting in an
effective yield of 7.92% and 6.33% for the quarters ended September 30, 1995
and 1994, respectively. Interest income earned on mortgage loans held for sale
totaled $8.3 million and $7.0 million resulting in an effective yield of 9.00%
and 7.53% for the quarters ended September 30, 1995 and 1994, respectively.
Interest income earned on revolving warehouse lines of credit totaled $3.3
million and $913,000 with interest earned at an effective yield of 9.55% and
7.99% for the quarters ended September 30, 1995 and 1994, respectively.
Interest income on construction loans totaled $1.9 million and $8,000 with
interest earned at an effective yield of 13.40% and 12.68% for the quarters
ended September 30, 1995 and 1994, respectively.
Interest income on collateral for CMOs was $4.2 million and $5.2 million for the
quarters ended September 30, 1995 and 1994, respectively. The decline was
primarily attributable to a decrease in the average aggregate principal amount
of collateral for CMOs outstanding to $210.4 million for the quarter ended
September 30, 1995 compared to $255.9 million for the quarter ended September
30, 1994 and a decrease in the effective yield earned on the collateral for
CMOs to 7.90% in the third quarter of 1995 from 8.05% in the third quarter of
1994. Interest income on collateral for CMOs includes the impact of
amortization of premiums paid in connection with acquiring the portfolio and the
impact of the delay in the receipt of prepayments and temporary investment in
lower yielding short-term holdings (GICs) until such amounts are used to repay
CMOs. The Company sold higher yielding mortgage-backed securities in the third
quarter of 1995 in connection with the early redemption of one CMO series
totaling $9.0 million. The sale of the higher yielding securities resulted in a
reduction in the overall yield on the collateral in the third quarter of 1995.
MASTER SERVICING, NET: Beginning in the third quarter of 1994, INMC began to
repay its then-outstanding 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
certain master servicing fees receivable associated with REMIC securities issued
by INMC. Accordingly, as of September 30, 1995, CWM had master servicing
fees receivable totaling $127.8 million. Gross master servicing income for CWM
was $6.8 million for the quarter ended September 30, 1995. This gross income
was offset by amortization of master servicing fees receivable of $4.6 million
for the quarter ended September 30, 1995. For the quarter ended September 30,
1994,
10
gross master servicing income totaled $4.8 million, offset by amortization of
master servicing fees receivable of $2.6 million.
INTEREST EXPENSE: For the quarters ended September 30, 1995 and 1994, total
interest expense was $35.5 million and $14.3 million, respectively. This
increase in interest expense of $21.2 million was due to an increase in interest
expense on reverse-repurchase agreements and other borrowings of $22.8 million
offset by a decrease in interest expense on CMOs of $1.7 million.
Interest expense on reverse-repurchase agreements and other borrowings used to
finance mortgage loans held for sale and investment, revolving warehouse lines
of credit, construction loans and master servicing fees receivable totaled $31.3
million for the quarter ended September 30, 1995, compared to $8.4 million for
the quarter ended September 30, 1994. This increase was principally the result
of an increase in the aggregate average balance of indebtedness outstanding for
the period to $1.9 billion for the quarter ended September 30, 1995 compared to
$636 million for the quarter ended September 30, 1994, combined with an increase
in the weighted average effective rate applicable to such indebtedness to 6.70%
for the quarter ended September 30, 1995 from 5.28% for the quarter ended
September 30, 1994.
Interest expense on CMOs was $4.2 million and $5.9 million for the quarter ended
September 30, 1995 and 1994, respectively. This decrease was primarily
attributable to a decrease in average aggregate CMOs outstanding to $179.6
million for the quarter ended September 30, 1995 from $234.2 million for the
quarter ended September 30, 1994, and a decrease in the effective rate on the
CMOs to 9.29% in the third quarter of 1995 from 10.11% in the third quarter of
1994. The decrease in the average balance of CMOs includes the early redemption
of one CMO series totaling $9.0 million in the third quarter of 1995 and
reflects higher prepayment activity in the third quarter of 1994 compared to the
third quarter of 1995. 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 decrease, resulting in a lower effective rate on the portfolio.
EQUITY IN EARNINGS OF INMC: The 1995 third quarter earnings of $4.5 million for
INMC, in which CWM has a 99% economic interest, resulted principally from net
interest income of $5.3 million, including gross master servicing income of $6.8
million and amortization of master servicing fees receivable of $3.9 million,
gain on sale of loans and securities of $9.1 million, offset by expenses of $5.3
million, management fee expense of $463,000, a provision for loan losses of
$767,000 and income taxes of $3.4 million. During the third quarter of 1994,
the earnings of INMC totaled $3.3 million and resulted principally from net
interest income of $2.4 million, including gross master servicing income
totaling $2.6 million and amortization of master servicing fees receivable of
$1.2 million, gain on sale of loans and securities of $7.1 million, expenses of
$3.7 million, management fee expense of $197,000 and income taxes of $2.4
million.
GENERAL AND ADMINISTRATIVE EXPENSE: The increase in general and administrative
expense in the third quarter of 1995 compared to the third quarter of 1994 is
primarily the result of increased salaries and operating costs related to the
construction lending and warehouse lending operations as the Company has
developed and expanded these business lines.
MANAGEMENT FEES: For the three months ended September 30, 1995, management fees
were $1.8 million compared to $302,000 for the three months ended September 30,
1994. The increase in the management fee of $1.5 million was primarily due to
an increase in contractually established incentive compensation for the third
quarter of 1995, directly related to the increase in CWM's earnings in the third
quarter of 1995. Regular management fees also increased due to increased
average balances of the mortgage loans held for investment and warehouse lines
of credit.
NINE MONTHS ENDED SEPTEMBER 30, 1995 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1994
NET EARNINGS: CWM's net earnings were $35.7 million or $0.91 per share, based on
39,370,204 weighted average shares outstanding for the nine months ended
September 30, 1995 compared to $19.1 million or $0.59 per share, based on
32,156,094 weighted average shares outstanding for the nine months ended
September 30, 1994. The increase in net earnings of $16.6 million was primarily
due to a $12.1 million increase associated with CWM's mortgage conduit,
warehouse lending and construction
11
lending activities, including CWM's equity in earnings of INMC, combined with a
$4.5 million decrease in net interest expense associated with the CMO Portfolio.
The increase in net earnings related to CWM's mortgage conduit, warehouse
lending and construction lending activities of $12.1 million is principally due
to an increase in net interest income of $17.2 million and an increase in the
equity in earnings of INMC of $1.9 million offset by a provision for loan losses
of $2.4 million, an increase in the management fee of $3.6 million and an
increase in general and administrative expenses of $1.2 million.
INTEREST INCOME: Total interest income was $133.7 million for the nine months
ended September 30, 1995 and $60.0 million for the nine months ended September
30, 1994. This increase in interest income of $73.7 million is primarily due to
an increase in interest on mortgage loans held for investment of $61.9 million.
Additionally, interest on mortgage loans held for sale, warehouse lines of
credit, construction loans, master servicing and advances to INMC all reflected
increases of $2.8 million, $3.5 million, $3.4 million, $3.7 million and $1.7
million, respectively. These increases were offset by a decrease of $3.5 million
of interest income on CMO collateral.
Interest income on mortgage loans held for investment totaled $68.0 million and
$6.1 million, respectively, resulting in an effective yield of 8.05% and 6.58%
for the nine months ended September 30, 1995 and 1994, respectively. Interest
income earned on mortgage loans held for sale totaled $29.1 million and $26.3
million resulting in an effective yield of 9.32% and 6.86% for the nine months
ended September 30, 1995 and 1994, respectively.
Interest income on revolving warehouse lines of credit totaled $6.6 million and
$3.1 million with interest earned at an effective yield of 9.68% and 7.52% for
the nine months ended September 30, 1995 and 1994, respectively. Interest
income on construction loans totaled $3.4 million and $8,000 with interest
earned at an effective yield of 13.65% and 12.68% for the nine months ended
September 30, 1995 and 1994, respectively.
Interest income on collateral for CMOs was $13.4 million and $16.9 million for
the nine months ended September 30, 1995 and 1994, respectively. The decline
was primarily attributable to a decrease in the average aggregate principal
amount of collateral for CMOs outstanding to $220.1 million for the nine months
ended September 30, 1995, compared to $307.9 million for the nine months ended
September 30, 1994, partially offset by an increase in the effective yield
earned on the collateral to 8.16% in the first nine months of 1995 from 7.32% in
the first nine months of 1994. Interest income on collateral for CMOs includes
the impact of amortization of premiums paid in connection with acquiring the
portfolio and the impact of the 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, during periods of higher interest
rates and reduced prepayments, as in the first nine months of 1995 compared to
the first nine months of 1994, amortization of premium declines and the amount
of the non-earning assets 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: Gross master servicing income for CWM was $20.5 million
for the nine months ended September 30, 1995. This gross income was offset by
amortization of master servicing fees receivable of $12.3 million for the nine
months ended September 30, 1995. Gross master servicing income for the nine
months ended September 30, 1994 totaled $8.7 million, offset by amortization of
the master servicing fees receivable of $4.1 million.
INTEREST EXPENSE: For the nine months ended September 30, 1995 and 1994, total
interest expense was $95.7 million and $43.7 million, respectively. This
increase in interest expense of $52.0 million was due to an increase in interest
expense on reverse-repurchase agreements and other borrowings of $60.0
million offset by a decrease in interest expense on CMOs of $8.0 million.
Interest expense on reverse-repurchase agreements and other borrowings used to
finance mortgage loans held for sale and investment, revolving warehouse lines
of credit, construction loans and master servicing fees receivable totaled $82.1
million for the nine months ended September 30, 1995 compared to $22.1 million
for the nine months ended September 30, 1994. The increase in interest expense
was principally the result of an increase in the aggregate average balance of
indebtedness outstanding for the period from
12
$609.8 million for the first nine months of 1994 to $1.6 billion for the first
nine months of 1995, combined with an increase in the weighted average effective
rate applicable to such indebtedness from 4.84% to 6.75% for the nine months
ended September 30, 1994 and 1995, respectively.
Interest expense on CMOs was $13.6 million and $21.6 million for the nine months
ended September 30, 1995 and 1994, respectively. This decrease was primarily
attributable to a decrease in average aggregate CMOs outstanding to $190.2
million for the nine months ended September 30, 1995 from $282.5 million for the
nine months ended September 30, 1994, and a decrease in the effective interest
rate on the CMOs to 9.56% for the first nine months of 1995 from 10.20% for the
first nine months of 1994. The decrease in the average balance of CMOs was
directly related to the prepayment activity on collateral for CMOs as 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: Net earnings for the nine months ended September
30, 1995 for INMC of $6.4 million, in which CWM has a 99% economic interest,
resulted principally from net interest income of $14.8 million, including gross
master servicing income of $13.8 million and amortization of master servicing
fees receivable of $7.5 million, and gains on sale of loans and securities of
$13.4 million, offset by a provision for loan losses of $1.4 million, expenses
of $14.9 million, management fee expense of $695,000, and income taxes of $4.8
million. During the first nine months of 1994, net earnings of $4.5 million
for INMC resulted principally from net interest income of $3.7 million,
including gross master servicing income of $9.3 million and amortization of
master servicing fees receivable of $9.4 million, gain on sale of loans and
securities of $8.0 million and a gain on sale of servicing of $5.8 million,
offset by expenses totaling $9.6 million, management fee expense of $222,000 and
income taxes of $3.2 million.
GENERAL AND ADMINISTRATIVE EXPENSE: General and Administrative expenses
increased from $1.8 million for the first nine months of 1994 to $3.0 million
for the same period of 1995. This increase is primarily the result of increased
salaries and operating costs related to the construction lending and warehouse
lending operations as the Company has developed and expanded these business
lines.
MANAGEMENT FEES: For the nine months ended September 30, 1995, management fees
were $4.1 million compared to $481,000 for the comparable 1994 period. This
increase was primarily due to an increase in contractually established incentive
compensation for the first nine months of 1995, directly related to the increase
in CWM's earnings for the period. Regular management fees also increased in the
nine months ended September 30, 1995 due to increased average balances of the
mortgage loans held for investment and warehouse lines of credit.
LIQUIDITY AND CAPITAL RESOURCES
The Company uses proceeds from the issuance of CMOs, reverse-repurchase
agreements, other borrowings and proceeds from the issuance of common stock and
debt to meet its working capital needs. In addition, in connection with its
mortgage conduit operations, the Company issues REMIC securities to help meet
such needs.
In May 1995, the Company entered into a committed credit facility in the
aggregate amount of $100 million with First Union National Bank of North
Carolina ("First Union"). During the third quarter of 1995, the Company and
First Union completed the syndication of this credit facility with additional
lenders, resulting in an increase in the aggregate credit to $300 million and an
extension of the relevant maturity dates.
13
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 or financed through
the Company's construction and warehouse lending operations.
14
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
Exhibits
--------
27 Financial Data Schedule
Reports on Form 8-K.
--------------------
None
15
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 10, 1995.
CWM MORTGAGE HOLDINGS, INC.
By: /Michael W. Perry
-----------------
Michael W. Perry
Executive Vice President and Chief
Operating Officer
By: /Carmella L. Grahn
--------------------
Carmella L. Grahn
Senior Vice President and Chief
Accounting Officer
16