SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the period ended June 30, 1996
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 June 30, 1996: 45,259,751 shares
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
CWM MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands)
June 30, 1996 December 31, 1995
------------- -----------------
(Unaudited)
ASSETS
Mortgage assets
Mortgage loans held for investment, net $1,103,036 $1,424,583
Mortgage loans held for sale - prime 359,230 379,363
Mortgage loans held for sale - subprime 227,868 30,221
Collateral for CMOs 310,100 184,111
Construction loans receivable, net 219,301 129,323
Securitized master servicing fees 112,425 120,281
Revolving warehouse lines of credit, net 174,847 190,705
Investment in and advances to Indy Mac 140,615 145,537
Manufactured housing loans held for sale 15,648 -
Cash and cash equivalents 2,269 8,049
Other assets 26,131 31,440
---------- ----------
Total assets $2,691,470 $2,643,613
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Repurchase agreements and other credit facilities $1,947,892 $2,037,834
Collateralized mortgage obligations 285,089 164,760
Senior unsecured notes 59,699 59,649
Accounts payable and accrued liabilities 19,984 18,386
---------- ----------
Total liabilities 2,312,664 2,280,629
Commitments and contingencies - -
Shareholders' equity
Common stock - authorized, 100,000,000 shares of
$.01 par value; issued and outstanding, 45,259,751 shares
at June 30, 1996 and 42,413,842 at December 31, 1995 453 424
Additional paid-in capital 398,425 353,965
Net unrealized gain (loss) on available-for-sale mortgage
securities held by Indy Mac (21,541) 7,845
Cumulative earnings 181,875 150,148
Cumulative distributions to shareholders (180,406) (149,398)
---------- ----------
Total shareholders' equity 378,806 362,984
---------- ----------
Total liabilities and shareholders' equity $2,691,470 $2,643,613
========== ==========
The accompanying notes are an integral part of these statements.
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,
--------------------------- ----------------------------
1996 1995 1996 1995
---------- ---------- ---------- ----------
REVENUES
Interest income
Mortgage loans held for investment $ 22,627 $ 20,978 $ 49,709 $ 41,184
Mortgage loans held for sale 14,248 10,135 28,223 20,770
Collateral for CMOs 6,034 4,562 11,367 9,243
Construction loans 5,939 1,090 10,422 1,510
Securitized master servicing fees, net 2,330 3,096 4,797 6,011
Revolving warehouse lines of credit 3,831 2,137 7,650 3,342
Advances to Indy Mac 2,133 1,908 3,906 3,303
Other 58 33 142 64
----------- ----------- ----------- -----------
Total interest income 57,200 43,939 116,216 85,427
Interest expense
Repurchase agreements and other credit facilities 30,634 26,706 64,202 50,817
Collateralized mortgage obligations 5,917 4,520 11,526 9,396
Senior unsecured notes 1,347 - 2,694 -
----------- ----------- ----------- -----------
Total interest expense 37,898 31,226 78,422 60,213
----------- ----------- ----------- -----------
Net interest income 19,302 12,713 37,794 25,214
Provision for loan losses 2,646 1,075 5,049 1,317
----------- ----------- ----------- -----------
Net interest income after provision for loan losses 16,656 11,638 32,745 23,897
Equity in earnings of Indy Mac 3,646 2,493 7,191 1,870
Other, net 913 341 1,120 545
----------- ----------- ----------- -----------
Net revenues 21,215 14,472 41,056 26,312
EXPENSES
Salaries, general and administrative 2,772 923 5,186 1,767
Management fees to affiliate 2,075 1,586 4,143 2,353
----------- ----------- ----------- -----------
Total expenses 4,847 2,509 9,329 4,120
----------- ----------- ----------- -----------
NET EARNINGS $ 16,368 $ 11,963 $ 31,727 $ 22,192
=========== =========== =========== ===========
EARNINGS PER SHARE $ 0.37 $ 0.30 $ 0.72 $ 0.57
=========== =========== =========== ===========
Weighted average shares outstanding 44,649,927 40,456,769 43,877,750 38,727,712
The accompanying notes are an integral part of these statements.
CWM MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar amounts in thousands)
(Unaudited)
Six Months Ended June 30,
--------------------------------
1996 1995
----------- -----------
Cash flows from operating activities:
Net earnings $ 31,727 $ 22,192
Adjustments to reconcile net earnings
to net cash provided by (used in) operating activities:
Amortization and depreciation 11,629 6,975
Provision for loan losses 5,049 1,317
Equity in earnings of Indy Mac (7,191) (1,870)
Purchases of mortgage loans held for sale (2,112,762) (2,156,719)
Principal repayments and proceeds from sale of mortgage loans 1,928,652 2,151,699
Net increase in manufactured housing loans held for sale (15,648) -
Change in accrued income and expense 439 (1,318)
----------- -----------
Net cash provided by (used in) operating activities (158,105) 22,276
Cash flows from investing activities:
Collateral for CMOs:
Principal payments on collateral 27,072 12,258
Net change in GICs held by trustees 2,339 1,150
----------- -----------
29,411 13,408
Purchases of mortgage loans held for investment - (176,916)
Principal payments on mortgage loans held for investment 170,787 43,259
Investment in securitized master servicing fees - (19,117)
Net (increase) decrease in revolving warehouse lines of credit 15,560 (82,233)
Net increase in construction loans receivable (91,225) (37,042)
Investment in Indy Mac - (15,842)
Advances to Indy Mac, net of cash repayments (17,274) (61,671)
Increase (decrease) in other assets 2,591 (7,300)
----------- -----------
Net cash provided by (used in) investing activities 109,850 (343,454)
Cash flows from financing activities:
Collateralized mortgage obligations:
Proceeds from issuance of securities 146,931 -
Principal payments on securities (27,057) (13,862)
----------- -----------
119,874 (13,862)
Net borrowings (repayments) on repurchase agreements and
other credit facilities (89,942) 286,231
Net proceeds from issuance of common stock 44,489 70,233
Cash dividends paid (31,008) (21,821)
Increase (decrease) in other liabilities (938) 3,164
----------- -----------
Net cash provided by financing activities 42,475 323,945
----------- -----------
Net increase (decrease) in cash and cash equivalents (5,780) 2,767
Cash and cash equivalents at beginning of period 8,049 2,605
----------- -----------
Cash and cash equivalents at end of period $ 2,269 $ 5,372
=========== ===========
Supplemental cash flow information:
Cash paid for interest $ 77,089 $ 56,736
=========== ===========
Supplemental disclosure of non-cash activity:
$154.6 million of mortgage loans held for investment were transferred to
collateral for CMOs in 1996 in association with the issuance of a CMO.
The accompanying notes are an integral part of these statements.
4
CWM MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996
(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. ("Indy Mac"), a taxable corporation. CWM
owns all of the preferred stock and a 99% economic interest in Indy Mac. CWM's
investment in Indy Mac is accounted for under a method similar to the equity
method. In addition, Indy Mac is not consolidated for income tax purposes. As
used herein, the "Company" includes CWM and Indy Mac and their respective
subsidiaries.
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 June 30, 1995 to conform to the June 30, 1996
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, 1996 are not necessarily
indicative of the results that may be expected for the year ending December 31,
1996. 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, 1995.
NOTE B - ALLOWANCE FOR CREDIT LOSSES
During the six months ended June 30, 1996, CWM added $5.0 million to its
allowance for credit losses. The allowance for credit losses totaled $9.4
million at June 30, 1996, and includes reserves for mortgage loans held for
investment, construction loans and warehouse lines of credit in the amounts of
$7.1 million, $1.4 million and $947,000, respectively. CWM recorded chargeoffs
of $23,000 and $42,000 during the six months ended June 30, 1996 and 1995,
respectively.
5
NOTE C - INVESTMENT IN INDY MAC (UNAUDITED)
- -------------------------------------------
Summarized financial information for Indy Mac follows (in thousands).
June 30, 1996 December 31, 1995
------------------------------------
Mortgage loans held for sale, net $ 5,072 $ 92,088
Mortgage securities available-for-sale 366,980 350,752
Securitized master servicing fees 194,080 116,851
Master servicing fees receivable 40,891 36,570
Other assets 27,748 22,953
------------------------------------
Total assets $634,771 $619,214
====================================
Repurchase agreements and other credit facilities $475,766 $441,305
Due to CWM 100,866 83,592
Other liabilities 17,988 31,746
Shareholders' equity 40,151 62,571
------------------------------------
Total liabilities and
shareholders' equity $634,771 $619,214
====================================
Quarter ended Six months ended
June 30, June 30,
-------------------------------- ---------------------------
1996 1995 1996 1995
-------------------------------- ---------------------------
Interest income
Mortgage loans held for sale $ 829 $ 13,421 $ 2,307 $25,282
Mortgage securities
available-for-sale 8,082 4,669 15,412 8,073
Securitized master servicing fees, 2,308 387 4,201 387
net
Master servicing fees receivable, net 438 1,801 1,184 3,025
-------------------------------- ---------------------------
Total interest income 11,657 20,278 23,104 36,767
Interest expense 10,112 14,952 18,854 27,307
-------------------------------- ---------------------------
Net interest income 1,545 5,326 4,250 9,460
Provision for loan losses - 650 - 650
-------------------------------- ---------------------------
Net interest income after
provision for loan losses 1,545 4,676 4,250 8,810
Gain on sale of mortgage loans and
securities 11,456 5,073 20,857 4,260
Other 477 - 725 -
-------------------------------- ---------------------------
Net revenues 13,478 9,749 25,832 13,070
Salaries, general and administrative
expense 6,604 5,183 12,170 9,581
Management fees to affiliate 467 224 910 232
-------------------------------- ---------------------------
Total expenses 7,071 5,407 13,080 9,813
-------------------------------- ---------------------------
Earnings before income tax provision 6,407 4,342 12,752 3,257
Income tax provision 2,724 1,824 5,488 1,368
-------------------------------- ---------------------------
Net earnings $ 3,683 $ 2,518 $ 7,264 $ 1,889
================================ ===========================
6
Allowance for Credit Losses. The allowance for credit losses related to
mortgage loans held for sale totaled $1.8 million at June 30, 1996. Indy Mac
recorded charge-offs of $18,000 during the six months ended June 30, 1996. There
were no charge-offs recorded by Indy Mac during the six months ended June 30,
1995.
Mortgage Securities Available-For-Sale. Mortgage securities consist of mortgage
derivative products including subordinated securities, principal-only and
interest-only securities and inverse floater securities. These securities
primarily consist of securities retained upon the issuance of Indy Mac'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 June 30, 1996 and December 31, 1995 (in thousands):
ESTIMATED GROSS GROSS
AMORTIZED FAIR UNREALIZED UNREALIZED
COST VALUE GAINS LOSSES
--------- --------- ---------- ----------
June 30, 1996 $404,495 $366,980 $ 7,308 $44,823
=================================================
December 31, 1995 $337,088 $350,752 $17,158 $ 3,494
=================================================
During the quarter ended June 30, 1996, Indy Mac sold mortgage securities
classified as available-for-sale with an amortized cost of $72.7 million (based
upon specific identification) for proceeds of $70.9 million, resulting in gross
realized gains of $252,000 and gross realized losses of $2.1 million. For the
six month period ended June 30, 1996, Indy Mac sold mortgage securities
classified as available-for-sale with an amortized cost of $113.5 million for
proceeds of $116.7 million, resulting in a net gain of $3.2 million. This net
gain was comprised of gross realized gains and gross realized losses of $5.3
million and $2.1 million respectively. The estimated fair value as of June 30,
1996 in the above table reflects increases in market interest rates during the
first six months of 1996, combined with lower expectations of prepayment rates.
As of June 30, 1996, all of Indy Mac's mortgage securities were pledged as
collateral under repurchase agreements.
NOTE D - SUBSEQUENT EVENT
On July 18, 1996, the Board of Directors declared a cash dividend of $0.37 per
share to be paid on September 3, 1996 to shareholders of record on July 29,
1996.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
CWM Mortgage Holdings, Inc. was incorporated in the state of Maryland in July
1985 and reincorporated in the state of Delaware in March 1987. References to
"CWM" mean either the parent company alone or the parent company and the
entities consolidated for financial reporting purposes, while references to the
"Company" mean the parent company, its consolidated subsidiaries and Indy Mac
and its subsidiary which are not consolidated with CWM for financial reporting
or tax purposes.
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 ("MBS") secured by or representing an ownership interest in
such mortgage loans. The Company purchases "jumbo" and other "nonconforming"
mortgage loans from mortgage originators. The Company and its sellers negotiate
whether such sellers will retain, or the Company will purchase the rights to
service the mortgage loans delivered by such sellers to the Company. All loans
purchased by CWM, for which a Real Estate Mortgage Investment Conduit ("REMIC")
transaction or whole loan sale is contemplated, are committed for sale to Indy
Mac at the same price at which the loans were acquired by CWM. At present, Indy
Mac does not purchase any loans from entities other than CWM.
The Company's conduit operations were expanded during 1995 through the
commencement of operations of two divisions of Indy Mac: the Subprime Mortgage
Division and the Manufactured Housing Division (formerly Independent National
Finance Corporation and Independent National Housing Services, respectively)
The Subprime Mortgage Division was formed to purchase, securitize and sell
subprime mortgage loans (i.e., "B through D" paper mortgages). The Manufactured
Housing Division was formed to facilitate the purchase or origination,
securitization and sale of consumer loans secured by manufactured housing.
The Company's principal sources of income from its conduit operations are gains
recognized on the sale and securitization of loans, the net spread between
interest earned on loans and the interest costs associated with the borrowings
used to finance such loans pending their securitization, the net interest earned
on the Company's mortgage securities, and master servicing fee income.
In addition to its conduit operations, the Company earns fee income and net
interest income through its portfolio of mortgage loans held for investment and
its construction and warehouse lending programs. The construction lending
operation consists of two distinct divisions: (i) the Builder Division, which
provides tract construction loans, builder custom home loans, model home loans
and lot financing on a nationwide basis to small-to-medium-size builders, and
(ii) the Consumer Division, which provides construction-to-permanent financing,
home improvement loans and lot financing to individual borrowers who wish to
construct or remodel their principal or secondary residences. The Company's
warehouse lending operation provides financing to small-to-medium-size mortgage
originators for the origination and sale of mortgage loans, and has provided
financing for the retention, acquisition or sale of servicing rights and the
carrying of mortgage loans pending foreclosure and/or repurchase from an
investor.
In the first quarter of 1996, Indy Mac purchased Guaranty Asset Protection
Services (GAPS), a mortgage fraud detection company located in West Hills,
California. The acquisition of GAPS will allow the Company to help prevent
fraud on its existing purchase volume as well as offer fraud detection services
to the Company's base of customers and other entities.
8
FINANCIAL CONDITION
CONDUIT OPERATIONS: During the first six months of 1996, CWM purchased $2.1
billion of non-conforming mortgage loans, including $212.6 million of subprime
mortgage loans. In addition, the company purchased $15.6 million of
manufactured housing loans. These loans were financed on an interim basis using
equity and short-term financing in the form of repurchase agreements and other
credit facilities. In general, the Company, through Indy Mac, sells the loans
in the form of REMIC securities or whole loan sales or, alternatively, through
CWM invests in the loans on a long-term basis using financing provided by CMOs
or repurchase agreements and other credit facilities. During the first six
months of 1996, Indy Mac sold $1.9 billion of mortgage loans through the
issuance of eight series of multiple-class MBS in the form of REMIC securities,
and through its Subprime Mortgage Division, sold $9.9 million in a whole loan
transaction. At June 30, 1996, the Company was committed to purchase $412.3
million of mortgage loans from various mortgage originators. The Indy Mac master
servicing portfolio at quarter-end had an aggregate outstanding principal
balance of $10.4 billion with a weighted average coupon of 8.39%.
MORTGAGE LOANS HELD FOR INVESTMENT: The $1.1 billion portfolio of mortgage loans
held for investment at June 30, 1996 consisted of $776.7 million of varying
types of adjustable-rate products which contractually reprice in monthly, semi-
annual or annual periods $178.4 million of mortgage loans which have a fixed
rate for a period of three to ten years and subsequently convert to adjustable-
rate mortgage loans that reprice annually, and $154.7 million of fixed-rate
mortgage loans. The weighted average coupon of mortgage loans held for
investment at June 30, 1996 was 8.86%. The Company finances mortgage loans held
for investment with repurchase agreements and other credit facilities which
reprice in periods ranging from overnight to 11 months as of June 30, 1996. The
Company also utilizes interest rate swap agreements to manage the interest rate
exposure on its portfolio of mortgage loans held for investment. The allowance
for losses related to mortgage loans held for investment totaled $7.1 million at
quarter end. Charge-offs related to mortgage loans held for investment totaled
$23,000 for the six months ended June 30, 1996.
CONSTRUCTION LENDING OPERATIONS: At June 30, 1996, the Builder Division had
loans outstanding totaling $157.4 million, net of reserves, with $288.7 million
of remaining commitments to fund tract and custom home loans. The Consumer
Division had loans outstanding at June 30, 1996 totaling $61.9 million with
remaining commitments to fund construction-to-permanent and home improvement
loans of $43.1 million. The allowance for losses related to construction loans
totaled $1.4 million at June 30, 1996. There were no charge-offs of construction
loans during the six months ended June 30, 1996. The Company had outstanding
borrowings totaling $92.7 million at June 30, 1996, under a revolving credit
facility associated with the financing of construction loans.
WAREHOUSE LENDING OPERATIONS: At June 30, 1996, CWM had extended committed
warehouse and related lines of credit in an aggregate amount of $456.2 million,
of which $174.8 million was outstanding, net of reserves. The allowance for loan
losses related to warehouse lines of credit totaled $946,000 at June 30, 1996.
There were no charge-offs of warehouse lines of credit during the six months
ended June 30, 1996. Repurchase agreements associated with CWM's financing of
these lines of credit totaled $113.4 million at June 30, 1996.
9
CMO PORTFOLIO: As of June 30, 1996, the CMO Portfolio was comprised of 12 series
of CMOs. Collateral for CMOs increased from $184.1 million at December 31, 1995
to $310.1 million at June 30, 1996. This increase of $126.0 million is primarily
the result of the addition of $154.6 million of collateral related to the
issuance of a CMO in January 1996, offset by repayments (including prepayments
and premium and discount amortization) of $27.1 million, a decrease in
guaranteed investment contracts ("GICs") held by trustees of $2.3 million and an
increase in accrued interest receivable of $800,000. The fair value of the
collateral for CMOs totaled $298.5 million and $185.2 million at June 30, 1996
and December 31, 1995, respectively. CWM's CMOs outstanding increased to $285.1
million at June 30, 1996 from $164.8 million at December 31, 1995. This increase
of $120.3 million resulted from issuance proceeds of $146.9 million in January
1996, offset by principal payments and discount amortization on CMOs of $27
million and an increase in accrued interest payable on CMOs of $500,000.
RESULTS OF OPERATIONS
QUARTER ENDED JUNE 30, 1996 COMPARED TO QUARTER ENDED JUNE 30, 1995
NET EARNINGS: CWM's net earnings were $16.4 million or $0.37 per share, based on
44,649,927 weighted average shares outstanding for the quarter ended June 30,
1996, compared to $12.0 million or $0.30 per share, based on 40,456,769 weighted
average shares outstanding for the quarter ended June 30, 1995.
The increase of $4.4 million in second quarter earnings resulted primarily from
an increase in net interest income of $6.6 million and an increase of $1.2
million in equity in earnings from Indy Mac, offset by an increase of $1.6
million in the provision for loan losses and increases of $1.8 million and
$489,000 in general and administrative expenses and management fees,
respectively.
INTEREST INCOME: Total interest income was $57.2 million for the quarter ended
June 30, 1996 and $43.9 million for the quarter ended June 30, 1995. This
increase in interest income of $13.3 million is primarily due to increases in
interest earnings on construction loans, mortgage loans held for sale, warehouse
lines of credit, mortgage loans held for investment, and collateral for CMOs of
$4.8 million, $4.1 million, $1.7 million, $1.6 million and $1.5 million
respectively, offset by a decrease of $766,000 in interest income earned on
securitized master servicing fees.
Interest income on mortgage loans held for investment, consisting primarily of
adjustable rate mortgages, totaled $22.6 million and $21.0 million, resulting
in an effective yield of 7.95% and 7.98% for the quarters ended June 30, 1996
and 1995, respectively.
Interest income earned on mortgage loans held for sale totaled $14.2 million and
$10.1 million, resulting in an effective yield of 8.91% and 9.48% for the
quarters ended June 30, 1996 and 1995, respectively. The average outstanding
balance rose to $642.7 million for the quarter ended June 30, 1996 from $429.4
million for the quarter ended June 30, 1995.
Interest income on construction loans totaled $5.9 million and $1.1 million,
with interest earned at an effective yield of 12.71% and 13.92% for the quarters
ended June 30, 1996 and 1995, respectively.
Interest income earned on revolving warehouse lines of credit totaled $3.8
million and $2.1 million, at an effective yield of 8.74% and 9.61% for the
quarters ended June 30, 1996 and 1995, respectively.
Interest income on collateral for CMOs was $6.0 million and $4.6 million for the
quarters ended June 30, 1996 and 1995, respectively. The increase was primarily
attributable to an increase in the average aggregate principal amount of
collateral for CMOs outstanding to $319.7 million for the quarter ended June 30,
1996 compared to $222.1 million for the quarter ended June 30, 1995. This
increase was offset by a decrease in the effective yield earned on the
collateral for CMOs to 7.59% in the second quarter of 1996 from 8.24% in the
second quarter of 1995. Interest income on collateral for CMOs includes the
impact of amortization of premiums paid in connection with acquiring the loan
portfolio and the impact of the
10
delay in the receipt of prepayments and temporary investment in lower yielding
short-term holdings (GICs) until such amounts are used to make payments on CMOs.
Investments in securitized master servicing fees have characteristics comparable
to "excess servicing" insofar as their value tends to decline as market interest
rates decline and prepayment rates increase. Accordingly, the yield on such
investments could decline considerably as a result of rapid actual or projected
future prepayments occasioned by declining interest rates. It is also possible
that under certain high prepayment scenarios the Company would not recoup its
initial investment in such assets. In such a scenario, the Company would write
down its securitized master servicing fees asset so that the remaining asset
does not exceed the estimated present value of future net master servicing
income. Gross master servicing income for CWM was $6.2 million and $7.2 million
for the three months ended June 30, 1996 and 1995, respectively. This gross
income was offset by amortization of the securitized master servicing fees of
$3.9 million and $4.1 million, for the three months ended June 30, 1996 and
1995, respectively. As of June 30, 1996, securitized master servicing fees of
$112.4 million were pledged to secure borrowings totaling $66.8 million.
INTEREST EXPENSE: For the quarters ended June 30, 1996 and 1995, total interest
expense was $37.9 million and $31.2 million, respectively. This increase in
interest expense of $6.7 million was due to an increase in interest expense on
repurchase agreements and other credit facilities, senior unsecured notes and
CMOs of $3.9 million, $1.4 million and $1.4 million, respectively.
Interest expense on repurchase agreements and other credit facilities used to
finance mortgage loans held for sale and investment, revolving warehouse lines
of credit, construction loans and master servicing fees receivable totaled $30.6
million for the quarter ended June 30, 1996, compared to $26.7 million for the
quarter ended June 30, 1995. This increase was principally the result of an
increase in the aggregate average balance of indebtedness outstanding for the
period to $2.0 billion for the quarter ended June 30, 1996 compared to $1.6
billion for the quarter ended June 30, 1995. Such increase was offset by a
decrease in the weighted average effective rate applicable to such indebtedness
to 6.17% for the quarter ended June 30, 1996 from 6.80% for the quarter ended
June 30, 1995.
Interest expense on senior unsecured notes totaled $1.4 million resulting in an
effective rate of 9.22% for the second quarter of 1996. There were no senior
unsecured notes outstanding during the second quarter of 1995.
Interest expense on CMOs was $5.9 million and $4.5 million for the quarters
ended June 30, 1996 and 1995, respectively. This increase was primarily
attributable to an increase in average aggregate CMOs outstanding to $293.0
million for the quarter ended June 30, 1996 from $192.6 million for the quarter
ended June 30, 1995, partially offset by a decrease in the effective rate on the
CMOs to 8.12% in the first quarter of 1996 from 9.42% in the second quarter of
1995.
EQUITY IN EARNINGS OF INDY MAC: The 1996 second quarter earnings of $3.7
million for Indy Mac, in which CWM has a 99% economic interest, resulted
principally from net interest income of $1.5 million and gain on sale of
mortgage loans and securities of $11.5 million, offset by expenses of $6.6
million, management fee expense of $467,000, and income taxes of $2.7 million.
Indy Mac's net income related to securitized master servicing fees totaled $2.3
million during the second quarter of 1996, including gross income of $11.1
million, offset by amortization of the related asset balances of $8.8 million.
Net income related to master servicing fees receivable totaled $438,000 during
the second quarter of 1996, including gross income of $4.4 million offset by
amortization of the related asset balances of $4.0 million.
During the second quarter of 1995, Indy Mac's earnings totaled $2.5 million
which resulted principally from net interest income of $5.3 million and gain on
sale of mortgage loans and securities of $5.1 million, offset by expenses of
$5.2 million, management fee expense of $224,000 and income taxes of $1.8
million.
11
Indy Mac's net income related to securitized master servicing fees totaled
$387,000 during the three months ended June 30, 1995, including gross income of
$880,000 offset by amortization of $493,000. Net income related to master
servicing fees receivable totaled $1.8 million during the three months ended
June 30, 1995, including gross income of $3.7 million offset by amortization of
the related asset balances of $1.9 million.
SALARIES, GENERAL AND ADMINISTRATIVE EXPENSE: The increase of $1.8 million for
the three months ended June 30, 1996 compared to the three months ended June 30,
1995 is primarily the result of the increased personnel and expenses required to
support the growth in the operations of CWM and its qualified REIT subsidiaries.
MANAGEMENT FEES: For the three months ended June 30, 1996, management fees were
$2.1 million compared to $1.6 million for the three months ended June 30, 1995.
The increase in the management fee of $467,000 was primarily due to an
increase in incentive compensation for the second quarter of 1996, directly
related to the increase in CWM's earnings in comparison to the second quarter of
1995. Regular management fees also increased due to increased average balances
of CMW's mortgage loans held for investment and warehouse lines of credit.
SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS ENDED JUNE 30, 1995
NET EARNINGS: CWM'S net earnings were $31.7 million or $0.72 per share, based on
43,877,750 weighted average shares outstanding for the six months ended June 30,
1996, compared to $22.2 million or $0.57 per share, based on 38,727,712 weighted
average shares outstanding for the six months ended June 30, 1995.
The increase of $9.5 million in 1996 earnings resulted primarily from an
increase in net interest income of $12.6 million and an increase of $5.3 million
in equity in earnings from Indy Mac, offset by an increase of $3.7 million in
the provision for loan losses and increases of $3.4 million and $1.8 million in
salaries, general and administrative expenses and management fees, respectively.
INTEREST INCOME: Total interest income was $116.2 million for the six months
ended June 30, 1996 and $85.4 million for the six months ended June 30, 1995.
This increase in interest income of $30.8 million is primarily due to an
increase in interest on construction loans of $8.9 million with additional
increases in mortgage loans held for investment, mortgage loans held for sale,
warehouse lines of credit, and collateral for CMOs of $8.5 million, $7.5
million, $4.3 million and $2.1 million, respectively. Such increases were offset
by a decrease of $1.2 million in interest earned on securitized master servicing
fees.
Interest income on mortgage loans held for investment totaled $49.7 million and
$41.2 million, resulting in an effective yield of 8.23% and 8.12%, for the six
months ended June 30, 1996 and 1995, respectively. Interest income on mortgage
loans held for sale totaled $28.2 million and $20.8 million, resulting in an
effective yield of 8.80% and 9.47%, for the six months ended June 30, 1996 and
1995, respectively.
Interest income earned on revolving warehouse lines of credit totaled $7.7
million and $3.3 million with interest earned at an effective yield of 8.72% and
9.75% for the six month periods ended June 30, 1996 and 1995, respectively.
Interest income on construction loans totaled $10.4 million and $1.5 million,
with interest earned at an effective yield of 12.65% and 13.87% for the six
month periods ended June 30, 1996 and 1995, respectively.
Interest income on collateral for CMOs was $11.4 million and $9.2 million for
the six month periods ended June 30, 1996 and 1995, respectively. The increase
was primarily attributable to an increase in the average aggregate principal
amount of collateral for CMOs outstanding to $303.9 million for the six months
ended June 30, 1996 compared to $224.9 million for the six month period ended
June 30, 1995, offset by a decrease in the effective yield earned on the
collateral for CMOs to 7.52% in the first half of 1996 from 8.29% in the first
half of 1995. Interest income on collateral for CMOs includes the impact of
amortization of premiums paid in connection with acquiring the loan portfolio
and the impact of the
12
delay in the receipt of prepayments and temporary investment in lower yielding
short-term holdings (GICs) until such amounts are used to make payments on CMOs.
SECURITIZED MASTER SERVICING FEES, NET: Gross master servicing income for CWM
was $12.7 million and $13.6 million for the six months ended June 30, 1996 and
1995, respectively. This gross income was offset by amortization of the
securitized master servicing fees of $7.9 million and $7.6 million, for the six
months ended June 30, 1996 and 1995, respectively.
INTEREST EXPENSE: For the six months ended June 30, 1996 and 1995, total
interest expense was $78.4 million and $60.2 million, respectively. This
increase in interest expense of $18.2 million was due to an increase in interest
expense on repurchase agreements and other credit facilities, senior unsecured
notes and CMOs of $13.4 million, $2.7 million and $2.1 million, respectively.
Interest expense on repurchase agreements and other credit facilities used to
finance mortgage loans held for sale and investment, revolving warehouse lines
of credit, construction loans and master servicing fees receivable totaled $64.2
million for the six months ended June 30, 1996, compared to $50.8 million for
the six months ended June 30, 1995. This increase was principally the result of
an increase in the aggregate average balance of indebtedness outstanding for the
period to $2.1 billion for the six months ended June 30, 1996 compared to $1.5
billion for the six months ended June 30, 1995, offset by a decrease in the
weighted average effective rate applicable to such indebtedness to 6.28% for the
six months ended June 30, 1996 from 6.75% for the six months ended June 30,
1995.
Interest expense on senior unsecured notes totaled $2.7 million resulting in an
effective rate of 9.22% for the first half of 1996. There were no senior
unsecured notes outstanding during the first half of 1995.
Interest expense on CMOs was $11.5 million and $9.4 million for the six months
ended June 30, 1996 and 1995, respectively. This increase was primarily
attributable to an increase in average aggregate CMOs outstanding to $278.3
million for the six months ended June 30, 1996 from $195.5 million for the six
months ended June 30, 1995, partially offset by a decrease in the effective rate
on the CMOs to 8.33% in the first half of 1996 from 9.69% in the first half of
1995.
EQUITY IN EARNINGS OF INDY MAC: Net earnings for Indy Mac for the six months
ended June 30, 1996 of $7.3 million, in which CWM has a 99% economic interest,
resulted principally from net interest income of $4.3 million and gain on sale
of mortgage loans and securities of $20.9 million, offset by expenses of $12.2
million, management fee expense of $910,000, and income taxes of $5.5 million.
Indy Mac's net income related to securitized master servicing fees totaled $4.2
million during the first six months of 1996, including gross income of $20.5
million offset by amortization of the related asset balances of $16.3 million.
Net income related to master servicing fees receivable totaled $1.2 million
during the first six months of 1996, including gross income of $8.9 million
offset by amortization of the related asset balances of $7.7 million.
During the first six months of 1995, Indy Mac earnings totaled $1.9 million
which resulted principally from net interest income of $9.5 million, gain on
sale of mortgage loans and securities of $4.3 million, expenses of $9.6 million,
management fee expense of $232,000 and income taxes of $1.4 million.
Indy Mac's income related to net securitized master servicing fees totaled
$387,000 during the first six months of 1995, including gross income of $880,000
offset by amortization of 493,000. Net income related to master servicing fees
receivable totaled $3.0 million during the first six months of 1995, including
gross income of $6.1 million offset by amortization of the related asset balance
of $3.1 million.
SALARIES, GENERAL AND ADMINISTRATIVE EXPENSE: The increase of $3.4 million for
the six months ended June 30, 1996 compared to the six months ended June 30,
1995 is primarily the result of an increase in personnel and expenses required
to support the growth in the operations of CWM and its qualified REIT
subsidiaries.
13
MANAGEMENT FEES: For the six months ended June 30, 1996, management fees were
$4.1 million compared to $2.3 million for the six months ended June 30, 1995.
The increase in the management fee of $1.8 million was primarily due to an
increase in incentive compensation for the first six months of 1996, directly
related to the increase in CWM's earnings in comparison to the first six months
of 1995. Regular management fees also increased due to increased average
balances of CWM's mortgage loans held for investment and warehouse lines of
credit.
LIQUIDITY AND CAPITAL RESOURCES
The Company uses proceeds from the issuance of CMOs, repurchase agreements, bank
debt, other borrowings and common stock to meet its working capital needs. In
addition, in connection with its mortgage conduit operations, Indy Mac issues
REMIC securities to help meet such needs.
During the first six months of 1996 the Company raised $43.3 million of new
capital primarily through the optional cash investment feature of CWM's Dividend
Reinvestment and Stock Purchase Plan.
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 Company's cash flow from operations and the
Company's 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 and/or obtaining
other sources of financing, including raising additional debt or equity from
time to time.
EFFECT OF INTEREST RATE CHANGES
The Company's earnings may be affected by changes in interest rates in a variety
of ways. For example, 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. Decreased market values could require 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 long-term debt securities. Increases in short-term
borrowing rates relative to rates earned on holdings that have not been financed
to maturity may also adversely affect the Company's earnings. However, the
Company has implemented a hedging strategy which is designed to 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
securitized master servicing fees and master servicing fees receivable and
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.
Conversely, lower interest rates tend to increase the rate at which mortgages
prepay, which may have an adverse effect on the value of the Company's
securitized master servicing fees and master servicing fees receivable.
However, lower interest rates also tend to improve the Company's mortgage
origination and production volumes and increase the market value, to an extent,
of the Company's mortgage loan and mortgage securities available for sale
portfolio.
14
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 29, 1996, the
stockholders voted to re-elect CWM's directors. The votes cast in this regard
were as follows: David S. Loeb - 40,355,687 for and 368,017 withheld; Angelo R.
Mozilo - 40,349,391 for and 374,313 withheld; Lyle E. Gramley - 40,441,013 for
and 282,691 withheld; Thomas J. Kearns - 40,450,513 for and 273,191 withheld;
and Frederick J. Napolitano - 40,445,963 for and 277,741 withheld. In addition,
the stockholders voted to approve the CWM 1996 Stock Incentive Plan, which was
adopted by the Board of Directors on April 1, 1996. The votes cast on this
proposal were as follows: 17,015,232 in favor; 5,869,111 opposed; 1,212,048
abstaining; and 16,627,313 broker non-vote. Finally, the stockholders voted to
ratify the selection of Grant Thornton LLP as CWM's independent certified
public accountants for the fiscal year ending December 31, 1996. The votes cast
on this proposal were as follows: 40,257,389 in favor; 162,583 opposed; 303,732
abstaining; and 0 broker non-vote.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
Exhibits
--------
4 1996 Stock Incentive Plan adopted May 29, 1996 (Incorporated by
reference to Exhibit 4 to CWM's Form S-8 filed with the SEC on July
26, 1996).
10.1 Amended Compensation Plan for Richard Wohl effective January 1, 1996.
10.2 1996 Amended and Extended Loan Purchase and Administrative Services
Agreement dated as of June 1, 1996 by and between CWM Mortgage
Holdings, Inc. and Countrywide Home Loans Inc.
10.3 1996 Amended and Extended Management Agreement extended as of June 1,
1996 by between CWM Mortgage Holdings Inc. and Countrywide Asset
Management Corporation.
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 August 14, 1996.
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
16