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, 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 incorporation or organization) (I. R. S. Employer Identification No.)
35 NORTH LAKE AVENUE, PASADENA, CALIFORNIA 91101-1857
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (800) 669-2300
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the close of the period covered by this report.
Common stock outstanding as of September 30, 1996: 47,315,394 shares
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
CWM MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands)
September 30, 1996 December 31, 1995
------------------ -----------------
(Unaudited)
ASSETS
Mortgage assets
Mortgage loans held for investment, net $1,074,337 $1,424,583
Mortgage loans held for sale - prime 424,646 379,363
Mortgage loans held for sale - subprime 145,079 30,221
Manufactured housing loans held for sale 69,421 -
Construction loans receivable, net 337,009 129,323
Collateral for CMOs 297,436 184,111
Securitized master servicing fees 117,472 120,281
Mortgage securities available for sale 11,774 -
Revolving warehouse lines of credit, net 187,529 190,705
Investment in and advances to Indy Mac 115,938 145,537
Cash and cash equivalents 6,738 8,049
Other assets 35,876 31,440
---------- ----------
Total assets $2,823,255 $2,643,613
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Repurchase agreements and other credit facilities $2,042,355 $2,037,834
Collateralized mortgage obligations 272,640 164,760
Senior unsecured notes 59,728 59,649
Accounts payable and accrued liabilities 24,334 18,386
---------- ----------
Total liabilities 2,399,057 2,280,629
Commitments and contingencies - -
Shareholders' equity
Common stock - authorized, 100,000,000 shares of
$.01 par value; issued and outstanding, 47,315,394 shares
at September 30, 1996 and 42,413,842 at December 31, 1995 473 424
Additional paid-in capital 433,072 353,965
Net unrealized gain (loss) on available-for-sale mortgage securities;
held by Indy Mac (11,745) 7,845
held by CWM 104
Cumulative earnings 199,765 150,148
Cumulative distributions to shareholders (197,471) (149,398)
---------- ----------
Total shareholders' equity 424,198 362,984
---------- ----------
Total liabilities and shareholders' equity $2,823,255 $2,643,613
========== ==========
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,
--------------------------- -------------------------------
1996 1995 1996 1995
----------- ----------- ----------- -------------
REVENUES
Interest income
Mortgage loans held for investment $ 22,039 $ 26,849 $ 71,749 $ 68,033
Mortgage loans held for sale 15,837 8,313 43,909 29,083
Manufactured housing loans held for sale 1,198 - 1,349 -
Construction loans 8,294 1,911 18,716 3,421
Collateral for CMOs 5,753 4,191 17,121 13,434
Securitized master servicing fees, net 2,759 2,246 7,556 8,257
Revolving warehouse lines of credit 3,860 3,254 11,510 6,596
Advances to Indy Mac 1,837 1,380 5,743 4,683
Other 116 118 256 182
---------- ---------- ---------- ----------
Total interest income 61,693 48,262 177,909 133,689
Interest expense
Repurchase agreements and other credit facilities 32,594 31,253 96,744 82,070
Collateralized mortgage obligations 5,658 4,206 17,183 13,602
Senior unsecured notes 1,374 - 4,121 -
---------- ---------- ---------- ----------
Total interest expense 39,626 35,459 118,048 95,672
---------- ---------- ---------- ----------
Net interest income 22,067 12,803 59,861 38,017
Provision for loan losses 3,924 1,082 8,973 2,399
---------- ---------- ---------- ----------
Net interest income after provision for loan losses 18,143 11,721 50,888 35,618
Equity in earnings of Indy Mac 4,877 4,435 12,068 6,305
Other, net 662 296 1,782 841
---------- ---------- ---------- ----------
Net revenues 23,682 16,452 64,738 42,764
EXPENSES
Salaries, general and administrative 3,436 1,184 8,622 2,951
Management fees to affiliate 2,356 1,777 6,499 4,130
---------- ---------- ---------- ----------
Total expenses 5,792 2,961 15,121 7,081
---------- ---------- ---------- ----------
NET EARNINGS $ 17,890 $ 13,491 $ 49,617 $ 35,683
========== ========== ========== ==========
EARNINGS PER SHARE $ 0.39 $ 0.33 $ 1.11 $ 0.91
========== ========== ========== ==========
Weighted average shares outstanding 46,206,369 40,634,237 44,649,235 39,370,204
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,
------------------------------------
1996 1995
--------------- ---------------
Cash flows from operating activities:
Net earnings $ 49,617 $ 35,683
Adjustments to reconcile net earnings
to net cash (used in) operating activities:
Amortization and depreciation 16,262 13,193
Provision for loan losses 8,973 2,399
Equity in earnings of Indy Mac (12,068) (6,305)
Purchases of mortgage loans held for sale (3,008,820) (3,008,363)
Principal repayments and proceeds from sale of mortgage loans 2,841,440 2,939,883
Purchases of manufactured housing loans held for sale 78,053 -
Principal repayments on manufactured housing loans held for sale 8,632 -
Change in accrued income and expense 6,056 5,605
----------- -----------
Net cash (used in) operating activities (167,960) (17,905)
Cash flows from investing activities:
Collateral for CMOs:
Principal payments on collateral 38,171 21,210
Proceeds from sale of collateral - 9,205
Net change in GICs held by trustees 241 974
----------- -----------
38,412 31,389
Purchases of mortgage loans held for investment (45,910) (157,529)
Principal payments on mortgage loans held for investment 231,033 88,734
Investment in securitized master servicing fees (7,849) (19,117)
Investment in mortgage securities (11,670) -
Net (increase) decrease in revolving warehouse lines of credit 2,727 (73,889)
Net increase in construction loans receivable (208,612) (65,183)
Investment in Indy Mac - (15,841)
Advances to Indy Mac, net of cash repayments 22,075 (43,570)
Increase (decrease) in other assets 1,860 (2,992)
----------- -----------
Net cash provided by (used in) investing activities 22,066 (257,998)
Cash flows from financing activities:
Collateralized mortgage obligations:
Proceeds from issuance of securities 146,152 -
Principal payments on securities (39,826) (21,824)
Redemption of CMO - (9,022)
----------- -----------
106,326 (30,846)
Net borrowings (repayments) on repurchase agreements and other credit facilities 4,521 279,176
Net proceeds from issuance of common stock 79,156 74,058
Cash dividends paid (48,073) (34,001)
Increase (decrease) in other liabilities 2,653 2,219
----------- -----------
Net cash provided by financing activities 144,583 290,606
----------- -----------
Net increase (decrease) in cash and cash equivalents (1,311) 14,703
Cash and cash equivalents at beginning of period 8,049 2,605
----------- -----------
Cash and cash equivalents at end of period $ 6,738 $ 17,308
=========== ===========
Supplemental cash flow information:
Cash paid for interest $ 115,815 $ 86,800
=========== ===========
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
SEPTEMBER 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 September 30, 1995 to conform to the September
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 nine months ended September 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 nine months ended September 30, 1996, CWM added $9.0 million to its
allowance for credit losses. The allowance for credit losses totaled $11.8
million at September 30, 1996, and includes reserves for mortgage loans held for
investment, construction loans and warehouse lines of credit in the amounts of
$9.0 million, $1.7 million and $1.1 million, respectively. CWM recorded
chargeoffs of $1.5 million and $42,000 during the nine months ended September
30, 1996 and 1995, respectively.
NOTE C - MORTGAGE SECURITIES AVAILABLE-FOR-SALE
During the third quarter of 1996, CWM invested in mortgage securities available-
for-sale consisting of non-rated subordinated securities issued by Indy Mac and
inverse floater securities. Contractural maturities range from 10 to 30 years.
The mortgage securities are carried at estimated fair market value and reflect
gross unrealized gains of $169,000 and gross unrealized losses of $65,000 at
September 30, 1996.
5
NOTE D - INVESTMENT IN INDY MAC (Unaudited)
- -------------------------------------------
Summarized financial information for Indy Mac follows (in thousands).
September 30, 1996 December 31, 1995
--------------------------------------
Mortgage loans held for sale, net $ 68,832 $ 92,088
Mortgage securities available-for-sale 300,368 350,752
Securitized master servicing fees 209,624 116,851
Master servicing fees receivable 43,650 36,570
Other assets 30,820 22,953
----------------------------
Total assets $653,294 $619,214
============================
Repurchase agreements and other credit facilities $505,795 $441,305
Due to CWM 61,517 83,592
Other liabilities 31,011 31,746
Shareholders' equity 54,971 62,571
----------------------------
Total liabilities and
shareholders' equity $653,294 $619,214
============================
Quarter ended Nine months ended
September 30, September 30,
------------------- -------------------
1996 1995 1996 1995
------------------- -------------------
Interest income
Mortgage loans held for sale $ 605 $ 8,693 $ 2,912 $33,975
Mortgage securities available-for-sale 6,559 5,372 21,969 13,445
Securitized master servicing fees, net 4,061 1,307 8,262 1,694
Master servicing fees receivable, net 2,353 1,630 3,538 4,655
------------------- -------------------
Total interest income 13,578 17,002 36,681 53,769
Interest expense 9,172 11,713 28,027 39,020
------------------- -------------------
Net interest income 4,406 5,289 8,654 14,749
Provision for loan losses - 767 - 1,417
------------------- -------------------
Net interest income after
provision for loan losses 4,406 4,522 8,654 13,332
Gain on sale of mortgage loans and securities 11,807 9,133 32,664 13,393
Other 586 - 1,312 -
------------------- -------------------
Net revenues 16,799 13,655 42,630 26,725
Salaries, general and administrative expense 7,740 5,297 19,908 14,878
Management fees to affiliate 470 463 1,381 695
------------------- -------------------
Total expenses 8,210 5,760 21,289 15,573
------------------- -------------------
Earnings before income tax provision 8,589 7,895 21,341 11,152
Income tax provision 3,663 3,416 9,151 4,784
------------------- -------------------
Net earnings $ 4,926 $ 4,479 $ 12,190 $ 6,368
=================== ===================
6
Allowance for Credit Losses. Indy Mac's allowance for credit losses related to
mortgage loans held for sale totaled $1.8 million at September 30, 1996. Indy
Mac recorded chargeoffs of $18,000 and $376,000 during the nine months ended
September 30, 1996 and 1995, respectively.
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. The majority of such
securities were retained upon Indy Mac's issuance of REMIC securities.
Contractual maturities on the mortgage securities range from 10 to 30 years.
Following is the estimated fair value of Indy Mac's mortgage securities as of
September 30, 1996 and December 31, 1995 (in thousands):
ESTIMATED GROSS GROSS
AMORTIZED FAIR UNREALIZED UNREALIZED
COST VALUE GAINS LOSSES
--------- --------- ---------- ----------
September 30, 1996 $320,823 $300,368 $ 9,592 $30,047
==============================================
December 31, 1995 $337,088 $350,752 $17,158 $ 3,494
==============================================
During the quarter ended September 30, 1996, Indy Mac sold mortgage securities
classified as available-for-sale with an amortized cost of $88.5 million (based
upon specific identification) for proceeds of $87.9 million, resulting in gross
realized gains of $1.8 million and gross realized losses of $2.4 million. For
the nine month period ended September 30, 1996, Indy Mac sold mortgage
securities available-for-sale with an amortized cost of $202.0 million for
proceeds of $204.6 million, resulting in a net gain of $2.6 million. This net
gain was comprised of gross realized gains and gross realized losses of $7.0
million and $4.4 million, respectively. The estimated fair market value as of
September 30, 1996 in the above table reflects increases in market interest
rates during the first nine months of 1996, combined with lower expectations of
prepayment rates.
As of September 30, 1996, all of Indy Mac's mortgage securities were pledged as
collateral under repurchase agreements.
NOTE E - SUBSEQUENT EVENTS
On October 17, 1996, the Board of Directors declared a cash dividend of $0.39
per share to be paid on December 2, 1996 to shareholders of record on October
28, 1996.
On November 4, 1996, CWM announced that it has reached a preliminary
understanding with Countrywide Credit Industries, Inc. (CCR) to acquire the
operations and employees of Countrywide Asset Management Corp. (CAMC), a wholly-
owned subsidiary of CCR and the Company's manager. CAMC currently
manages CWM and Indy Mac pursuant to a management contract, and all personnel
deployed to work on CWM's business affairs are currently employed by CAMC.
The proposed transaction is structured as a merger of CAMC with and into CWM
with CCR to receive approximately 3.6 million newly issued common shares of CWM,
subject to certain adjustments (which equates to a dollar value of approximately
$75.0 million based on certain recent closing prices of CWM's common stock). If
a definitive agreement is executed and the transaction is consummated, CCR will
become CWM's largest single shareholder, with an equity interest of
approximately 10 percent. The basic terms of the transaction have been approved
by a special committee consisting of CWM's unaffiliated directors, and assuming
execution of a definitive agreement, it is expected that the transaction will be
presented for approval at a special meeting of CWM's shareholders' in early 1997
following the filing and distribution of a proxy statement.
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 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 and
mortgage loans secured by manufactured housing.
The Company's principal sources of income from its conduit operations are gains
recognized on the sale or 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 sale or 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 subdivision construction, builder custom home and model home financing
on a nationwide basis to 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 nine months of 1996, CWM purchased $3.1
billion of non-conforming mortgage loans, including $319.2 million of subprime
mortgage loans. In addition, the company purchased $78.1 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 nine months
of 1996, Indy Mac sold $2.6 billion of its prime mortgage loans through the
issuance of eleven series of multiple-class MBS in the form of REMIC securities.
In addition, Indy Mac's Subprime Mortgage Division sold $202 million of mortgage
loans in the form of REMIC securities and $9.9 million of mortgage loans in the
form of a whole loan transaction. At September 30, 1996, the Company was
committed to purchase $540.6 million of mortgage loans from various mortgage
originators. The Indy Mac master servicing portfolio at September 30, 1996 had
an aggregate outstanding principal balance of $10.9 billion with a weighted
average coupon of 8.48%.
MORTGAGE LOANS HELD FOR INVESTMENT: The $1.1 billion portfolio of mortgage
loans held for investment at September 30, 1996 consisted of $760.8 million of
adjustable-rate products which contractually reprice in monthly, semi-annual or
annual periods, $179.9 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 $142.7 million of fixed-rate mortgage
loans. The weighted average coupon of mortgage loans held for investment at
September 30, 1996 was 8.87%. The Company finances mortgage loans held for
investment with repurchase agreements and other credit facilities which reprice
at intervals ranging from overnight to 8 months as of September 30, 1996. The
Company also utilizes interest rate swap agreements to manage interest rate
exposure on its portfolio of mortgage loans held for investment. The allowance
for losses related to mortgage loans held for investment totaled $9.0 million at
September 30, 1996. Chargeoffs related to mortgage loans held for investment
totaled $1.5 million for the nine months ended September 30, 1996.
CONSTRUCTION LENDING OPERATIONS: At September 30, 1996, the Builder Division had
net loan outstandings totaling $249.6 million, with $321.1 million of remaining
commitments, to fund subdivision and builder custom home loans. The Consumer
Division had net loan outstandings at September 30, 1996 totaling $87.4 million
with remaining commitments to fund construction-to-permanent and home
improvement loans of $58.9 million. The allowance for losses related to
construction loans totaled $1.7 million at September 30, 1996. There were no
chargeoffs against such allowance during the nine months ended September 30,
1996. The Company had outstanding borrowings totaling $86.9 million at
September 30, 1996 under a revolving credit facility associated with the
financing of construction loans.
WAREHOUSE LENDING OPERATIONS: At September 30, 1996, CWM had extended committed
warehouse and related lines of credit in an aggregate committed amount of $535.2
million, of which $187.5 million was outstanding, net of reserves. The allowance
for loan losses related to warehouse lines of credit totaled $1.1 million at
September 30, 1996. There were no chargeoffs against such allowance during the
nine months ended September 30, 1996. Repurchase agreements associated with
CWM's financing of these lines of credit totaled $159.5 million at September 30,
1996.
9
CMO PORTFOLIO: As of September 30, 1996, the CMO Portfolio was comprised of 12
series of CMOs. Collateral for CMOs increased to $297.4 million at September 30,
1996 from $184.1 million at December 31, 1995. This increase of $113.3 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 $38.2 million, a decrease
in guaranteed investment contracts ("GICs") held by trustees of $241,000 and a
decrease in accrued interest receivable of $2.9 million. The fair value of the
collateral for CMOs totaled $286.5 million and $185.2 million at September 30,
1996 and December 31, 1995, respectively. CWM's CMOs outstanding increased to
$272.6 million at September 30, 1996 from $164.8 million at December 31, 1995.
This increase of $107.8 million resulted from issuance proceeds of $146.1
million in January 1996, offset by principal payments and discount amortization
on CMOs of $39.8 million and an increase in accrued interest payable on CMOs of
$1.5 million.
RESULTS OF OPERATIONS
QUARTER ENDED SEPTEMBER 30, 1996 COMPARED TO QUARTER ENDED SEPTEMBER 30, 1995
NET EARNINGS: CWM's net earnings were $17.9 million or $0.39 per share, based on
46,206,369 weighted average shares outstanding for the quarter ended September
30, 1996, compared to $13.5 million or $0.33 per share, based on 40,634,237
weighted average shares outstanding for the quarter ended September 30, 1995.
The increase of $4.4 million in third quarter earnings resulted primarily from
an increase in net interest income of $9.3 million and an increase of $442,000
in equity in earnings from Indy Mac, offset by an increase of $2.8 million, $2.3
million and $579,000 in the provision for loan losses, salaries, general and
administrative expenses and management fees, respectively.
INTEREST INCOME: Total interest income was $61.7 million for the quarter ended
September 30, 1996 and $48.3 million for the quarter ended September 30, 1995.
The increase in interest income of $13.4 million is primarily due to increases
in interest earnings on mortgage loans held for sale, construction loans,
collateral for CMOs, and manufactured housing loans, of $7.5 million, $6.4
million, $1.6 million and $1.2 million, respectively, offset by a decrease of
$4.8 million in interest income earned on mortgage loans held for investment.
Interest income on mortgage loans held for investment, consisting primarily of
adjustable rate mortgages, totaled $22.0 million and $26.8 million, resulting
in effective yields of 8.11% and 7.92% for the quarters ended September 30, 1996
and 1995, respectively. The average outstanding balance of such loans declined
to $1.1 billion for the third quarter of 1996 from $1.3 billion during the third
quarter of 1995.
Interest income earned on mortgage loans held for sale totaled $15.8 million and
$8.3 million, resulting in effective yields of 8.61% and 9.00% for the quarters
ended September 30, 1996 and 1995, respectively. The average outstanding
balance of such loans rose to $731.6 million for the quarter ended September 30,
1996 from $366.5 million for the quarter ended September 30, 1995.
Interest income on construction loans totaled $8.3 million and $1.9 million,
with interest earned at effective yields of 12.60% and 13.40%, for the quarters
ended September 30, 1996 and 1995, respectively. The average outstanding
balance of such loans increased to $261.9 million during the third quarter of
1996 from $56.6 million during the third quarter of 1995.
Interest income earned on revolving warehouse lines of credit totaled $3.8
million and $3.3 million, at effective yields of 9.12% and 9.55%, for the
quarters ended September 30, 1996 and 1995, respectively.
Interest income on manufactured housing loans held for sale totaled $1.2 million
during the three months ended September 30, 1996 at an effective yield of 9.15
percent. The company did not purchase or originate manufactured housing loans
during 1995.
10
Interest income on collateral for CMOs was $5.8 million and $4.2 million for the
quarters ended September 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 $301.2 million for the quarter ended
September 30, 1996 compared to $210.4 million for the quarter ended September
30, 1995. This increase was offset by a decrease in the effective yield earned
on the collateral for CMOs to 7.60% in the third quarter of 1996 from 7.90% in
the third quarter of 1995. Interest income on collateral for CMOs includes the
impact of amortization of premiums paid in connection with acquiring the loan
portfolio, the delay in the receipt of prepayments and the 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 circumstances, 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 $6.6 million and $6.8 million
for the three months ended September 30, 1996 and 1995, respectively. This
gross income was offset by amortization of the securitized master servicing fees
of $3.8 million and $4.6 million for the three months ended September 30, 1996
and 1995, respectively. As of September 30, 1996, securitized master servicing
fees of $117.5 million were pledged to secure borrowings totaling $74.1 million.
INTEREST EXPENSE: For the quarters ended September 30, 1996 and 1995, total
interest expense was $39.6 million and $35.5 million, respectively. This
increase in interest expense of $4.1 million was due to an increase in interest
expense on repurchase agreements and other credit facilities, senior unsecured
notes and CMOs of $1.3 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 $32.6
million for the quarter ended September 30, 1996, compared to $31.3 million for
the quarter ended September 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 quarter ended September 30, 1996 compared to
$1.9 billion for the quarter ended September 30, 1995. Such increase was offset
by a decrease in the weighted average effective rate applicable to such
indebtedness to 6.18% for the quarter ended September 30, 1996 from 6.70% for
the quarter ended September 30, 1995.
Interest expense on senior unsecured notes totaled $1.4 million resulting in an
effective rate of 9.22% for the third quarter of 1996. There were no senior
unsecured notes outstanding during the third quarter of 1995.
Interest expense on CMOs was $5.7 million and $4.2 million for the quarters
ended September 30, 1996 and 1995, respectively. This increase was primarily
attributable to an increase in average aggregate CMOs outstanding to $276.9
million for the quarter ended September 30, 1996 from $179.6 million for the
quarter ended September 30, 1995, offset by a decrease in the effective rate on
the CMOs to 8.13% in the third quarter of 1996 from 9.29% in the third quarter
of 1995.
EQUITY IN EARNINGS OF INDY MAC: The 1996 third quarter earnings of $4.9 million
for Indy Mac, in which CWM has a 99% economic interest, resulted principally
from net interest income of $4.4 million and gain on sale of mortgage loans and
securities of $11.8 million, offset by salaries, general and administrative
expenses of $8.2 million; management fees of $470,000; and income taxes of $3.7
million.
Indy Mac's net income related to securitized master servicing fees totaled $4.1
million during the third quarter of 1996, including gross income of $13.5
million, offset by amortization of the related asset
11
balances of $9.4 million. Net income related to master servicing fees receivable
totaled $2.4 million during the third quarter of 1996, including gross income of
$5.7 million offset by amortization of the related asset balances of $3.3
million.
During the third quarter of 1995, Indy Mac's earnings totaled $4.5 million which
resulted principally from net interest income of $5.3 million and gain on sale
of mortgage loans and securities of $9.1 million, offset by salaries, general
and administrative expenses of $5.8 million, management fees of $463,000 and
income taxes of $3.4 million.
Indy Mac's net income related to securitized master servicing fees totaled $1.3
million during the three months ended September 30, 1995, including gross income
of $3.6 million offset by amortization of $2.3 million. Net income related to
master servicing fees receivable totaled $1.6 million during the three months
ended September 30, 1995, including gross income of $3.2 million offset by
amortization of the related asset balances of $1.6 million.
SALARIES, GENERAL AND ADMINISTRATIVE EXPENSE: The increase of $2.3 million for
the three months ended September 30, 1996 compared to the three months ended
September 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 September 30, 1996, management fees
were $2.4 million compared to $1.8 million for the three months ended September
30, 1995. The increase in the management fees was primarily due to an increase
in incentive compensation for the manager for the third quarter of 1996,
directly related to the increase in CWM's earnings in comparison to the third
quarter of 1995.
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1995
NET EARNINGS: CWM's net earnings were $49.6 million or $1.11 per share, based on
44,649,235 weighted average shares outstanding for the nine months ended
September 30, 1996, compared to $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.
The increase of $13.9 million in 1996 earnings resulted primarily from an
increase in net interest income of $21.8 million and an increase of $5.8 million
in equity in earnings from Indy Mac, offset by increases of $6.6 million, $5.7
million and $2.4 million in the provision for loan losses, salaries, general and
administrative expenses and management fees, respectively.
INTEREST INCOME: Total interest income was $177.9 million for the nine months
ended September 30, 1996 and $133.7 million for the nine months ended September
30, 1995. This increase in interest income of $44.2 million is primarily due to
increases in interest earnings on construction loans and mortgage loans held for
sale of $15.3 million and $14.8 million, respectively with additional increases
in warehouse lines of credit, mortgage loans held for investment, and
collateral for CMOs of $4.9 million, $3.7 million and $3.7 million,
respectively. Such increases were offset by a decrease of $701,000 in interest
earned on securitized master servicing fees.
Interest income on mortgage loans held for investment totaled $71.7 million and
$68.0 million, resulting in effective yields of 8.19% and 8.05% for the nine
months ended September 30, 1996 and 1995, respectively. Average outstanding
balances of mortgage loans held for investment increased to $1.2 billion for the
nine months ended September 30, 1996 from $1.1 billion for the comparable 1995
period.
Interest income on mortgage loans held for sale totaled $43.9 million and $29.1
million, resulting in effective yields of 8.73% and 9.32% for the nine months
ended September 30, 1996 and 1995, respectively. The average outstanding
balances of mortgage loans held for sale increased to $671.9 for the nine month
period ended September 30, 1996 from $417.1 million for the comparable 1995
period.
Interest income on construction loans totaled $18.7 million and $3.4 million,
with interest earned at effective yields of 12.64% and 13.65% for the nine month
periods ended September 30, 1996 and 1995, respectively. Average outstanding
balances on construction loans increased to $197.7 million during the nine
months ended September 30, 1996 from $33.5 million during the comparable 1995
period.
Interest income earned on revolving warehouse lines of credit totaled $11.5
million and $6.6 million with interest earned at effective yields of 8.85% and
9.68% for the nine month periods ended September 30, 1996 and 1995,
respectively.
12
Interest income on collateral for CMOs was $17.1 million and $13.4 million for
the nine month periods ended September 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 $303.0 million for the
nine months ended September 30, 1996 from $220.1 million for the nine month
period ended September 30, 1995, offset by a decrease in the effective yields
earned on the collateral for CMOs to 7.55% in the third quarter of 1996 from
8.16% in the third quarter of 1995. Interest income on collateral for CMOs
includes the impact of amortization of premiums paid in connection with
acquiring the loan portfolio, the delay in the receipt of prepayments and the
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 $19.2 million and $20.5 million for the nine months ended September 30, 1996
and 1995, respectively. This gross income was offset by amortization of the
securitized master servicing fees of $11.7 million and $12.3 million, for the
nine months ended September 30, 1996 and 1995, respectively.
INTEREST EXPENSE: For the nine months ended September 30, 1996 and 1995, total
interest expense was $118.1 million and $95.7 million, respectively. This
increase in interest expense of $22.4 million was due to an increase in interest
expense on repurchase agreements and other credit facilities, senior unsecured
notes and CMOs of $14.7 million, $3.6 million and $4.1 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 $96.7
million for the nine months ended September 30, 1996, compared to $82.1 million
for the nine months ended September 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 nine months ended September
30, 1996 compared to $1.6 billion for the nine months ended September 30, 1995,
offset by a decrease in the weighted average effective rate applicable to such
indebtedness to 6.24% for the nine months ended September 30, 1996 from 6.75%
for the nine months ended September 30, 1995.
Interest expense on senior unsecured notes totaled $4.1 million resulting in an
effective rate of 9.22% for the nine months ended September 30, 1996. There
were no senior unsecured notes outstanding during the nine months ended
September 30, 1995.
Interest expense on CMOs was $17.2 million and $13.6 million for the nine months
ended September 30, 1996 and 1995, respectively. This increase was primarily
attributable to an increase in average aggregate CMOs outstanding to $277.8
million for the nine months ended September 30, 1996 from $190.2 million for the
nine months ended September 30, 1995, partially offset by a decrease in the
effective rate on the CMOs to 8.26% in the nine months ended September 30, 1996
from 9.56% in the nine months ended September 30, 1995.
EQUITY IN EARNINGS OF INDY MAC: Net earnings for Indy Mac for the nine months
ended September 30, 1996 of $12.2 million, in which CWM has a 99% economic
interest, resulted principally from net interest income of $8.7 million and gain
on sale of mortgage loans and securities of $32.7 million, offset by salaries,
general and administrative expenses of $19.9 million; management fees of $1.4
million; and income taxes of $9.2 million.
Indy Mac's net income related to securitized master servicing fees totaled $8.3
million during the first nine months of 1996, including gross income of $33.9
million offset by amortization of the related asset balances of $25.6 million.
Net income related to master servicing fees receivable totaled $3.5 million
during the first nine months of 1996, including gross income of $11.0 million
offset by amortization of the related asset balances of $7.5 million.
13
During the first nine months of 1995, Indy Mac earnings totaled $6.4 million
which resulted principally from net interest income of $14.7 million, and gain
on sale of mortgage loans and securities of $13.4 million offset by salaries,
general and administrative expenses of $14.9 million, management fees of
$695,000 and income taxes of $4.8 million.
Indy Mac's net income related to securitized master servicing fees totaled $1.7
million during the first nine months of 1995, including gross income of $4.5
million offset by amortization of $2.8 million. Net income related to master
servicing fees receivable totaled $4.7 million during the first nine months of
1995, including gross income of $9.3 million offset by amortization of the
related asset balances of $4.6 million.
SALARIES, GENERAL AND ADMINISTRATIVE EXPENSE: The increase of $5.7 million for
the nine months ended September 30, 1996 compared to the nine months ended
September 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.
MANAGEMENT FEES: For the nine months ended September 30, 1996, management fees
were $6.5 million compared to $4.1 million for the nine months ended September
30, 1995. The increase in management fees was primarily due to an increase in
incentive compensation for the manager for the first nine months of 1996,
directly related to the increase in CWM's earnings in comparison to the first
nine months of 1995.
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 nine months of 1996 CWM issued 4,901,552 shares of common
stock at an average per share price of $16.15 and raised $79.0 million of new
equity 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.
Cash Flows
- ----------
Operating Activities - In the nine months ended September 30, 1996, the
Company's operating activities required cash of approximately $168.0 million.
The primary investing activity for which cash was used during the nine months
ended September 30, 1996 was the acquisition of mortgage loans and manufactured
housing loans held for sale.
Investing Activities - The primary investing activity for which cash was used
during the nine months ended September 30, 1996 was the funding of construction
loans receivable and acquisition of mortgage loans held for investment. The
investment activities were exceeded by principal repayments on mortgage loans
held for investment resulting in net cash provided by investing activities of
$22.1 million for the nine months ended September 30, 1996 compared to net
cash used in investing activities of $258.0 million for the nine months ended
September 30, 1995.
Financing Activities - Net cash provided by financing activities amounted to
$144.6 million for the nine months ended September 30, 1996. Net cash provided
by financing activities amounted to $290.6 million
14
for the nine months ended September 30, 1995. The decline in cash provided by
financing activities was primarily the result of reductions in new borrowings
under repurchase agreements and other credit facilities during the nine months
ended September 30, 1996, offset by the issuance of CMOs.
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.
15
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
Exhibits
--------
10.1 First Amendment to 1996 Amended and Extended Management Agreement
dated as of July 25, 1996 between CWM Mortgage Holdings, Inc.
("CWM") and Countrywide Asset Management Corporation.
10.2* Amended and Restated Facility II Credit Agreement dated as of
August 28, 1996 among CWM, Independent National Mortgage
Corporation ("Indy Mac"), Independent Lending Corporation
("ILC"), the lenders party thereto and First Union National Bank
of North Carolina ("First Union")
10.3* Amended and Restated Facility I Credit Agreement dated as of
August 28, 1996 among CWM, Indy Mac, ILC, the lenders party
thereto and First Union.
27 Financial Data Schedule
* Certain confidential portions of this Exhibit have been deleted
and have been filed separately with the Securities and Exchange
Commission in connection with a request for confidential
treatment filed pursuant to Rule 24b-2 under the Securities
Exchange Act of 1934, as amended.
Reports on Form 8-K.
--------------------
None
16
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 13, 1996.
CWM MORTGAGE HOLDINGS, INC.
By: /s/ Michael W. Perry
----------------------------------
Michael W. Perry
Executive Vice President and Chief
Operating Officer
By: /s/ James P. Gross
----------------------------------
James P. Gross
Senior Vice President and Chief
Financial Officer
17