SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q/A
Amendment No. 1
[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
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.
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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.
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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.
4
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
5
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.
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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.
7
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 CMO's, repurchase agreements,
bank debt, other borrowings, and common stock to meet its liquidity
requirements. In addition, in connection with its mortgage conduit operations,
Indy Mac issues REMIC securities from time to time to help meet such
requirements.
The Company has established three repurchase facilities, and one master
assignment agreement facility, with Merrill Lynch Mortgage Capital, Inc. and
certain of its affiliates, in an aggregate principal amount of $725 million. All
four such agreements are committed for a period of at least two years from their
respective dates of execution and currently permit the Company to finance its
mortgage conduit, mortgage portfolio, warehouse lending and consumer
construction lending assets and operations. All of the three repurchase
agreements and the master assignment agreement carry floating rates of
interest based on LIBOR, which vary by the type of asset financed.
The Company has entered into a repurchase facility with Nomura Asset Capital
Corporation in an aggregate principal amount of $300 million. Such repurchase
facility is committed for a two-year period from the date of execution and
currently permits the Company to finance its mortgage conduit, mortgage
portfolio, warehouse lending and consumer construction lending assets and
operations. This repurchase facility carries a floating rate of interest based
on LIBOR, plus an applicable margin, which varies by the type of asset
financed.
The Company has entered into a repurchase facility with Lehman Commercial Paper,
Inc. in an aggregate principal amount of $500 million. Such repurchase facility
is committed for a two-year period from the date of execution and currently
permits the Company to finance its mortgage conduit operations and mortgage
asset portfolio. This repurchase facility carries a floating rate of interest
based on LIBOR, plus an applicable margin, which varies by the type of asset
financed.
The Company has entered into a repurchase facility with PaineWebber Real Estate
Securities, Inc. in an aggregate principal amount of $500 million. Such
repurchase facility is committed for a one-year period from the date of
execution and currently permits the Company to finance its mortgage conduit,
warehouse lending and mortgage portfolio assets and operations. Such repurchase
facility carries a floating rate of interest based on LIBOR, plus an applicable
margin, which varies by the type of asset financed.
In May, 1995, the Company entered into a two-year committed credit facility with
a syndicate of nine commercial banks led by First Union National Bank of North
Carolina. This facility finances mortgage loans, builder construction loans,
and master servicing assets, as well as servicing-secured, servicing-receivable
and repurchase lines of credit extended by the Company to its customers.
Earlier in 1996, the Company amended this credit facility to expand the
available committed borrowings from $300 million to $400 million. During the
third quarter of 1996, the credit facility was amended and restated to increase
financing available for builder construction loans. The interest rates under
this credit facility are based, at the Company's election, on LIBOR or the
federal funds rate, plus an applicable margin, which varies by the type of asset
financed.
During the fourth quarter of 1995, the Company raised $59.6 million in
connection with the private placement of senior notes with certain institutional
lenders. These senior notes are unsecured, and the proceeds are utilized by the
Company in connection with its working capital needs. The rate of interest on
such senior notes is fixed at 9.22% for a period of seven years from the date of
issuance. The senior notes were rated "BBB-" by Duff & Phelps Credit Rating Co.
The Company has from time to time raised additional capital through secondary
public offerings, the most recent of which involved the issuance of the
Company's common stock with net proceeds totaling $68.7 million in February,
1995. The Company also raises new equity capital through the optional cash
investment feature of its Dividend Reinvestment Plan on a monthly basis, and
during the third quarter of 1996, the Company raised $32.2 million through such
Dividend Reinvestment Plan.
During the first quarter of 1996, the Company issued one series of CMO's in an
aggregate principal amount of $146.2 million, secured by collateral consisting
of mortgage loans with an aggregate principal balance of $154.6 million.
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, conduit and other operations by requiring CWM to distribute to its
shareholders substantially all of its taxable income from operations. Certain
of the Company's material businesses, including its mortgage conduit and
commercial lending operations, are known to require significant and continuing
commitments of capital resources.
The Company's liquidity and its ability to raise working capital has generally
improved during recent periods, and management believes that the Company's cash
flow from operations and the Company's existing financing arrangements are
sufficient to meet the Company's current short-term liquidity requirements. To
the extent the Company possesses working capital in excess of its current
liquidity requirements, such working capital is as a general matter utilized to
repay borrowings under those tranches of the Company's lines of credit which
carry higher rates of interest, which borrowings would typically remain
available for reborrowing by the Company pursuant to the terms and conditions of
the applicable credit facility.
The Company's ability to meet its long-term liquidity requirements is subject to
the renewal of its repurchase and credit facilities and/or obtaining other
sources of financing, including issuing additional debt or equity from time to
time. Any decision by the Company's lenders and/or investors to make additional
funds available to the Company in the future will depend on a number of factors,
such as the Company's compliance with the terms of its existing credit
arrangements, the Company's financial performance, industry and market trends in
the Company's various businesses, the general availability of and rates
applicable to financing and investments, such lenders' and/or investors' own
resources and policies concerning loans and investments, and the relative
attractiveness of alternative investment opportunities.
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
8
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.
9
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
* Previously filed
Reports on Form 8-K.
--------------------
None
10
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 December 20, 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
11