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 March 31, 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 March 31, 1996: 43,980,354 shares
1
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 Independent
National Mortgage Corporation and its subsidiary ("Indy Mac"), which is 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. Pursuant to the
Master Forward Commitment and Servicer Agreement between CWM and Indy Mac, Indy
Mac does not purchase any loans from entities other than CWM.
The Company's conduit operations were expanded during 1995 through the
introduction of two divisions; Independent National Finance Corporation ("INFC")
and Independent National Housing Services (INHS). INFC was formed to purchase,
securitize and sell subprime mortgage loans (i.e., "B through D" paper
mortgages). INHS 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, 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.
2
FINANCIAL CONDITION
CONDUIT OPERATIONS: During the first three months of 1996, CWM purchased $1.1
billion of non-conforming mortgage loans, including $98 million of subprime
mortgage loans through INFC, and $581,000 of manufactured housing loans through
INHS. 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 three months of 1996,
Indy Mac sold $1.0 billion of mortgage loans through the issuance of five series
of multiple-class MBS in the form of REMIC securities. In addition, INFC Sold
$9.9 million of whole loans during the quarter. At March 31, 1996, the Company
was committed to purchase $386.7 million of mortgage loans from various mortgage
originators. The Indy Mac master servicing portfolio at quarter-end had an
aggregate outstanding principal balance of $9.9 billion with a weighted average
coupon of 8.378%.
MORTGAGE LOANS HELD FOR INVESTMENT: The $1.2 billion portfolio of mortgage loans
held for investment at March 31, 1996 consisted of $827.2 million of varying
types of adjustable-rate products which contractually reprice in monthly, semi-
annual or annual periods; $190.6 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 $159.6 million of fixed-rate
mortgage loans. The weighted average coupon of the mortgage loans held for
investment at March 31, 1996 was 8.93%. The Company finances mortgage loans held
for investment with repurchase agreements and other credit facilities which have
maturities ranging from overnight to 14 months as of March 31, 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 $4.9 million at quarter
end. Charge-offs related to mortgage loans held for investment totaled $23,000
for the three months ended March 31, 1996.
During the first quarter of 1996, the Company financed $154.6 million of
mortgage loans held for investment through the issuance of a CMO. The mortgage
loans consisted of loans that are fixed for a period of 10 years and
subsequently convert to adjustable-rate mortgage loans. The issuance of the CMO
substantially defeased the interest rate risk component of holding these loans
for investment.
CONSTRUCTION LENDING OPERATIONS: At March 31, 1996, the Builder Division had
loans outstanding totaling $114.4 million, net of reserves, with $198.5 million
of remaining commitments to fund tract and custom home loans. The Consumer
Division had loans outstanding at March 31, 1996 totaling $45.9 million with
remaining commitments to fund construction-to-permanent and home improvement
loans of $29.8 million. The allowance for losses related to construction loans
totaled $996,000 at march 31, 1996. There were no charge-offs of construction
loans during the three months ended March 31, 1996. The Company had outstanding
borrowings under a revolving credit facility totaling $65.1 million at March 31,
1996 associated with the financing of construction loans.
WAREHOUSE LENDING OPERATIONS: At March 31, 1996, CWM had extended committed
warehouse and related lines of credit in an aggregate amount of $412.9 million,
of which $205.7 million was outstanding, net of reserves. The allowance for loan
losses related to warehouse lines of credit totaled $797,000 at March 31, 1996.
there were no charge-offs of warehouse lines of credit during the threee months
ended March 31, 1996. Repurchase agreements associated with CWM's financing of
these lines of credit totaled $157.4 million at Aarch 31, 1996.
3
CMO PORTFOLIO: As of March 31, 1996, the CMO portfolio was comprised of 12
series of CMOs. Collateral for CMOs increased from $184.1 million at December
31, 1995 to $326.9 million at March 31, 1996. This increase of $142.8 million
included an increase of $154.6 million of collateral related to the issuance of
a CMO, repayments (including prepayments and premium and discount amortization)
of $10.9 million, and an increase in guaranteed investment contracts ("GICS")
held by trustees and accrued interest receivable of $644,000 and $767,000,
respectively. The fair value of the collateral for CMOs totaled $322.5 million
and $185.2 million at March 31, 1996 and December 31, 1995, respectively. CWM's
CMOs outstanding increased to $299.4 million at March 31, 1996 from $164.8
million at December 31, 1995. This increase of $134.6 million resulted from
issuance proceeds of $146.9 million, principal payments and discount
amortization on CMOs of $10.0 million and an increase in accrued interest
payable on CMOs of $751,000.
RESULTS OF OPERATIONS
QUARTER ENDED MARCH 31, 1996 COMPARED TO QUARTER ENDED MARCH 31, 1995
NET EARNINGS: CWM's net earnings were $15.4 million or $0.36 per share, based on
43,105,573 weighted average shares outstanding for the quarter ended March 31,
1996, compared to $10.2 million or $0.28 per share, based on 36,979,444 weighted
average shares outstanding for the quarter ended March 31, 1995.
The increase of $5.2 million in first quarter earnings resulted from an increase
in net interest income of $6.0 million, an increase of $4.2 million in equity in
earnings from Indy Mac, offset by and increases of $2.2 million in the provision
for loan losses, and increases of $1.6 million and $1.3 million in general and
administrative expenses and management fees, respectively.
INTEREST INCOME: Total interest income was $59.0 million for the quarter ended
March 31, 1996 and $41.5 million for the quarter ended March 31, 1995. This
increase in interest income of $17.5 million is primarily due to an increase in
interest on mortgage loans held for investment of $6.9 million with additional
increases in construction loans, mortgage loans held for sale, warehouse lines
of credit, and collateral for CMO's of $4.0 million, $3.3 million, $2.6 million
and $653,000, respectively, offset by a decrease of $448,000 in securitized
master servicing fees.
Interest income on mortgage loans held for investment, consisting primarily of
adjustable rate mortgages, totaled $27.1 million and $20.2 million, resulting in
an effective yield of 8.48% and 8.27%, for the quarters ended March 31, 1996 and
1995, respectively. The increase is primarily due to an increase in the average
outstanding balance of mortgage loans held for investment to $1.3 billion for
the quarter ended March 31, 1996 from $991.1 million for the quarter ended March
31, 1995.
Interest income earned on mortgage loans held for sale totaled $14.0 million and
$10.6 million, resulting in an effective yield of 8.68% and 9.47%, for the
quarters ended March 31, 1996 and 1995, respectively. Average outstanding
balances rose to $647.4 million for the quarter ended March 31, 1996 from $455.3
million for the quarter ended March 31, 1995.
Interest income earned on revolving warehouse lines of credit totaled $3.8
million and $1.2 million with interest earned at an effective yield of 8.71% and
9.97% for the quarters ended March 31, 1996 and 1995, respectively. Interest
income on construction loans totaled $4.5 million and $462,000, with interest
earned at an effective yield of 12.58% and 13.63%, for the quarters ended March
31, 1996 and 1995, respectively.
Interest income on collateral for CMOs was $5.3 million and $4.7 million for the
quarters ended March 31, 1996 and 1995, respectively. The increase was primarily
attributable to an increase in the average aggregate principal amount of
collateral for CMOs outstanding to $288.1 million for the quarter ended March
31, 1996 compared to $227.8 million for the quarter ended March 31, 1995,
offset by a decrease in the effective yield earned on the collateral for CMOs to
7.45% in the first quarter of 1996 from 8.33%
4
in the first quarter of 1995. Interest income on collateral for CMOs includes
the impact of amortization of premiums paid in connection with acquiring the
loan portfolio and the impact of the delay in the receipt of prepayments and
temporary investment in lower yielding short-term holdings (GICs) until such
amounts are used to make payments on CMOs.
SECURITIZED MASTER SERVICING FEES, NET: Investments in securitized master
servicing fees have characteristics comparable to "excess servicing" insofar as
the value thereof tends to decline as market interest rates decline and
prepayment rates increase. Accordingly, the yield on this investment could
decline considerably as a result of rapid 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 present value of future
net master servicing income. Gross master servicing income for CWM was $6.4
million and $6.5 million for the three months ended March 31, 1996 and 1995,
respectively. This gross income was offset by amortization of the securitized
master servicing fees of $4.0 million, and $3.6 million, for the three months
ended March 31, 1996 and 1995, respectively. As of March 31, 1996, securitized
master servicing fees of $116.3 million were pledged to secure borrowings
totaling $66.3 million.
INTEREST EXPENSE: For the quarters ended March 31, 1996 and 1995, total interest
expense was $40.5 million and $29.0 million, respectively. This increase in
interest expense of $11.5 million was due to an increases in interest expense on
repurchase agreements and other credit facilities, senior unsecured notes and
CMO's of $9.4 million, $1.4 million and $732,000, 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 $33.5
million for the quarter ended March 31, 1996, compared to $24.1 million for the
quarter ended March 31, 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 March 31, 1996 compared to $1.5
billion for the quarter ended March 31, 1995, slightly offset by a decrease in
the weighted average effective rate applicable to such indebtedness to 6.37% for
the quarter ended March 31, 1996 from 6.70% for the quarter ended March 31,
1995.
Interest expense on senior unsecured notes totaled $1.4 million resulting in an
effective rate of 9.22% for the first quarter of 1996. There were no senior
unsecured notes outstanding during the first quarter of 1995.
Interest expense on CMOs was $5.6 million and $4.9 million for the quarters
ended March 31, 1996 and 1995, respectively. This increase was primarily
attributable to an increase in average aggregate CMOs outstanding to $263.6
million for the quarter ended March 31, 1996 from $198.5 million for the quarter
ended March 31, 1995, partially offset by a decrease in the effective rate on
the CMOs to 8.56% in the first quarter of 1996 from 9.96% in the first quarter
of 1995. The overall increase in the outstanding average balance and the
reduction in weighted average effective rate was primarily due to the issuance
of a $146.2 million CMO at an effective rate of 6.75%.
EQUITY IN EARNINGS OF INDY MAC: The 1996 first quarter earnings of $3.6 million
for Indy Mac, in which CWM has a 99% economic interest, resulted principally
from net interest income of $2.7 million, gain on sale of mortgage loans and
issuances of securities of $4.4 million and loss on sale of mortgage securities
offset by expenses of $5.0 million, management fee expense of $443,000, and
income taxes of $2.8 million.
Net income related to the securitized master servicing fees totaled $1.9 million
during the first three months of 1996, including gross income of $9.4 million
offset by amortization of the related asset balances of $7.5 million. Net income
related to the master servicing fees receivable totaled $746,000 during the
first three months of 1996, including gross income of $4.5 million offset by
amortization of the related asset balances of $3.8 million.
During the first quarter of 1995, Indy Mac realized a loss of $629,000 which
resulted principally from net interest income of $4.1 million, including master
servicing fees receivable gross income totaling $6.5 million and related
amortization of $5.3 million, loss on sale of mortgage loans and issuance of
securities of $2.7 million, gain on sale of mortgage securities available-for-
sale of $1.9 million, expenses of $4.4 million, management fee expense of $8,000
and income taxes of $456,000.
5
SALARIES, GENERAL AND ADMINISTRATIVE EXPENSE: The increase of $1.6 million for
the three months ended March 31, 1996 compared to three months ended March 31,
1995 is primarily the result of growth in personnel related to the operations of
CWM, combined with the expansion of the Company's construction lending
operations.
MANAGEMENT FEES: For the three months ended March 31, 1996, management fees
were $2.1 million compared to $767,000 for the three months ended March 31,
1995. The increase in the management fee of $1.3 million was primarily due to
an increase in incentive compensation for the first quarter of 1996, directly
related to the increase in cwm's earnings in comparison to the first 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.
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 quarter the Company raised $23.5 million of new capital primarily
through the optional cash investment feature of the Dividend Reinvestment Plan.
In addition, the Company completed a $500 million repurchase facility with a
leading investment bank, committed through November 1996.
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. During the first quarter of 1996, the Company amended this credit
facility to expand the available committed borrowings from $300 million to $400
million. 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. 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.
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 to an
extent of the Company's investment portfolio if the yield on such holdings does
not keep pace with increases in interest rates. As a result of decreased market
values it could be necessary for the Company to borrow additional funds and
pledge additional assets to maintain financing for its holdings that have not
been financed to maturity through the issuance of CMOs or other debt securities.
Increases in short-term borrowing rates relative to rates earned on holdings
that have not been financed to maturity through the issuance of CMOs or other
debt securities may also adversely affect the Company's earnings. However, the
Company has implemented a hedging strategy which may to an extent 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 for
classes of the CMOs issued by the Company and may result in higher residual cash
flows from such assets than would otherwise have been obtained. However, higher
rates of interest may also discourage potential mortgagors from borrowing or
refinancing mortgage loans, thus decreasing the volume of loans available to be
purchased through the Company's mortgage conduit operations or financed through
the Company's construction and warehouse lending operations.
6
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.
7
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
Exhibits
--------
10.1* Compensation Plan for Michael W. Perry effective
January 1, 1996.
10.2* Compensation Plan for Richard Wohl effective January 1, 1996.
10.3* Compensation Plan for Carmella Grahn effective January 1, 1996.
10.4* Second Amendment to Facility I Credit Agreement dated January
4, 1996 by and among CWM Mortgage Holdings, Inc., Independent
National Mortgage Corporation, Independent Lending Corporation,
First Union National Bank of North Carolina and the Lenders
from time to time party thereto.
10.5* Second Amendment to Facility II Credit Agreement dated January
4, 1996 by and among CWM Mortgage Holdings, Inc., Independent
National Mortgage Corporation, Independent Lending Corporation,
First Union National Bank of North Carolina and the Lenders
from time to time party thereto.
10.6 Third Amendment to Facility I Credit Agreement dated March 15,
1996 by and among CWM Mortgage Holdings, Inc., Independent
National Mortgage Corporation, Independent Lending Corporation,
First Union National Bank of North Carolina and the Lenders
from time to time party thereto.
10.7 Third Amendment to Facility II Credit Agreement dated March 15,
1996 by and among CWM Mortgage Holdings, Inc., Independent
National Mortgage Corporation, Independent Lending Corporation,
First Union National Bank of North Carolina and the Lenders
from time to time party thereto.
10.8* Master Forward Commitment and Services Agreement effective
January 1, 1996 between CWM Mortgage Holdings, Inc. and
Independent
National Mortgage Corporation.
10.9* Independent National Mortgage Corporation Capitalization
Agreement effective as of January 1, 1996, by and among CWM
Mortgage Holdings, Inc., Countrywide Funding Corporation and
Independent National Mortgage Corporation.
10.10* Revolving Working Capital Credit Facility and Credit Support
Agreement effective as of January 1, 1996, between CWM Mortgage
Holdings, Inc. and Independent National Mortgage Corporation.
27* Financial Data Schedule
*Previously filed.
Reports on Form 8-K.
--------------------
None
8
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: /Michael W. Perry
-----------------
Michael W. Perry
Executive Vice President and Chief
Operating Officer
By: /James P. Gross
--------------------
James P. Gross
Senior Vice President and Chief
Financial Officer
9