SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
Form 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the period ended June 30, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to ______________
Commission File Number 1-8972
CWM MORTGAGE HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 95-3983415
(State or other jurisdiction of (I. R. S. Employer Identification No.)
incorporation or organization)
35 NORTH LAKE AVENUE, PASADENA, CALIFORNIA 91101-1857
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (800) 669-2300
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
requirements for the past 90 days. Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the close of the period covered by this report.
Common stock outstanding as of June 30, 1995: 40,573,656 shares
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CWM Mortgage Holdings, Inc. and Subsidiaries
Consolidated Balance Sheets
(Dollar amounts in thousands)
(Unaudited)
June 30, 1995 December 31, 1994
---------------- -----------------
ASSETS
Mortgage assets
Mortgage loans held for sale $ 613,260 $ 608,240
Mortgage loans held for investment 1,034,816 899,672
Collateral for CMOs 219,915 233,690
Master servicing fees receivable 132,441 120,954
Construction loans receivable 43,277 6,370
Revolving warehouse lines of credit 151,632 69,591
Cash 5,372 2,605
Investment in and advances to INMC 124,382 40,032
Other assets 24,214 16,490
---------------- -----------------
Total assets $ 2,349,309 $ 1,997,644
================ =================
LIABILITIES AND SHAREHOLDERS' EQUITY
Reverse-repurchase agreements and other borrowings $ 1,820,421 $ 1,534,189
Collateralized mortgage obligations 188,826 202,259
Accounts payable and accrued liabilities 8,471 5,176
---------------- -----------------
Total liabilities 2,017,718 1,741,624
Commitments and contingencies - -
Shareholders' equity
Common stock - authorized, 100,000,000 shares of
$.01 par value; issued and outstanding, 40,573,656 shares
in 1995 and 32,281,156 in 1994 406 323
Additional paid-in capital 328,390 258,240
Net unrealized gain (loss) on available-for-sale securities
held by INMC 4,077 (890)
Cumulative earnings 122,329 100,137
Cumulative distributions to shareholders (123,611) (101,790)
---------------- -----------------
Total shareholders' equity 331,591 256,020
---------------- -----------------
Total liabilities and shareholders' equity $ 2,349,309 $ 1,997,644
================ =================
The accompanying notes are an integral part of these statements.
CWM Mortgage Holdings, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF EARNINGS
(Dollar amounts in thousands, except per share data)
(Unaudited)
Quarter Ended June 30, Six Months Ended June 30,
------------------------ -------------------------
1995 1994 1995 1994
---------- ----------- ---------- -----------
REVENUES
Interest income
Mortgage loans held for sale $ 10,135 $ 8,221 $ 20,770 $ 19,279
Mortgage loans held for investment 20,978 2,709 41,184 2,709
Collateral for CMOs 4,562 5,497 9,243 11,746
Master servicing income 3,096 2,384 6,011 2,384
Construction loans 1,090 - 1,510 -
Revolving warehouse lines of credit 2,137 720 3,342 2,142
Advances to INMC 1,908 912 3,303 1,529
Other 33 23 64 48
---------- ----------- ---------- ----------
Total interest income 43,939 20,466 85,427 29,837
Interest expense
Reverse-repurchase agreements & other borrowings 26,706 6,573 50,817 13,685
Collateralized mortgage obligations 4,520 7,047 9,396 15,690
---------- ----------- ---------- ----------
Total interest expense 31,226 13,620 60,213 29,375
---------- ----------- ---------- ----------
Net interest income 12,713 6,846 25,214 10,462
Provision for loan losses 1,075 - 1,317 -
---------- ----------- ---------- ----------
Net interest income after provision for loan losses 11,638 6,846 23,897 10,462
Equity in earnings of INMC 2,493 (592) 1,870 1,196
Other, net 341 114 545 435
---------- ----------- ---------- ----------
Net revenues 14,472 6,368 26,312 12,093
EXPENSES
General and administrative 923 579 1,767 1,151
Management fees to affiliate 1,586 78 2,353 178
---------- ----------- ---------- ----------
Total expenses 2,509 657 4,120 1,329
---------- ----------- ---------- ----------
NET EARNINGS $ 11,963 $ 5,711 $ 22,192 $ 10,764
========== =========== ========== ==========
EARNINGS PER SHARE $0.30 $0.18 $0.57 $0.34
========== =========== ========== ==========
Weighted average shares outstanding 40,456,769 32,141,443 38,727,712 32,123,456
The accompanying notes are an integral part of these statements.
CWM Mortgage Holdings, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar amounts in thousands)
(Unaudited)
Six Months Ended June 30,
------------------------------
1995 1994
----------- -----------
Cash flows from operating activities:
Net earnings $ 22,192 $ 10,764
Adjustments to reconcile net earnings
to net cash provided by operating activities:
Amortization and depreciation 6,975 4,254
Provision for loan losses 1,317 -
Equity in earnings of INMC (1,870) (1,196)
Purchases of mortgage loans held for sale (2,156,719) (2,793,066)
Principal repayments and proceeds from sale of mortgage loans 2,151,699 3,076,351
Change in other assets and liabilities (5,454) (3,115)
----------- -----------
Net cash provided by operating activities 18,140 293,992
Cash flows from investing activities:
Collateral for CMOs:
Principal payments on collateral 12,258 117,005
Net change in GICs held by trustees 1,150 6,162
----------- -----------
13,408 123,167
Purchases of mortgage loans held for investment (176,916) (171,009)
Principal payments on mortgage loans held for investment 43,259 -
Investment in master servicing fees receivable (19,117) (74,862)
(Increase) decrease in revolving warehouse lines of credit (82,233) 42,556
Net increase in construction loans receivable (37,042) -
Investment in INMC (15,842) (4,541)
Advances to INMC, net of cash repayments (61,671) (13,069)
----------- -----------
Net cash used in investing activities (336,154) (97,758)
Cash flows from financing activities:
Collateralized mortgage obligations:
Principal payments on securities (13,862) (122,775)
----------- -----------
(13,862) (122,775)
Net increase (decrease) in reverse-repurchase agreements 286,231 (63,618)
Net proceeds from issuance of common stock 70,233 655
Cash dividends paid (21,821) (8,999)
----------- -----------
Net cash provided by (used in) financing activities 320,781 (194,737)
----------- -----------
Net increase in cash 2,767 1,497
Cash at beginning of period 2,605 7,099
----------- -----------
Cash at end of period $ 5,372 $ 8,596
=========== ===========
Supplemental cash flow information:
Cash paid for interest $ 56,736 $ 23,965
=========== ===========
The accompanying notes are an integral part of these statements.
CWM Mortgage Holdings, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1995
(Unaudited)
NOTE A - BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Rule 10-01 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. The consolidated financial statements include the accounts of CWM
Mortgage Holdings, Inc. and its qualified REIT subsidiaries ("CWM"). The
mortgage loan conduit operations are primarily conducted through Independent
National Mortgage Corporation, Inc. ("INMC"), a taxable corporation. CWM owns
all the preferred stock and a 99% economic interest in INMC. CWM's investment in
INMC is accounted for under a method similar to the equity method. In addition,
INMC is not consolidated for income tax purposes. As used herein, the "Company"
includes CWM and INMC.
All significant intercompany balances and transactions have been eliminated in
consolidation of CWM. Certain reclassifications have been made to the financial
statements for the period ended June 30, 1994 to conform to the June 30, 1995
financial statement presentation.
In the opinion of management, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation have been included.
Operating results for the six months ended June 30, 1995 are not necessarily
indicative of the results that may be expected for the year ending December 31,
1995. For further information, refer to the consolidated financial statements
and footnotes thereto included in CWM's annual report on Form 10-K for the year
ended December 31, 1994.
NOTE B - RESERVE FOR CREDIT LOSSES
----------------------------------
The Company maintains a reserve for possible credit losses on mortgage loans
held for sale and investment, construction loans and warehouse lines of credit.
Additions to the reserve are based on an assessment of certain factors,
including but not limited to estimated future losses on the loans, general
economic conditions and trends in portfolio volume, composition, maturity and
delinquency statistics. Additionally, since the Company's various loan
portfolios are relatively immature, the Company looks at historical statistics
of loan portfolios with similar characteristics at other financial institutions.
Additions to the reserve are provided through a charge to earnings. Actual
losses on loans are recorded as a charge-off or a reduction to the loan loss
reserve. The balance in the reserve at December 31, 1994 totaled $500,000.
During the six months ended June 30, 1995, CWM and INMC provided $1.3
million and $650,000, respectively to the allowance for credit losses and CWM
recorded charge-offs of $42,000. The reserve is allocated to mortgage loans held
for investment, construction loans and warehouse lines of credit in the amount
of $990,000, $435,000 and $350,000, respectively. The reserve for credit losses
related to mortgage loans held for sale on INMC totaled $650,000 at June 30,
1995.
5
NOTE C - INVESTMENT IN INMC
---------------------------
Summarized financial information for INMC follows (in thousands).
June 30, 1995 December 31, 1994
-------------------------------------
Mortgage loans held for sale $ 625,631 $ 180,602
Mortgage securities 254,584 138,472
Master servicing fees receivable 56,850 29,444
Other assets 21,781 16,045
-------------------------------------
Total assets $ 958,846 $ 364,563
=====================================
Reverse-repurchase agreements $ 816,085 $ 304,080
Other liabilities 17,911 20,212
Advances from CWM 78,136 16,464
Shareholders' equity 46,714 23,807
Total liabilities and -------------------------------------
shareholders' equity $ 958,846 $ 364,563
=====================================
Quarter ended Six months ended
June 30, June 30,
------------------------ ---------------------
1995 1994 1995 1994
Interest income
Mortgage loans held for sale $ 13,421 $ 4,650 $ 25,282 $11,585
Master servicing, net 2,188 (61) 3,412 (1,557)
Mortgage securities 4,669 375 8,073 375
------------------------ ---------------------
Total interest income 20,278 4,964 36,767 10,403
Interest expense 14,952 4,636 27,307 9,116
------------------------ ---------------------
Net interest income 5,326 328 9,460 1,287
Provision for loan losses 650 - 650 -
------------------------ ---------------------
Net interest income after
provision for loan losses 4,676 328 8,810 1,287
Gain (loss) on sale of mortgage
loans & securities 5,073 (3,862) 4,260 863
Gain on sale of servicing - 5,834 - 5,834
------------------------ ---------------------
Net revenues 9,749 2,300 13,070 7,984
Salaries and related expenses 3,258 2,069 5,840 3,693
General and administrative
expenses 1,925 1,249 3,741 2,182
Management fee to affiliate 224 14 232 26
------------------------ ---------------------
Total expenses 5,407 3,332 9,813 5,901
------------------------ ---------------------
Earnings (loss) before income
taxes 4,342 (1,032) 3,257 2,083
Income tax provision (benefit) 1,824 (434) 1,368 874
------------------------ ---------------------
Net earnings (loss) $ 2,518 $ (598) $ 1,889 $ 1,209
======================== =====================
6
Mortgage Securities. Mortgage securities consist of mortgage derivative products
including subordinated securities, principal-only securities and inverse
floaters invested in or retained in connection with the issuance of INMC's REMIC
securities. Contractual maturities on the mortgage securities range from 10 to
30 years. The following is a disclosure of the estimated fair value of mortgage
securities as of June 30, 1995 and December 31, 1994 (in thousands):
Net Estimated Gross Gross
book fair unrealized unrealized
Classification value value gains losses
-------------- -------- --------- ---------- ----------
June 30, 1995:
Available-for-sale $247,483 $254,584 $11,495 $4,394
=============================================
December 31, 1994:
Available-for-sale $106,928 $105,378 $ 512 $2,062
Held-to-maturity 33,094 33,201 1,463 1,356
---------------------------------------------
Total $140,022 $138,579 $ 1,975 $3,418
=============================================
During the quarter ended June 30, 1995, INMC sold mortgage securities classified
as available-for-sale with a net book value of $29.8 million (based on specific
identification) for proceeds of $32.5 million, resulting in a gross realized
gain of $2.7 million. For the six month period ended June 30, 1995, INMC sold
mortgage securities classified as available-for-sale with a net book value of
$64.5 million for proceeds of $69.1 million, resulting in a net gain of $4.6
million. This net gain was comprised of gross realized gains and gross realized
losses of $4.6 million and $25,000, respectively. All securities sold by INMC
during the six months ended June 30, 1994 occurred simultaneously with the trade
of the REMIC security. Accordingly, such assets and the related gains and losses
are not reported separately in the Consolidated Balance Sheet and Statement of
Earnings as of and for the six months ended June 30, 1994. INMC had no trading
securities at June 30, 1995 and December 31, 1994.
During the first quarter of 1995, INMC transferred its entire portfolio of
mortgage securities classified as held-to-maturity to available-for-sale. The
unrealized gain as of the date of transfer was $1.2 million. The decision to
transfer these securities to available-for-sale was based on a reassessment of
the purpose of such investments. INMC considers the category of available-for-
sale to more properly reflect INMC's intentions with respect to the mortgage
securities.
NOTE D - SUBSEQUENT EVENT
On July 19, 1995, the Board of Directors declared a cash dividend of $0.30 per
share to be paid on September 1, 1995 to shareholders of record on July 28,
1995.
7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
General
In its mortgage loan conduit business, the Company acts as an intermediary
between the originators of mortgage loans and permanent investors in mortgage-
backed securities secured by or representing an ownership interest in such
mortgage loans. The Company purchases "jumbo" and other "nonconforming" mortgage
loans from mortgage originators who generally retain the servicing rights. All
loans purchased by CWM, for which a REMIC transaction or whole loan sale is
contemplated, are committed for sale to INMC at the same price at which the
loans were acquired by CWM. INMC does not purchase any loans from entities other
than CWM. The Company's principal sources of income from its mortgage conduit
operations are gains recognized on the sale of mortgage loans, the net spread
between interest earned on mortgage loans and the interest costs associated with
the borrowings used to finance such loans pending their securitization and the
net interest earned on its long-term investment portfolio, mortgage securities
and master servicing fee income. In addition, the Company earns fee income and
net interest income through its warehouse lending programs which provide
warehouse and other types of credit to third-party mortgage loan originators.
Through the warehouse lending programs, financing is provided to small and
medium-size mortgage originators for the origination and sale of mortgage loans,
the retention, acquisition or sale of servicing rights, and the carrying of
mortgage loans pending foreclosure and/or repurchase from an investor.
In August 1994, the Company commenced its construction lending operations. The
Company offers both single-family subdivision construction lending to small-to-
medium size builders (tract construction) and consumer construction financing to
individual borrowers who wish to construct or remodel their principal or
secondary residences. The Company earns fee income and net interest income from
these programs.
In February 1995 the Company introduced a new division, Independent National
Finance Corporation (INFC), to purchase, securitize and sell mortgage loans to
borrowers with higher debt-to-income ratios and/or prior adverse credit
circumstances (i.e., "B and C" paper mortgages). The Company earns fee income
and net interest income from this program and will recognize gains from the sale
of such loans once an adequately sized pool of loans has been purchased. For the
six months ended June 30, 1995, $1.5 million in mortgage loans have been
purchased under this program.
Prior to 1993, the Company's principal source of earnings had been net interest
income generated from its mortgage portfolio which was primarily financed
through the issuance of CMOs (the "CMO Portfolio"). The amount of net interest
earned on the CMO Portfolio is directly affected by the rate of principal
repayment (including prepayments) of the related mortgage loans. When prevailing
mortgage interest rates are low relative to interest rates of existing mortgage
loans, prepayments on the underlying mortgage loans generally tend to increase
as mortgagors refinance their existing loans. The cash flow generated by these
prepayments is used to repay the CMOs which are collateralized by these mortgage
loans. However, the remaining mortgage loans typically carry a lower coupon, and
the interest spread between these loans and the underlying financing thus
narrows. The CMO Portfolio experienced accelerated prepayments during the
beginning of 1994, and since mortgage loan premiums, original issue discount and
bond issuance costs were required to be amortized, losses were ultimately
realized on the portfolio. As mortgage rates rose during 1994, principal
prepayments on the underlying mortgage loans declined and the Company
experienced stabilization of the CMO Portfolio resulting in a decrease in the
net interest expense on the CMO Portfolio in the first half of 1995 compared to
the same period of 1994.
8
Financial Condition
Conduit Operations: Through INMC's mortgage loan conduit operations, the Company
purchases jumbo and other nonconforming loans from mortgage originators who
generally retain the servicing rights. During the six months ended June 30,
1995, the Company purchased $2.3 billion of non-conforming mortgage loans, which
were financed on an interim basis using equity and short-term borrowings in the
form of reverse-repurchase agreements and other borrowings. In general, the
Company, through INMC, sells the loans in the form of real estate mortgage
investment conduit ("REMICs") or whole loan sales or alternatively, through CWM,
invests in the loans on a long-term basis using financing provided by CMOs,
reverse-repurchase agreements and other borrowings. During the six months ended
June 30, 1995, INMC sold $1.7 billion of mortgage loans through the issuance of
10 series of multiple-class mortgage-backed securities in the form of REMICs and
sold $17 million of non-conforming mortgage loans as whole loans. At June 30,
1995, CWM was committed to purchase $351.8 million of mortgage loans from
various mortgage originators. The master servicing portfolio at June 30, 1995
had an aggregate outstanding principal balance of $8.2 billion with a weighted
average coupon of 7.99% compared to $4.8 billion at June 30, 1994 with a
weighted average coupon of 7.2%.
Construction Lending Operations: The Company's construction lending program
provides tract construction loans to small-to-medium size builders and consumer
construction financing to individual borrowers. At June 30, 1995 CWM had loan
commitments totaling $92.6 million for tract construction and $44.3 million for
consumer construction financing, of which $24.9 million and $20.1 million was
outstanding, respectively. The reserve for loan losses related to construction
loans totaled $435,000 at June 30, 1995. The Company had outstanding borrowings
under a revolving credit facility totaling $27.9 million at June 30, 1995
associated with the financing of construction loans.
Warehouse Lending Operations: The Company's warehouse lending program provides
secured short-term revolving financing to small- and medium-size mortgage
originators to finance mortgage loans from the closing of the loan until it is
sold to a permanent investor. Financing is also provided for the retention or
acquisition of servicing rights, receivables generated through the sale of
servicing rights, and the carrying of mortgage loans pending foreclosure and/or
repurchase from an investor. At June 30, 1995, CWM had extended committed lines
of credit under this program to 103 borrowers in the aggregate amount of $344.0
million, of which $152.0 million was outstanding. The aggregate committed lines
of credit increased from $264.5 million at June 30, 1994 with outstanding
balances of $49.5 million. The reserve for loan losses related to warehouse
loans totaled $350,000 and $0 at June 30, 1995 and 1994, respectively. Reverse-
repurchase agreements associated with CWM's financing of these lines of credit
totaled $132.8 million and $40.9 million at June 30, 1995 and 1994,
respectively.
CMO Portfolio: As of June 30, 1995, the CMO Portfolio was comprised of 14 series
of CMOs issued from CWM's inception. Collateral for CMOs decreased from $233.7
million at December 31, 1994 to $219.9 million at June 30, 1995. This decrease
of $13.8 million included repayments (including prepayments and premium and
discount amortization) of $12.5 million and a decrease in guaranteed investment
contracts ("GICs") held by trustees and accrued interest receivable of $1.1
million and $167,000 respectively. The fair value of the collateral for CMOs
totaled $217.1 million and $224.2 million at June 30, 1995 and December 31,
1994, respectively. CWM's CMOs outstanding decreased to $188.8 million at June
30, 1995 from $202.2 million at December 31, 1994. This decrease of $13.4
million resulted from principal payments (including discount amortization) on
CMOs of $13.3 million and a decrease in accrued interest payable on CMOs of
$133,000.
9
Results of Operations
Quarter Ended June 30, 1995 Compared to Quarter Ended June 30, 1994
Net Earnings: CWM's net earnings were $12.0 million or $0.30 per share,
based on 40,456,769 weighted average shares outstanding for the quarter
ended June 30, 1995 compared to $5.7 million or $0.18 per share, based on
32,141,443 weighted average shares outstanding for the quarter ended
June 30, 1994. The increase in net earnings of $6.3 million was due to a
$4.7 million increase associated with CWM's mortgage conduit, warehouse and
construction lending activities, including CWM's equity in earnings (losses)
of INMC, combined with a $1.6 million decrease in net interest expense
associated with the CMO portfolio.
The increase in net earnings related to CWM's mortgage conduit, warehouse and
construction lending activities of $4.7 million is principally due to an
increase in net interest income of $4.3 million and an increase in the equity in
earnings of INMC of $3.1 million, offset by a provision for loan losses of $1.1
million and an increase in the management fee expense of $1.5 million.
Interest Income: Total interest income was $43.9 million for the quarter ended
June 30, 1995 and $20.5 million for the quarter ended June 30, 1994. This
increase in interest income of $23.4 million is primarily due to an increase in
interest on mortgage loans held for investment of $18.3 million with additional
increases in mortgage loans held for sale, warehouse lines of credit and
construction loans of $1.9 million, $1.4 million and $1.1 million, respectively.
Interest income earned on mortgage loans held for sale totaled $10.1 million and
8.2 million resulting in an effective yield of 9.48% and 7.92% for the quarters
ended June 30, 1995 and 1994, respectively. Interest income on mortgage loans
held for investment totaled $21.0 million and $2.7 resulting in an effective
yield of 7.98% and 6.92% for the quarters ended June 30, 1995 and 1994,
respectively.
Interest income earned on revolving warehouse lines of credit totaled $2.1
million and $720,000, with interest earned at an effective yield of 9.61% and
7.76% for the quarters ended June 30, 1995 and 1994, respectively. Interest
income on construction loans totaled $1.1 with interest earned at an effective
yield of 13.92% for the quarter ended June 30, 1995. Construction lending
operations began in August 1994 therefore there was no income from this
activity in the second quarter of 1994.
Interest income on collateral for CMOs was $4.6 million and $5.5 million for the
quarters ended June 30, 1995 and 1994, respectively. The decline was primarily
attributable to a decrease in the average aggregate principal amount of
collateral for CMOs outstanding, from $303.0 million for the quarter ended June
30, 1994 to $222.1 million for the quarter ended June 30, 1995, partially offset
by an increase in the effective yield earned on the collateral from 7.26% in the
second quarter of 1994 to 8.24% in the second quarter of 1995. Interest income
on collateral for CMOs includes the impact of amortization of premiums paid in
connection with acquiring the portfolio and a delay in the receipt of
prepayments and temporary investment in lower yielding short-term holdings
(GICs) until such amounts are used to repay CMOs. Accordingly, as interest rates
increase and prepayments decline, as in the second quarter of 1995 compared to
the second quarter of 1994, amortization of premium declines and the amount of
the non-earning asset associated with the delay in the receipt of prepayments
combined with the lower yielding GICs are reduced relative to the portfolio,
resulting in a higher effective yield.
Master Servicing, Net: Beginning in the second quarter of 1994, INMC began to
repay its debt to CWM by the transfer of its master servicing fees receivable
asset from INMC to CWM at its then carrying value which approximated market
value. In addition, in October 1994, CWM began investing in master servicing
fees receivable associated with REMIC securities issued by INMC. Accordingly, as
of June 30, 1995, CWM had master servicing fees receivable totaling $132.4
million. Gross master servicing income for CWM was $ 7.2 million for the quarter
ended June 30, 1995. This gross income was offset by amortization of master
servicing fees receivable of $4.1 million for the quarter ended June 30, 1995.
For the quarter ended June 30, 1994, gross master servicing totaled $3.8
million, offset by amortization of master servicing fees receivable of $1.4
million.
10
Interest Expense: For the three months ended June 30, 1995 and 1994, total
interest expense was $31.2 million and $13.6 million, respectively. This
increase in interest expense of $17.6 million was due to an increase in interest
expense on reverse-repurchase agreements and other borrowings of $20.1 million
offset by a decrease in interest expense on CMOs of $2.5 million.
Interest expense on reverse-repurchase agreements and other borrowings used to
finance mortgage loans held for sale and investment, revolving warehouse lines
of credit, construction loans and master servicing fees receivable totaled $26.7
million for the quarter ended June 30, 1995, compared to $6.6 million for the
quarter ended June 30, 1994. This increase was principally the result of an
increase in the aggregate average balance of indebtedness outstanding for the
period from $554 million for the quarter ended June 30,1994 to $1.6 billion for
the quarter ended June 30, 1995 combined with an increase in the weighted
average effective rate applicable to such indebtedness from 4.76% to 6.80% for
the quarters ended June 30, 1994 and 1995, respectively.
Interest expense on CMOs was $4.5 million and $7.0 million for the three months
ended June 30, 1995 and 1994, respectively. This decrease was primarily
attributable to a decrease in average aggregate CMOs outstanding from $277.9
million for the quarter ended June 30, 1994 to $192.6 million for the quarter
ended June 30, 1995 and a decrease in the effective rate on the CMOs from 10.14%
in the second quarter of 1994 to 9.42% in the second quarter of 1995. The
decrease in the average balance of CMOs was directly related to the prepayment
activity on collateral for CMOs discussed above. The prepayments are ultimately
used to repay the related CMOs. As interest rates increase and prepayments
decline on the underlying collateral, the amortization of original issue
discount and bond issue costs also decreases resulting in a lower effective rate
on the portfolio.
Equity in Earnings of INMC: The 1995 second quarter earnings of $2.5 million
for INMC, in which CWM has a 99% economic interest, resulted principally from
net interest income of $5.3 million, including gross master servicing income of
$4.1 million and amortization of master servicing fees receivable of $1.9
million, gain on sale of loans and securities of $5.1 million, offset by
expenses of $5.4 million, a provision for loan losses of $650,000 and income
taxes of $1.8 million. During the second quarter of 1994, the $598,000 net loss
of INMC resulted principally from net interest income of $328,000, including
gross master servicing fees receivable totaling $2.8 million and amortization of
master servicing fees receivable of $2.9 million, gain on sale servicing of $5.8
million, a loss on sale of loans and securities of $3.9 million, expenses of
$3.3 million and income tax benefit of $434,000.
General and Administrative Expense: The increase in general and administrative
expense in the second quarter of 1995 compared to the second quarter of 1994 is
primarily the result of increased salaries and operating costs related to the
warehouse and construction lending operations as the Company has developed and
expanded these business lines.
Management Fees: For the three months ended June 30, 1995, management fees were
$1.6 million compared to $78,000 for the three months ended June 30, 1994. The
increase in the management fee of $1.5 million was primarily due to an increase
in incentive compensation for the second quarter of 1995, directly related to
the increase in CWM's earnings in the second quarter of 1995. Regular management
fees also increased due to increased average balances of the mortgage loans held
for investment and warehouse lines of credit.
Six Months Ended June 30, 1995 Compared to Six Months Ended June 30, 1994
Net Earnings: CWM's net earnings were $22.2 million or $0.57 per share, based
on 38,727,712 weighted average shares outstanding for the six months ended June
30, 1995 compared to $10.8 million or $0.34 per share, based on 32,123,456
weighted average shares outstanding for the six months ended June 30, 1994. The
increase in net earnings of $11.4 million was primarily due to a $7.6 million
increase associated with CWM's mortgage conduit, warehouse and construction
lending activities, including CWM's equity in earnings of INMC, combined with a
$3.8 million decrease in net interest expense associated with the CMO portfolio.
The increase in net earnings related to CWM's mortgage conduit, warehouse and
construction lending activities of $7.6 million is principally due to an
11
increase in net interest income of $10.9 million and an increase in the equity
in earnings of INMC of $674,000 offset by a provision for loan losses of $1.3
million, an increase in the management fee of $2.2 million and an increase in
general and administrative expense of $616,000.
Interest Income: Total interest income was $85.4 million for the six months
ended June 30, 1995 and $39.8 million for the six months ended June 30, 1994.
This increase in interest income of $45.6 million is primarily due to an
increase in interest on mortgage loans held for investment and interest on
master servicing of $38.5 million and $3.6 million, respectively, offset by a
decrease in interest income on collateral for CMOs of $2.5 million.
Additionally, interest on mortgage loans held for sale, warehouse lines of
credit, construction loans and advances to INMC increased $1.5 million,
$1.2 million, $1.5 million and $1.8 million, respectively.
Interest income earned on mortgage loans held for sale totaled $20.8 million
and $19.3 resulting in an effective yield of 9.47% and 7.18% for the six month
periods ended June 30, 1995 and 1994, respectively. Interest income on
mortgage loans held for investment totaled $41.2 million and $2.7 million
resulting in an effective yield of 8.12% and 6.92% for the six month periods
ended June 30, 1995 and 1994, respectively.
Interest income on revolving warehouse lines of credit totaled $3.3 million
and $2.1 million with interest earned at an effective yield of 9.75% and
7.39%, for the six month periods ended June 30, 1995 and 1994, respectively.
Interest income on construction loans totaled $1.5 million with interest
earned at an effective yield of 13.87% for the six months ended June 30, 1995.
Interest income on collateral for CMOs was $9.2 million and $11.7 million for
the six months ended June 30, 1995 and 1994, respectively. The decline was
primarily attributable to a decrease in the average aggregate principal amount
of collateral for CMOs outstanding, from $336.5 million for the six months
ended June 30, 1994 to $224.9 million for the six months ended June 30, 1995,
partially offset by an increase in the effective yield earned on the
collateral from 6.98% in the first half of 1994 to 8.29% in the first half
of 1995. Interest income on collateral for CMOs includes the impact of
amortization of premiums paid in connection with acquiring the portfolio and
a delay in the receipt of prepayments and temporary investment in lower
yielding short-term holdings (GICs) until such amounts are used to repay
CMOs. Accordingly, in periods of higher interest rates and reduced
prepayments, as in the first half of 1995 compared to the first half of
1994, amortization of premium declines and the amount of the non-earning
asset associated with the delay in the receipt of prepayments combined with
the lower yielding GICs are reduced relative to the portfolio, resulting in
a higher effective yield.
Master Servicing, Net: Gross master servicing income for CWM was $13.6
million for the six months ended June 30, 1995. This gross income was offset
by amortization of master servicing fees receivable of $7.6 million for the
six months ended June 30, 1995. Gross master servicing income for the six
months ended June 30, 1994 totaled $3.8 million, offset by amortization of
the master servicing fees receivable of $1.4 million.
Interest Expense: For the six months ended June 30, 1995 and 1994, total
interest expense was $60.2 million and $29.4 million, respectively. This
increase in interest expense of $30.8 million was due to an increase in
interest expense on reverse-repurchase agreements and other borrowings of
$37.1 million offset by a decrease in interest expense on CMOs of $6.3
million.
Interest expense on reverse-repurchase agreements and other borrowings used to
finance mortgage loans held for sale and investment, revolving warehouse lines
of credit, construction loans and master servicing fees receivable totaled
$50.8 million for the six months ended June 30, 1995 compared to $13.7
million for the six months ended June 30, 1994. The increase in interest
expense was principally the result of an increase in the aggregate average
balance of indebtedness outstanding for the period from $620.7 million for
the first half of 1994 to $1.5 billion for the first half of 1995, combined
with an increase in the weighted average effective rate applicable to such
indebtedness from 4.45% to 6.75% for the six months ended June 30, 1994 and
1995, respectively.
Interest expense on CMOs was $9.4 million and $15.7 million for the six months
ended June 30, 1995 and 1994, respectively. This decrease was primarily
attributable to a decrease in average aggregate CMOs outstanding from $308.2
million for the six months ended June 30, 1994 to $195.5 million for the
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six months ended June 30, 1995 and a decrease in the effective rate on the CMOs
from 10.18% in the first half of 1994 to 9.69% in the first half of 1995. The
decrease in the average balance of CMOs was directly related to the prepayment
activity on collateral for CMOs discussed above. The prepayments are ultimately
used to repay the related CMOs. As interest rates increase and prepayments
decline on the underlying collateral, the amortization of original issue
discount and bond issue costs also decreases resulting in a lower effective rate
on the portfolio.
Equity in Earnings of INMC: Net earnings for the six months ended June 30, 1995
for INMC of $1.9 million, in which CWM has a 99% economic interest, resulted
principally from net interest income of $9.5 million, including gross master
servicing fees receivable of $7.0 million and amortization of master servicing
fees receivable of $3.6 million, and gains on sale of loans and securities of
$4.3 million, offset by a provision for loan losses of $650,000, expenses of
$9.8 million, and income taxes of $1.4 million. During the first half of 1994,
net earnings of $1.2 million for INMC resulted principally from net interest
income of $1.3 million, including gross master servicing fees receivable of $6.7
million and amortization of master servicing fees receivable of $8.3 million,
gain on sale of loans and securities of $863,000 and a gain on sale of servicing
of $5.8 million, offset by expenses totaling $5.9 million and income taxes of
$874,000.
General and Administrative Expense: General and Administrative expenses
increased from $1.2 million for the first six months of 1994 to $1.8 million for
the same period of 1995. This increase is primarily the result of increased
salaries and operating costs related to the warehouse and construction lending
operations as the Company has developed and expanded these business lines.
Management Fees: For the six months ended June 30, 1995, management fees were
$2.4 million compared to $178,000 for the comparable 1994 period. This increase
was primarily due to an increase in incentive compensation for the first half of
1995, directly related to the increase in CWM's earnings for the period. Regular
management fees also increased in the six months ended June 30, 1995 due to
increased average balances of the mortgage loans held for investment and
warehouse lines of credit.
Liquidity and Capital Resources
The Company uses proceeds from the issuance of CMOs, reverse-repurchase
agreements, other borrowings and proceeds from the issuance of common stock to
meet its working capital needs. In addition, in connection with its mortgage
conduit operations, the Company issues REMIC securities to help meet such needs.
In February 1995, the Company completed an additional public offering in which
8.05 million shares of the Company's common stock were issued at an offering
price of $9.125 per share. The offering increased the total capitalization of
the Company to approximately $315 million. The net proceeds from this offering
of $69 million has been used to continue the Company's mortgage loan acquisition
and securitization activities, to expand its construction lending operations and
to fund INFC.
In May 1995, the Company entered into a committed credit facility in the
aggregate amount of $100 million with First Union National Bank of North
Carolina ("First Union"). The credit facility consists of six tranches secured
by, and for the purpose of financing, mortgage loans held for sale, mortgage
loans held for investment, tract construction loans, master servicing rights,
servicing-secured and servicing-receivable loans, and foreclosure and repurchase
loans. The financing for the tract construction loans, master servicing rights,
servicing-secured and servicing-receivable loans and foreclosure and repurchase
loans is committed for a period of two years. The Company and First Union are in
the process of seeking commitments from additional lenders with the objective of
raising the aggregate credit limit for the syndicated facility to $300 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 by requiring CWM to distribute to its shareholders substantially all
of its taxable income from operations.
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Management believes that the cash flow from operations and the current and
potential financing arrangements are sufficient to meet current liquidity
requirements. The Company's ability to meet future liquidity requirements is
subject to the renewal of credit facilities or obtaining other sources of
financing, including raising additional debt or equity from time to time.
Inflation
Interest rates often increase during periods of rising inflation. Higher
interest rates may depress the market value of the Company's investment
portfolio if the yield on such holdings does not keep pace with increases in
interest rates. As a result of decreased market values it could be necessary for
the Company to borrow additional funds and pledge additional assets to maintain
financing for its holdings that have not been financed to maturity through the
issuance of CMOs or other debt securities. Increases in short-term borrowing
rates relative to rates earned on holdings that have not been financed to
maturity through the issuance of CMOs or other debt securities may also
adversely affect the Company's earnings. However, the Company has implemented a
hedging strategy which may mitigate this adverse effect. In addition, high
levels of interest rates tend to decrease the rate at which mortgages prepay. A
decrease in the rate of prepayments may lengthen the estimated average lives of
the underlying mortgages supporting master servicing fees receivable and for
classes of the CMOs issued by the Company and may result in higher residual cash
flows from such assets than would otherwise have been obtained. However, higher
rates of interest may also discourage potential mortgagors from borrowing or
refinancing mortgage loans, thus decreasing the volume of loans available to be
purchased through the company's mortgage conduit operations.
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Item 6. Exhibits and Reports on Form 8-K
--------------------------------
Exhibits
--------
3.1 Certificate of Incorporation, as amended
3.2 Bylaws, as amended
10.1 1995 Amended and Extended Management Agreement
10.2 Termination Agreement
10.3 1995 Amended and Extended Loan Purchase and Administrative
Services Agreement
*10.4 Facility I Credit Agreement
*10.5 Facility II Credit Agreement
10.6 Security and Collateral Agency Agreement
27 Financial Data Schedule
Reports on Form 8-K.
--------------------
None
-----------
* Certain confidential portions of this exhibit have been filed
separately with the Securities and Exchange Commission in connection
with a request for confidential treatment filed pursuant to Rule 406
under the Securities Act of 1933, as amended.
15
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Pasadena, State of California, on August 14, 1995.
CWM MORTGAGE HOLDINGS, INC.
By: /Michael W. Perry
-----------------
Michael W. Perry
Executive Vice President and Chief
Operating Officer
By: /Carmella L. Grahn
--------------------
Carmella L. Grahn
Senior Vice President and Chief
Accounting Officer
16