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, 2000
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
INDYMAC BANCORP, INC.
(formerly IndyMac Mortgage Holdings, Inc.)
(Exact name of registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of 95-3983415
incorporation or organization) (I. R. S. Employer Identification No.)
155 NORTH LAKE AVENUE, PASADENA, CALIFORNIA 91101-7211
(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 latest practicable date.
Common stock outstanding as of June 30, 2000: 70,082,497 shares
1
INDYMAC BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
June 30, December 31, December 31,
2000 1999 1999
---------- ------------- -----------
(Unaudited) Pro forma (1)
Assets
Cash and cash equivalents $ 58,828 $ 4,960 $ 4,488
Mortgage-backed securities available for sale, amortized cost of
$743,564, $639,843 and $458,578, respectively 746,313 650,586 471,231
Loans receivable:
Loans held for sale 802,016 658,838 615,243
Loans held for investment
Mortgage loans 1,142,343 983,173 983,173
Builder construction 639,291 730,233 730,233
Consumer construction 448,053 381,872 381,872
Income property 131,676 143,070 143,070
Revolving warehouse lines of credit 226,760 243,630 243,630
Allowance for loan losses (57,356) (53,880) (53,880)
------------ ------------ ------------
Total loans receivable 3,332,783 3,086,936 3,043,341
Mortgage servicing rights 174,643 140,309 -
Foreclosed assets 23,142 22,323 21,286
Interest receivable 44,540 35,899 41,290
Other assets 168,059 83,998 144,886
------------ ------------ ------------
Total assets $ 4,548,308 $4,025,011 $3,726,522
============ ============ ============
Liabilities and Shareholders' Equity
Borrowings $ 3,638,259 $ 3,123,865 $ 2,863,973
Other liabilities 75,613 73,616 35,019
------------ ------------ ------------
Total liabilities 3,713,872 3,197,481 2,898,992
Shareholders' Equity
Preferred stock - authorized, 10,000,000 shares of $.01 par value;
none issued - - -
Common stock - authorized, 200,000,000 shares of $.01 par
value; issued 80,993,334 shares (70,082,497 outstanding) at
June 30, 2000 and issued 80,720,129 shares (75,076,868
outstanding) at December 31, 1999 810 807 807
Additional paid-in-capital 900,986 895,668 1,080,327
Accumulated other comprehensive income 5,772 7,433 7,433
Cumulative distributions to shareholders - - (577,808)
Retained earnings 74,276 - 393,149
Treasury stock, 10,910,837 shares and 5,643,261 shares, respectively (147,408) (76,378) (76,378)
------------ ------------ ------------
Total shareholders' equity 834,436 827,530 827,530
------------ ------------ ------------
Total liabilities and shareholders' equity $ 4,548,308 $ 4,025,011 $ 3,726,522
============ ============ ============
(1) Pro forma gives effect to the change in the Company's structure to a fully
taxable entity and the buyout of the minority interest in IndyMac, Inc.
effective January 2000.
The accompanying notes are an integral part of these statements.
INDYMAC BANCORP, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(Dollars in thousands)
(Unaudited)
Three months ended June 30,
2000 1999 1999
Pro forma (1)
Interest income
Mortgage-backed securities available for sale $ 18,340 $ 10,959 $ 581
Loans held for sale 21,618 29,467 24,256
Loans held for investment
Mortgage loans 22,938 13,570 13,562
Builder construction 19,594 20,017 20,017
Consumer construction 10,296 9,650 9,650
Income property 3,414 4,499 4,499
Revolving warehouse lines of credit 5,227 5,693 5,693
Other 120 84 5,354
-------- -------- -------
Total interest income 101,547 93,939 83,612
Interest expense 63,380 53,210 44,749
-------- -------- -------
Net interest income 38,167 40,729 38,863
Provision for loan losses 4,406 1,536 1,217
Net interest income after provision for loan losses 33,761 39,193 37,646
Other income
Gain on sale of loans, net 25,962 35,933 -
Service fee income 9,030 4,552 -
Gain (loss) on sale of mortgage-backed securities, net 1,188 (517) -
Loss on sale of other securities, net - (16,629) -
Equity in earnings (loss) of IndyMac, Inc. - - (1,982)
Fee income 7,795 6,170 607
-------- -------- -------
Total other income 43,975 29,509 (1,375)
-------- -------- -------
Net revenues 77,736 68,702 36,271
Other expense
Salaries and related 24,354 22,674 5,386
Other general and administrative expenses 13,537 18,403 1,780
Non-recurring charges 1,344 - -
--------- -------- -------
Total other expense 39,235 41,077 7,166
--------- -------- -------
Earnings before provision for income tax 38,501 27,625 29,105
Provision for income tax 16,170 11,741 -
-
Income tax benefit from termination of REIT status - - -
Net earnings $ 22,331 $ 15,884 $ 29,105
Earnings per share
Basic $ 0.31 $ 0.20 $ 0.36
Diluted $ 0.31 $ 0.19 $ 0.36
Weighted average shares outstanding
Basic 71,192 80,381 80,381
Diluted 72,324 81,535 81,535
(1) Pro forma gives effect to the change in the Company's structure to a fully
taxable entity and the buyout of the minority interest in IndyMac, Inc.
effective January 2000.
INDYMAC BANCORP, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(Dollars in thousands)
(Unaudited)
Six months ended June 30,
2000 1999 1999
Pro forma (1)
Interest income
Mortgage-backed securities available for sale $ 36,552 $ 23,199 $ 3,010
Loans held for sale 40,639 54,098
64,703
Loans held for investment
Mortgage loans 45,334 28,095
28,096
Builder construction 41,091 39,867
39,867
Consumer construction 19,328 20,003
20,003
Income property 8,723
7,263 8,723
Revolving warehouse lines of credit 11,786
9,626 11,786
Other
330 782 11,564
----------- ----------- -------
Total interest income 200,163 197,159 177,146
Interest expense 118,664 116,218 98,184
----------- ----------- -------
Net interest income 81,499 80,941 78,962
Provision for loan losses 8,722 8,326 7,898
----------- ----------- -------
Net interest income after provision for loan losses 72,777 72,615 71,064
Other income
Gain on sale of loans, net 44,550 63,909 -
Service fee income 17,267 10,167 -
Gain (loss) on sale of mortgage-backed securities, net 2,151 (1,118) -
Loss on sale of other securities, net - (31,390) -
Equity in earnings (loss) of IndyMac, Inc. - - (4,306)
Fee income 14,537 12,945 2,108
----------- ----------- ------
Total other income 78,505 54,513 (2,198)
----------- ----------- ------
Net revenues 151,282 127,128 68,866
Other expense
Salaries and related 47,380 44,748 11,138
Other general and administrative expenses 26,514 32,880 5,014
Non-recurring charges 11,567 - -
----------- ----------- -------
Total other expense 85,461 77,628 16,152
----------- ----------- -------
Earnings before provision for income tax 65,821 49,500 52,714
Provision for income tax 27,645 21,038 -
Income tax benefit from termination of REIT status (36,100) - -
----------- ----------- ------
Net earnings $ 74,276 $ 28,462 $52,714
Earnings per share
Basic $ 1.02 $ 0.36 $ 0.66
Diluted $ 1.01 $ 0.35 $ 0.65
Weighted average shares outstanding
Basic 72,610 79,807 79,807
Diluted 73,613 80,980 80,980
(1) Pro forma gives effect to the change in the Company's structure to a fully
taxable entity and the buyout of the minority interest in IndyMac, Inc.
effective January 2000.
The accompanying notes are an integral part of these statements.
INDYMAC BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Six months ended June 30,
------------------------------------
2000 1999
------------ -----------
Cash flows from operating activities:
Net earnings $ 74,276 $ 52,714
Adjustments to reconcile net earnings
to net cash provided by (used in) operating activities:
Amortization and depreciation 79,402 34,554
Gain on sale of loans (44,550) -
(Gain) loss on sale of securities (2,151) 1,118
Non-cash severance expense 9,380 -
Provision for loan losses 8,722 7,898
Deferred compensation and 401(k) expense 2,097 1,615
Equity in (earnings) loss of IndyMac, Inc. - 4,306
Sale of and payments from mortgage loans held for sale 3,024,672 3,690,802
Purchases of mortgage loans held for sale (3,353,147) (3,061,800)
Net increase (decrease) in other assets (21,240) 3,991
Net decrease in other liabilities (2,807) (8,947)
------------ ------------
Net cash provided by (used in) operating activities (225,346) 726,251
------------ ------------
Cash flows from investing activities:
Payments and sales from mortgage loans held for investment 81,375 187,820
Net increase in manufactured housing loans held for investment (4,059) (1,786)
Net decrease in home improvement loans held for investment 15,767 -
Net (increase) decrease in construction loans receivable (73,694) 105,138
Net decrease in revolving warehouse lines of credit 16,870 145,926
Purchases of mortgage securities available for sale (177,658) (77,427)
Sales of and payments from mortgage securities available for sale 28,424 14,403
Payments from collateral for collateralized mortgage obligations 9,303 40,979
Purchases of mortgage servicing rights (349) -
Purchase of SGV Bancorp (59,523) -
Net decrease in advances to IndyMac, Inc. - 29,347
------------ ------------
Net cash provided by (used in) investing activities (163,544) 444,400
------------ ------------
Cash flows from financing activities:
Net increase (decrease) in loans and securities sold under agreements to
repurchase 344,319 (1,066,706)
Net increase (decrease) in syndicated bank lines and commercial
paper conduit 175,512 (47,646)
Principal payments on collateralized mortgage obligations (7,763) (41,501)
Net proceeds from issuance of common stock 2,192 48,067
Acquisition of common stock (71,030) -
Cash dividends paid - (58,853)
------------ ------------
Net cash provided by (used in) financing activities 443,230 (1,166,639)
------------ ------------
Net increase in cash and cash equivalents 54,340 4,012
Cash and cash equivalents at beginning of period 4,488 815
------------ ------------
Cash and cash equivalents at end of period $ 58,828 $ 4,827
============ ============
Supplemental cash flow information:
Cash paid for interest $ 105,966 $ 96,654
============ ============
Cash paid for income taxes $ 22,350 $ -
============ ============
Supplemental disclosure of noncash investing and financing activities:
The fair value of noncash assets acquired and liabilities assumed in the purchase of IndyMac, Inc. in January of
2000 was approximately $424 million and $332 million, respectively.
The accompanying notes are an integral part of these statements.
INDYMANC BANCORP, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
(Dollars in thousands)
(Unaudited)
Accumulated
Additional Other
Common Paid-in Comprehensive Cumulative
Stock Capital Income (Loss) Earnings
------------- --------------- -------------- ------------
Balance at December 31, 1998 $ 758 $1,018,859 $(18,776) $277,220
Common stock options exercised 4 1,189 - -
Directors' and officers' notes receivable - 474 - -
Deferred compensation, restricted stock - 1,203 - -
401(k) contribution - 412 - -
Net gain on available for sale securities - - 26,915 -
Dividend reinvestment plan 43 46,357 - -
Net earnings - - - 52,714
Dividends paid - - - -
------------- --------------- -------------- ------------
Net change 47 49,635 26,915 52,714
------------- --------------- -------------- ------------
Balance at June 30, 1999 $ 805 $1,068,494 $ 8,139 $329,934
============= =============== ============== ============
Balance at December 31, 1999 $ 807 $1,080,327 $7,433 $ 393,149
Common stock options exercised 3 2,043 - -
Directors' and officers' notes receivable - 29 - -
Deferred compensation, restricted stock 2,562 - -
401(k) contribution 566 - -
Net loss on mortgage securities
available for sale - (1,661) -
Dividend reinvestment plan - 118 - -
Acquisition of treasury stock - - - -
Close-out of cumulative earnings and distributions
to additional paid-in capital (184,659) (393,149)
Net earnings - - - 74,276
------------- --------------- -------------- ------------
Net change 3 (179,341) (1,661) (318,873)
============= =============== ============== ============
Balance at June 30, 2000 $ 810 $ 900,986 $ 5,772 $ 74,276
============= =============== ============== ============
Cumulative Total
Comprehensive Distributions to Treasury Shareholders'
Income Shareholders Stock Equity
-------------------- ------------------- ---------------- --------------
Balance at December 31, 1998 $ (442,896) $ (13,062) $ 822,103
Common stock options
exercised
- - - 1,193
Directors' and officers' notes
receivable
- - - 474
Deferred compensation,
restricted stock
- - - 1,203
401(k) contribution
- - 412
Net gain on available for sale securities
26,915 - - 26,915
Dividend reinvestment plan
- - - 46,400
Net earnings
52,714 - - 52,714
Dividends paid
- (58,853) - (58,853)
-------------------- ------------------- ---------------- ---------------
Net change
79,629 (58,853) - 70,458
-------------------- ------------------- ---------------- ---------------
Balance at June 30, 1999 $ (501,749) $ (13,062) $ 892,561
=================== ================ ===============
Balance at December 31, 1999 ($577,808) ($76,378) $ 827,530
Common stock options
exercised - - - 2,046
Directors' and officers' notes
receivable - - - 29
Deferred compensation,
restricted stock - - - 2,562
401(k) contribution - - - 566
Net loss on mortgage securities
available for sale (1,661) -
(1,661)
Dividend reinvestment plan - - - 118
Acquisition of treasury stock - - (71,030) (71,030)
Close-out of cumulative earnings and distributions
to additional paid-in capital 577,808 -
Net earnings 74,276 - - 74,276
-------------------- ------------------- ---------------- ---------------
Net change 72,615 577,808 (71,030) 6,906
-------------------- ------------------- ---------------- ---------------
Balance at June 30, 2000 $ - $(147,408) $ 834,436
=================== ================ ===============
The accompanying notes are an integral part of these statements.
NOTE A - BASIS OF PRESENTATION
IndyMac Bancorp, Inc., formerly known as IndyMac Mortgage Holdings, Inc.
("IndyMac"), conducts a diversified mortgage lending business, including the
origination and purchase of and investment in conforming, non-conforming and
jumbo residential loans, subprime loans, construction loans, mortgage-backed
securities and other mortgage-related assets. Beginning July 1, 2000 the
Company's operations also include retail banking operations through its
acquisition of SGV Bancorp, Inc. ("SGVB"). See further discussion in Note D -
Subsequent Events. References to "IndyMac" refer to the parent company alone,
while references to the "Company" mean the parent company and its consolidated
subsidiaries. The accompanying consolidated financial statements of the Company
have been prepared in accordance with generally accepted accounting principles
("GAAP") 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 GAAP for complete financial statements.
Prior to January of 2000, IndyMac elected to be treated as a real estate
investment trust ("REIT") under the Internal Revenue Code of 1986, as amended.
The consolidated financial statements as of and for the six months ended June
30, 1999 include the accounts of IndyMac and its qualified REIT subsidiaries.
Through December 31, 1999, IndyMac owned all the preferred non-voting stock and
had a 99% economic interest in IndyMac, Inc. ("IndyMac Operating").
Accordingly, IndyMac's investment in IndyMac Operating was accounted for under a
method similar to the equity method because IndyMac had the ability to exercise
influence over the financial and operating policies of IndyMac Operating through
its ownership of the preferred stock and other contracts. In January of 2000,
IndyMac acquired all of the voting stock of IndyMac Operating. See Note B -
Acquisition of IndyMac Operating's Common Stock, for further information.
During 1999, IndyMac's Board of Directors and shareholders approved the
termination of its income tax status as a REIT, effective January of 2000. As a
result of its conversion to a fully taxable status, an income tax benefit and
related deferred tax asset of $36.1 million was recorded in January of 2000. In
addition, the Company's $393.1 million and $577.8 million balance of cumulative
earnings and distributions to shareholders, respectively, were closed against
additional paid in capital. As a fully taxable entity, IndyMac is no longer
required to distribute 95% of its taxable income to its shareholders, but is
taxed on its earnings based on currently enacted tax rates.
Certain reclassifications have been made to the unaudited financial statements
for the period ended June 30, 1999 to conform to the June 30, 2000 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 quarter ended June 30, 2000 are not necessarily
indicative of the results that may be expected for the year ending December 31,
2000. For further information, refer to the consolidated financial statements
and footnotes thereto included in the Company's annual report on Form 10-K for
the year ended December 31, 1999.
All significant intercompany balances and transactions with the Company's
consolidated subsidiaries have been eliminated in consolidation of the Company.
NOTE B - ACQUISITION OF INDYMAC OPERATING'S COMMON STOCK
In January of 2000, IndyMac purchased all of IndyMac Operating's outstanding
common stock, which was held by Countrywide Home Loans, Inc. ("CHL"), for $1.8
million (the "acquisition"). IndyMac Operating's total assets and shareholder's
equity on the date of the acquisition were approximately $424 million and
6
$92 million, respectively. CHL's minority interest investment of 1% in IndyMac
Operating as of the effective date of the purchase amounted to $922,300. As
IndyMac owns 100% of the outstanding common and preferred stock of IndyMac
Operating subsequent to the buyout of CHL's common stock effective January of
2000, the consolidation method of accounting is used for IndyMac's investment in
IndyMac Operating. Included in the consolidated balance sheets and consolidated
statements of earnings is the pro forma effect to IndyMac's financial statements
as of December 31, 1999 and for the six months ended June 30, 1999, had IndyMac
been a fully taxable entity and had used the consolidation method of accounting
for its investment in IndyMac Operating during such time period.
NOTE C - SEGMENT REPORTING
The Company's reportable operating segments include Mortgage Banking, Investment
Portfolio and Commercial Lending. The Mortgage Banking segment purchases
conforming, jumbo and other non-conforming mortgage loans from business-to-
business ("B2B") customers, and funds loans directly to consumers ("B2C").
These loans are then securitized through the issuance of mortgage-backed
securities ("MBS"), resold in bulk whole loan sales to permanent investors or
government sponsored enterprises, or retained by the Company's Investment
Portfolio segment. The Mortgage Banking segment also administers the related
construction advances for the purchase of construction-to-permanent mortgage
loans originated by or sourced through the Company's B2B sellers and direct
customers ("consumer construction"). The Investment Portfolio segment invests
in residential loans on a long-term basis and securities retained in connection
with loan sales activities or purchased on the open market. The Investment
Portfolio also performs mortgage servicing activities. The Commercial Lending
segment makes residential construction loans to builders and engages in secured
warehouse lending operations for mortgage brokers and mortgage bankers.
Operating segments' profitability is measured on a fully-leveraged basis.
Excess capital is unallocated and included in the Other operating segment. The
Company does not allocate corporate costs such as corporate salaries and related
expenses, and non-recurring corporate items. These corporate items are included
in the Other operating segment.
In connection with an internal reorganization in the first quarter of 2000, the
consumer construction business was moved to the Mortgage Banking segment and
servicing operations were moved to the Investment Portfolio Segment. In
addition, prior to 2000, corporate support costs were allocated to the operating
segments. Segment reporting for the three and six months ended June 30, 1999
has been restated to conform to the current method of reporting segments.
7
Segment information for the three and six months ended June 30, 2000 and 1999
were as follows:
(Dollars in thousands) Mortgage Investment Commercial
Banking Portfolio Lending Other Consolidated
---------- ---------- ----------- ---------- -------------
Three months ended June 30, 2000
Net interest income $ 9,608 $ 7,651 $ 11,437 $ 9,471 $ 38,167
Net revenues 41,576 15,365 11,324 9,471 77,736
Tax provision (benefit) 8,972 4,362 3,331 (495) 16,170
Net earnings (loss) 12,390 6,025 4,600 (684) 22,331
Three months ended June 30, 1999 (1)
Net interest income $ 10,544 $ 12,277 $ 13,338 $ 4,570 $ 40,729
Net revenues 53,628 (4,907) 15,312 4,669 68,702
Tax provision (benefit) 12,934 (9,756) 3,375 5,188 11,741
Net earnings (loss) 17,127 (13,145) 4,567 7,335 15,884
Six months ended June 30, 2000
Net interest income $ 18,703 $ 18,841 $ 24,652 $ 19,303 $ 81,499
Net revenues 72,698 33,262 24,395 20,927 151,282
Tax provision (benefit) 14,256 9,706 7,463 (39,880) (8,455)
Net earnings 19,688 9,259 10,305 35,024 74,276
Six months ended June 30, 1999 (1)
Net interest income $ 21,215 $ 25,664 $ 26,544 $ 7,518 $ 80,941
Net revenues 98,699 1,518 19,126 7,785 127,128
Tax provision (benefit) 26,190 (11,634) 3,363 3,119 21,038
Net earnings (loss) 35,434 (15,739) 4,550 4,217 28,462
Assets as of June 30, 2000 $1,264,726 $2,128,252 $ 990,923 $164,407 $4,548,308
Assets as of June 30, 1999 (1) $1,212,794 $2,019,146 $1,184,850 $ 21,020 $4,437,810
(1) Balances presented on a pro forma basis to give effect to the change in the
Company's structure to a fully taxable entity and the buyout of the minority
interest in IndyMac, Inc. effective January of 2000.
NOTE D - SUBSEQUENT EVENTS
Acquisition of SGVB
On July 1, 2000, IndyMac completed its merger with SGVB. SGVB was the parent of
First Federal Savings and Loan Association of San Gabriel Valley. As of the date
of merger, SGVB had assets of $490.8 million, deposits of $355.7 million, and
stockholders' equity of $37.5 million. IndyMac paid $25.00 per share, or $59.5
million, for all of the SGVB shares outstanding and subject to option. Goodwill
and core deposit intangible asset totaling $37.8 million were recorded as of the
date of acquisition, using the purchase method of accounting. The goodwill will
be amortized using the straight-line method of amortization over a period of 20
years.
8
The operating results for SGVB and the Company as though SGVB was purchased
at the beginning of the respective periods follow:
(Dollars in thousands)
Six months ended June 30,
2000 1999 (1)
------ --------
Net revenues
Company $151,282 $127,128
SGVB 8,161 6,989
Combined 159,443 134,117
Net earnings
Company $ 72,154 $ 26,581
SGVB 966 1,358
Combined 73,120 27,939
Diluted earnings per share $0.99 $0.35
(1) IndyMac's balances presented on a pro forma basis to give effect to the
change in the Company's structure to a fully taxable entity and the buyout
of the minority interest in IndyMac, Inc. effective January of 2000.
Acquisition of PNB Mortgage
In August of 2000, the Company announced that it signed a definitive agreement
to acquire certain assets and operations of PNB Mortgage ("PNB"), a wholesale
loan originator owned by U.S. Bancorp that specializes in FHA and VA mortgage
lending. Management believes this acquisition will provide IndyMac with the
ability to expand its mortgage services to the FHA and VA market. The Company
will acquire PNB's loans and certain other assets in a cash purchase transaction
for fair market value, as defined in the asset purchase agreement. The
acquisition includes approximately $48 million of mortgage loans and certain
non-mortgage assets, and will generate approximately $600,000 of goodwill.
IndyMac expects to complete the transaction by the end of the third quarter of
2000.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- - ------------------------------------------------------------------------
RESULTS OF OPERATIONS
- - ---------------------
GENERAL
IndyMac Bancorp, Inc., formerly known as IndyMac Mortgage Holdings, Inc.
("IndyMac"), conducts a diversified mortgage banking business, manages an
investment portfolio, and offers commercial lending products including builder
construction loans and warehouse lines of credit. References to "IndyMac" refer
to the parent company alone, while references to the "Company" mean the parent
company and its consolidated subsidiaries.
Through December 31, 1999, IndyMac elected to be taxed as a real estate
investment trust ("REIT") under the Internal Revenue Code of 1986, as amended
(the "Code"). As a result of this election, IndyMac was not, with certain
limited exceptions, taxed at the corporate level on the net income distributed
to IndyMac's shareholders. On December 14, 1999, the shareholders of IndyMac
approved the conversion of IndyMac from a REIT to a fully taxable entity,
effective January of 2000. As a fully taxable entity, IndyMac is no longer
required to distribute 95% of its taxable income to its shareholders, but is
taxed on its earnings based on currently enacted tax rates. IndyMac no longer
pays a dividend and payment of future dividends is subject to declaration by
IndyMac's Board of Directors.
On July 1, 2000, IndyMac completed its merger (the "merger") with SGV Bancorp,
Inc., ("SGVB"). SGVB was the parent of First Federal Savings and Loan
Association of San Gabriel Valley (the "thrift"). As of the date of the merger,
SGVB had assets of $490.8 million, deposits of $355.7 million, and stockholders'
equity of $37.5 million. IndyMac paid $25.00 per share, or $59.5 million, for
all of the SGVB shares outstanding and subject to option. The merger represents
the culmination of IndyMac's transition to a growth oriented, technology driven
consumer depository institution. Substantially all of the assets and operations
of IndyMac and its subsidiaries are being contributed into the Thrift, which is
now a wholly owned subsidiary of IndyMac and is known as IndyMac Bank. With more
than $5 billion in assets, IndyMac Bank is the ninth largest consumer depository
institution (in terms of assets) headquartered in California.
Mortgage Banking Operations
- - ---------------------------
The Company's mortgage banking group represents the core of IndyMac Bank's asset
generation platform. It is a technology based, highly scalable operation that
includes the following distinct channels: (1) a business-to-business (B2B)
channel, with mortgage brokers, small mortgage bankers and community financial
institutions effectively providing the Company with access to a variable cost,
nationwide branch network, (2) a branchless, technology driven, business-to
consumer (B2C) channel, (3) a business-to-realtor (B2R) channel LoanWorks.com,
which allows real estate professionals to utilize IndyMac Bank's technology to
fulfill the mortgage loan process for their customers in the process of
purchasing a home, and (4) IndyMac Bank Home Construction Lending, which
provides consumer construction and lot loans. IndyMac Bank has been able to
successfully expand and leverage its proprietary system e-MITS.com across its
B2B, B2C and B2R channels and expects to further expand and enhance this system
to incorporate its consumer construction products during the third quarter of
this year. These channels provide IndyMac with comprehensive coverage of the
consumer market. The Company's principal sources of income from its mortgage
banking operations are gains recognized on the sale or securitization of
mortgage loans, fee income from the origination or purchase of such loans, and
the net spread between interest earned on mortgage loans and the interest costs
associated with the borrowings used to finance such loans pending their sale or
securitization.
The B2B channel funded $1.7 billion of prime and subprime loans during the three
months ended June 30, 2000, compared with $1.4 billion during both the first
quarter of 2000 and the second quarter of 1999. B2B's loan production was
financed using equity and short-term financing in the form of repurchase
agreements and other credit facilities. The Company sold $1.7 billion of prime
and subprime loans during the three months ended June 30, 2000, compared with
$1.3 billion and $1.7 billion of sales during the first quarter of 2000 and
second quarter of 1999, respectively. Loans funded through e-MITS during the
three
10
months ended June 30, 2000 totaled $1.3 billion, representing 78% of the
Company's B2B prime and subprime mortgage production for the quarter, up from
$486 million or 36% of production during the three months ended June 30, 1999.
The Company's B2C group funded $177 million of mortgage loans during the three
months ended June 30, 2000, an increase of 27% in comparison to $139 million of
loans during the three months ended March 31, 2000.
At June 30, 2000, IndyMac Bank Home Construction Lending ("HCL") had outstanding
commitments to fund consumer construction loans of $693.6 million compared to
outstanding commitments of $647.9 million at March 31, 2000.
Investment Portfolio Operations
- - -------------------------------
The Company invests in residential loans and mortgage securities either retained
in connection with the issuance of mortgage-backed securities or purchased from
third parties. The Company acts as primary servicer and master servicer with
respect to substantially all of the mortgage loans it sells pursuant to private-
label securitizations, and loans sold to government sponsored entities ("GSEs").
IndyMac Bank Home Loan Servicing's portfolio at June 30, 2000 and December 31,
1999 was $12.2 billion and $10.1 billion, respectively, with a weighted average
coupon of 8.7% and 8.6% as of June 30, 2000 and December 31, 1999, respectively.
At June 30, 2000 and December 31, 1999, the Company's master servicing portfolio
had aggregate outstanding principal balances of $16.4 billion and $16.1 billion,
respectively, with weighted average coupons of 8.4% and 8.2%, respectively.
Commercial Lending Operations
- - -----------------------------
The Company conducts its builder construction lending activities through
Construction Lending Corporation of America ("CLCA"), which makes residential
construction loans to builders. Warehouse lending activities are conducted
through Warehouse Lending Corporation of America ("WLCA"), which provided
various types of short-term revolving financing to small-to-medium size mortgage
bankers and brokers. In July of 2000, the Board of Directors approved
management's decision to begin a systematic wind-down of the Company's warehouse
lending activities. This decision was reached as a result of an analysis of
WLCA's year-to-date operating results and the likelihood that WLCA would not
achieve targeted contribution and return on investment levels within an
acceptable period of time. The Company will continue to honor its outstanding
commitments, but will not engage in any new commitments. It is anticipated that
the wind-down of this division will be substantially completed during the first
quarter of 2001.
At June 30, 2000, CLCA had outstanding commitments to fund builder construction
loans of $1.4 billion which is comparable to the $1.4 billion at March 31, 2000.
At June 30, 2000, IndyMac had extended commitments to make warehouse and related
lines of credit in an aggregate amount of $818.0 million, compared to
commitments of $955.0 million at March 31, 2000.
Operations Following Acquisition of SGVB
- - -----------------------------------------
Following the acquisition of SGVB on July 1, 2000, the Company has generally
continued to operate and develop its existing mortgage and consumer lending
businesses, and to institute new lending strategies and programs as the mortgage
and consumer lending markets have evolved. As expected, the most significant
change from the Company's former operations has been the expansion of its
funding sources to include federally insured deposit products offered by the
Bank and advances to the Bank from the Federal Home Loan Bank ("FHLB") of San
Francisco. In addition to continuing to obtain deposits in California through
the Bank's existing branch network, the Company markets deposits nationally
through the Internet and a centralized telebanking operation. The Company
anticipates that the availability of these new funding sources will reduce its
reliance on the capital markets for its funding requirements, and will therefore
make the Company less vulnerable to future adverse changes in the capital
markets.
11
FINANCIAL CONDITION
Mortgage-Backed Securities Available for Sale: At June 30, 2000 and December 31,
1999, the fair value of the Company's mortgage-backed securities portfolio
totaled $746.3 million and $650.6 million (on a pro forma basis), respectively.
The balances consisted of the following types of securities:
(Dollars in thousands)
June 30, December 31,
2000 1999
------------------------ -----------------
AAA rated interest-only securities $ 302,348 $ 341,447
AAA rated agency securities 207,540 140,372
AAA rated MBS securities 112,274 46,871
Other investment grade securities 59,278 47,959
------------------------ -----------------
Total investment grade securities 681,440 576,649
------------------------ -----------------
Non-investment grade residual securities 41,628 42,784
Other non-investment grade securities 23,245 31,153
------------------------ -----------------
Total non-investment grade securities 64,873 73,937
------------------------ -----------------
Total mortgage securities $ 746,313 $650,586
======================== =================
The Company evaluates the carrying value of its AAA rated interest-only
securities and residual securities monthly by discounting estimated net future
cash flows. Adjustments to the carrying value are recorded as a component of
other comprehensive income in shareholders' equity. The assumptions used to
value these securities at June 30, 2000 and December 31, 1999 were as follows:
(Dollars in thousands)
Actual
______________________________________________________________________
3-Month Wtd.
Book Collateral Gross Interest Prepayment Avg.
Value Balance WAC Strip Speeds Multiple
------- ------------ -------- -------- --------- ---------
June 30, 2000
AAA rated interest-only securities $302,348 $11,171,285 8.30% 0.84% 13.6% 3.23
-------- ----------- ------- -------- --------- -------
Non-investment grade residual securities
Prime residual securities $ 7,567 $ 268,557 8.36% 1.38% 17.3% 2.04
Subprime residual securities 31,962 1,019,904 10.01% 2.24% 22.1% 1.40
Manufactured housing securities 2,099 379,148 10.25% 2.42% 111 MHP 0.23
--------- ------------ -------- -------- --------- --------
Total non-investment grade residual securities $41,628 $1,667,609 9.80% 2.14% 1.16
========== ============ ======== ======= =======
December 31, 1999
AAA rated interest-only securities $341,447 $11,019,669 8.14% 0.92% 15.8% 3.37
---------- ----------- -------- ------- ------ ------
Non-investment grade residual securities
Prime residual securities $ 8,524 $ 294,189 8.38% 1.50% 17.3% 1.93
Subprime residual securities 31,579 890,281 9.56% 2.60% 28.6% 1.36
Manufactured housing securities 2,681 402,071 10.16% 2.47% 135 MHP 0.27
--------- ---------- ------- ------- ------- ------
Total non-investment grade residual securities $42,784 $1,586,541 9.49% 2.56% 1.04
========= ========== ======= ====== ======
Valuation Assumptions
____________________________________________
Annual
Prepayment Discount Loss
Speeds Yield Rate
----------- ----------- -------
June 30, 2000
AAA rated interest-only securities 14.0% 12.8% NA
----------- ---------- -------
Non-investment grade residual securities
Prime residual securities 23.2% 20.0% 0.3%
Subprime residual securities 30.2% 20.0% 1.3%
Manufactured housing securities 180 MHP 25.0% 1.8%
----------- -------- ----------
Total non-investment grade residual securities 21.1% 1.3%
=========== ========== ==========
December 31, 1999
AAA rated interest-only securities 12.7% 12.7% NA
---------- ----------- -----------
Non-investment grade residual securities
Prime residual securities 30.0% 20.0% 0.4%
Subprime residual securities 35.1% 20.0% 1.2%
Manufactured housing securities 208 MHP 20.0% 1.8%
------------ ----------- ----------
Total non-investment grade residual securities 20.0% 1.2%
=========== ==========
The fair value for the Company's other investment and non-investment grade
securities is estimated based on market quotes when available or discounted cash
flow techniques using assumptions for prepayment rates, market yield
requirements and credit losses. Adjustments to the carrying value are recorded
as a component of other comprehensive income in shareholders' equity. The
detail of other investment and non-investment grade securities by credit rating
as of June 30, 2000 and December 31, 1999 were as follows:
12
(Dollars in thousands)
Premium
Current (Discount)
Face To Face Amortized Book
Value Value Cost Value
---------------- ---------------- --------------- ---------------
June 30, 2000
AAA principal-only securities $ 6,640 $ (1,112) $ 5,528 $ 4,437
A 12,796 (415) 12,381 12,211
BBB 44,927 (2,012) 42,915 42,630
---------------- ---------------- --------------- ---------------
Total other investment grade securities 64,363 (3,539) 60,824 59,278
BB 27,886 (5,876) 22,010 16,695
B 7,629 (988) 6,641 5,178
NR 6,902 (6,286) 616 1,372
---------------- ---------------- --------------- ---------------
Total other non-investment grade securities 42,417 (13,150) 29,267 23,245
---------------- ---------------- --------------- ---------------
Total other investment and non-investment grade securities $ 106,780 $ (16,689) $ 90,091 $ 82,523
================ ================ =============== ===============
December 31, 1999
AAA principal-only securities $ 5,948 $ (810) $ 5,138 $ 3,990
AA 208 8 216 206
A 2,690 (117) 2,573 2,407
BBB 46,767 (4,464) 42,303 41,356
---------------- ---------------- --------------- ---------------
Total other investment grade securities 55,613 (5,383) 50,230 47,959
BB 43,987 (9,486) 34,501 28,365
B 1,934 (808) 1,126 1,102
NR 9,209 (8,531) 678 1,686
---------------- ---------------- --------------- ---------------
Total other non-investment grade securities 55,130 (18,825) 36,305 31,153
---------------- ---------------- --------------- ---------------
Total other investment and non-investment grade securities $ 110,743 $ (24,208) $ 86,535 $ 79,112
================ ================ =============== ===============
Loans Held for Sale, Net: The Company's $802.0 million portfolio of loans held
for sale at June 30, 2000 consisted of $551.0 million and $251.0 million of
prime and subprime products, respectively. The Company's $658.8 million
portfolio of loans held for sale at December 31, 1999 (on a pro forma basis)
consisted of $543.9 million and $114.9 million of prime and subprime products,
respectively.
Mortgage Loans Held For Investment, Net: The $1.1 billion portfolio of mortgage
loans held for investment, net, at June 30, 2000 included $1.1 billion in
outstanding principal, net of $6.8 million in net discounts. This portfolio
included $815.6 million, $13.6 million, $202.6 million, and $110.5 million of
prime loans, subprime loans, home improvement loans, and manufactured housing
loans, respectively, at June 30, 2000. The prime and subprime loan portfolio
consisted of $155.5 million of varying types of adjustable-rate products, which
contractually re-price in monthly, semi-annual or annual periods; $391.7 million
of loans which have a fixed interest rate for a period of three, five, seven or
ten years and subsequently convert to adjustable-rate mortgage loans that re-
price annually; and $282.0 million of fixed-rate loans.
At December 31, 1999, the Company held $660.3 million of mortgage loans held for
investment, net, which consisted of $337.4 million of prime loans, $17.9 million
of subprime loans, $211.0 million of home improvement loans, and $94.0 million
of manufactured housing loans.
Residential Construction: At June 30, 2000, CLCA had outstanding balances of
$639.3 million, compared to outstanding balances of $730.2 million at December
31, 1999. At June 30, 2000, HCL had outstanding balances of $448.1 million
compared to outstanding balances of $381.9 million at December 31, 1999.
Mortgage Servicing Rights: At June 30, 2000 and December 31, 1999, the Company's
mortgage servicing rights balance totaled $174.6 million and $140.3 million,
respectively. The increase in the mortgage servicing rights balance was
primarily due to assets retained totaling $45.5 million resulting from
13
securitizations and loan sales to GSE's during the six months ended June 30,
2000. The assumptions used to value mortgage servicing rights at June 30, 2000
and December 31, 1999 were as follows:
(Dollars in thousands)
Actual
__________________________________________________________________________
Wtd.
Book Collateral Gross Servicing Avg.
Value Balance WAC Fee Multiple
---------- -------------- -------- ----------- -----------
June 30, 2000
Master servicing $ 53,757 $14,036,495 8.35% 0.11% 3.63
-------- ----------- ----- ----- ----
Primary servicing
Prime/subprime 119,610 9,006,031 8.53% 0.37% 3.58
Manufactured housing 1,276 371,639 10.26% 1.00% 0.34
--------- ----------- -------- --------- --------
Total primary servicing 129,886 9,377,670 8.60% 0.40% 3.26
--------- ----------- -------- --------- -------
Total mortgage servicing rights $174,643
==========
December 31, 1999
Master servicing $ 51,365 $13,829,264 8.21% 0.11% 3.27
--------- ------------- -------- --------- -------
Primary servicing
Prime/subprime 87,548 7,352,119 8.29% 0.34% 3.55
Manufactured housing 1,396 394,545 10.26% 1.01% 0.35
--------- ----------- -------- --------- --------
Total primary servicing 88,944 $ 7,746,664 8.39% 0.37% 3.10
--------- ------------ -------- --------- ---------
Total mortgage servicing rights $140,309
=========
Valuation Assumptions
_________________________________________________
Prepayment Discount
Speeds Yield
----------- ----------
June 30, 2000
Master servicing 14.6% 20.5%
---------- ----------
Primary servicing
Prime/subprime 14.6% 12.9%
Manufactured housing 180 MHP 16.0%
----------
Total primary servicing 13.5%
----------
Total mortgage servicing rights
December 31, 1999
Master servicing 14.3% 16.3%
----------
Primary servicing
Prime/subprime 13.5% 12.1%
Manufactured housing 208 MHP 15.0%
----------
Total primary servicing 12.0%
----------
Total mortgage servicing rights
Asset Quality
A summary of the Company's non-performing loans as of June 30, 2000 and December
31, 1999 were as follows:
(Dollars in thousands)
June 30, December 31,
2000 1999
------------------------------- -----------------------------
% of % of
Amount Portfolio Amount Portfolio
------- ---------- -------- -----------
Non-performing loans:
Single family residential ("SFR") mortgage loans $50,535 3.08% $ 58,359 4.76%
Builder construction and income property loans 14,730 1.91% 23,885 2.67%
Consumer construction loans 3,642 0.81% 2,906 0.80%
Revolving warehouse lines of credit 9,307 4.10% 5,731 2.35%
Manufactured housing loans 6,758 6.12% 7,396 6.72%
Home improvement loans 937 0.46% 5,890 2.71%
-------- --------- --------- ----------
Totals $85,909 2.53% $104,167 3.41%
======= ==== ======== ===========
SFR Mortgage Loans: Non-performing loans decreased $7.8 million to $50.5 million
at June 30, 2000 compared to $58.4 million at December 31, 1999 primarily as a
result of a sale of non-performing loans totaling $6.4 million during the
quarter ended June 30, 2000.
Builder Construction and Income Property Loans: Non-performing loans decreased
$9.2 million to $14.7 million at June 30, 2000 compared to $23.9 million at
December 31, 1999. The decrease was primarily the result of the payoff of a
$4.4 million loan and the sale of two loans totaling $3.8 million, all of which
were classified as non-performing at December 31, 1999.
Consumer Construction: The balance of non-performing loans for Consumer
Construction loans was comparable at June 30, 2000 and December 31, 1999 at $3.6
million and $2.9 million, respectively.
14
Revolving Warehouse Lines of Credit: Non-performing loans increased $3.6 million
to $9.3 million at June 30, 2000 compared to $5.7 million at December 31, 1999
primarily due to the addition of one borrower's non-accrual loans totaling $5.2
million. The Company is currently perfecting title to these loans. Established
reserves are considered adequate for this portfolio.
Manufactured Housing Loans: Non-performing loans at June 30, 2000 and December
31, 1999 were comparable at $6.8 million and $7.4 million, respectively.
Home Improvement Loans: Non-performing loans decreased $4.9 million to $1.0
million at June 30, 2000 compared to $5.9 million at December 31, 1999. The
decrease is primarily due to the charge-off of all loans greater than 120 days
delinquent. The entire balance of the loans charged-off during the six months
ended June 30, 2000 was fully reserved at December 31, 1999.
Allowance for Loan Losses: The Company's allowance for loan losses totaled $57.4
million at June 30, 2000, or 1.69% of the book value of loans outstanding,
compared to $53.9 million at December 31, 1999, or 1.77% of the book value of
loans outstanding. The allowance for loan losses was increased through the
provision for loan losses during the six months ended June 30, 2000 to maintain
the allowance at prudent levels given the composition of the loan portfolio and
management's assessment of the level of losses inherent in the Company's loan
portfolio at June 30, 2000. Net charge-offs totaled $2.4 million during the
three months ended June 30, 2000, compared to $3.0 million during the three
months ended March 31, 2000.
Real Estate Acquired in Settlement of Loans (REO): At June 30, 2000 and
December 31, 1999, the Company's REO balance totaled $23.1 million and $22.3
million, respectively. The Company recognized a total of $723 thousand in net
gains on sale of REO during the six months ended June 30, 2000, and a mark to
market loss of $637 thousand during the six months ended June 30, 2000.
REO consisted of the following:
(Dollars in thousands)
June 30, December 31,
2000 1999
-------------------- --------------------
SFR mortgage loans $ 6,703 $ 7,389
Builder construction and income property loans 10,941 11,107
Consumer construction loans 2,294 1,182
Manufactured housing loans 3,204 2,645
-------------------- --------------------
$23,142 $22,323
==================== ====================
15
RESULTS OF OPERATIONS
Three months ended June 30, 2000 compared to the three months ended June 30,
1999
Highlights for the three months ended June 30, 2000 and 1999
(Dollars in thousands)
For the three months ended
June 30,
2000 1999
---- ----
(Pro forma) (1)
Net earnings before non-recurring items $23,110 $15,884
Return on average assets before non-recurring items 2.09% 1.36%
Return on average equity before non-recurring items 10.82% 7.11%
Interest spread
Yield on interest-earning assets 9.89% 8.52%
Cost of interest-bearing liabilities 7.23% 5.72%
Interest spread 2.66% 2.80%
Net interest margin 3.72% 3.74%
(1) Pro forma gives effect to the change in the Company's structure to a fully
taxable entity and the buyout of the minority interest in IndyMac, Inc.
effective January of 2000.
Net Earnings: The Company's net earnings were $22.3 million for the three months
ended June 30, 2000, compared to $29.1 million for the three months ended June
30, 1999. Excluding non-recurring charges of $1.3 million related to the
acquisition of SGVB, net earnings would have been $23.1 million during the
second quarter of 2000. The Company's pro forma net earnings for the three
months ended June 30, 1999 would have been $15.9 million had the Company owned
100% of IndyMac, Inc.'s common stock, and had it been a fully taxable entity.
The increase in net earnings (on a pro forma basis) primarily associated with
Company's loss on U.S. Treasuries during the second quarter of 1999 totaled
$16.6 million.
Interest Income: Total interest income was $101.5 million and $83.6 million for
the three months ended June 30, 2000 and 1999, respectively. On a pro forma
basis, total interest income was $93.9 million during the three months ended
June 30, 1999. Interest income increased by $7.6 million (compared to the
quarter ended June 30, 1999 on a pro forma basis) primarily due to an increase
in the yield on interest earning assets. The yield on average interest earning
assets increased to 9.9% during the three months ended June 30, 2000 compared to
8.5% during the three months ended June 30,1999 primarily due to the rising
interest rate environment over the course of the year. The impact to interest
income due to the increase in yields was partially offset by a decrease in the
balance of average interest earning assets to $4.1 billion during the second
quarter of 2000 from $4.4 billion during the three months ended June 30,1999.
Mortgage-backed securities available for sale
----------------------------------------------
Interest income on mortgage-backed securities totaled $18.3 million and $0.6
million for the three months ended June 30, 2000 and 1999, respectively. On
a pro forma basis, interest income was $11.0 million for the three months
ended June 30, 1999. The $7.3 million increase in interest income on
mortgage-backed securities (on a pro forma basis) was primarily due to
impairment charges on manufactured housing residual securities totaling $5.3
million recorded as a reduction to interest income during the second quarter
of 1999.
Loans held for sale, net
------------------------
Interest income on loans held for sale totaled $21.6 million and $24.3
million for the three months ended June 30, 2000 and 1999, respectively. On
a pro forma basis, interest income was $29.5 million during the three months
ended June 30, 1999. The decrease in interest income of $7.9 million on
loans held for sale (on a pro forma basis) was primarily the result of a
decrease in the average balance of such loans by $365.1 million to $917.9
million from $1.3 billion for the three
16
months ended June 30, 2000 and 1999, respectively. This reduction to interest
income was partially offset by an increase in the effective yield to 9.5%
from 9.2%. The increase in the effective yield was primarily due to the
increase in rates during the year.
Mortgage loans held for investment, net
---------------------------------------
Interest income on mortgage loans held for investment totaled $22.9 million
and $13.6 million for the quarters ended June 30, 2000 and 1999,
respectively. The $9.3 million increase was primarily the result of an
increase in the average balance of such loans by $356.3 million to $1.0
billion during the three months ended June 30, 2000, from $684.3 million
during the three months ended June 30, 1999, as well as an increase in the
effective yield to 8.9% from 8.0%. The increase in the effective yield was
primarily due to the increase in rates during the year, as well as the
transfer of the Company's manufactured housing and home improvement loans
portfolio to the held for investment portfolio during 1999.
Residential construction loans
------------------------------
Interest income on residential construction loans totaled $29.9 million and
$29.7 million for the three months ended June 30, 2000 and 1999,
respectively. The average balance of residential construction loans
outstanding was $1.1 billion for the three months ended June 30, 2000 and
$1.2 billion for the three months ended June 30, 1999. Interest was earned
at an effective yield of 11.3% and 10.3% during the three months ended June
30, 2000 and 1999, respectively. The increase in the effective yield was
primarily due to the increase in rates during the year.
Income property loans
---------------------
Interest income on income property loans totaled $3.4 million and $4.5
million for the three months ended June 30, 2000 and 1999, respectively. The
$1.1 million decrease in interest income was primarily the result of a
decrease in the average balance of such loans to $129.7 million from $194.3
million during the three months ended June 30, 2000 and 1999, respectively,
following a decision to discontinue this product during the prior year. The
decrease in interest income was partially offset by an increase in the
effective yield to 10.6% from 9.3%, primarily due to the increase in rates
during the year.
Revolving warehouse lines of credit
-----------------------------------
Interest income on revolving warehouse lines of credit totaled $5.2 million
and $5.7 million for the three months ended June 30, 2000 and 1999,
respectively. The $0.5 million decrease quarter over quarter was primarily
the result of a decrease in the average balance of such lines to $227.4
million from $286.0 million during the quarters ended June 30, 2000 and 1999.
This reduction was partially offset by an increase in the effective yield to
9.3% from 8.0%.
Interest Expense: Total interest expense was $63.4 million and $44.7 million for
the three months ended June 30, 2000 and 1999, respectively. On a pro forma
basis, total interest expense during the three months ended June 30, 1999 was
$53.2 million. The increase in interest expense was primarily due to an
increase in the Company's cost of funds to 7.2% from 5.7%. The impact to
interest expense resulting from this increase in the cost of funds was partially
offset by a decrease in the average balance of interest bearing liabilities
during the three months ended June 30, 2000 and 1999 to $3.5 billion from $3.7
billion (on a pro forma basis), respectively.
Provision for Loan Losses: The provision for loan losses was $4.4 million and
$1.2 million during the three months ended June 30, 2000 and 1999, respectively.
On a pro forma basis, the provision for loan losses was $1.5 million during the
three months ended June 30, 1999. IndyMac's determination of the level of the
allowance for loan losses and correspondingly, the provision for loan losses, is
based on various judgments and assumptions regarding various matters, including
general economic conditions, loan portfolio composition, delinquency trends and
prior loan loss experience.
Gain on Sale of Loans: Income from gain on sale of loans decreased $9.9 million
to $26.0 million from $35.9 million during the three months ended June 30, 2000
and 1999 (on a pro forma basis), respectively.
17
The decrease in gain on sale of loans was primarily due to tighter profit
margins in 2000 as compared to 1999.
Service Fee Income: Service fee income increased $4.4 million to $9.0 million
from $4.6 million (on a pro forma basis) during the quarters ended June 30, 2000
and 1999, respectively. The increase in service fee income was primarily due to
a decrease in prepayment speeds during the year, which resulted in higher
valuation adjustments quarter over quarter, as well as an increase in the size
of the portfolio.
Net Gain (Loss) on Sale of Securities: The Company recorded a gain on sale of
securities of $1.2 million during the three months ended June 30, 2000, compared
to a loss of $17.1 million during the three months ended June 30, 1999 (on a pro
forma basis). The $17.1 million loss in the second quarter of 1999 was
primarily related to IndyMac Operating's sale of U.S. Treasuries at a loss of
$16.6 million during this time period.
Equity in Earnings (Loss) of IndyMac Operating: IndyMac had a 99% equity
interest in IndyMac Operating during the three months ended June 30, 1999. In
January of 2000, IndyMac purchased the minority interest in IndyMac Operating
from Countrywide Home Loans, Inc. ("CHL"). As such, there is no equity in
earnings (loss) of IndyMac Operating in 2000, whereas a loss of $2.0 million was
recognized during the three months ended June 30, 1999.
Fee Income: Fee income totaled $7.8 million for the three months ended June 30,
2000 and $607 thousand for the three months ended June 30, 1999, respectively.
On a pro forma basis, fee income was $6.2 million for the three months ended
June 30, 1999. The $1.6 million increase in fee income was primarily due to an
increase in table funding fees of $1.5 million due to an increase in the number
of table funded loans.
Expenses: Total expenses were $39.2 million and $7.2 million for the three
months ended June 30, 2000 and 1999, respectively. On a pro forma basis, total
expenses were $41.0 million for the three months ended June 30, 1999. Included
in total expenses during the three months ended June 30, 2000 was $1.3 million
in acquisition costs related to the merger with SGVB. This decrease in expenses
period over period was offset by higher marketing costs incurred during the
three months ended June 30, 1999 as compared to the three months ended June 30,
2000.
RESULTS OF OPERATIONS
Six months ended June 30, 2000 compared to the six months ended June 30, 1999
Highlights for the six months ended June 30, 2000 and 1999
(Dollars in thousands)
For the six months ended
June 30,
2000 1999
---- ----
(Pro forma) (1)
Net earnings before non-recurring items $44,885 $28,462
Return on average assets before non-recurring items 2.09% 1.15%
Return on average equity before non-recurring items 10.74% 6.54%
Interest spread
Yield on interest-earning assets 9.98% 8.23%
Cost of interest-bearing liabilities 6.98% 5.68%
Interest spread 3.00% 2.55%
Net interest margin 4.06% 3.38%
(1) Pro forma gives effect to the change in the Company's structure to a fully
taxable entity and the buyout of the minority interest in IndyMac, Inc.
effective January of 2000.
18
Net Earnings: The Company's net earnings were $74.3 million for the six months
ended June 30, 2000, compared to $52.7 million for the six months ended June 30,
1999. Excluding non-recurring items totaling $24.5 million, net earnings would
have been $44.9 million during the six months ended June 30, 2000. The
Company's pro forma net earnings for the six months ended June 30, 1999 would
have been $28.5 million had the Company owned 100% of IndyMac, Inc.'s common
stock, and had it been a fully taxable entity. The increase in net earnings (on
a pro forma basis) was primarily associated with the Company's conversion to a
fully taxable entity, at which time the Company recorded a $36.1 million
deferred tax asset and associated tax benefits, as well as a loss on the sale of
U.S. Treasuries during 1999 totaling $31.4 million.
Interest Income. Total interest income was $200.2 million and $177.1 million for
the six months ended June 30, 2000 and 1999, respectively. On a pro forma
basis, total interest income was $197.2 million during the six months ended June
30, 1999. Average interest earning assets decreased to $4.0 billion during the
six months ended June 30, 2000 from $4.8 billion during the six months ended
June 30,1999. The yield on average interest earning assets increased to 10.0%
during the six months ended June 30, 2000 compared to 8.2% during the six months
ended June 30,1999, primarily due to the rising interest rate environment over
the course of the year.
Mortgage securities available for sale
---------------------------------------
Interest income on mortgage securities totaled $36.6 million and $3.0 million
for the six months ended June 30, 2000 and 1999, respectively. On a pro
forma basis, interest income was $23.2 million during the six months ended
June 30, 1999. The increase in interest income on mortgage securities year
over year was primarily due to impairment charges on residual and interest-
only securities totaling $8.3 million that were recognized during the first
six months of 1999 as a reduction in interest income.
Loans held for sale, net
------------------------
Interest income on loans held for sale totaled $40.6 million and $54.1
million for the six months ended June 30, 2000 and 1999, respectively. On a
pro forma basis, interest income was $64.7 million during the six months
ended June 30, 1999. The decrease in interest income of $24.1 million on
loans held for sale (on a pro forma basis) was primarily the result of a
decrease in the average balance of such loans to $868.5 million from $1.5
billion during the six months ended June 30, 2000 and 1999, respectively,
offset in part by an increase in the effective yield to 9.4% from 8.8%. The
increase in the effective yield was primarily due to the increase in rates
during the year, offset in part by the transfer of the Company's manufactured
housing and home improvement loans portfolio to the held for investment
portfolio in 1999.
Mortgage loans held for investment, net
---------------------------------------
Interest income on mortgage loans held for investment totaled $45.3 million
and $28.1 million for the six months ended June 30, 2000 and 1999,
respectively. The $17.2 million increase was primarily the result of an
increase in the average balance of such loans during the six months ended
June 30, 2000 to $1.0 billion as compared to $728.3 million during the six
months ended June 30, 1999, as well as an increase in the effective yield to
9.0% from 7.8%. The increase in the effective yield was primarily due to the
increase in rates during the year, as well as the transfer of the Company's
manufactured housing and home improvement loans portfolio to the held for
investment portfolio during 1999.
Residential construction loans
------------------------------
Interest income on residential construction loans totaled $60.4 million and
$59.9 million for the six months ended June 30, 2000 and 1999, respectively.
The average balance of residential construction loans outstanding was $1.1
billion for the six months ended June 30, 2000 and $1.2 billion for the six
months ended June 30, 1999. Interest was earned at an effective yield of
11.4% and 10.0% during the six months ended June 30, 2000 and 1999,
respectively. The increase in the effective yield was primarily due to the
increase in rates during the year.
19
Income property loans
---------------------
Interest income on income property loans totaled $7.3 million and $8.7
million for the six months ended June 30, 2000 and 1999, respectively. The
$1.4 million decrease in interest income was primarily the result of a
decrease in the average balance of such loans to $133.6 million from $188.9
million during the six months ended June 30, 2000 and 1999, respectively,
following a decision to discontinue this product during the prior year. The
decrease in interest income was partially offset by an increase in the
effective yield to 10.9% from 9.3%, primarily due to the increase in rates
during the year, as well as cash received during the six months ended June
30, 2000 on loans previously on non-accrual status.
Revolving warehouse lines of credit
-----------------------------------
Interest income on revolving warehouse lines of credit totaled $9.6 million
and $11.8 million for the six months ended June 30, 2000 and 1999,
respectively. The $2.2 million decrease was primarily the result of a
decrease in the average balance of such lines to $209.7 million from $289.7
million during the six months ended June 30, 2000 and 1999. This reduction
was partially offset by an increase in the effective yield to 9.2% from 8.2%.
Interest Expense: Total interest expense was $118.7 million and $98.2 million
for the six months ended June 30, 2000 and 1999, respectively. On a pro forma
basis, total interest expense during the six months ended June 30, 1999 was
$116.2 million. The increase in interest expense was primarily the result of an
increase in the Company's cost of funds to 7.0% from 5.7% during the six months
ended June 30, 2000 and 1999, respectively. This increase was offset in part by
a decrease in the average balance of interest bearing liabilities to $3.4
billion from $4.1 billion (on a pro forma basis).
Provision for Loan Losses: The provision for loan losses was $8.7 million and
$7.9 million during the six months ended June 30, 2000 and 1999, respectively.
On a pro forma basis, the provision for loan losses was $8.3 million during the
six months ended June 30, 1999. IndyMac's determination of the level of the
allowance for loan losses and correspondingly, the provision for loan losses, is
based on various judgments and assumptions regarding various matters, including
general economic conditions, loan portfolio composition, delinquency trends and
prior loan loss experience.
Gain on Sale of Loans: Income from gain on sale of loans decreased $19.3
million to $44.6 million from $63.9 million during the six months ended June 30,
2000 and 1999 (on a pro forma basis), respectively. The decrease in gain on
sale of loans was primarily due to tighter profit margins in 2000 as compared to
1999.
Service Fee Income: Service fee income increased $7.1 million to $17.3 million
from $10.2 million (on a pro forma basis) during the quarters ended June 30,
2000 and 1999, respectively. The increase in service fee income was primarily
due to a decrease in prepayment speeds during the year, which resulted in higher
valuation adjustments quarter over quarter.
Net Gain (Loss) on Sale of Securities: The Company recorded a gain on sale of
securities of $2.2 million during the six months ended June 30, 2000, compared
to a loss of $32.5 million during the six months ended June 30, 1999 (on a pro
forma basis). The $32.5 million loss recognized during the first six months of
1999 was primarily related to IndyMac Operating's sale of U.S. Treasuries at a
loss of $31.4 million during this time period.
Equity in Earnings (Loss) of IndyMac Operating: IndyMac had a 99% equity
interest in IndyMac Operating during the six months ended June 30, 1999. In
January of 2000, IndyMac purchased the minority interest in IndyMac Operating
from CHL. As such, there is no equity in earnings (loss) of IndyMac Operating
in 2000, whereas a loss of $4.3 million was recognized during the six months
ended June 30, 1999.
20
Fee Income: Fee income totaled $14.5 million for the six months ended June 30,
2000 and $2.1 million for the six months ended June 30, 1999, respectively. On
a pro forma basis, fee income was $12.9 million for the six months ended June
30, 1999. The $1.6 million increase in fee income was primarily due to an
increase in table funding fees due to an increase in the number of table funded
loans.
Expenses: Total expenses were $85.5 million and $16.2 million for the six
months ended June 30, 2000 and 1999, respectively. On a pro forma basis, total
expenses were $77.6 million for the six months ended June 30, 1999. The
increase in expenses period over period was primarily due to non-recurring
expenses of $11.6 million recognized during the six months ended June 30, 2000.
This $11.6 million consisted of (a) $9.4 million in compensation expense related
to the resignation of Mr. Mozilo from the Board of Directors, (b) $843 thousand
related to the buyout of CHL's minority interest in IndyMac Operating, and (c)
$1.3 million in acquisition costs for the merger with SGVB.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal financing needs are the financing of its mortgage loan
inventory and its investment in mortgage-backed securities and servicing rights.
The Company's primary sources of funds used to meet these financing needs
include cash flow from operations, committed and uncommitted borrowings,
structured financing, and unsecured debt.
At June 30, 2000, the Company had liquidity approximating $182.0 million, with a
leverage ratio (debt to equity) of 4.5:1. The Company believes that its
liquidity levels and borrowing capacity are more than sufficient to meet its
current operating requirements. However, the Company's liquidity and capital
resources will continue to depend on factors such as cash flow from operations
and margins on financial collateral required by lenders.
The table below summarizes the Company's sources of financing as of June 30,
2000:
(Dollars in millions)
Committed Outstanding Maturity
Financial Institution Financing Balances Type of Financing Date
- - -------------------------------- --------- ----------- ----------------------------------- ---------------
Merrill Lynch $1,500 $1,380 Repurchase Agreement May 2001
Paine Webber 500 500 Repurchase Agreement September 2001
Morgan Stanley 500 238 Repurchase Agreement January 2002
Credit Suisse First Boston 500 151 Repurchase Agreement June 2001
First Union Bank Syndicate 865 803 Revolving Bank Line February 2001
Bank of America 50 42 Revolving Bank Line September 2000
Bank of America 200 123 Commercial Paper Conduit March 2001
Credit Lyonnais 100 - Commercial Paper Conduit March 2001
Various 75 75 Collateralized Mortgage Obligations -
Various 60 60 Senior Unsecured Notes October 2002
------ ------
Total committed financing 4,350 3,372
Uncommitted repurchase -
facilities - 266
------ ------
Total financing $4,350 $3,638
====== ======
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 access to federally insured customer deposits
and Federal Home Loan Bank advances, and issuing additional debt or equity from
time to time. Decisions by the Company's lenders and investors to make
additional funds available to the Company in the future will depend upon a
number of factors. These include 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
21
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 or lending opportunities.
In July of 1999, IndyMac's Board of Directors approved a $100 million share
repurchase plan and an additional $100 million was approved in April of 2000.
Since the share repurchase program's inception through June 30, 2000, the
Company has repurchased 9.8 million shares in open market transactions at an
average price of approximately $13.69 per share, for a total of $134.3 million.
In August of 2000, the Company acquired an additional 3.6 million shares in a
bulk purchase from Countrywide Credit Industries, Inc. ("Countrywide") at a
price of $18.70 per share. This bulk purchase represents the entire holdings of
IndyMac stock by Countrywide. The bulk purchase was completed separate from the
share repurchase program and does not impact the repurchase capacity remaining
under the program.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
- - ------------------------------------------------------------------
As part of its interest rate risk management process, the Company performs
various interest rate calculations that quantify the financial impact of changes
in interest rates on its interest-earning assets, commitments and hedges. As of
June 30, 2000, there were no material changes to the Company's interest rate
risk management process, or to the financial impact of changes in interest rates
on its interest-earning assets, commitments, and hedges, from that which was
disclosed in the Company's annual report on Form 10-K for the year ended
December 31, 1999. For further information, refer to Item 7A. Quantitative and
Qualitative Disclosure About Market Risk included in the Company's annual report
on Form 10-K for the year ended December 31, 1999.
FORWARD-LOOKING STATEMENTS
Certain statements contained in this Form 10-Q may be deemed to be forward-
looking statements within the meaning of Section 27A of the Securities Act of
1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking
statements include the Company's statements regarding liquidity, provisions for
loan losses, capital resources, and anticipated future expense levels and other
anticipated aspects of future operations. Forward-looking statements typically
include the words "anticipate," "believe," "estimate," "expect," "intend," and
other similar expressions. These statements reflect the Company's current views
with respect to future events and financial performance. They are subject to
risks and uncertainties, including those identified below, which could cause
future results to differ materially from historical results or from the results
anticipated. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of their dates or as of the date
hereof if no other date is identified. The Company undertakes no obligation to
publicly update or revise any forward-looking statements, whether as a result of
new information, future events or otherwise. The following factors could cause
future results to differ materially from historical results or those anticipated
in any forward-looking statements herein:
(1) the level of demand for consumer loans, mortgage loans and construction
loans, which is affected by such external factors as the level of interest
rates, the strength of various segments of the economy and demographics of
the Company's lending markets;
(2) the availability of funds from the Company's lenders and other sources of
financing to support the Company's lending activities;
(3) the direction of interest rates and the relationship between interest rates
and the cost of funds;
(4) federal and state regulation of the Company's consumer lending operations;
(5) the actions undertaken by both current and potential new competitors;
(6) the execution of the Company's growth plans related to the consumer banking
operation;
22
(7) other risks and uncertainties detailed herein under "Item 2. Management's
Discussion and Analysis of Financial Condition and Results of Operations."
PART II
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- - ------------------------------------------------------------
At the annual meeting of IndyMac's shareholders held on May 23, 2000, the
shareholders voted to re-elect IndyMac's directors. The votes cast in this
regard were as follows:
For WITHHELD
--- --------
David S. Loeb 62,821,162 1,355,204
Michael W. Perry 63,623,908 552,458
Lyle E. Gramley 62,943,985 1,232,381
Thomas J. Kearns 62,885,138 1,291,228
Frederick J. Napolitano 62,954,387 1,221,979
Patrick C. Haden 63,634,236 542,130
In addition, the shareholders voted to approve the 2000 Stock Incentive Plan.
The votes cast in this regard were as follows:
In Favor 30,679,647
Against 14,924,607
Abstaining 454,626
Broker Non-Votes 18,117,486
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- - ------- --------------------------------
(a) Exhibits
--------
3.1 Certificate of Incorporation of IndyMac, as amended
4.1 2000 Stock Incentive Plan
27 Financial Data Schedule
(b) Reports on Form 8-K
-------------------
None
23
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, 2000 for the six months ended June 30, 2000.
INDYMAC BANCORP, INC.
By: /s/ Michael W. Perry
--------------------
Michael W. Perry
Vice Chairman of the Board of Directors and
Chief Executive Officer
By: /s/ Carmella L. Grahn
---------------------
Carmella L. Grahn
Executive Vice President and
Chief Financial Officer
24