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 March 31, 1998
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
INMC MORTGAGE HOLDINGS, INC.
(dba IndyMac Mortgage Holdings, Inc.)
(Exact name of registrant as specified in its charter)
DELAWARE 95-3983415
(State or other jurisdiction of (I. R. S. Employer
incorporation or organization) Identification No.)
155 NORTH LAKE AVENUE, PASADENA, CALIFORNIA 91101-1857
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (800) 669-2300
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the close of the period covered by this report.
Common stock outstanding as of March 31, 1998: 66,166,964 shares
INMC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
(dba, IndyMac Mortgage Holdings, Inc.)
CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands)
(Unaudited)
March 31, December 31,
1998 1997
------------------------------
ASSETS
Loans held for sale
Mortgages-prime $1,177,608 $1,091,908
Mortgages-subprime 136,433 75,770
Manufactured housing 139,740 208,830
Home improvement 120,209 81,763
---------- ----------
1,573,990 1,458,271
Loans held for investment, net
Mortgages-prime 1,397,979 1,801,014
Manufactured housing 31,031 30,033
Construction 1,107,114 946,806
Revolving warehouse lines of credit, net 671,945 512,458
---------- ----------
3,208,069 3,290,311
Mortgage securities 953,578 558,445
Collateral for CMOs 228,741 245,474
Investment in and advances to IndyMac, Inc. 177,684 185,715
Cash and cash equivalents 12,192 13,676
Interest receivable 38,872 36,762
Other assets 81,131 60,456
---------- ----------
Total assets $6,274,257 $5,849,110
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Repurchase agreements and other credit facilities $5,206,877 $4,826,656
Collateralized mortgage obligations 204,653 221,154
Senior unsecured notes 59,922 59,888
Accounts payable and accrued liabilities 28,472 37,518
---------- ----------
Total liabilities 5,499,924 5,145,216
Shareholders' equity
Common stock - authorized, 100,000,000 shares of
$.01 par value; issued and outstanding, 66,166,964 shares
at March 31, 1998 and 63,351,616 at December 31, 1997 662 634
Additional paid-in capital 842,657 773,475
Accumulated other comprehensive income (1,844) (1,505)
Cumulative earnings 275,995 243,430
Cumulative distributions to shareholders (343,137) (312,140)
---------- ----------
Total shareholders' equity 774,333 703,894
---------- ----------
Total liabilities and shareholders' equity $6,274,257 $5,849,110
========== ==========
2
INMC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
(dba, IndyMac Mortgage Holdings, Inc.)
CONSOLIDATED STATEMENTS OF EARNINGS
(Dollar amounts in thousands, except per share data)
(Unaudited)
Quarter Ended March 31,
-----------------------
1998 1997
----------- -----------
REVENUES
Interest income
Loans held for sale
Mortgages-prime $ 22,944 $ 11,081
Mortgages-subprime 2,488 4,091
Manufactured housing 4,642 2,260
Home improvement 2,770 -
-------- --------
32,844 17,432
Loans held for investment
Mortgages-prime 31,002 26,933
Manufactured housing 646 633
Construction 26,474 14,713
Revolving warehouse lines of credit 10,788 4,029
-------- --------
68,910 46,308
Mortgage securities 15,331 3,323
Collateral for CMOs 4,424 5,400
Advances to IndyMac, Inc. 2,921 2,710
Other 105 45
-------- --------
Total interest income 124,535 75,218
Interest expense
Repurchase agreements and other credit facilities 77,276 41,567
Collateralized mortgage obligations 4,302 5,203
Senior unsecured notes 1,381 1,378
-------- --------
Total interest expense 82,959 48,148
-------- --------
Net interest income 41,576 27,070
Provision for loan losses 6,250 3,900
-------- --------
Net interest income after provision for loan losses 35,326 23,170
Equity in earnings of IndyMac, Inc. 2,889 4,257
Gain (loss) on mortgage loans and securities (296) (295)
Other income 1,242 1,607
-------- --------
Net revenues 39,161 28,739
EXPENSES
Salaries 4,968 2,989
General and Administrative 1,628 2,097
Management fees to affiliate - 2,309
-------- --------
Total expenses 6,596 7,395
-------- --------
NET EARNINGS $ 32,565 $ 21,344
======== ========
EARNINGS PER SHARE
Basic EPS $0.50 $0.42
Diluted EPS 0.50 0.41
WEIGHTED AVERAGE SHARES OUTSTANDING (in thousands)
Basic 64,613 51,341
Diluted 65,143 51,697
3
INMC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
(dba, IndyMac Mortgage Holdings, Inc.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar amounts in thousands)
Three Months Ended March 31
-----------------------------------
1998 1997
-------------- -------------
Cash flows from operating activities:
Net earnings $ 32,565 $ 21,344
Adjustments to reconcile net earnings
to net cash provided by (used in) operating activities:
Amortization and depreciation 9,672 6,433
Provision for loan losses 6,250 3,900
Equity in earnings of Indy Mac (2,889) (4,257)
Purchases of mortgage loans held for sale (2,181,925) (916,462)
Sale of and payments from mortgage loans held for sale 2,033,961 767,742
Net purchases of manufactured housing loans held for sale 53,504 (34,566)
Purchases of trading securities (41,244) (1,494)
Principal payments on trading securities 4,434 135
Net increases in other assets (26,157) (6,833)
Net (decreases)/increases in other liabilities (8,750) 7,111
-------------- -------------
Net cash used in operating activities (120,579) (156,947)
Cash flows from investing activities:
Purchases of mortgage loans held for investment (120,480) (276,309)
Payments from mortgage loans held for investment 223,606 87,914
Net increase in construction loans receivable (184,076) (120,734)
Purchases of mortgage securities (133,336) (11,500)
Sales and payments of mortgage securities 64,980 8,385
Net (increase)/decrease in revolving warehouse lines of credit (159,832) 53,596
Net purchases of manufactured housing loans held for investment (1,373) (641)
Decrease in advances to IndyMac, net of cash payments 11,262 6,817
Payments from collateral for CMOs 16,175 7,582
Net change in GICs held by trustees as collateral for CMOs 557 197
-------------- -------------
Net cash used in investing activities (282,517) (244,693)
Cash flows from financing activities:
Net increase in repurchase agreements and other credit facilities 380,221 370,837
Net proceeds from issuance of common stock 69,210 50,503
Cash dividends paid (30,997) (20,528)
Principal payments on collateralized mortgage obligations (16,822) (7,913)
-------------- -------------
Net cash provided by financing activities 401,612 392,899
Net increase in cash and cash equivalents (1,484) (8,741)
Cash and cash equivalents at beginning of period 13,676 12,450
-------------- -------------
Cash and cash equivalents at end of period $ 12,192 $ 3,709
============= ============
Supplemental cash flow information:
Cash paid for interest $ 85,828 $ 42,262
============= ============
4
INMC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
(dba, IndyMac Mortgage Holdings, Inc.)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Dollar amounts in thousands) Three months ended
March 31, 1998 March 31, 1997
--------------------------- --------------------------
Cumulative Earnings
Balance, beginning of year $ 243,430 $ 219,135
Net earnings 32,565 $32,565 21,344 $21,344
--------- ---------
Balance, end of quarter 275,995 240,479
Cumulative Distribution to Shareholders
Balance, beginning of year (312,140) (216,315)
Dividends paid (30,997) (20,528)
--------- ---------
Balance, end of quarter (343,137) (236,843)
Accumulated Other Comprehensive Income
Balance, beginning of year
IndyMac REIT (2,006) (7,166)
IndyMac Operating 501 (8,427)
Unrealized gain/(loss) on securities,
net of reclassification adjustment
IndyMac REIT (682) 3,837
IndyMac Operating, net of tax 343 7,267
------- -------
Other comprehensive income (339) (339) 11,104 11,104
--------- ------- --------- -------
Comprehensive income $32,226 $32,448
Balance, end of quarter
IndyMac REIT (2,688) (3,329)
IndyMac Operating 844 (1,160)
Common Stock
Balance, beginning of year 634 502
Common stock issued 27 23
Common stock options exercised 1 1
--------- ---------
Balance, end of quarter 662 526
Additional Paid in Capital
Balance, beginning of year 773,475 490,695
Common stock issued 67,505 49,895
Common stock options exercised 1,677 584
--------- ---------
Balance, end of quarter 842,657 541,174
--------- ---------
Total Stockholders' Equity $ 774,333 $ 540,847
========= =========
5
INMC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
(DBA INDYMAC MORTGAGE HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
(UNAUDITED)
NOTE A - BASIS OF PRESENTATION
The accompanying consolidated financial statements 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 generally accepted accounting principles for complete
financial statements.
INMC Mortgage Holdings, Inc., dba IndyMac Mortgage Holdings, Inc. ("IndyMac
REIT"), has elected to be treated as a real estate investment trust ("REIT")
under the Internal Revenue Code of 1986, as amended. The consolidated financial
statements include the accounts of IndyMac Mortgage Holdings, Inc. and its
qualified REIT subsidiaries. The mortgage lending and securitization operations
are primarily conducted through IndyMac, Inc. ("IndyMac Operating"), a taxable
corporation, which is not consolidated with IndyMac REIT for financial reporting
or income tax purposes. IndyMac REIT owns all of the preferred stock and a 99%
economic interest in IndyMac Operating. IndyMac REIT's investment in IndyMac
Operating is accounted for under a method similar to the equity method. As used
herein, "IndyMac" includes IndyMac REIT and IndyMac Operating and their
respective subsidiaries.
All significant intercompany balances and transactions have been eliminated in
consolidation of IndyMac REIT. Certain reclassifications have been made to the
financial statements for the period ended March 31, 1997 to conform to the March
31, 1998 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 three months ended March 31, 1998 are not necessarily
indicative of the results that may be expected for the year ending December 31,
1998. For further information, refer to the consolidated financial statements
and footnotes thereto included in IndyMac REIT's annual report on Form 10-K for
the year ended December 31, 1997.
NOTE B - ALLOWANCE FOR CREDIT LOSSES
During the three months ended March 31, 1998, IndyMac REIT added $6.3 million to
its allowance for credit losses. IndyMac REIT's allowance for credit losses
totaled $30.5 million at March 31, 1998, and primarily includes reserves for
residential loans held for investment, construction loans, and warehouse lines
of credit in the amounts of $19.5 million, $8.1 million, and $2.2 million
respectively. IndyMac REIT recorded chargeoffs of $2.7 million and $1.7 million
during the three months ended March 31, 1998 and 1997, respectively.
6
NOTE C - MORTGAGE SECURITIES
Mortgage securities consist of REMIC senior securities, adjustable rate agency
securities, subordinated securities, principal-only securities, AAA rated
interest-only securities and inverse floater securities. Interest-only
securities are comprised primarily of interest-only strips sold by IndyMac
Operating to IndyMac REIT and subsequently securitized and held by IndyMac REIT,
which are classified and accounted for as available for sale, and also include
interest-only securities acquired by IndyMac REIT in connection with the
securitization of mortgage loans held for sale by IndyMac Operating, which are
classified and accounted for as trading securities. Contractual maturities on
the mortgage securities range from 10 to 30 years.
Following is the estimated fair value of IndyMac REIT's mortgage securities as
of March 31, 1998 and December 31, 1997:
March 31, 1998 December 31, 1997
--------------------------------- -------------------------------
(Dollar amounts in thousands) Available Available
Trading for sale Trading for sale
------- -------- ------- --------
Amortized cost $126,437 $829,829 $93,199 $467,252
Gross unrealized gains -- 6,935 -- 5,711
Gross unrealized losses -- (9,623) -- (7,717)
-------- -------- ------- --------
Estimated fair value $126,437 $827,141 $93,199 $465,246
======== ======== ======= ========
As of March 31, 1998, all of IndyMac REIT's mortgage securities were pledged to
secure repurchase borrowings intended to finance the holding of such securities.
NOTE D - INVESTMENT IN INDYMAC OPERATING (Unaudited)
- ----------------------------------------------------
Summarized financial information for IndyMac Operating follows:
(Dollars in thousands) March 31, 1998 December 31, 1997
--------------------------------------------------------
Loans held for sale, net $ 109,750 $ 98,834
Mortgage securities 813,606 601,669
Mortgage servicing rights 90,172 72,784
Other assets 38,957 47,766
----------------------- -------------------------
Total assets $1,052,485 $821,053
======================= =========================
Repurchase agreements and other credit facilities $ 810,061 $578,763
Due to INMC 106,655 117,917
Accounts payable, income taxes payable and
accrued liabilities 64,023 55,891
Shareholders' equity 71,746 68,482
----------------------- -------------------------
Total liabilities and shareholders' equity $1,052,485 $821,053
======================= =========================
7
NOTE D - INVESTMENT IN INDYMAC OPERATING (Unaudited)-continued
- --------------------------------------------------------------
Quarter ended March 31,
----------------------------------------------
(Dollars in thousands) 1998 1997
------------------- ------------------
Interest income
Loans held for sale $ 2,964 $ 1,528
Mortgage securities 12,351 10,207
------------------- ------------------
Total interest income 15,315 11,735
Interest expense 12,902 10,727
------------------- ------------------
Net interest income 2,413 1,008
Provision for loan losses 36 -
Gain on sale of loans and securities 21,591 16,510
Servicing fee income (252) 1,988
Other 1,411 332
------------------- ------------------
Net revenues 25,127 19,838
Salaries and related expenses 12,007 7,107
General and administrative expenses 8,045 4,186
Management fees to affiliate - 757
------------------- ------------------
Total expenses 20,052 12,050
Earnings before income tax provision 5,075 7,788
Income tax provision 2,157 3,281
------------------- ------------------
Net earnings $ 2,918 $ 4,507
=================== ==================
Allowance for Credit Losses. IndyMac Operating's allowance for credit losses
related to loans held for sale totaled $454,000 at March 31, 1998. IndyMac
Operating recorded chargeoffs of $469,000 and $436,000 during the three months
ended March 31, 1998 and 1997, respectively.
Mortgage Securities. Mortgage securities consist of REMIC subordinated
securities, principal-only securities and AAA rated interest-only securities.
Interest-only securities are comprised primarily of interest-only strips
retained in connection with the securitization of mortgage loans previously held
for sale. Contractual maturities on the mortgage securities range from 10 to 30
years. Following is the estimated fair value of IndyMac Operating's mortgage
securities as of March 31, 1998 and December 31, 1997:
March 31, 1998 December 31, 1997
---------------------------------------- ----------------------------------------
(Dollar amounts in thousands) Available Available
Trading for sale Trading for sale
------- -------- ------- --------
Amortized cost $771,042 $41,077 $544,743 $56,053
Gross unrealized gains -- 1,957 -- 2,321
Gross unrealized losses -- (470) -- (1,448)
---------------- ------------------ ---------------- ------------------
Estimated fair value $771,042 $42,564 $544,743 $56,926
================ ================== ================ ==================
As of March 31, 1998, all of IndyMac Operating's mortgage securities were
pledged to secure repurchase borrowings intended to finance the holding of such
securities.
8
NOTE E - NEW ACCOUNTING PRONOUNCEMENT
During 1997, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income",
which is effective for fiscal years beginning after December 15, 1997 and
requires restatement of earlier financial statements for comparative purposes.
SFAS No. 130 requires that items meeting the criteria of a component of
comprehensive income, such as foreign currency items and unrealized gains and
losses on certain investments in debt and equity securities classified as
available for sale, be shown in the financial statements as adjustments to
reported net income to arrive at a disclosure of comprehensive income, as
defined. SFAS No. 130 provides informative disclosure but does not and will not
impact previously reported or future net earnings and earnings per share.
IndyMac REIT has reported comprehensive income in the accompanying Consolidated
Statements of Shareholders' Equity and Consolidated Balance Sheets.
NOTE F - SUBSEQUENT EVENTS
On April 22, 1998, the Board of Directors of IndyMac REIT declared a cash
dividend of $0.50 per share payable on June 8, 1998 to shareholders of record
on May 4, 1998.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- ------------------------------------------------------------------------
RESULTS OF OPERATIONS
- ---------------------
GENERAL
INMC Mortgage Holdings, Inc., dba IndyMac Mortgage Holdings, Inc. ("IndyMac
REIT"), was incorporated in the state of Maryland in July 1985 and
reincorporated in the state of Delaware in March 1987. References to "IndyMac
REIT" mean either the parent company alone or the parent company and the
entities consolidated for financial reporting purposes, while references to
"IndyMac" mean the parent company, its consolidated subsidiaries and IndyMac
REIT's affiliate, IndyMac, Inc. ("IndyMac Operating") and its consolidated
subsidiaries, which are not consolidated with IndyMac REIT for financial
reporting or tax purposes.
In its mortgage lending and securitization business, IndyMac acts as an
intermediary between the originators of mortgage loans and permanent investors
in mortgage-backed securities ("MBS") secured by or representing an ownership
interest in such mortgage loans. IndyMac purchases primarily "jumbo" and other
"nonconforming" mortgage loans from mortgage originators, and also purchases to
a much lesser extent subprime mortgage loans (i.e., "A- through D paper"
mortgages). IndyMac and its Sellers negotiate whether such Sellers will retain,
or IndyMac will purchase, the rights to service the mortgage loans delivered by
such Sellers to IndyMac. All loans purchased by IndyMac REIT, for which a Real
Estate Mortgage Investment Conduit ("REMIC") transaction or whole loan sale is
contemplated, are committed for sale to IndyMac Operating at the same price at
which the loans were acquired by IndyMac REIT pursuant to a Master Forward
Commitment and Services Agreement. At present, IndyMac Operating does not
purchase any loans from entities other than IndyMac REIT. Additionally,
IndyMac's lending and securitization operations include the purchase or
origination, securitization and sale of consumer or mortgage loans for
manufactured housing and home improvements.
IndyMac's principal sources of income from its lending and securitization
operations are gains recognized on the sale or securitization of mortgage and
consumer loans, the net spread between interest earned on mortgage and consumer
loans and the interest costs associated with the borrowings used to finance such
loans pending their sale or securitization, and servicing and master servicing
fee income.
In addition to its lending and securitization operations, IndyMac earns fee
income and net interest income through its construction and warehouse lending
programs and net interest income on its investment portfolio of mortgage and
manufactured housing loans and mortgage securities. Construction Lending
Corporation of America ("CLCA") provides acquisition, development and
construction, builder custom home, model home, construction-to-permanent and lot
loan financing on a nationwide basis to builders, while IndyMac Construction
Lending Division ("IndyMac CLD") provides the same products as CLCA to IndyMac
Operating's third party customers. Warehouse Lending Corporation of America
("WLCA"), IndyMac's warehouse lending operation, provides financing to small-to-
medium-size mortgage originators for the origination and sale of mortgage loans.
IndyMac's Loanworks Division offers a full-service menu of consumer mortgage
products directly to consumers via phone, fax and the Internet. IndyMac's Home
Improvement Division offers various types of home improvement loans to
consumers.
FINANCIAL CONDITION
Lending and Securitization Operations: During the first three months of 1998,
IndyMac REIT purchased $2.2 billion of non-conforming mortgage loans, including
$69 million of subprime mortgage loans. In addition, IndyMac REIT purchased
$103 million of manufactured housing loans and $41 million of home improvement
loans. These loans were financed on an interim basis using equity and short-
term financing in the form of repurchase agreements and other credit facilities.
In general, IndyMac, through IndyMac Operating, sells the loans in the form of
REMIC securities or whole loan sales or, alternatively, IndyMac REIT invests in
the loans on a long-term basis using financing provided by CMOs or repurchase
agreements and other credit facilities.
10
During the first three months of 1998, IndyMac Operating sold $1.9 billion of
mortgage loans through the issuance of four series of multiple-class MBS in the
form of REMIC securities and sold $91 million of mortgage loans in the form of
whole loan sales transactions. At March 31, 1998, IndyMac was committed to
purchase $977 million of mortgage loans from various mortgage originators.
IndyMac Operating's master servicing portfolio at March 31, 1998 had an
aggregate outstanding principal balance of $13.6 billion with a weighted average
coupon of 8.5%. Delinquencies (30 days and over) for loans held for sale were
2.8% of principal at March 31, 1998 compared with 2.3% at December 31, 1997.
Residential Loans Held For Investment: The $1.4 billion portfolio of residential
loans held for investment (exclusive of construction loans and warehouse lines
of credit and inclusive of $31 million of manufactured housing loans) at March
31, 1998 consisted of $899 million of varying types of adjustable-rate products
which contractually reprice in monthly, semi-annual or annual periods; $360
million of loans which have a fixed rate for a period of three, five, seven or
ten years and subsequently convert to adjustable-rate mortgage loans that
reprice annually and $146 million of fixed-rate loans. The weighted average
coupon of the mortgage loans held for investment at March 31, 1998 was 8.0%.
IndyMac utilizes interest rate swap agreements to manage the interest rate
exposure on its portfolio of loans held for investment. IndyMac finances loans
held for investment with repurchase agreements and other credit facilities which
reprice from overnight to one month, as of March 31, 1998. The allowance for
losses related to loans held for investment by IndyMac REIT totaled $19.5
million at March 31, 1998. Chargeoffs related to loans held for investment
totaled $2.7 million for the three months ended March 31, 1998. Delinquencies
(30 days and over) for loans held for investment were 7.3% of principal at March
31, 1998 compared with 6.3% at December 31, 1997.
CONSTRUCTION LENDING OPERATIONS: At March 31, 1998, CLCA had commitments to
fund construction loans of $1.6 billion, with outstanding principal balances of
$711 million. The allowance for losses related to CLCA loans totaled $7.6
million at March 31, 1998, and there were no chargeoffs related to CLCA loans
for the three months ended March 31, 1998. Delinquencies (30 days and over) for
CLCA were 2.6% and 0.9% of principal at March 31, 1998 and December 31, 1997,
respectively. IndyMac had outstanding borrowings under various revolving credit
facilities totaling $360 million at March 31, 1998 associated with the financing
of CLCA loans.
At March 31, 1998, IndyMac CLD had commitments to fund construction-to-permanent
and home improvement loans of $568 million with outstanding principal balances
of $516 million. The allowance for losses related to IndyMac CLD loans totaled
$459,000 at March 31, 1998, and there were $24,000 of chargeoffs for the three
months ended March 31, 1998. Delinquencies for IndyMac CLD were 1.2% and 1.5%
of principal, at March 31, 1998 and December 31, 1997, respectively. IndyMac
had outstanding borrowings under various revolving credit facilities totaling
$350 million at March 31, 1998 associated with the financing of IndyMac CLD
loans.
WAREHOUSE LENDING OPERATIONS: At March 31, 1998, IndyMac REIT had extended
commitments to make warehouse and related lines of credit in an aggregate amount
of $879 million, of which $672 million was outstanding, net of reserves. The
allowance for loan losses related to warehouse lines of credit totaled $2.2
million at March 31, 1998. There were no chargeoffs against such allowance
during the three months ended March 31, 1998. Repurchase debt outstanding
associated with IndyMac REIT's financing of these warehouse lines of credit
totaled $650 million at March 31, 1998. As of March 31, 1998 and December 31,
1997, there were no delinquent (30 days and over) warehouse lines of credit.
CMO PORTFOLIO: As of March 31, 1998, IndyMac REIT had a portfolio comprised of
nine series of CMOs (the "CMO Portfolio"). Collateral for CMOs decreased to
$228.7 million at March 31, 1998 from $245.5 million at December 31, 1997. This
decrease of $16.8 million is primarily the result of repayments (including
prepayments and premium and discount amortization) of $16.2 million and a
decrease in guaranteed investment contracts ("GICs") held by trustees of
$600,000. IndyMac REIT's CMOs outstanding decreased to $204.6 million at March
31, 1998 from $221.2 million at
11
December 31, 1997. This decrease of $16.6 million resulted from principal
payments and discount amortization on CMOs.
RESULTS OF OPERATIONS
QUARTER ENDED MARCH 31, 1998 COMPARED TO QUARTER ENDED MARCH 31, 1997
Net Earnings: IndyMac REIT's net earnings were $32.6 million, or $0.50 basic
and diluted earnings per share, based on 64,613,436 and 65,142,622 weighted
average shares outstanding for the three months ended March 31, 1998,
respectively, compared to $21.3 million, or $0.42 basic earnings per share and
$0.41 diluted earnings per share, based on 51,341,609 and 51,696,553 weighted
average shares outstanding for the three months ended March 31, 1997,
respectively.
The increase in net earnings of $11.3 million was principally due to an increase
in net interest income of $14.5 million and a decrease in management fees to
affiliate of $2.3 million, offset, in part, by increases in the provision for
loan losses, a decrease in equity in earnings of IndyMac Operating, and
increases in salaries, general and administrative expenses of $2.4 million, $1.4
million, and $1.5 million, respectively.
Interest Income: Total interest income was $124.5 million for the three months
ended March 31, 1998 and $75.2 million for the three months ended March 31,
1997. The increase in interest income of $49.3 million was primarily the result
of increases in interest earnings on the following: loans held for sale, $15.4
million; mortgage securities, $12.0 million; construction loans, $11.8 million;
revolving warehouse lines of credit, $6.8 million; and mortgage loans held for
investment, $4.1 million. These increases were partially offset by a reduction
in the interest income related to collateral for CMOs of $1.0 million.
Interest income on residential loans held for sale totaled $25.4 million and
$15.2 million, resulting in effective yields of 8.1% and 8.7%, for the three
months ended March 31, 1998 and 1997, respectively. The average principal
balance of such loans increased to $1.3 billion for the three months ended March
31, 1998, from $708.3 million for the three months ended March 31, 1997.
Interest income on manufactured housing loans held for sale totaled $4.6 million
and $2.3 million, with interest earned at effective yields of 9.1% and 9.3%, for
the three months ended March 31, 1998 and 1997, respectively. The average
principal balance of such loans increased by $104.9 million to $203.5 million
during the first three months of 1998, from $98.6 million for the three months
of 1997.
Interest income on mortgage loans held for investment totaled $31.0 million and
$26.9 million for the three months ended March 31, 1998 and 1997, respectively.
This increase was the result of an increase in the average amount of loans held
for investment during the year of $300 million partially offset by a decrease in
the average yield. The average principal balance of mortgage loans held for
investment was $1.7 billion during the first three months of 1998 with interest
earned at an effective yield of 7.4%, compared to the average principal balance
of mortgage loans held for investment for the three months ended March 31, 1997
of $1.4 billion with interest earned at an effective rate of 8.0%.
Interest income on manufactured housing loans held for investment totaled
$646,000 and $633,000, with interest earned at effective yields of 8.9% and 9.4%
for the three months ended March 31, 1998 and 1997, respectively. The average
principal balance of such loans was $29.1 million and $26.8 million for the
three months ended March 31, 1998 and 1997, respectively.
Interest income on construction loans totaled $26.5 million and $14.7 million,
with interest earned at an effective yield of 10.4% and 12.8% for the three
months ended March 31, 1998 and 1997, respectively. The average principal
balance of construction loans outstanding increased $532.1
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million to $1.0 billion during the first three months of 1998 from $467.9
million during the first three months of 1997
Interest income on revolving warehouse lines of credit totaled $10.8 million and
$4.0 million, with interest earned at effective yields of 8.9% and 9.2% for the
three months ended March 31, 1998 and March 31, 1997, respectively. The average
principal balance outstanding increased to $491.3 million from $178.5 million
for the three months ended March 31, 1998 and March 31, 1997, respectively.
Interest income on mortgage securities totaled $15.3 million and $3.3 million,
with interest earned at effective yields of 8.3% and 5.5% for the three months
ended March 31, 1998 and 1997, respectively. During the first three months of
1998, the average principal balance increased to $736.5 million from $238.3
million during the first three months of 1997. Mortgage securities consisted of
REMIC senior securities, adjustable rate agency securities, subordinated
securities, principal-only securities, AAA rated interest-only securities and
inverse floater securities. Interest-only securities were comprised primarily
of interest-only strips sold by IndyMac Operating to IndyMac REIT and
subsequently securitized by IndyMac REIT, which were classified and accounted
for as available for sale, and also include interest-only securities acquired by
IndyMac REIT in connection with the securitization of mortgage loans held for
sale by IndyMac Operating, which were classified and accounted for as trading
securities.
Interest income on collateral for CMOs was $4.4 million and $5.4 million for the
three months ended March 31, 1998 and 1997, respectively. This decrease was
primarily attributable to a decrease in the average aggregate principal amount
of collateral for CMOs outstanding to $237.8 million from $282.0 million for the
three months ended March 31, 1998 and 1997, respectively. Interest income on
collateral for CMOs includes the impact of amortization of net premiums paid in
connection with acquiring the CMO Portfolio and the impact of the delay in the
receipt of prepayments and temporary investment in lower yielding short-term
holdings (GICs) until such amounts are used to repay CMOs.
Interest Expense: For the three months ended March 31, 1998 and 1997,
respectively, total interest expense was $83.0 million and $48.1 million. This
increase in interest expense of $34.9 million was primarily due to an increase
in interest expense on repurchase agreements and other credit facilities of
$35.7 million, offset in part by a decline in interest expense on CMOs of
$900,000.
Interest expense on repurchase agreements and other credit facilities used to
finance residential loans held for sale and investment, revolving warehouse
lines of credit, construction loans and mortgage securities totaled $77.3
million and $41.6 million for the three months ended March 31, 1997 and 1998,
respectively. This increase of $35.7 million was primarily the result of an
increase in the aggregate average balance of indebtedness outstanding to $5.0
billion from $2.9 billion for the three months ended March 31, 1998 and 1997,
respectively. The effective interest rate on such borrowings was 6.3% and 5.9%
for the three months ended March 31, 1998 and 1997, respectively.
Interest expense on CMOs was $4.3 million and $5.2 million for the three months
ended March 31, 1998 and 1997, respectively. This decrease was primarily
attributable to a decrease in average aggregate CMOs outstanding to $214.8
million from $259.2 million for the three months ended March 31, 1998 and 1997,
respectively. The effective interest rate of 8.1% was the same for the three
months ended March 31, 1998 and 1997.
Interest expense on senior unsecured notes totaled $1.4 million for each of the
three months ended March 31, 1998 and 1997. The weighted average interest rate
of 9.2% and average outstanding balance of $59.9 million were also the same for
each of the three months ended March 31, 1998 and 1997.
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Equity in Earnings of Indymac Operating: For the three months ended March 31,
1998 earnings for IndyMac Operating of $2.9 million, in which IndyMac REIT has a
99% economic interest, resulted principally from net interest income of $2.4
million and gain on sale of loans and securities of $21.6 million, offset by
salaries, general and administrative expenses of $20.1 million, and income taxes
of $2.2 million. During the three months ended March 31, 1997, earnings for
IndyMac Operating of $4.5 million resulted principally from net interest income
of $1.0 million and gains on sale of loans and securities of $16.5 million,
offset by salaries, general and administrative expenses of $11.3 million,
management fee expense of $757,000 and income taxes of $3.3 million.
Salaries, General and Administrative Expenses: The increase of $1.5 million for
the three months ended March 31, 1998 compared to the three months ended March
31, 1997 is primarily the result of the increased personnel and expenses
required to support the growth in the operations of IndyMac REIT, including
CLCA, IndyMac CLD, and WLCA as well as the expense of putting in place certain
administrative and accounting functions as part of IndyMac REIT becoming self-
managed.
Management Fees: For the three months ended March 31, 1998, there were no
management fees compared to $2.3 million for the three months ended March 31,
1997. This decrease in the management fee was due to IndyMac REIT's acquisition
of its manager on July 1, 1997, as a result, IndyMac REIT and IndyMac Operating
became self-managed, and the management fee was eliminated.
LIQUIDITY AND CAPITAL RESOURCES
IndyMac's primary source of funds includes monthly principal and interest
payments on its investment portfolio, short-term borrowings, proceeds from the
sales of assets and issuance of REMIC and asset-backed securities, master
servicing fees and other servicing-related revenues and proceeds from IndyMac's
Dividend Reinvestment and Stock Purchase Plan ("DRIP"). Additionally, IndyMac
incurs certain charges to earnings, including amortization and depreciation,
loan loss provisions and unrealized losses on trading securities, which do not
require an outlay of funds. IndyMac believes these funds are sufficient for
growth of its lending activities, acquisition of investment assets, repayment of
short-term borrowings and the payment of cash dividends. It is IndyMac's policy
to maintain adequate capital and to comply with leverage and other financial
covenants set forth in IndyMac's debt covenants.
IndyMac has entered into a repurchase facility with Merrill Lynch, Pierce,
Fenner & Smith Incorporated and certain of its affiliates, in an aggregate
committed principal amount of $2.0 billion. The agreement is committed for a
period of at least two years from the date of execution and currently permits
IndyMac to finance its mortgage conduit, mortgage portfolio, warehouse lending,
IndyMac CLD lending and manufactured housing lending assets and operations. The
repurchase facility carries a floating rate of interest based on LIBOR, plus an
applicable margin, which varies by the type of asset financed. IndyMac is
permitted to borrow additional uncommitted amounts under this repurchase
facility, and as of March 31, 1998, the total balance of outstanding loans from
Merrill Lynch was $3.6 billion.
IndyMac has entered into a repurchase facility with Nomura Asset Capital
Corporation in an aggregate principal amount of $300 million. Such repurchase
facility is committed for a two-year period from the date of execution and
currently permits IndyMac to finance its mortgage conduit, mortgage portfolio,
warehouse lending and consumer construction lending assets and operations. This
repurchase facility carries a floating rate of interest based on LIBOR, plus an
applicable margin, which varies by the type of asset financed.
IndyMac has entered into a repurchase facility with Paine Webber Real Estate
Securities, Inc. in an aggregate principal amount of $500 million. Such
repurchase facility is committed for a one-year period from the date of
execution and currently permits IndyMac to finance its mortgage conduit,
warehouse lending and mortgage portfolio assets and operations. Such repurchase
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facility carries a floating rate of interest based on LIBOR, plus an applicable
margin, which varies by the type of asset financed.
In May, 1995, IndyMac entered into a two-year committed credit facility with a
syndicate of nine commercial banks led by First Union National Bank of North
Carolina. This facility primarily finances mortgage loans, construction loans,
and master servicing assets. The interest rates under this credit facility are
based, at IndyMac's election, on LIBOR or the federal funds rate, plus an
applicable margin, which varies by the type of asset financed. On February 25,
1998, IndyMac amended this facility, by among other things, increasing the
available committed borrowings from $500 million to $900 million, expanding the
types of collateral which can be financed thereunder and extending the term of
the commitment to three years.
During the fourth quarter of 1995, IndyMac raised $59.6 million in connection
with the private placement of senior notes with certain institutional lenders.
These senior notes are unsecured, and the proceeds are utilized by IndyMac in
connection with its working capital needs. The effective rate of interest on
such senior notes is fixed at 9.2% for a period of seven years from the date of
issuance. In 1995, the, the notes were rated "BBB-" by Duff & Phelps Credit
Rating Co., and subsequently raised to "BBB" in 1997. At December 31, 1997, the
notes were rated "BBB " by Fitch IBCA Inc., and "BB+" by Standard & Poor's
Rating Services, Inc.
IndyMac has from time to time raised additional capital through secondary public
offerings, the most recent of which involved the issuance of IndyMac's common
stock with net proceeds totaling $68.7 million in February, 1995. IndyMac also
raises new equity capital primarily through the optional cash payment feature of
its Dividend Reinvestment and Stock Purchase Plan. During the first quarter of
1998, IndyMac raised $67.3 million through the Dividend Reinvestment and Stock
Purchase Plan During 1997 and 1996, IndyMac raised $206 million and $133
million, respectively, through such Dividend Reinvestment and Stock Purchase
Plan.
IndyMac has filed a shelf registration statement with the Securities and
Exchange Commission in an aggregate amount of $500 million which became
effective in January, 1998. Under the terms of the registration statement,
IndyMac is permitted to offer a variety of debt and or equity instruments.
IndyMac has not determined what debt or equity instruments it may offer pursuant
to the shelf registration statement or when any such offerings may occur.
The REIT provisions of the Internal Revenue Code restrict IndyMac REIT's ability
to retain earnings and thereby replenish the capital committed to its mortgage
portfolio, conduit operations, commercial lending and other operations by
requiring IndyMac REIT to distribute to its shareholders substantially all of
its taxable income from operations. Certain of IndyMac's material businesses,
including its mortgage conduit and commercial lending operations, are known to
require significant and continuing commitments of capital resources.
Management believes that IndyMac's cash flow from operations and IndyMac's
existing financing arrangements are currently sufficient to meet IndyMac's
current short-term liquidity requirements. To the extent IndyMac possesses
working capital in excess of its current liquidity requirements, such working
capital is as a general matter utilized to repay borrowings under those tranches
of IndyMac's lines of credit which carry higher rates of interest, which
borrowings would typically remain available for reborrowing by IndyMac pursuant
to the terms and conditions of the applicable credit facility.
IndyMac's ability to meet its long-term liquidity requirements is subject to the
renewal of its repurchase and credit facilities and/or obtaining other sources
of financing, including issuing additional debt or equity from time to time.
Any decision by IndyMac's lenders and/or investors to make additional funds
available to IndyMac in the future will depend upon a number of factors, such as
IndyMac's compliance with the terms of its existing credit arrangements,
IndyMac's financial performance, industry and market trends in IndyMac's various
businesses, the general availability of and rates applicable to financing and
investments, such lenders' and/or investors'
15
own resources and policies concerning loans and investments, and the relative
attractiveness of alternative investment or lending opportunities.
CASH FLOWS
Operating Activities - During the three months ended March 31, 1998, IndyMac
REIT's operating activities required cash of approximately $121 million. The
primary operating activity for which cash was used during the first quarter of
1998 was the acquisition of loans held for sale.
Investing Activities - The primary investing activities for which cash was used
during three months ended March 31, 1998 were the acquisition of loans held for
investment and the purchase of mortgage securities. The net cash used in
investing activities totaled $283 million for the first quarter of 1998.
Financing Activities - Net cash provided by financing activities amounted to
$402 million for the first quarter of 1998. The cash provided by financing
activities was primarily the result of additional borrowings under repurchase
agreements and other credit facilities and proceeds of common stock issuances
pursuant to the Dividend Reinvestment and Stock Purchase Plan during the first
quarter of 1998.
Effect of Interest Rate Changes
Due to the characteristics of certain financial assets and liabilities of
IndyMac, and the nature of IndyMac's business activities, IndyMac's financial
position and results of operations may be materially affected by changes in
interest rates in various ways. With respect to its financial assets and
liabilities, IndyMac has devised and implemented a general asset/liability
investment management strategy which seeks, on an economic basis, to mitigate
significant fluctuations in the financial position and results of operations of
IndyMac likely to be caused by changes in market interest rates. This strategy
attempts, among other things, to balance investments in various types of
financial instruments whose values could be expected to move inversely to each
other in response to movements in market interest rates. However, there can be
no assurance that this strategy (including assumptions concerning the
correlation thought to exist between different types of instruments) or its
implementation will be successful in any particular interest rate environment.
Financial assets of IndyMac that tend to increase in value as interest rates
increase, and decline in value as interest rates decrease would include
interest-only securities. These financial assets carry an implicit yield that
is based upon estimates of future cash flows on an underlying pool of mortgage
loans. As interest rates increase, the prepayments on the underlying pool of
mortgage loans tends to slow, resulting in higher residual cash flows than would
otherwise have been obtained, and therefore, results in higher implicit yields.
As of March 31, 1998, IndyMac REIT and IndyMac Operating on a combined basis
held $414 million of interest-only securities. Of the $414 million aggregate
amount, $316 million of such assets are classified as trading securities in
accordance with the requirements of SFAS No. 115, since they were acquired in
connection with the securitization of loans held for sale by IndyMac Operating.
Financial instruments of IndyMac that tend to decrease in value as interest
rates increase, and increase in value as interest rates decline, would include
REMIC senior securities, fixed rate subordinated securities, adjustable rate
agency securities, principal-only securities, US Treasury bonds and inverse-
floater securities. Similar to the interest-only securities, the principal-only
and inverse floater securities carry an implicit yield based upon estimates of
future cash flows on an underlying pool of mortgage loans. However, the
principal-only and inverse-floater securities generally sell at a discount,
similar to a "zero-coupon" bond, in order to yield an estimated return. If
interest rates increase and prepayments slow in comparison to assumed prepayment
rates, the repayment rate of the principal-only and inverse-floater security
would tend to lengthen and thus reduce the implicit yield on the security.
Conversely, if interest rates decrease, the rate of
16
prepayment on the underlying pool of loans would tend to increase, resulting in
a more rapid rate of repayment on the principal-only security and inverse
floater security and therefore a higher implicit yield. To a lesser extent, any
mortgage securities held by IndyMac and supported by adjustable rate mortgage
loans may decline in value as interest rates increase, if the timing or absolute
level of interest rate adjustments on the underlying loans do not correspond to
applicable increases in market interest rates. As of March 31, 1998, IndyMac
held $1.4 billion of REMIC senior securities, fixed and adjustable rate
subordinated securities, adjustable rate agency securities, principal-only
securities, US Treasury bonds and inverse floater securities. Of the $1.4
billion aggregate amount, $581 million of such securities are classified as
trading securities.
In addition to the inherent risks in seeking to manage fluctuations in the value
of certain assets due to interest rate changes, there may be timing differences
in the recognition of the offsetting effects of gains and losses which are
attributable to specific instruments, depending upon whether a security is
classified as trading or available for sale. The unrealized holding gains and
losses on trading securities are recognized in earnings of the period for
IndyMac. By comparison, the unrealized holding gains and losses of securities
available for sale are excluded from earnings of IndyMac and included as a
separate component of accumulated other comprehensive income. Therefore, to the
extent that IndyMac is required under GAAP to classify certain securities as
trading, such identification and the resulting accounting could cause additional
volatility in IndyMac's future reported earnings in periods where interest rates
fluctuate.
IndyMac is also subject to certain business and credit risks in connection with
interest rate changes. Increases in interest rates may discourage potential
mortgagors from borrowing or refinancing mortgage or manufactured housing loans,
thus decreasing the volume of loans available to be purchased through IndyMac's
conduit operations, or financed through IndyMac's construction and warehouse
lending operations. Additionally, with respect to adjustable rate loans, the
rate of delinquency may increase in periods of increasing interest rates as
borrowers face higher mortgage payments.
IndyMac's liquidity position and net interest income could also be adversely
impacted by significant interest rate fluctuations. Each of IndyMac's
collateralized borrowing facilities described above in Liquidity and Capital
Resources permits the lender or lenders thereunder to require IndyMac to repay
amounts outstanding and/or pledge additional assets in the event that the value
of the pledged collateral declines due to changes in market interest rates. In
the event of such a decrease in collateral values, it could be necessary for
IndyMac to provide additional funds and/or pledge additional assets to maintain
financing for its holdings that have not been financed to maturity through the
issuance of CMOs or other longer-term debt securities. In addition, increases
in short-term borrowing rates relative to rates earned on asset holdings that
have not been financed to maturity through the issuance of CMOs or other debt
securities may also adversely affect IndyMac's "spread income" on such assets
and thus reduce IndyMac's earnings.
17
SYSTEMS ISSUES ASSOCIATED WITH THE YEAR 2000
IndyMac is conducting a comprehensive review of its computer systems to
determine if they will be affected by the Year 2000 issue - computer programs
and embedded logic devices that utilize two digits rather than four to define
the applicable year may fail to properly recognize date sensitive information
when the year changes to 2000. Generally, IndyMac is not affected by issues
resulting from the use of "legacy" computer systems and software because it
commenced its active operating businesses within the past five years.
Accordingly, IndyMac does not anticipate incurring Year 2000 systems compliance
costs that would be material to its financial position, results of operations,
or cash flows in future periods. However, there can be no assurance that
IndyMac's depository institutions, lenders, custodians, vendors, and clients
will timely resolve their own Year 2000 compliance issues or that any failure by
these other parties to resolve such issues would not have an adverse effect on
IndyMac's operations and financial condition. Management believes it is
devoting the necessary resources to timely address all Year 2000 issues over
which it has control.
18
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
--------
27 Financial Data Schedule
(b) Reports on Form 8-K.
--------------------
None
19
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Pasadena, State of California, on November 14, for the three months ended March
31, 1998.
INMC MORTGAGE HOLDINGS, INC.
By: /s/ Michael W. Perry
--------------------------
Michael W. Perry
President and Chief Operating Officer
By: /s/ James P. Gross
--------------------------
James P. Gross
Executive Vice President and
Chief Financial Officer
20