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, 1999
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 MORTGAGE HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 95-3983415
(State or other jurisdiction of incorporation or organization) (I. R. S. Employer Identification No.)
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 close of the period covered by this report.
Common stock outstanding as of March 31, 1999: 80,300,506 shares
1
INDYMAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(Unaudited)
March 31, December 31,
1999 1998
-------------------- --------------------
ASSETS
Loans held for sale, net
Mortgages-prime $ 612,174 $ 989,052
Mortgages-subprime 30,685 145,793
Manufactured housing 240,365 215,507
Home improvement 184,580 205,304
---------- ----------
1,067,804 1,555,656
Other loans, net
Loans held for investment 582,803 668,523
Construction
Builder 793,437 799,712
Consumer 428,594 468,735
---------- ----------
1,222,031 1,268,447
Income property 185,210 178,756
Revolving warehouse lines of credit 309,305 443,946
---------- ----------
2,299,349 2,559,672
Mortgage securities 221,483 235,032
Collateral for collateralized mortgage obligations 142,783 162,726
Investment in and advances to IndyMac Operating 273,048 279,693
Other assets 67,619 58,373
---------- ----------
Total assets $4,072,086 $4,851,152
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Repurchase agreements and other credit facilities $2,974,820 $3,785,549
Collateralized mortgage obligations 121,147 140,810
Senior unsecured notes 60,069 60,031
Accounts payable and accrued liabilities 33,039 42,659
---------- ----------
Total liabilities 3,189,075 4,029,049
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 and outstanding, 80,300,506 shares at
March 31, 1999 and 75,794,435 at December 31, 1998 803 758
Additional paid-in capital 1,052,596 1,005,797
Accumulated other comprehensive income (loss) 459 (18,776)
Cumulative earnings 300,829 277,220
Cumulative distributions to shareholders (471,676) (442,896)
---------- ----------
Total shareholders' equity 883,011 822,103
---------- ----------
Total liabilities and shareholders' equity $4,072,086 $4,851,152
========== ==========
The accompanying notes are an integral part of these statements.
2
INDYMAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Dollars in thousands, except per share data)
(Unaudited)
Quarters ended March 31,
-------------------------
1999 1998
----------- -----------
REVENUES
Interest income
Loans held for sale
Mortgages-prime $15,332 $ 22,944
Mortgages-subprime 3,772 2,488
Manufactured housing 5,557 4,642
Home improvement 5,179 2,770
------- --------
29,840 32,844
Other loans
Loans held for investment 11,719 31,648
Construction
Builder 20,298 17,243
Consumer 9,906 8,103
------- --------
30,204 25,346
Income property 4,224 1,128
Revolving warehouse lines of credit 6,093 10,788
------- --------
52,240 68,910
Mortgage securities 2,428 15,331
Collateral for collateralized mortgage obligations 2,815 4,424
Advances to IndyMac Operating 5,585 2,921
Other 624 105
------- --------
Total interest income 93,532 124,535
Interest expense
Repurchase agreements and other credit facilities 49,074 77,276
Collateralized mortgage obligations 2,976 4,302
Senior unsecured notes 1,384 1,381
------- --------
Total interest expense 53,434 82,959
Net interest income 40,098 41,576
Provision for loan losses 6,681 6,250
------- --------
Net interest income after provision for loan losses 33,417 35,326
Equity in earnings (loss) of IndyMac Operating (2,323) 2,889
Other income 1,686 946
------- --------
Net revenues 32,780 39,161
EXPENSES
Salaries and related 5,914 4,968
General and administrative 3,257 1,628
------- --------
Total expenses 9,171 6,596
______ _______
NET EARNINGS $23,609 $ 32,565
======= ========
EARNINGS PER SHARE
Basic EPS $0.30 $0.50
Diluted EPS 0.30 0.50
WEIGHTED AVERAGE SHARES OUTSTANDING (in thousands)
Basic 77,858 64,613
Diluted 78,027 65,143
The accompanying notes are an integral part of these statements.
3
INDYMAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Quarters ended March 31,
----------------------------------
1999 1998
-------------- --------------
Cash flows from operating activities:
Net earnings $ 23,609 $ 32,565
Adjustments to reconcile net earnings
to net cash provided by (used in) operating activities:
Amortization and depreciation 12,257 9,672
Provision for loan losses 6,681 6,250
Equity in (earnings) loss of IndyMac Operating 2,323 (2,889)
Purchases of loans held for sale (1,480,784) (2,281,844)
Sales and payments from loans held for sale 1,974,461 2,187,384
Purchases of trading securities - (41,244)
Sales and payments from trading securities - 4,434
Net increase in other assets (3,254) (26,157)
Net decrease in other liabilities (9,620) (8,750)
----------- -----------
Net cash provided by (used in) operating activities 525,673 (120,579)
Cash flows from investing activities:
Purchases of mortgage loans held for investment - (120,480)
Payments from mortgage loans held for investment 125,974 223,606
Net (increase) decrease in construction loans 4,180 (184,076)
Purchased and retained available for sale securities (6,853) (133,336)
Sales and payments from available for sale securities 14,488 64,980
Net (increase) decrease in revolving warehouse lines of credit 134,487 (159,832)
Net decrease in manufactured housing loans held for investment (13,960) (1,373)
Decrease in advances to IndyMac Operating 16,071 11,262
Payments from collateral for collateralized mortgage obligations 20,045 16,732
----------- -----------
Net cash provided by (used in) investing activities 294,432 (282,517)
Cash flows from financing activities:
Net increase (decrease) in repurchase agreements and other credit
facilities (811,424) 380,221
Net proceeds from issuance of common stock 46,844 69,210
Cash dividends paid (28,780) (30,997)
Principal payments on collateralized mortgage obligations (20,290) (16,822)
----------- -----------
Net cash provided by (used in) financing activities (813,650) 401,612
Net increase (decrease) in cash and cash equivalents 6,455 (1,484)
Cash and cash equivalents at beginning of period 815 13,676
----------- -----------
Cash and cash equivalents at end of period $ 7,270 $ 12,192
=========== ===========
Supplemental cash flow information:
Cash paid for interest $ 55,566 $ 85,828
=========== ===========
The accompanying notes are an integral part of these statements.
4
INDYMAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Dollars in thousands)
(Unaudited)
Additional Accumulated other comprehensive income (loss)
Common Paid-in ----------------------------------------------
Stock Capital REIT Operating Total
------ ---------- --------------- ---------- --------------
Balance as of December 31,
1997 $634 $ 773,475 $(2,006) $ 501 $ (1,505)
Common stock options
exercised - 570 - - -
Director's and officer's notes
receivable 1 1,011 - - -
Deferred compensation, restricted
stock - 11 - - -
401(k) contribution - 275 - - -
Net gain (loss) on AFS
securities - - (682) 343 (339)
Dividend reinvestment plan 27 67,315 - - -
Net earnings - - - - -
Dividends paid - - - - -
---- ---------- ------------- --------- -------------
Net change 28 69,182 (682) 343 (339)
---- ----------- --------------- --------- -------------
Balance at March 31, 1998 $662 $ 842,657 $(2,688) $ 844 $ (1,844)
==== =========== =============== ========== =============
Balance at December 31,
1998 $758 $1,005,797 $(18,366) $ (410) $(18,776)
Common stock options exercised 2 263 - - -
Director's and officer's notes
receivable - 469 - - -
Deferred compensation, restricted stock - 212 - - -
401(k) contribution - 178 - - -
Net gain on AFS securities - - 7,694 11,541 19,235
Dividend reinvestment plan 43 45,677 - - -
Net earnings - - - - -
Dividends paid - - - - -
---- ----------- --------------- --------- -------------
Net change 45 46,799 7,694 11,541 19,235
---- ----------- --------------- --------- -------------
Balance at March 31, 1999 $803 $1,052,596 $(10,672) $11,131 $ 459
==== =========== =============== ========== =============
Cumulative
Distributions Total
Cumulative Comprehensive to Shareholders'
Earnings Income Shareholders Equity
-------- ---------- ------------ ---------
Balance as of December 31,
1997 $243,430 $ 241,925 $(312,140) $703,894
Common stock options
exercised - - - 570
Director's and officer's notes
receivable - - - 1,012
Deferred compensation, restricted
stock - - - 11
401(k) contribution - - - 275
Net gain (loss) on
securities - (339) - (339)
Dividend reinvestment plan - - - 67,342
Net earnings 32,565 32,565 - 32,565
Dividends paid - - (30,997) (30,997)
-------- ----------- ------------ --------
Net change 32,565 32,226 (30,997) 70,439
-------- ----------- ------------ --------
Balance at March 31, 1998 $275,995 $ 274,151 $(343,137) $774,333
======== =========== ============ =========
Balance at December 31,
1998 $277,220 $ 258,444 $(442,896) $822,103
Common stock options exercised - - - 265
Director's and officer's notes
receivable - - - 469
Deferred compensation, restricted stock - - - 212
401(k) contribution - - - 178
Net gain on securities - 19,235 - 19,235
Dividend reinvestment plan - - - 45,720
Net earnings 23,609 23,609 - 23,609
Dividends paid - - (28,780) (28,780)
-------- ----------- ------------ --------
Net change 23,609 42,844 (28,780) 60,908
-------- ----------- ------------ --------
Balance at March 31, 1999 $300,829 $ 301,288 $(471,676) $883,011
======== =========== ============ =========
The accompanying notes are an integral part of these statements.
5
INDYMAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999
(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.
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 REIT and its qualified REIT subsidiaries. IndyMac, Inc. ("IndyMac
Operating") acts as an intermediary between the originators of mortgage loans
and permanent investors in whole loans and mortgage backed securities ("MBS")
through its third party and direct lending businesses. IndyMac Operating is a
taxable affiliate of IndyMac REIT established in 1993. IndyMac REIT owns all the
preferred non-voting stock and has a 99% economic interest in IndyMac Operating.
Accordingly, IndyMac REIT's investment in IndyMac Operating is accounted for
under a method similar to the equity method because IndyMac REIT has the ability
to exercise influence over the financial and operating policies of IndyMac
Operating through its ownership of the preferred stock and other contracts.
Under this method, original investments are recorded at cost and adjusted by
IndyMac REIT's share of earnings or losses and decreased by dividends received.
References to the "Company" mean the parent company, its consolidated
subsidiaries, and IndyMac Operating and its consolidated subsidiaries. All
significant intercompany balances and transactions with IndyMac REIT's
consolidated subsidiaries have been eliminated in consolidation of IndyMac REIT.
Certain reclassifications have been made to the financial statements for the
period ended March 31, 1998 to conform to the March 31, 1999 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 March 31, 1999 are not necessarily
indicative of the results that may be expected for the year ending December 31,
1999. 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, 1998.
NOTE B - ALLOWANCE FOR LOAN LOSSES
IndyMac REIT's determination of the level of the allowance and correspondingly,
the provision for loan losses, rests upon various judgments and assumptions,
including general economic conditions, loan portfolio composition, prior loan
loss experience and IndyMac REIT's ongoing examination process. IndyMac REIT
recognized a $6.7 million provision for loan losses during the first quarter
1999, which was offset by net charge-offs of $3.5 million. The increase in the
allowance for loan losses during the first quarter 1999 was considered necessary
given (a) prepayments of higher credit quality loans increased more than
prepayments of lower credit quality loans as a result of the more favorable
interest rate environment during the first quarter 1999 and (b) the Company sold
a substantial number of the more marketable loans held in this portfolio to
raise liquidity during the fourth quarter 1998. IndyMac REIT considers the
allowance for loan losses of $53.3 million adequate to cover losses inherent in
the loan portfolio at March 31, 1999. However, no assurance can be given that
IndyMac REIT will not, in any particular period, sustain loan losses that exceed
the amount reserved, or that subsequent evaluation of the loan portfolio, in
light of the prevailing factors, including economic conditions, the credit
quality of the assets comprising IndyMac REIT's portfolio and IndyMac REIT's
ongoing examination process, will not require significant increases in the
allowance for loan losses.
6
NOTE C - MORTGAGE SECURITIES
A summary of IndyMac REIT's mortgage securities as of March 31, 1999 and
December 31, 1998 follows:
(Dollars in thousands) March 31, December 31,
1999 1998
-------------- --------------
Amortized cost $232,155 $253,398
Gross unrealized gains 5,854 317
Gross unrealized losses (16,526) (18,683)
-------- --------
Estimated fair value $221,483 $235,032
======== ========
At March 31, 1999, IndyMac REIT's mortgage securities included $128.4 million of
AAA-rated interest-only securities, $60.3 million of residual securities, $30.4
million of adjustable rate agency securities, $1.2 million of non-investment
securities and $1.2 million of senior securities.
The fair value for IndyMac REIT's interest-only and residual securities is
determined by discounting estimated net future cash flows, using discount rates
that approximate current market rates and estimating expected prepayment rates
and credit losses. Prepayment speed assumptions used to value IndyMac REIT's
interest-only securities and residual securities are based primarily on
historical experience, collateral coupon and seasoning. At March 31, 1999, the
interest-only securities reflect an average constant prepayment rate assumption
for the remainder of 1999 of approximately 28%. In addition, these valuations
incorporated weighted average discount rates ranging from 10% to 12%. The
residual securities, comprised primarily of subprime and manufactured housing
collateral, were valued at a weighted average discount rate ranging from 15% to
20% and assumed weighted average annual credit losses on underlying collateral
of 1.03%. The subprime residuals reflect an average annual CPR ranging from 30%
to 35%.
The fair value of the non-investment grade securities is net of a $5 million
reserve for credit losses.
NOTE D-SEGMENT REPORTING
IndyMac REIT's reportable operating segments include Mortgage Banking,
Investments and Lending. The Mortgage Banking segment purchases conforming,
jumbo and non-conforming mortgage loans from third party originators of mortgage
loans as well as direct originated loans from LoanWorks, a division of IndyMac
Operating. The Mortgage Banking segment also engages in financing manufactured
housing loans and home improvement loans. The Investment segment invests in
residential loans and securities on a long-term basis. The Lending segment
offers a variety of commercial term loan programs, residential construction,
land and lot loan programs for builders and developers and third party customers
through its Construction Lending Corporation of America, Construction Lending
Division and Income Property divisions. This segment also engages in secured
warehouse lending operations. In the first quarter 1999, the loan loss reserve
was reclassified between the Investments and Lending segments. This resulted in
a loss for the Lending segment offset by increased earnings in the Investment
segment. These changes had no impact on the Company's overall results of
operations.
7
Segment information for the quarters ended March 31, 1999 and 1998 were as
follows:
(Dollars in thousands) Mortgage
Banking Investments Lending Adjustment (1) Consolidated
---------- ----------- ----------- -------------- ------------
Quarter ended March 31, 1999
Net interest income $ 12,000 $ 3,470 $ 19,043 $ 5,585 $ 40,098
Net revenues 11,848 12,677 4,993 3,262 32,780
Net earnings (loss) 11,693 11,697 (3,043) 3,262 23,609
Assets as of March 31, 1999 $1,124,976 $ 926,412 $1,747,650 $273,048 $4,072,086
Quarter ended March 31, 1998
Net interest income $ 11,554 $ 11,942 $ 15,159 $ 2,921 $ 41,576
Net revenues 10,024 8,002 15,325 5,810 39,161
Net earnings 9,485 7,204 10,066 5,810 32,565
Assets as of March 31, 1998 $1,612,160 $2,674,685 $1,809,728 $177,684 $6,274,257
(1) Represents intercompany interest and earnings from investment in IndyMac
Operating.
NOTE E - INVESTMENT IN INDYMAC OPERATING
Summarized financial information for IndyMac Operating follows:
(Dollars in thousands) March 31, December 31,
1999 1998
------------- -------------
Loans held for sale, net $177,870 $ 210,086
Mortgage securities 415,693 398,094
Treasury securities 192,712 302,313
Mortgage servicing rights 127,647 127,229
Other assets 76,024 65,074
-------- ----------
Total assets $989,946 $1,102,796
======== ==========
Repurchase agreements and other credit facilities $675,445 $ 786,545
Due to IndyMac REIT 180,083 196,154
Accounts payable and accrued liabilities 40,514 35,714
Shareholders' equity 93,904 84,383
-------- ----------
Total liabilities and shareholders' equity $989,946 $1,102,796
======== ==========
8
(Dollars in thousands) For the Quarters ended March 31,
--------------------------------
1999 1998
-------- --------
Interest income
Loans held for sale $ 5,388 $ 2,964
Mortgage securities 5,059 9,231
Treasury securities 4,826 3,120
-------- -------
Total interest income 15,273 15,315
Interest expense 15,159 12,902
-------- -------
Net interest income 114 2,413
Provision for loan losses 109 36
Net gain on mortgage loans 27,976 17,972
Net gain (loss) on securities (15,294) 3,618
Servicing fee income (loss) 5,710 (252)
Other income 4,645 1,412
-------- -------
Net revenues 23,042 25,127
Total expenses 27,123 20,052
Earnings (loss) before income tax provision (benefit) (4,081) 5,075
Income tax provision (benefit) (1,734) 2,157
-------- -------
Net earnings (loss) $ (2,347) $ 2,918
======== =======
Allowance for Loan Losses
IndyMac Operating's allowance for loan losses related to loans held for sale
totaled $1.2 million at March 31, 1999.
Mortgage Securities
A summary of IndyMac Operating's mortgage securities as of March
31, 1999 and December 31, 1998 follows:
(Dollars in thousands) March 31, December 31,
1999 1998
--------- ------------
Amortized cost $390,789 $397,859
Gross unrealized gains 33,891 408
Gross unrealized losses (8,987) (173)
-------- --------
Estimated fair value $415,693 $398,094
======== ========
At March 31, 1999, IndyMac Operating's mortgage securities included $235.4
million of AAA-rated interest-only securities, $105.6 million of investment-
grade subordinated securities, $63.9 million of non-investment grade securities,
a $5.5 million residual security, and $5.3 million of principal-only securities.
The fair value for IndyMac Operating's interest-only and residual securities is
determined by discounting estimated net future cash flows, using discount rates
that approximate current market rates and estimating expected prepayment rates
and credit losses. Prepayment speed assumptions used to value IndyMac
Operating's interest-only securities and residual security portfolios are based
primarily on historical experience, collateral coupon and seasoning. At March
31, 1999, the interest-only securities reflected an average constant prepayment
rate assumption for the remainder of 1999 of approximately 28%. In addition,
these valuations incorporated weighted average discount rates ranging from 10%
to 12%.
The $63.9 million fair value of the non-investment grade securities is net of a
$31 million reserve for credit losses.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- ------------------------------------------------------------------------
RESULTS OF OPERATIONS
- ---------------------
GENERAL
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 the "Company" 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 third party lending business ("IndyMac TPL"), the Company acts as an
intermediary between the originators of mortgage loans and permanent investors
in whole loans and mortgage-backed securities ("MBS") secured by or
representing an ownership interest in such mortgage loans. The Company has
realigned IndyMac TPL to concentrate on mortgage originators through the use of
its electronic underwriting and risk-based pricing system, e-MITS/1/
(electronic-Mortgage Information and Transaction System). The Company purchases
conforming, jumbo and other non-conforming mortgage loans, as well as
manufactured housing and home improvement loans, from mortgage originators. The
Company also originates conforming, jumbo and other non-conforming mortgage
loans through its LoanWorks/2/ division via its proprietary website at
www.loanworks.com, other internet relationships, and direct-to-consumer market
methods. The Company and its IndyMac TPL customers ("sellers") negotiate
whether such sellers will retain, or the Company will purchase, the rights to
service the mortgage loans delivered by such sellers to the Company. The
Company, through its LoanWorks Servicing division, services those loans that it
has purchased on a servicing-released basis and that it originates through
LoanWorks. All loans purchased or originated 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.
The Company's principal sources of income from its third party and direct
lending 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 primary and master
servicing fee income.
In addition to its third party lending operations, the Company earns net
interest income and fee income through its other consumer lending operations, as
well as its commercial lending operations, and earns net interest income on its
investment portfolio of mortgage and consumer loans and mortgage securities.
The Company's consumer lending operations include: IndyMac Construction Lending
Division ("IndyMac CLD"), which facilitates the purchase of a variety of
residential construction, land and lot loans through sellers; IndyMac
Manufactured Housing Division ("IndyMac MHD"), which facilitates the direct
origination and purchase of consumer loans and mortgage loans secured by
manufactured housing; LoanWorks, which facilitates the direct origination of a
variety of residential loans; and LoanWorks Servicing, which performs servicing
for mortgage loans acquired by the Company on a servicing-released basis or
originated by the Company through LoanWorks. Through the first quarter 1999,
the Company also operated a Home Improvement Division ("IndyMac HID"), which
focused on the purchase of home improvement loans from specialty loan brokers
and dealers. The Company closed this division during April 1999 and plans to
change the major focus of its home improvement lending business to loans
originated via the internet and through LoanWorks' direct lending channels. See
further discussion in "Subsequent Events." The Company's commercial lending
operations include Construction Lending Corporation of America ("CLCA"), which
provides a variety of commercial, multi-family term, construction, land and lot
loan programs to builders and developers, and Warehouse Lending Corporation of
America
- ------------------------
/1/ Registered in the U.S. Patent and Trademark Office. Patent pending.
/2/ Registered in the U.S. Patent and Trademark Office.
10
("WLCA"), which provides various types of short-term revolving financing to
small-to-medium-size mortgage originators and offers builder inventory lines of
credit.
FINANCIAL CONDITION
Overview of Third Party Lending Operations: Total loans produced by IndyMac TPL
during the first quarter 1999 were $1.3 billion, compared with fourth quarter
1998 and first quarter 1998 production of $2.2 billion and $2.4 billion,
respectively. These loans were financed on an interim basis using equity and
short-term financing in the form of repurchase agreements and other credit
facilities. The Company sold $2.0 billion of loans during the first quarter
1999, compared with $3.4 billion sold during the fourth quarter 1998. Of the
loans sold, $1.8 billion, $193.5 million and $34.8 million represented sales of
prime, subprime and home improvement loans, respectively. At March 31, 1999,
the Company was committed to purchase $500 million of mortgage loans from
various mortgage originators.
The Company has realigned its third party lending business to concentrate on
mortgage originators where it can add value through the use of e-MITS. Loans
funded through e-MITS in the first quarter 1999 totaled $193.0 million,
representing 15% of the Company's third party prime and subprime mortgage
production during the period, compared with $8.5 million, or less than 1%,
during the first quarter 1998 when the Company began its e-MITS pilot program.
LoanWorks funded $186.7 million of loans during the quarter, up 10% from the
fourth quarter 1998 and up 105% in comparison to the first quarter 1998. In
addition to its proprietary website at www.loanworks.com, LoanWorks initiates
relationships with borrowers via internet channels through its contractual
relationships with other popular consumer websites including America Online,
Inc., QuickenMortgage(TM), Owners.com(TM) and Microsoft HomeAdvisor(TM).
LoanWorks' production obtained via internet channels during the first quarter
1999 totaled $37.6 million or 23% of total LoanWorks' production as measured in
loan count.
At March 31, 1999 IndyMac Operating's master servicing portfolio had an
aggregate outstanding principal balance of $16.2 billion with a weighted average
coupon of 8.2%, while LoanWorks Servicing's portfolio at March 31, 1999 was
$10.4 billion with a weighted average coupon of 8.4%. Non-performing loans held
for sale were 2.2% of principal at March 31, 1999 compared with 1.6% at December
31, 1998. The increase in non-performing loans/3/ as of March 31, 1999 compared
to December 31, 1998 was primarily due to (a) prepayments of higher credit
quality loans increased more than prepayments of lower credit quality loans as a
result of the more favorable interest rate environment during the first quarter
1999 and (b) the Company sold a substantial number of the more marketable loans
held in this portfolio to raise liquidity during the fourth quarter of 1998.
At March 31, 1999, the Company's manufactured housing loans held for sale had an
outstanding balance of $269.0 million (of which $240.4 million was held by
IndyMac REIT) compared with $243.2 million at December 31, 1998 (of which $215.5
million was held by IndyMac REIT). The average balance of manufactured housing
loans held for sale was $255.8 million for the quarter ended March 31, 1999, an
increase of $50.9 million from the average balance of $204.9 million for the
quarter ended December 31, 1998. Non-performing manufactured housing loans held
for sale were 1.1% of principal at March 31, 1999 compared with 0.7% at December
31, 1998.
At March 31, 1999 the Company's home improvement loans held for sale had an
outstanding balance of $243.2 million (of which $184.6 million was held by
IndyMac REIT) compared with $278.3 million at December 31, 1998 (of which $205.3
million was held by IndyMac REIT). The average balance of home improvement loans
held for sale of $266.8 million for the quarter ended March 31, 1999 was
slightly lower than the average balance of $268.1 million for the quarter ended
December 31, 1998. Non-performing home improvement loans held for sale were 1.2%
of principal at March 31, 1999 compared with 0.8% at December 31, 1998.
- ----------------------
/3/ Non-performing loans are generally loans delinquent 90 days or more,
excluding real estate owned. With respect to revolving warehouse lines of
credit, non-performing consists of loans securing the line which, while
performing, are in default with the contractual terms of the line of credit.
11
Loans Held For Investment: The $582.8 million portfolio of loans held for
investment at March 31, 1999 consisted of $206.6 million of varying types of
adjustable-rate product which contractually reprice in monthly, semi-annual or
annual periods; $196.4 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 $179.8 million of fixed-rate loans.
Included in the loans held for investment portfolio as of March 31, 1999 was
$37.1 million of manufactured housing loans. The weighted average coupon of the
mortgage loans held for investment at March 31, 1999 was 8.4%. The average
balance of residential loans held for investment was $618.5 million for the
quarter ended March 31, 1999, a decrease of $1.1 billion from the average
balance of $1.7 billion for the quarter ended March 31, 1998. The allowance for
loan losses related to loans held for investment totaled $14.8 million at March
31, 1999. Charge-offs related to loans held for investment totaled $720.4
thousand for the quarter ended March 31, 1999. Non-performing loans held for
investment were 6.7% of principal at March 31, 1999 compared with 5.6% at
December 31, 1998. See "Overview of Third Party Lending Operations" above for
explanation for increases in non-performing loans as of March 31, 1999 compared
to December 31, 1998.
Construction Lending Operations: At March 31, 1999, CLCA had commitments to
fund construction loans of $1.5 billion, with outstanding balances of $731.9
million compared to commitments to fund construction loans of $1.6 billion and
an outstanding balance of $731.0 million at December 31, 1998. The allowance
for loan losses related to CLCA loans totaled $19.7 million at March 31, 1999,
and charge-offs related to CLCA loans were $250 thousand for the first quarter
of 1999. Non-performing loans were 1.8% and 1.0% of principal at March 31, 1999
and December 31, 1998, respectively. The increase in non-performing loans is
due to three specific loans which rolled into non-performing status during the
first quarter 1999.
At March 31, 1999, CLCA's income property division had commitments to fund term
and construction loans of $278.6 million with outstanding balances of $87.6
million on commercial term loans and $97.6 million on commercial construction
loans. The allowance for loan losses related to CLCA's income property totaled
$2.9 million and there were no charge-offs as of March 31, 1999. Similarly,
there were no non-performing loans for CLCA's income property portfolio as of
March 31, 1999.
At March 31, 1999, IndyMac CLD had commitments to fund construction-to-
permanent, lot loans and home improvement loans of $662.0 million with an
outstanding balance of $469.8 million compared with commitments of $797.7
million and an outstanding balance of $508.7 million at December 31, 1998.
Included in consumer construction loans were $16.3 million of manufactured
housing and $4.0 million of other construction loans as of March 31, 1999. The
allowance for loan losses related to IndyMac CLD loans totaled $7.7 million at
March 31, 1999, and there were no charge-offs for the quarter ended March 31,
1999. Non-performing loans for IndyMac CLD were 2.2% and 2.7% of principal, at
March 31, 1999 and December 31, 1998, respectively.
Warehouse Lending Operations: At March 31, 1999, IndyMac REIT had extended
commitments to make warehouse and related lines of credit in an aggregate amount
of $1.1 billion, of which $309.3 million was outstanding. The average principal
balance outstanding of warehouse lines of credit was $295.0 million during the
quarter ended March 31, 1999, a decrease of $195.6 million from December 31,
1998. The allowance for loan losses related to warehouse lines of credit
totaled $3.0 million at March 31, 1999 and there were no charge-offs for the
quarter ended March 31, 1999. At March 31, 1999, 3.9% of warehouse lines were
non-performing compared to 2.2% non-performing warehouse lines of credit at
December 31, 1998. The increase in non-performing loans is due primarily to a
$5.5 million line of credit which, while performing at March 31, 1999, was
classified as non-performing because the underlying collateral remained on the
line past the contractual limit. The Company expects that this default will be
cured during the second quarter 1999 with minimal impact on results of
operations.
12
RESULTS OF OPERATIONS
Quarter Ended March 31, 1999 Compared to Quarter Ended March 31, 1998
Highlights for the Quarters Ended March 31, 1999 and 1998
(Dollars in thousands) For the Quarters ended
-----------------------------------------
March 31, March 31,
1999 1998
------------------- -------------------
Net interest income $40,098 $41,576
Net earnings 23,609 32,565
Return on average assets (annualized) 2.16% 2.22%
Return on average equity (annualized) 11.14% 17.65%
Interest spread
Yield on interest-earning assets 8.44% 8.56%
Cost of interest-bearing liabilities 5.98% 6.38%
Interest spread 2.46% 2.18%
Net Earnings
IndyMac REIT's net earnings were $23.6 million, or $0.30 basic and diluted
earnings per share for the quarter ended March 31, 1999, compared to net
earnings of $32.6 million, or $0.50 basic and diluted earnings per share for the
quarter ended March 31, 1998. The decrease in net earnings of $9.0 million was
primarily due to a decrease in the outstanding balances of loans held for sale
and loans held for investment as a result of the Company's response to the
disruption in global financial markets during the fourth quarter 1998. This
decrease in the outstanding loan balances resulted in a decrease in interest
income of $31.0 million from the quarter ended March 31, 1998 to March 31, 1999.
The decrease in interest income was offset by a decrease of $29.5 million in
interest expense as a result of the Company's lower outstanding borrowings
during the same period. IndyMac REIT's equity in earnings (loss) of IndyMac
Operating decreased $5.2 million primarily as a result of IndyMac Operating's
decrease in net interest income of $2.3 million and an increase in loss on sale
of securities of $18.9 million during the first quarter 1999. These losses were
partially offset by a $10.0 million increase in gain on mortgage loans and a
$9.2 million increase in service fee and other income. The remaining decrease
in net earnings was primarily due to an increase in salaries, general and
administrative expenses due to an increase in personnel and expenses required to
support the growth of operations of IndyMac REIT.
Interest Income
Total interest income was $93.5 million for the quarter ended March 31, 1999 and
$124.5 million for the quarter ended March 31, 1998. The decrease in interest
income of $31.0 million was primarily the result of a reduction in interest
income related to mortgage loans held for investment of $19.9 million, loans
held for sale of $3.0 million, mortgage securities of $12.9 million, and
collateral for collateralized mortgage obligations of $1.6 million, offset by an
increase in interest income on other loans of $3.3 million, advances to IndyMac
Operating of $2.6 million and other interest income of $0.5 million.
Loans held for sale
-------------------
Interest income on mortgage loans held for sale totaled $29.8 million and
$32.8 million for the quarters ended March 31, 1999 and March 31, 1998,
respectively. This decrease was primarily the result of a decrease in the
effective yields to 8.3% from 8.4% for the quarters ended March 31, 1999, and
1998, respectively. In addition, the average principal balance of such loans
decreased to $1.5 billion for the quarter ended March 31, 1999, from $1.6
billion for the quarter ended March 31, 1998.
13
Loans held for investment
-------------------------
Interest income on loans held for investment totaled $11.7 million and $31.6
million for the quarters ended March 31, 1999 and 1998, respectively. This
decrease was the result of a decrease in the average balance of loans held
for investment during the first quarter 1999 by $1.1 billion, in part offset
by an increase in the effective yield to 7.7% from 7.5%, for the quarters
ended March 31, 1999 and 1998, respectively.
Other loans
-----------
Interest income on construction loans totaled $30.2 million and $25.3
million, with interest earned at an effective yield of 9.8% and 10.6%, for
the quarters ended March 31, 1999 and 1998, respectively. The average
principal balance of construction loans outstanding increased $235.2 million
to $1.3 billion during the quarter ended March 31, 1999 compared to the
quarter ended March 31, 1998.
Interest income on revolving warehouse lines of credit totaled $6.1 million
and $10.8 million, with interest earned at effective yields of 8.4% and 9.0%
for the quarters ended March 31, 1999 and March 31, 1998, respectively. The
average principal balance outstanding decreased to $295.0 million from $489.0
million for the quarters ended March 31, 1999 and March 31, 1998,
respectively.
Mortgage securities
-------------------
Interest income on mortgage securities totaled $2.4 million and $15.3
million, with interest earned at effective yields of 4.2% and 8.5% for the
quarters ended March 31, 1999 and 1998, respectively. The $12.9 million
decrease in interest income is primarily due to a decrease in the average
principal balance to $226.3 million from $734.5 million during the quarters
ended March 31, 1999 and 1998, respectively. This decrease in the average
principal balance was primarily a result of the sale of certain of the
Company's mortgage securities in response to the disruption in global
financial markets during the fourth quarter 1998. Impairment losses on
interest-only securities of $3.0 million were recognized during the first
quarter 1999 as a reduction in interest income, whereas no impairment losses
were recognized during the first quarter 1998. Excluding this first quarter
impairment loss of $3.0 million, the effective yield on mortgage securities
would have approximated 9.4%.
Interest Expense
Total interest expense for the quarters ended March 31, 1999 and 1998 was $53.4
million and $83.0 million, respectively. The decrease in interest expense of
$29.6 million was primarily due to the decrease in the average outstanding
balance of repurchase agreements and other credit facilities to $3.4 billion
from $5.0 billion at March 31, 1998, coupled with a decrease in the Company's
cost of funds to 6.0% from 6.4% for the quarters ended March 31, 1999 and 1998,
respectively.
Equity in Earnings (Loss) of IndyMac Operating
For the quarter ended March 31, 1999 the loss for IndyMac Operating of $2.3
million, in which IndyMac REIT has a 99% economic interest, resulted principally
from a decrease in net interest income of $2.3 million, a decrease in gain on
securities of $18.9 million, and an increase in other expense of $7.1 million.
This was offset by an increase in net gain on mortgage loans of $10.0 million
and an increase in service fee income of $6.0 million. The increase in net gain
on mortgage loans was due primarily to the Company's improved profit margins on
loan sales in the first quarter 1999 compared to the first quarter 1998. The
increase in service fee income was due primarily to an increase in the valuation
allowance during the first quarter 1998 of $2.4 million compared to a reduction
in the valuation allowance during the first quarter 1999 of $1.8 million due to
a change in market conditions.
Salaries, General and Administrative Expenses
IndyMac REIT's $2.6 million increase in salaries, general and administrative
expenses for the quarter ended March 31, 1999 compared to the quarter ended
March 31, 1998 is primarily the result of the
14
increased personnel and expenses required to support the growth in the
operations of IndyMac REIT, CLCA, IndyMac CLD, and WLCA The Company employed
approximately 1,200 employees as of March 31, 1999 compared to 950 employees as
of March 31, 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of funds include monthly principal and interest
payments on its loans held for sale and investment portfolios, committed and
uncommitted borrowings, structured financing, proceeds from the sale of loans
and other assets and issuance of REMIC and asset-backed securities, master and
primary servicing fees and other servicing-related revenues and proceeds from
the Company's Dividend Reinvestment and Stock Purchase Plan ("DRIP").
Market conditions improved and stabilized during the first quarter 1999 compared
to the fourth quarter 1998. IndyMac REIT raised approximately $45.8 million
through the DRIP during the first quarter 1999, but does not intend to continue
raising substantial amounts of equity capital through this vehicle during the
second quarter 1999. The Company currently maintains liquidity approximating
$300 million, with a leverage ratio of 4.4:1 at March 31, 1999 compared to 5.9:1
at December 31, 1998 and 8.2:1 at March 31, 1998. The Company is continuing to
pursue strategic alternatives to managing its liabilities, with an emphasis on
procuring longer term facilities where collateral values are not subject to
periodic mark to market valuations. These options include, but are not limited
to structured financing vehicles, and the possible acquisition, or de novo
charter, of a depository institution. In general, the Company plans to continue
to operate with more conservative leverage ratios compared to 1998.
The Company believes that its liquidity levels and borrowing capacity are
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, margins on financial collateral required by lenders,
margin calls and the Company's ability to raise funds in the capital markets.
It is the Company's policy to maintain adequate capital and liquidity and to
comply with all leverage and financial covenants set forth in the Company's
credit agreements.
The table below summarizes the Company's sources of financing as of March 31,
1999:
(Dollars in millions) Committed Outstanding Maturity
Financing Balances Date
--------- ----------- --------
Merrill Lynch $2,000 $1,896 April 2000
First Union Bank Syndicate 900 726 February 2001
Paine Webber 500 334 June 2000
Morgan Stanley 500 241 February 2000
Bank of America 200 198 December 1999
Senior unsecured notes 60 60 October 2002
MBS borrowings - 255
------ ------
Total $4,160 $3,710
====== ======
The Company's ability to meet its long-term liquidity requirements is subject to
the renewal of its repurchase and credit facilities and/or obtaining other
sources of financing, including issuing additional debt or equity from time to
time. Any decision by the Company's lenders and/or investors to make additional
funds available to the Company in the future will depend upon a number of
factors, such as the Company's compliance with the terms of its existing credit
arrangements, the Company's financial performance, industry and market trends in
the Company's various businesses, the general availability of and rates
applicable to financing and investments, such lenders' and/or investors' own
resources and policies concerning loans and investments, and the relative
attractiveness of alternative investment or lending opportunities.
In March 1999, Standard & Poor's Corporation reaffirmed the Company's senior
unsecured credit rating at "BBB-", but with a negative outlook as a result of
the events of the fourth quarter 1998. In October 1998, Fitch IBCA Inc., in
response to liquidity concerns and credit tightening for market funded
companies, lowered the Company's rating on its senior unsecured obligations from
"BBB" to "BBB-", maintaining the
15
Company's investment grade rating. In October 1998, these senior unsecured
obligations were rated "BBB" by Duff & Phelps Rating Co. In February 1999, Fitch
IBCA Inc. lowered its rating for the Company's senior secured revolving credit
facility to "BBB+", and at the same time affirmed the Company's investment grade
rating at "BBB-" and removed the ratings from Rating Alert Negative.
SUBSEQUENT EVENTS
In April 1999, the Company announced that it was changing its emphasis in the
home improvement lending business from transactions predominantly with specialty
loan brokers and dealers to loans originated via the internet at LoanWorks.com
and through LoanWorks' other direct lending channels. As a result of the above
shift in emphasis, the Atlanta office, which dealt primarily with large
specialty retailers and dealers and employed approximately 40 people, was closed
in April 1999. The Company's home improvement products will continue to be
offered to mortgage bankers and mortgage brokers in IndyMac's third party
lending operation. For 1998, home improvement lending represented approximately
1.5% of IndyMac's total production volume, and the Company's portfolio of home
improvement loans totaled $247.7 million at March 31,1999. The servicing
operations of the portfolio were transferred to the Company's primary servicing
operation in Kalamazoo, Michigan, during the fourth quarter 1998 and collection
activities have been centralized at IndyMac's Pasadena headquarters.
SYSTEMS ISSUES ASSOCIATED WITH THE YEAR 2000
Summary
The Company has completed the review of its computer systems to determine the
impact of the Year 2000 issue and is in the process of remediating and replacing
those systems determined to be non-Year 2000 compliant. The Year 2000 issue
relates to the effects of potentially date sensitive calculation errors by
computers whose programs may not properly recognize the year 2000.
The Company's Year 2000 strategy is to identify all systems, which internally
and externally impact its business, and determine Year 2000 compliance.
Internal impact relates to the Company's internally developed programs and
vendor purchased software programs which are operated in-house by the Company.
External impact refers to embedded technology equipment and systems, vendors
that supply the Company with goods and services (including data processing
service bureaus), and business partners. The goals of the Company related to
Year 2000 are to determine its state of readiness, identify risks and develop
contingency plans to mitigate those risks and to identify costs associated with
Year 2000 issues. The Company is using external consultants to assist the
Company's Year 2000 staff in identifying Year 2000 risks, addressing these
risks, and developing contingency plans.
State of Readiness and Identification of Risks
The identification and assessment of internal systems has been completed and the
remediation, testing and implementation phases are currently in progress. Most
of the Company's internally developed systems were developed over the past five
years, and were designed to be Year 2000 compliant. The Company currently
expects to substantially complete both remediation and validation of internal
mission-critical systems during the second quarter 1999, with formal
implementation to occur at the beginning of the third quarter 1999.
In 1998, the Company began its communication with significant third parties to
determine the extent to which the Company may be affected by those third
parties' failure to remediate their own Year 2000 issues. The Company will
continue to monitor the progress of third party testing and implementation
procedures throughout 1999. Contingency plans for mission-critical third party
systems are completed. The Company cannot at present determine the financial
effect if significant third party remediation efforts fail.
An inventory of embedded technology equipment and systems has been compiled in
order to ensure that all components are Year 2000 compliant. Embedded
technology equipment and systems include
16
equipment, machinery or building infrastructure that are controlled, monitored
or operated by embedded computer devices.
Risks and Contingency Plans
The Company has identified material potential risks related to its Year 2000
issues. These risks are that the Company's primary lenders, depository
institutions and collateral custodians do not become Year 2000 compliant before
year-end 1999, which could materially impact the Company's ability to access
funds and collateral necessary to operate its various businesses. The Company
is currently assessing the risks related to these and other Year 2000 risks, and
has received significant assurances that the computer systems of its lenders,
depository institutions, collateral custodians, business partners, and service
bureaus, many of whom are among the largest financial institutions in the
country, will be Year 2000 compliant by year-end 1999.
The Company has developed and is continuing to develop contingency plans for all
non-Year 2000 compliant internal systems. Contingency plans include identifying
alternative processing platforms and alternative sources for services and
businesses provided by critical non-Year 2000 compliant financial depository
institutions, vendors and business partners. The Company believes that its plans
for internal systems and related processing are sufficient to mitigate most of
the major effects of Year 2000 issues. However, there can be no assurance that
the Company's lenders, depository institutions, custodians, vendors and business
partners resolve their own Year 2000 compliance issues in a timely manner.
Neither are there any assurances that any failure by these other parties to
resolve such issues would not have an adverse effect on the Company's operations
and financial condition.
Costs Related to Year 2000
During the first quarter 1999, the Company recognized $1.0 million of expenses
to ensure the readiness of the Company's computer systems for the year 2000. No
additional material expenditures are expected to be recorded for Year 2000
compliance in future periods.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
- ------------------------------------------------------------------
The Company's primary market risk affecting market risk sensitive instruments is
interest rate risk. When interest rates fluctuate, the Company can be adversely
impacted because the fair market value of its assets and commitments to purchase
assets changes. In addition to gains or losses on sale, the Company realizes
income or losses from the differential or spread between the interest earned on
loans, investments, and other interest-earning assets and the interest incurred
on borrowings. Any changes in overall interest rates effect both the amount of
interest income received on interest-earning assets and the amount of interest
expense incurred on interest-bearing liabilities. Since the change in amount
received is generally not equal to the change in amount paid, the spread
(defined as the difference between the two) can be adversely affected.
Financial instruments of the Company that tend to decrease in value as interest
rates decrease include interest-only securities and servicing assets since
prepayments tend to increase, resulting in lower residual cash flows then would
otherwise have been obtained in a stable or increasing interest rate
environment. Financial instruments of the Company that tend to increase in value
as interest rates decrease include REMIC senior securities, fixed rate
subordinated securities, adjustable rate agency securities, principal-only
securities and U.S. Treasury bonds. In addition, as interest rates decrease the
fair market value of the Company's purchase commitments increase.
In order to minimize the adverse impact on net income and shareholders' equity
due to changes in the fair market value of its assets and commitments to
purchase assets, the Company hedges its loans held for sale, mortgage securities
and mortgage servicing rights. During the first quarter 1999, the Company
expanded its notional balance on hedges to further reduce its exposure to
interest rate risk.
As part of its interest rate risk management process, the Company performs
various interest rate scenarios that quantify the net financial impact of
changes in interest rates on its interest-earning assets, commitments and
interest-bearing liabilities. As of March 31, 1999, the Company estimates that
a parallel downward shift in U.S. Treasury bond rates and short-term indices of
50 basis points, or 0.50%, all
17
else being constant, would result in a combined after tax loss, including
hedges, to net income for IndyMac REIT and IndyMac Operating of $8.1 million,
and a combined after tax loss on available for sale securities, recorded as a
component of other comprehensive income of $900 thousand. The net result would
be a reduction to comprehensive income in 1999 of $9.0 million. The assumptions
inherent in this model include an instantaneous rate shock and a degree of
correlation between the hedges and hedged assets and as a result is subject to
basis risk (i.e., the spread-widening risk between the change in rates on U.S.
Treasury bonds and mortgage-backed securities). These sensitivity analyses are
limited by the fact that they are performed at a particular point in time and do
not incorporate other factors that would impact the Company's financial
performance in such a scenario, such as the increase in income associated with
the increase in production volume that would result from the decrease in
interest rates. Consequently, the preceding estimates should not be viewed as a
forecast and there can be no assurance that actual results would not vary
significantly from the analysis discussed above.
FORWARD-LOOKING STATEMENTS
Certain statements contained in this Form 10-Q may be deemed to be forward-
looking statements which reflect the Company's current views with respect to
future events and financial performance. These forward-looking statements are
subject to certain risks and uncertainties, including those identified below,
which could cause future results to differ materially from historical results or
those anticipated. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of their dates, and if no date
is provided, then such statements speak only as of the date hereof. 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: (1) the level of demand for consumer
loans, mortgage loans, construction loans and commercial term 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 and commercial lending operations and federal regulation of the
Company's real estate investment trust status; (5) the actions undertaken by
both current and potential new competitors; and (6) other risks and
uncertainties detailed in this Management's Discussion and Analysis of Financial
Condition and Results of Operations.
18
PART II
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
(a) Exhibits
--------
4.1 1998 Stock Incentive Plan adopted May 19, 1998, as amended July 21,
1998, January 20, 1999 and March 1, 1999.
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 May 13, 1999 for the quarter ended March 31, 1999.
INDYMAC MORTGAGE HOLDINGS, INC.
By: /s/ Michael W. Perry
--------------------
Michael W. Perry
Director and Chief Executive Officer
By: /s/ Carmella Grahn
------------------
Carmella Grahn
Executive Vice President and
Chief Financial Officer
20