SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
Form 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the period ended June 30, 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 (I. R. S. Employer Identification No.)
incorporation or organization)
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 June 30, 1999: 80,476,001 shares
INDYMAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
June 30, December 31,
1999 1998
------------ --------------
ASSETS (Unaudited)
Loans held for sale, net
Mortgages-prime $ 583,844 $ 989,052
Mortgages-subprime 87,304 145,793
Manufactured housing 79,636 215,507
Home improvement 186,123 205,304
---------- -----------
936,907 1,555,656
Other loans, net
Loans held for investment 501,733 668,523
Residential construction
Builder 730,161 799,712
Consumer 372,833 468,735
---------- -----------
1,102,994 1,268,447
Income property 195,573 178,756
Revolving warehouse lines of credit 297,672 443,946
---------- -----------
2,097,972 2,559,672
Mortgage securities 275,688 235,032
Collateral for collateralized mortgage obligations 121,984 162,726
Investment in and advances to IndyMac Operating 258,293 279,693
Other assets 69,086 58,373
---------- -----------
Total assets $3,759,930 $ 4,851,152
========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Repurchase agreements $1,877,239 $ 2,942,270
Syndicated bank lines and commercial paper conduit 795,633 843,279
Collateralized mortgage obligations 100,677 140,810
Senior unsecured notes 60,108 60,031
Accounts payable and accrued liabilities 33,712 42,659
---------- -----------
Total liabilities 2,867,369 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,
80,476,001 shares at June 30, 1999 and 75,794,435
at December 31, 1998 805 758
Additional paid-in capital 1,055,432 1,005,797
Accumulated other comprehensive income (loss) 8,139 (18,776)
Cumulative earnings 329,934 277,220
Cumulative distributions to shareholders (501,749) (442,896)
---------- -----------
Total shareholders' equity 892,561 822,103
---------- -----------
Total liabilities and shareholders' equity $3,759,930 $ 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 June 30, Six months ended June 30,
----------------------------- --------------------------------
1999 1998 1999 1998
------------ ------------ -------------- ------------
REVENUES
Interest income
Loans held for sale
Mortgages-prime $12,418 $ 30,427 $ 27,751 $ 53,371
Mortgages-subprime 1,303 6,188 5,075 8,676
Manufactured housing 5,648 4,965 11,206 9,398
Home improvement 4,887 3,922 10,066 6,692
------- -------- -------- --------
24,256 45,502 54,098 78,137
Other loans
Loans held for investment 10,992 26,717 22,711 58,365
Residential construction
Builder 20,513 18,911 40,811 36,154
Consumer 9,154 10,345 19,060 19,785
------- -------- -------- --------
29,667 29,256 59,871 55,939
Income property 4,499 987 8,723 987
Revolving warehouse lines of credit 5,693 13,686 11,786 24,474
------- -------- -------- --------
50,851 70,646 103,091 139,765
Mortgage securities 581 18,925 3,010 34,306
Collateral for collateralized mortgage obligations 2,570 3,898 5,384 8,322
Advances to IndyMac Operating 5,326 4,865 10,911 7,786
Other 28 142 652 247
------- -------- -------- --------
Total interest income 83,612 143,978 177,146 268,563
Interest expense
Repurchase agreements 29,723 77,441 68,127 147,132
Syndicated bank lines and commercial paper conduit 10,905 11,112 21,575 18,697
Collateralized mortgage obligations 2,736 3,944 5,712 8,247
Senior unsecured notes 1,385 1,382 2,770 2,763
------- -------- -------- --------
Total interest expense 44,749 93,879 98,184 176,839
Net interest income 38,863 50,099 78,962 91,724
Provision for loan losses 1,217 9,357 7,898 15,607
------- -------- -------- --------
Net interest income after provision
for loan losses 37,646 40,742 71,064 76,117
Equity in earnings (loss) of IndyMac Operating (1,982) 2,002 (4,306) 4,891
Other income 1,061 80 2,724 853
------- -------- -------- --------
Net revenues 36,725 42,824 69,482 81,861
EXPENSES
Salaries and related 5,840 5,299 11,754 10,268
General and administrative 1,780 1,593 5,014 3,097
------- -------- -------- --------
Total expenses 7,620 6,892 16,768 13,365
------- -------- -------- --------
NET EARNINGS $29,105 $ 35,932 $ 52,714 $ 68,496
======= ======== ======== ========
EARNINGS PER SHARE
Basic EPS $ 0.36 $ 0.53 $ 0.66 $ 1.03
Diluted EPS 0.36 0.53 0.65 1.03
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic 80,381 68,175 79,807 66,404
Diluted 81,535 68,381 80,980 66,742
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)
Six months ended June 30,
------------------------------------
1999 1998
------------- ------------
Cash flows from operating activities:
Net earnings $ 52,714 $ 68,496
Adjustments to reconcile net earnings
to net cash provided by (used in) operating activities:
Amortization and depreciation 34,554 22,492
Provision for loan losses 7,898 15,607
Equity in (earnings) loss of IndyMac Operating 4,306 (4,891)
Purchases of mortgage loans held for sale (2,996,507) (5,437,969)
Sales of and payments from mortgage loans held for sale 3,467,175 4,514,299
Purchases of manufactured housing loans held for sale (65,293) (214,837)
Sales of and payments from manufactured housing 223,627 162,605
loans held for sale
Purchases of trading securities - (54,055)
Sale of and payments from trading securities - 12,287
Net (increase) decrease in other assets 3,991 (24,754)
Net increase (decrease) in other liabilities (8,947) (2,649)
----------- -----------
Net cash provided by (used in) operating activities 723,518 (943,369)
Cash flows from investing activities:
Purchases of mortgage loans held for investment - (180,836)
Payments from mortgage loans held for investment 187,820 479,768
Net (increase) decrease in construction loans receivable 105,138 (284,525)
Purchases of mortgage securities (76,309) (240,680)
Sales of and payments from mortgage securities 14,403 207,641
Net (increase) decrease in revolving warehouse lines of credit 145,926 (71,094)
Net increase in manufactured housing loans held for investment (1,786) (3,197)
(Increase) decrease in advances to IndyMac Operating net 29,347 (35,191)
of cash payments
Payments from collateral for collateralized mortgage obligations 40,979 37,412
----------- -----------
Net cash provided by (used in) investing activities 445,518 (90,702)
Cash flows from financing activities:
Net increase (decrease) in repurchase agreements (1,066,706) 608,265
Net increase (decrease) in syndicated bank lines
and commercial paper conduit (47,646) 380,939
Net proceeds from issuance of common stock 49,682 138,264
Cash dividends paid (58,853) (64,833)
Principal payments on collateralized mortgage obligations (41,501) (37,654)
----------- -----------
Net cash provided by (used in) financing activities (1,165,024) 1,024,981
Net increase (decrease) in cash and cash equivalents 4,012 (9,090)
Cash and cash equivalents at beginning of period 815 13,676
----------- -----------
Cash and cash equivalents at end of period $ 4,827 $ 4,586
=========== ===========
Supplemental cash flow information:
Cash paid for interest $ 96,654 $ 176,215
=========== ===========
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 at December 31, 1997 $634 $ 773,475 $ (2,006) $ 501 $ (1,505)
Common stock options exercised - 966 - - -
Director's and officer's notes
receivable 9 (5,307) - - -
Deferred compensation,
restricted stock 1 220 - - -
401(k) contribution - 362 - - -
Net gain (loss) on AFS
securities - - (426) 655 229
Dividend reinvestment plan 59 141,954 - - -
Net earnings - - - - -
Dividends paid - - - - -
---- ---------- -------- ------- --------
Net change 69 138,195 (426) 655 229
---- ---------- -------- ------- --------
Balance at June 30, 1998 $703 $ 911,670 $ (2,432) $ 1,156 $ (1,276)
==== ========== ======== ======= ========
Balance at December 31, 1998 $758 $1,005,797 $(18,366) $ (410) $(18,776)
Common stock options exercised 4 1,189 - - -
Director's and officer's notes
receivable - 474 - - -
Deferred compensation,
restricted stock - 1,203 - - -
401(k) contribution - 412 - - -
Net gain on AFS securities - - 15,784 11,131 26,915
Dividend reinvestment plan 43 46,357 - - -
Net earnings - - - - -
Dividends paid - - - - -
---- ---------- -------- ------- --------
Net change 47 49,635 15,784 11,131 26,915
---- ---------- -------- ------- --------
Balance at June 30, 1999 $805 $1,055,432 $ (2,582) $10,721 $ 8,139
==== ========== ======== ======= ========
Cumulative Total
Cumulative Comprehensive Distributions to Shareholders'
Earnings Income Shareholders Equity
---------- ------------- --------------- ------------
Balance at December 31, 1997 243,430 $241,925 $(312,140) $703,894
Common stock options exercised - - - 966
Director's and officer's notes
receivable - - - (5,298)
Deferred compensation,
restricted stock - - - 221
401(k) contribution - - - 362
Net gain (loss) on AFS
securities - 229 - 229
Dividend reinvestment plan - - - 142,013
Net earnings 68,496 68,496 - 68,496
Dividends paid - - (64,833) (64,833)
-------- -------- ---------- --------
Net change 68,496 68,725 (64,833) 142,156
-------- -------- ---------- --------
Balance at June 30, 1998 $311,926 $310,650 $ (376,973) $846,050
======== ======== ========== ========
Balance at December 31, 1998 $277,220 $258,444 $ (442,896) $822,103
Common stock options exercised - - - 1,193
Director's and officer's notes
receivable - - - 474
Deferred compensation,
restricted stock - - - 1,203
401(k) contribution - - - 412
Net gain on AFS securities - 26,915 - 26,915
Dividend reinvestment plan - - - 46,400
Net earnings 52,714 52,714 - 52,714
Dividends paid - - (58,853) (58,853)
-------- -------- ---------- --------
Net change 52,714 79,629 (58,853) 70,458
-------- -------- ---------- --------
Balance at June 30, 1999 $329,934 $338,073 $(501,749) $892,561
======== ======== ========== ========
The accompanying notes are an integral part of these statements.
5
INDYMAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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 June 30, 1998 to conform to the June 30, 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 June 30, 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 $1.2 million provision for
loan losses during the second quarter of 1999, compared to a $6.7 million
provision for loan losses during the first quarter of 1999. The larger
increase in the allowance for loan losses during the first quarter of 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 of 1999, (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, and (c) the Company reduced originations during 1999 with
the result that, by June 30, 1999, payments and sales of loans were not
replaced by a similar volume of new loans. Given the composition of the
Company's loan portfolio at June 30, 1999, the $52.1 million allowance for
loan losses was considered adequate to cover losses inherent in the loan
portfolio at June 30, 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
The table below summarizes the changes to the allowance for loan losses for the
quarter and six months ended June 30, 1999:
(Dollars in thousands) Quarter ended Six months ended
June 30, 1999 June 30, 1999
------------- ----------------
Beginning balance $53,349 $50,112
Provision 1,217 7,898
Net charge-offs (2,489) (5,933)
------- -------
Ending balance $52,077 $52,077
======= =======
NOTE C - MORTGAGE SECURITIES
A summary of IndyMac REIT's mortgage securities as of June 30, 1999
and December 31, 1998 follows:
(Dollars in thousands) June 30, December 31,
1999 1998
---------- ------------
Amortized cost $278,270 $253,398
Gross unrealized gains 11,844 317
Gross unrealized losses (14,426) (18,683)
-------- --------
Estimated fair value $275,688 $235,032
======== ========
At June 30, 1999, IndyMac REIT's mortgage securities included $133.9 million of
AAA-rated interest-only securities, $49.8 million of senior securities, $45.5
million of residual securities, $31.1 million of agency securities, $12.2
million of other investment grade securities, and $3.2 million of non-investment
grade securities.
The fair value of 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 and expectations of future prepayment levels based on
collateral coupon and seasoning. At June 30, 1999, the interest-only securities
reflected an average constant prepayment rate assumption for the remainder of
1999 of approximately 23%. In addition, these valuations incorporated weighted
average discount rates ranging from 10% to 12%. The residual securities,
comprised of prime, subprime and manufactured housing collateral, were valued at
a weighted average discount rate of 20% and assumed weighted average annual
credit losses on underlying collateral of 1.1%. The subprime residuals reflect
an average annual constant prepayment rate ranging from 30% to 35%.
The fair value of the non-investment grade securities is net of a $5.0 million
discount to face or valuation 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 loans funded directly to consumers via LoanWorks, a division of
IndyMac Operating. The Mortgage Banking segment also engages in financing
manufactured housing loans and home improvement loans. The Investments 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 of 1999,
a portion of 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 Investments segment. These changes had no impact on
the Company's overall results of operations.
7
Segment information for the quarters and six months ended June 30, 1999 and 1998
were as follows:
(Dollars in thousands) Mortgage
Banking Investments Lending Adjustment (1) Consolidated
---------- ----------- ---------- -------------- ------------
Quarter ended June 30, 1999
Net interest income $ 7,106 $ 6,802 $ 19,629 $ 5,326 $ 38,863
Net revenues 5,342 7,059 21,003 3,321 36,725
Net earnings 5,110 6,168 14,506 3,321 29,105
Quarter ended June 30, 1998
Net interest income $ 15,206 $ 11,051 $ 18,977 $ 4,865 $ 50,099
Net revenues 15,385 4,097 16,475 6,867 42,824
Net earnings 14,806 3,611 10,648 6,867 35,932
Six months ended June 30, 1999
Net interest income $ 19,107 $ 10,272 $ 38,672 $ 10,911 $ 78,962
Net revenues 17,167 19,736 25,996 6,583 69,482
Net earnings 16,803 17,865 11,463 6,583 52,714
Six months ended June 30, 1998
Net interest income $ 26,809 $ 22,993 $ 34,136 $ 7,786 $ 91,724
Net revenues 25,285 12,099 31,800 12,677 81,861
Net earnings 24,290 10,815 20,714 12,677 68,496
Assets as of June 30, 1999 $ 976,336 $ 896,935 $1,628,366 $258,293 $3,759,930
Assets as of June 30, 1998 $2,263,775 $2,595,841 $1,853,172 $226,659 $6,939,447
(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) June 30, December 31,
1999 1998
---------- ------------
Loans held for sale, net $151,664 $ 210,086
Mortgage securities 404,573 398,094
Treasury securities 181,137 302,313
Mortgage servicing rights 128,157 127,229
Other assets 70,642 65,074
-------- ----------
Total assets $936,173 $1,102,796
======== ==========
Repurchase agreements $551,937 $ 697,406
Syndicated bank lines 89,139 89,139
Due to IndyMac REIT 167,723 196,154
Accounts payable and accrued liabilities 35,889 35,714
Shareholders' equity 91,485 84,383
-------- ----------
Total liabilities and shareholders' equity $936,173 $1,102,796
======== ==========
8
(Dollars in thousands) Quarters ended June 30, Six months ended June 30,
--------------------------------------------------------------
1999 1998 1999 1998
------------ ------------ ------------ ---------
Interest income
Loans held for sale $ 5,219 $ 3,056 $ 10,607 $ 6,019
Mortgage securities 8,104 7,750 13,162 16,980
Treasury securities 2,330 3,917 7,156 7,038
-------- ------- -------- -------
Total interest income 15,653 14,723 30,925 30,037
Interest expense 13,787 15,295 28,947 28,197
-------- ------- -------- -------
Net interest income (expense) 1,866 (572) 1,978 1,840
Provision for loan losses 319 - 428 36
Net gain on mortgage loans 35,933 26,515 63,909 44,488
Net loss on securities (17,146) (7,077) (32,440) (3,459)
Service fee income 4,632 3,570 10,342 1,947
Other income 4,973 6,085 9,620 8,867
-------- ------- -------- -------
Net revenues 29,939 28,521 52,981 53,647
Total expenses 33,421 25,004 60,544 45,055
-------- ------- -------- -------
Earnings (loss) before income tax provision (benefit) (3,482) 3,517 (7,563) 8,592
Income tax provision (benefit) (1,480) 1,495 (3,214) 3,652
-------- ------- -------- -------
Net earnings (loss) $ (2,002) $ 2,022 $ (4,349) $ 4,940
======== ======= ======== =======
Allowance for Loan Losses
IndyMac Operating's allowance for loan losses related to loans held for sale
totaled $1.0 million at June 30, 1999.
Mortgage Securities
A summary of IndyMac Operating's mortgage securities as of June
30, 1999 and December 31, 1998 follows:
(Dollars in thousands) June 30, December 31,
1999 1998
------------ -------------
Amortized cost $385,715 $397,859
Gross unrealized gains 32,597 408
Gross unrealized losses (13,739) (173)
-------- --------
Estimated fair value $404,573 $398,094
======== ========
At June 30, 1999, IndyMac Operating's mortgage securities included $234.8
million of AAA-rated interest-only securities, $101.7 million of investment-
grade securities, $58.0 million of non-investment grade securities, a $5.3
million residual security, and $4.8 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 and expectations of future
prepayment levels based on collateral coupon and seasoning. At June 30, 1999,
the interest-only securities reflected an average constant prepayment rate
assumption for the remainder of 1999 of approximately 23%. In addition, these
valuations incorporated weighted average discount rates ranging from 10% to 12%.
9
The fair value of the non-investment grade securities is net of a $34.3 million
discount to face or valuation reserve for credit losses.
NOTE F - SUBSEQUENT EVENT
In July of 1999, the Company announced that it had signed a definitive agreement
to acquire SGV Bancorp ("SGVB"), the holding company for First Federal Savings
and Loan Association of San Gabriel Valley. SGVB is a Southern California-based,
savings and loan holding company whose savings and loan subsidiary had eight
branches, $324 million in deposits, and $469 million of assets as of June 30,
1999. During July of 1999, SGVB completed a deposit acquisition, which increased
SGVB's deposit base to approximately $360 million and added one additional
branch.
The Company will acquire SGVB in a cash purchase transaction for $25.00 per
share, or $62.5 million, for all of the SGVB shares outstanding or subject to
option. This price is subject to adjustment as a result of changes in the value
of certain assets and liabilities of SGVB. The acquisition will be structured
so that the Company and all of its assets and liabilities will be merged into
SGVB, which will be the surviving corporation and will be renamed IndyMac.
Pursuant to the transaction, IndyMac REIT's shareholders will receive one share
of SGVB common stock in exchange for each share of IndyMac REIT's common stock,
which shares will be traded on the New York Stock Exchange.
The acquisition is subject to Office of Thrift Supervision ("OTS") approval as
well as approval by the shareholders of both the Company and SGVB.
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 proprietary
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
direct-to-consumer LoanWorks/2/ division via its proprietary website at
www.loanworks.com, other internet relationships, and direct-to-consumer
- -----------------
marketing 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
- -----------------
/1/ Registered in the U.S. Patent and Trademark Office. Patent pending.
/2/ Registered in the U.S. Patent and Trademark Office.
10
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; 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 second quarter of 1999, the Company also operated a
Manufactured Housing Division ("IndyMac MHD"), which facilitated the direct
origination and purchase of consumer loans and mortgage loans secured by
manufactured housing. The Company restructured this division during June of
1999 to change the major focus of its manufactured housing lending business to
offer manufactured housing loans directly to consumers using its
LoanTown/LoanWorks brands, and internet technology and telemarketing expertise.
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 ("WLCA"), which
provides various types of short-term revolving financing to small-to-medium-size
mortgage originators and offers builder inventory lines of credit.
In June of 1999, IndyMac REIT's Board of Directors approved the termination of
its status as a REIT, to be effective after December 31, 1999, subject to
shareholder approval. The Company will no longer be required to distribute 95%
of its net income to its shareholders and will be required to pay income taxes
based on its income tax liability each year. It is anticipated that the
strategy to convert to a taxable entity will maximize the Company's growth
potential and its competitive advantage in internet-based mortgage lending and
securitization markets.
In July of 1999, the Company announced that it signed a definitive agreement to
acquire SGV Bancorp, the holding company for First Federal Savings and Loan
Association of San Gabriel Valley. See further discussion in "Note F-Subsequent
Event."
FINANCIAL CONDITION
Overview of Third Party Lending Operations: Total loans produced by IndyMac TPL
during the second quarter of 1999 were $1.4 billion, compared with the first
quarter of 1999 and the second quarter of 1998 production of $1.3 billion and
$3.1 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 $1.7 billion of loans during the second
quarter of 1999, compared with $2.0 billion sold during the first quarter of
1999 and $2.3 billion sold in the second quarter of 1998.
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 second quarter of 1999 totaled $486 million,
representing 36 percent of IndyMac's third party prime and subprime mortgage
production for this period, up from $193 million or 15 percent of production
during the first quarter of 1999. Total year-to-date loan production via e-
MITS.com of $679 million exceeds the total production volume from this channel
for the full year 1998.
11
LoanWorks funded $166 million of mortgage loans during the second quarter of
1999, down 11 percent in comparison to $187 million of loans during the first
quarter of 1999, but up 77 percent in comparison with production volume in the
second quarter of 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 second quarter of 1999 totaled $29.0 million or 17.5% of total
LoanWorks' production as measured in principal balance.
At June 30, 1999 and 1998, IndyMac Operating's master servicing portfolio had an
aggregate outstanding principal balance of $14.5 billion and $14.6 billion,
respectively, with a weighted average coupon of 8.2% and 8.3%, respectively,
while LoanWorks Servicing's portfolio at June 30, 1999 and December 31, 1998 was
$9.5 billion and $10.6 billion, respectively, with a weighted average coupon of
8.3% for both periods. Non-performing loans/3/ held for sale were 2.1% of
principal at June 30, 1999 compared with 1.6% at December 31, 1998 and 0.7% at
June 30, 1998. The increase in the percentage of non-performing loans as of
June 30, 1999 compared to December 31, 1998 and June 30, 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 1999, (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 and (c) the Company reduced originations during 1999
with the result that, by June 30, 1999, payments and sales of loans were not
replaced by a similar volume of new loans.
At June 30, 1999, the Company's manufactured housing loans held for sale had an
outstanding balance of $82.0 million (of which $79.6 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). In connection with the decision to restructure the
Company's manufactured housing lending division during the second quarter of
1999, IndyMac sold $240.8 million of its manufactured housing loans in the form
of a whole loan bulk sale for cash. Non-performing manufactured housing loans
held for sale were 5.4% of principal at June 30, 1999 compared with 0.7% at
December 31, 1998. The increase in non-performing loans is primarily due to the
$240.8 million loan sale in the second quarter of the more marketable loans in
the portfolio, which left a higher ratio of non-performing loans. In addition,
the Company significantly decreased its originations of manufactured housing
loans during the second quarter of 1999 in line with its shift in emphasis to
loans originated via the internet with the result that, by June 30, 1999,
prepayments of loans were no longer being replaced by new loans.
At June 30, 1999, the Company's home improvement loans held for sale had an
outstanding balance of $248.3 million (of which $186.1 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). Non-performing home improvement loans held
for sale were 1.1% of principal at June 30, 1999 compared with 0.8% at December
31, 1998. The increase in non-performing loans resulted primarily from
prepayments of higher credit quality loans increasing more than prepayments of
lower credit quality loans as a result of the more favorable interest rate
environment during 1999.
Loans Held For Investment: The $501.7 million portfolio of loans held for
investment at June 30, 1999 consisted of $181.3 million of varying types of
adjustable-rate product which contractually reprice in monthly, semi-annual or
annual periods; $161.2 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 $159.2 million of fixed-rate loans.
Included in the loans held for investment portfolio as of June 30, 1999 and 1998
was $20.2 million and $33.5 million, respectively, of manufactured housing
loans. The weighted average coupon of the mortgage loans held for investment at
June 30, 1999 and 1998 was
- -----------------
/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.
12
8.4% and 8.1% respectively. The allowance for loan losses related to loans held
for investment totaled $14.6 million at June 30, 1999. Net charge-offs related
to loans held for investment totaled $383 thousand for the quarter ended June
30, 1999. Non-performing loans held for investment were 8.4% of principal at
June 30, 1999 compared with 5.6% at December 31, 1998 and 2.9% at June 30, 1998.
The increase in non-performing loans from June 30, 1998 to December 31, 1998 and
June 30, 1999 resulted primarily from (a) prepayments of higher credit quality
loans increasing more than prepayments of lower credit quality loans as a result
of the more favorable interest rate environment during 1999 and (b) sales of the
more marketable loans during the fourth quarter of 1998 and the first quarter of
1999.
Construction Lending Operations: At June 30, 1999, CLCA had commitments to fund
construction loans of $1.4 billion, with outstanding balances of $669.5 million
compared to commitments to fund construction loans of $1.6 billion and an
outstanding balance of $731.0 million at December 31, 1998. At June 30, 1998,
CLCA had commitments to fund construction loans of $1.5 billion, with
outstanding balances of $844.9 million. The allowance for loan losses related
to CLCA loans totaled $18.2 million at June 30, 1999, and net charge-offs
related to CLCA loans were $200 thousand for the second quarter of 1999. Non-
performing loans were 1.9% and 1.0% of principal at June 30, 1999 and December
31, 1998, respectively. The increase in non-performing loans is due primarily
to one construction loan in the amount of $7.8 million which became non-
performing during 1999. Foreclosure of this loan has been delayed due to the
borrower's bankruptcy filing. However, the Company anticipates it will
ultimately foreclose on the property and has identified a prospective buyer with
a continuing interest in purchasing the property. The estimated loss on this
foreclosure is included in the allowance for loan losses as of June 30, 1999.
At June 30, 1999, CLCA's Income Property division had commitments to fund term
and construction loans of $292.6 million with outstanding balances of $88.1
million on commercial term loans and $107.5 million on commercial construction
loans compared to commitments to fund term and construction loans of $290.8
million with outstanding balances of $53.6 million on commercial term loans and
$125.2 million on commercial construction loans at December 31, 1998. At June
30, 1998, CLCA's Income Property division had outstanding balances of $29.2
million on commercial term loans and $104.4 million on other construction loans.
The allowance for loan losses related to CLCA's Income Property division totaled
$3.0 million as of June 30, 1999 and there were no charge-offs for the quarter
ended June 30, 1999. Similarly, there were no non-performing loans for CLCA's
income property portfolio as of June 30, 1999.
At June 30, 1999, IndyMac CLD had commitments to fund construction-to-permanent
lot loans and home improvement loans of $599.7 million with an outstanding
balance of $426.5 million compared with commitments of $797.7 million and an
outstanding balance of $508.7 million at December 31, 1998. At June 30, 1998,
IndyMac CLD had commitments to fund construction-to-permanent, lot loans and
home improvement loans of $652.6 million with an outstanding balance of $420.9
million. Included in consumer construction loans were $7.0 million of
manufactured housing loans at June 30, 1999 and $28.7 million of such loans at
December 31, 1998. The allowance for loan losses related to IndyMac CLD loans
totaled $8.9 million at June 30, 1999, and there were net charge-offs of $149
thousand for the quarter ended June 30, 1999. Non-performing loans for IndyMac
CLD were 1.4% and 2.7% of principal, at June 30, 1999 and December 31, 1998,
respectively, compared to 0.5% of principal at June 30, 1998.
Warehouse Lending Operations: At June 30, 1999, IndyMac REIT had extended
commitments to make warehouse and related lines of credit in an aggregate amount
of $1.2 billion, of which $297.7 million was outstanding, compared to $443.9
million outstanding at December 31, 1998. The decrease in the outstanding
balance resulted primarily from lower production volumes and a significant
reduction in the average length of time that customer borrowings remain
outstanding. The allowance for loan losses related to warehouse lines of credit
totaled $3.2 million at June 30, 1999 and there were no charge-offs for the
quarter ended June 30, 1999. At June 30, 1999, 2.7% 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 lines of credit as a percentage of
total outstanding borrowings resulted from the reduction in the outstanding
borrowings during 1999.
13
RESULTS OF OPERATIONS
Quarter ended June 30, 1999 compared to quarter ended June 30, 1998
Highlights for the quarters ended June 30, 1999 and 1998
(Dollars in thousands) For the quarters ended
-----------------------------------
June 30, June 30,
1999 1998
------------- --------------
Net interest income $38,863 $50,099
Net earnings 29,105 35,932
Return on average assets 2.71% 2.10%
Return on average equity 13.06% 17.38%
Interest spread
Yield on interest-earning assets 8.39% 8.51%
Cost of interest-bearing liabilities 5.88% 6.29%
Interest spread 2.51% 2.22%
Net earnings
IndyMac REIT's net earnings were $29.1 million, or $0.36 basic and diluted
earnings per share for the quarter ended June 30, 1999, compared to net earnings
of $35.9 million, or $0.53 basic and diluted earnings per share for the quarter
ended June 30, 1998. The decrease in net earnings of $6.8 million was primarily
due to a decrease in the average outstanding balances of loans held for sale,
loans held for investment and mortgage securities as a result of the Company's
response to the disruption in financial markets during the fourth quarter of
1998 and lower production levels. This decrease in the outstanding loan balances
and mortgage securities resulted in a decrease in interest income of $60.4
million from the quarter ended June 30, 1998 to June 30, 1999. The decrease in
interest income was partially offset by a decrease of $49.1 million in interest
expense as a result of the Company's lower outstanding borrowings during the
same period. The provision for loan losses decreased $8.1 million primarily as a
result of the decrease in the outstanding balances of loans held for sale and
loans held for investment. IndyMac REIT's equity in earnings of IndyMac
Operating decreased $4.0 million primarily as a result of a $3.2 million charge
to IndyMac Operating's earnings for the restructuring of its manufactured
housing dealer business, partially offset by improved profit margins on its loan
sale activity.
Interest income
Total interest income decreased $60.4 million for the second quarter to $83.6
million, down from $144.0 million for the second quarter of 1998. This decrease
was the result of a reduction in the average outstanding loan balances in 1999
resulting from the Company's significant sales in the fourth quarter of 1998 and
lower production volume in 1999. This resulted in decreases in interest income
related to loans held for sale of $21.2 million, mortgage securities of $18.3
million, mortgage loans held for investment of $15.7 million, and revolving
warehouse lines of credit of $8.0 million, partially offset by an increase in
interest income on income property loans of $3.5 million.
Loans held for sale
-------------------
Interest income on loans held for sale decreased $21.2 million for the second
quarter of 1999 to $24.3 million, down from $45.5 million for the second
quarter of 1998. This decrease was primarily the result of a decrease in the
average principal balance of such loans to $1.1 billion for the second
quarter of 1999, down from $2.2 billion for the second quarter of 1998,
partially offset by an increase in the effective yield to 8.9% from 8.4%.
14
Loans held for investment
-------------------------
Interest income on loans held for investment decreased $15.7 million for the
second quarter of 1999 to $11.0 million, down from $26.7 million for the
second quarter of 1998. This decrease was primarily the result of a decrease
in the average balance of such loans to $550.3 million for the second quarter
of 1999, down from $1.5 billion for the second quarter of 1998, partially
offset by an increase in the effective yield to 8.0% from 7.3%. The decrease
in the average balance of loans held for investment decreased because, in
response to the fourth quarter 1998 market disruption, the Company reduced
its assets and borrowing requirements under uncommitted lines of credit and
sold to third parties through IndyMac Operating $443.6 million of whole loans
from its held for investment portolio thereby increasing liquidity. Loans are
classified as held for investment based upon management's intent and ability
to hold such loans for the foreseeable future.
Revolving warehouse lines of credit
-----------------------------------
Interest income on revolving warehouse lines of credit decreased $8.0 million
for the second quarter of 1999 to $5.7 million, down from $13.7 million for
the second quarter of 1998. This decrease was primarily the result of a
decrease in the average balance of such loans to $286.0 million for the
second quarter of 1999, down from $576.4 million for the second quarter of
1998, compounded by a decrease in the effective yield to 8.0% from 9.5%,
primarily due to the decrease in the prime lending rates.
Income property loans
---------------------
Interest income on income property loans increased $3.5 million for the
second quarter of 1999 to $4.5 million, up from $1.0 million for the second
quarter of 1998. This increase was primarily the result of an increase in
the average balance of such loans to $194.3 million for the second quarter of
1999, up from $51.9 million for the second quarter of 1998, compounded by an
increase in the effective yield to 9.3% from 9.2%.
Mortgage securities
-------------------
Interest income on mortgage securities decreased $18.3 million for the second
quarter of 1999 to $0.6 million, down from $18.9 million for the second
quarter of 1998. This decrease was primarily the result of a decrease in the
average principal balance of securities to $223.3 million for the second
quarter, down from $957.2 million for the second quarter of 1998, compounded
by a decrease in the effective yield to 1.0% from 7.9%. The decrease in the
average principal balance was primarily the result of the sale of certain of
the Company's mortgage securities in response to the disruption in the
financial markets during the fourth quarter of 1998, which has not been
replaced by new purchases or retaining of assets via securitizations during
1999. Impairment losses on manufactured housing residual securities of $5.3
million were recognized during the second quarter of 1999 as a reduction in
interest income, whereas no impairment losses were recognized during the
second quarter of 1998. Excluding this second quarter impairment loss, the
effective yield on mortgage securities would have approximated 10.5%.
Interest expense
Total interest expense decreased $49.1 million to $44.7 million for the second
quarter of 1999, down from $93.9 million for the second quarter of 1998. This
decrease was primarily the result of a decrease in the average outstanding
balance of repurchase agreements and other credit facilities to $3.1 billion,
down from $6.0 billion at June 30, 1998, coupled with a decrease in the
Company's cost of funds to 5.9% from 6.3%.
Provision for loan losses
The provision for loan losses decreased from $9.4 million in the second quarter
of 1998 to $1.2 million in the second quarter of 1999 primarily as a result of
the lower average outstanding balances of loans held for sale and loans held for
investment during 1999 compared to 1998. As of June 30, 1999, the $52.1 million
allowance for loan losses was considered adequate to cover losses inherent in
the loan portfolio at June 30, 1999.
15
Equity in earnings (loss) of IndyMac Operating
IndyMac REIT has a 99% equity interest in IndyMac Operating. IndyMac Operating
incurred a $2.0 million loss for the second quarter, down $4.0 million from
earnings of $2.0 million for the second quarter of 1998. This decrease was
primarily the result of a loss on sale of securities of $17.1 million in the
second quarter of 1999, compared to a $7.1 million loss in the second quarter of
1998, as well as a $3.2 million charge for the restructuring of its manufactured
housing dealer business. These losses were partially offset by improved profit
margins on its loan sale activity, resulting in an increase in net gain
on sale of loans of $9.4 million to $35.9 million. Assets retained by the
Company during the second quarter of 1999 in connection with its loan sale
transactions consisted solely of $4.1 million of capitalized servicing or 0.2%
of the total principal amount of the loans sold during the period.
Six months ended June 30, 1999 compared to six months ended June 30, 1998
Highlights for the six months ended June 30, 1999 and 1998
(Dollars in thousands) For the six months ended
----------------------------------
June 30, June 30,
1999 1998
-------------- ------------
Net interest income $78,962 $91,724
Net earnings 52,714 68,496
Return on average assets 2.30% 2.11%
Return on average equity 12.11% 17.12%
Interest spread
Yield on interest-earning assets 8.27% 8.54%
Cost of interest-bearing liabilities 5.94% 6.34%
Interest spread 2.33% 2.20%
Net earnings
IndyMac REIT's net earnings were $52.7 million, or $0.65 diluted earnings per
share and $0.66 basic earnings per share, respectively, for the six months ended
June 30, 1999, compared to $68.5 million, or $1.03 basic and diluted earnings
per share for the six months ended June 30, 1998. The decrease in net earnings
of $15.8 million was primarily due to a decrease in the outstanding balances of
loans held for sale, loans held for investment and mortgage securities as a
result of the Company's response to the disruption in the financial markets
during the fourth quarter of 1998. This decrease in the outstanding loan
balances and mortgage securities resulted in a decrease in interest income of
$91.4 million from the six months ended June 30, 1998 to June
30,1999. The decrease in interest income was partially offset by a decrease of
$78.7 million in interest expense as a result of the Company's lower outstanding
borrowings during the same period. IndyMac REIT's equity in earnings of IndyMac
Operating decreased $9.2 million primarily due to a $3.2 million charge to
IndyMac Operating's other expenses for the restructuring of its manufactured
housing dealer business and an increase of $29.0 million in net loss on
securities for the six months ended June 30, 1999. These losses were partially
offset by a $19.4 million increase in net gain on mortgage loans and an $8.4
million increase in service fee and other income.
Interest Income
Total interest income was $177.1 million for the six months ended June 30, 1999
and $268.6 million for the six months ended June 30, 1998. The decrease in
interest income was the result of a reduction in the average outstanding loan
balances in 1999 resulting from the Company's significant sales in the fourth
quarter of 1998 and lower production volumes in 1999. This resulted in decreases
in interest income related to mortgage loans held for investment of $35.7
million, loans held for sale of $24.0 million, mortgage securities of $31.3
million and revolving warehouse lines of credit of $12.7 million, partially
offset
16
by increases related to income property loans of $7.7 million, residential
construction loans of $3.9 million and advances to IndyMac Operating of $3.1
million.
Loans held for sale
-------------------
Interest income on mortgage loans held for sale totaled $54.1 million and
$78.1 million for the first six months of 1999 and 1998, respectively. The
decrease of $24.0 million resulted primarily from a decrease in the average
principal balance of such loans to $1.3 billion for the first six months of
1999, down $0.6 billion from the first six months of 1998, partially offset
by an increase in the effective yield to 8.5% from 8.4%.
Loans held for investment
-------------------------
Interest income on loans held for investment decreased $35.7 million for the
first six months of 1999 to $22.7 million, down from $58.4 million for the
first six months of 1998. This decrease was primarily the result of a
decrease of $1.0 billion in the average balance of such loans to $584.4
million for the first six months of 1999, down from $1.6 billion for the
second quarter of 1998, partially offset by an increase in the effective
yield to 7.8% from 7.4%.
Residential construction loans
------------------------------
Interest income on residential construction loans totaled $59.9 million and
$55.9 million, with interest earned at an effective yield of 10.0% and 10.6%
for the six months ended June 30, 1999 and 1998, respectively. The average
principal balance of construction loans outstanding increased $136.1 million
to $1.2 billion during the first six months of 1999 from $1.1 billion during
the first six months of 1998.
Income property loans
---------------------
Interest income on income property loans increased $7.7 million for the first
six months of 1999 to $8.7 million, up from $1.0 million for the first six
months of 1998. This increase was primarily the result of an increase of
$159.6 million in the average balance of such loans to $188.9 million for the
first six months of 1999, up from $29.3 million for the first six months of
1998.
Revolving warehouse lines of credit
-----------------------------------
Interest income on revolving warehouse lines of credit decreased $12.7
million for the first six months of 1999 to $11.8 million, down from $24.5
million for the corresponding period of 1998. This decrease resulted
primarily from a decrease in the average balance of such loans to $289.7
million for the first six months of 1999, down $243.0 million from the
average of $532.7 million for the first six months of 1998, compounded by a
decrease in the effective yield to 8.2% from 9.3%, primarily due to decreases
in prime lending rates.
Mortgage securities
-------------------
Interest income on mortgage securities decreased $31.3 million for the first
six months of 1999 to $3.0 million, down from $34.3 million for the first six
months of 1998. This decrease was primarily the result of a decrease in the
average principal balance of securities to $224.8 million for the first six
months of 1998, down $621.1 million from $845.9 million for the first six
months of 1998, compounded by a decrease in the effective yield to 2.7% from
8.2%. The 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 the financial markets during the fourth quarter of 1998.
Impairment losses on residual and interest-only securities of $8.3 million
were recognized during the first six months of 1999 as a reduction in
interest income (of which $5.3 million related to manufactured housing
residuals), whereas no impairment losses were recognized during the first six
months of 1998. Excluding this impairment
17
loss, the effective yield on mortgage securities for the first six months of
1999 would have approximated 10.2%.
Interest Expense
For the six months ended June 30, 1999 and 1998, total interest expense was
$98.2 million and $176.8 million, respectively. The decrease in interest
expense was primarily due to a decrease of $2.3 billion in the average balance
outstanding of repurchase agreements and other credit facilities to $3.3 billion
for the first six months of 1999 from $5.6 billion for the first six months of
1998, coupled with a decrease in the cost of funds to 5.9% from 6.3% for the
first six months of 1999 and 1998, respectively.
Provision for loan losses
The provision for loan losses decreased from $15.6 million to $7.9 million
during the six months ended June 30, 1998 to the six months ended June 30, 1999
primarily as a result of the lower average outstanding balances of loans held
for sale and loans held for investment during 1999 compared to 1998. As of June
30, 1999, the $52.1 million allowance for loan losses was considered adequate to
cover losses inherent in the loan portfolio at June 30, 1999.
Equity in earnings (loss) of IndyMac Operating
IndyMac Operating incurred a $4.3 million loss for the six months ended June 30,
1999, compared to earnings of $4.9 million for the six months ended June 30,
1998. This decrease was primarily the result of realized losses on sale of
treasury securities of $32.4 million during the first six months of 1999,
compared to a $3.5 million loss in the first six months of 1998, as well as a
$3.2 million charge to other expenses related to the restructuring of its
manufactured housing dealer business. These losses were partially offset by
improved profit margins on loan sale activity, resulting in an increase in net
gain on sale of loans of $19.5 million to $63.9 million. In addition, service
fee income increased $8.4 million to $10.3 million from $1.9 million for the
first six months of 1999 and 1998, respectively. The increase in service fee
income was due primarily to an increase in the valuation allowance during the
first six months of 1998 of $3.4 million compared to a reduction of $7.4 million
in the valuation allowance during the first six months of 1999 due to changes in
market conditions.
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.
The Company currently maintains liquidity approximating $300 million, with a
leverage ratio of 4.0:1 at June 30, 1999 compared to 5.9:1 at December 31, 1998
and 8.2:1 at June 30, 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.
In June of 1999, IndyMac REIT's Board of Directors approved a $100 million share
repurchase plan. The shares will be purchased at prevailing market prices from
time to time depending upon market conditions. The purchases will be effected
through open market purchases or in privately negotiated transactions in
compliance with all regulatory requirements. The Company expects to begin
repurchasing shares during the third quarter of 1999.
18
The table below summarizes the Company's sources of financing as of June 30,
1999:
(Dollars in millions) Committed Outstanding Maturity
Financing Balances Date
--------------- --------------- ---------------
Merrill Lynch $1,500 $1,175 May 2001
First Union Bank Syndicate 900 686 February 2001
Paine Webber 500 335 June 2000
Morgan Stanley 500 93 January 2000
Bank of America 200 198 December 1999
Senior unsecured notes 60 60 October 2002
Uncommitted borrowings - 827 -
------ ------
Total $3,660 $3,374
====== ======
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. From time to
time, the Company may enter into uncommitted financing arrangements to take
advantage of preferable pricing opportunities. However, it is the Company's
practice to maintain its balance of total outstanding borrowings at an amount
less than or equal to its committed financing.
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 1998 global financial crisis. 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 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.
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.
19
State of Readiness and Identification of Risks
The identification and assessment of internal systems has been completed, as
well as the remediation and testing phases. The implementation phase is expected
to be completed during August of 1999. Most of the Company's internally
developed systems were developed over the past five years, and were designed to
be Year 2000 compliant.
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.
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 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
has assessed the risks related to these and other Year 2000 issues, 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
The Company recognized approximately $1.3 million of expenses year to date 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 may 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 may not equal the change in amount paid, the spread (defined as
the difference between the two) can be adversely affected.
20
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 over time
than 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
investment and non-investment grade securities, adjustable rate agency
securities, principal-only securities and U.S. Treasury bonds and off-balance
sheet instruments such as futures, call options, and floors. In addition, as
interest rates decrease the fair market value of the Company's purchase
commitments increases.
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 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 calculations that quantify the net financial impact of
changes in interest rates on its interest-earning assets, commitments and
interest-bearing liabilities. As of June 30, 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 else being constant, would result in a combined
reduction to after tax income for IndyMac REIT and IndyMac Operating of $3.9
million, and a combined after tax gain on available for sale securities,
recorded as a component of other comprehensive income of $2.1 million. The net
result would be a reduction to comprehensive income in 1999 of $1.8 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; (6) certain matters relating to the
proposed acquisition of SGVB, including the timing and uncertainty of the
regulatory approval process and other consents and approvals that may be
required, the changing nature and size of the surviving corporation's business;
and (7) other risks and uncertainties detailed in this Management's Discussion
and Analysis of Financial Condition and Results of Operations.
21
PART II
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
At the annual meeting of IndyMac REIT's shareholders held on June 3, 1999, the
shareholders voted to re-elect IndyMac REIT's directors. The votes cast in this
regard were as follows:
For Withheld
-------------- --------------
Lyle E. Gramley 72,524,379 1,635,538
Thomas J. Kearns 72,499,634 1,660,283
David S. Loeb 72,511,826 1,648,091
Angelo R. Mozilo 72,559,512 1,600,405
Frederick J. Napolitano 72,530,086 1,629,831
Michael W. Perry 73,568,941 590,976
In addition, the shareholders voted to approve an amendment to the Company's
1998 Stock Incentive Plan and to ratify the selection of Grant Thornton LLP as
IndyMac REIT's independent certified public accountants for the fiscal year
ending December 31, 1999. The votes cast on these proposals were as follows:
Broker
In Favor Against Abstaining Non-Votes
--------------- --------------- ------------- ------------
Amendment to the 1998 Stock Incentive Plan 60,757,198 12,649,490 753,229 -
Selection of Grant Thornton LLP 73,548,795 211,912 389,210 -
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- ---------- --------------------------------
(a) Exhibits
--------
4.1 1998 Stock Incentive Plan adopted May 19, 1998, as amended.
27 Financial Data Schedule
(b) Reports on Form 8-K.
--------------------
None
22
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Pasadena,
State of California, on August 16, 1999 for the six months ended June 30, 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
23