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 September 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 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 September 30, 1999: 76,617,809 shares
1
INDYMAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
September 30, December 31,
1999 1998
------------ -----------
ASSETS (Unaudited)
Loans held for sale, net
Mortgages-prime $ 464,733 $ 989,052
Mortgages-subprime 57,665 145,793
Manufactured housing - 215,507
Home improvement - 205,304
---------- ----------
522,398 1,555,656
Loans held for investment, net
Mortgage loans 873,644 668,523
Residential construction
Builder 717,613 799,712
Consumer 330,940 468,735
Income property 167,600 178,756
Revolving warehouse lines of credit 215,742 443,946
----------- ----------
2,305,539 2,559,672
Mortgage securities available for sale 261,069 235,032
Collateral for collateralized mortgage obligations 111,091 162,726
Investment in and advances to IndyMac, Inc. 210,913 279,693
Cash 11,793 815
Other assets 74,747 57,558
------------ -----------
Total assets $3,497,550 $4,851,152
============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Loans and securities sold under agreements to repurchase $1,773,449 $2,942,270
Syndicated bank lines and commercial paper conduit 675,190 843,279
Collateralized mortgage obligations 90,045 140,810
Senior unsecured notes 60,148 60,031
Accounts payable and accrued liabilities 41,773 42,659
---------- ----------
Total liabilities 2,640,605 4,029,049
Shareholders' Equity
Preferred stock - authorized, 10,000,000 shares of $.01 par value;
none issued - -
Commonstock - authorized, 200,000,000 shares of $.01 par value;issued
80,604,770 shares (76,617,770 outstanding) at September30, 1999 and
74,794,435 shares (74,693,565 outstanding) at December 31, 1998 806 758
Additional paid-in capital 1,078,438 1,018,859
Treasury stock, at cost, 3,896,961 shares at September 30, 1999 and 1,100,870
shares at December 31, 1998 (54,065) (13,062)
Accumulated other comprehensive income (loss) 2,138 (18,776)
Cumulative earnings 361,783 277,220
Cumulative distributions to shareholders (532,155) (442,896)
---------- ----------
Total shareholders' equity 856,945 822,103
---------- ----------
Total liabilities and shareholders' equity $3,497,550 $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)
Three months ended September 30, Nine months ended September 30,
-------------------------------- -------------------------------
1999 1998 1999 1998
------- -------- ------- -------
REVENUES
Interest income
Loans held for sale, net
Mortgages-prime $13,831 $35,852 $41,582 $ 89,223
Mortgages-subprime 2,285 15,418 7,360 24,094
Manufactured housing 1,832 2,416 13,038 11,814
Home improvement 4,929 5,821 14,995 12,513
-------- -------- -------- ---------
22,877 59,507 76,975 137,644
Loans held for investment, net
Mortgage loans 10,619 24,293 33,330 82,658
Residential construction
Builder 20,238 21,177 61,049 57,331
Consumer 8,339 9,749 27,399 29,534
Income property 4,544 3,751 13,267 4,738
Revolving warehouse lines of credit 4,920 10,952 16,706 35,426
-------- -------- -------- ---------
48,660 69,922 151,751 209,687
Mortgage securities available for sale 6,830 14,828 9,840 49,134
Collateral for collateralized mortgage obligations 2,162 3,499 7,546 11,821
Advances to IndyMac, Inc. 5,112 5,134 16,023 12,920
Other 70 190 722 437
-------- -------- -------- ---------
Total interest income 85,711 153,080 262,857 421,643
Interest expense
Loans and securities sold under agreements to repurchase 29,503 85,549 97,630 232,681
Syndicated bank lines and commercial paper conduit 10,195 12,514 31,770 31,211
Collateralized mortgage obligations 1,808 3,535 7,520 11,782
Senior unsecured notes 1,386 1,383 4,156 4,146
-------- -------- -------- ---------
Total interest expense 42,892 102,981 141,076 279,820
Net interest income before provision for loan losses 42,819 50,099 121,781 141,823
Provision for loan losses 4,412 7,285 12,310 22,892
-------- -------- -------- ---------
Net interest income 38,407 42,814 109,471 118,931
Equity in earnings (loss) of IndyMac, Inc. 1,658 4,826 (2,647) 9,717
Other income (loss) 129 (1,500) 2,875 (647)
-------- -------- -------- ---------
Net revenues 40,194 46,140 109,699 128,001
EXPENSES
Salaries and related benefits 5,554 5,205 17,308 14,240
General and administrative 2,791 1,912 7,828 6,242
-------- -------- -------- ---------
Total expenses 8,345 7,117 25,136 20,482
-------- -------- -------- ---------
NET EARNINGS $31,849 $39,023 $84,563 $107,519
======== ======== ======== =========
EARNINGS PER SHARE
Basic $ 0.40 $ 0.54 $ 1.07 $ 1.57
Diluted 0.39 0.54 1.06 1.57
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic 79,998 72,070 79,014 68,314
Diluted 81,082 72,154 79,759 68,489
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)
Nine months ended September 30,
---------------------------------
1999 1998
------------- -------------
Cash flows from operating activities:
Net earnings $ 84,563 $ 107,519
Adjustments to reconcile net earnings
to net cash provided by (used in) operating activities:
Provision for loan losses 12,310 22,892
Unrealized loss on trading securities and loans held for investment 2,202 2,089
Equity in (earnings) loss of IndyMac, Inc. 2,647 (9,717)
Amortization and depreciation 44,440 39,380
Purchases of mortgage loans held for sale (4,395,437) (9,245,825)
Sales of and payments from mortgage loans held for sale 4,891,985 8,588,903
Purchases of manufactured housing loans held for sale (75,166) (358,552)
Sales of and payments from manufactured housing loans held for sale 251,200 411,067
Net (purchases) sales of home improvement loans held for sale 25,758 (169,471)
Purchases of trading mortgage securities - (96,834)
Sales of and payments from trading mortgage securities - 25,145
Net decrease in other assets 866 4,785
Net increase (decrease) in other liabilities (886) 1,256
------------ ------------
Net cash provided by (used in) operating activities 844,482 (677,363)
------------ ------------
Cash flows from investing activities:
Purchases of mortgage loans held for investment (9,869) (265,286)
Payments from mortgage loans held for investment 242,726 1,012,412
Net decrease (increase) in construction loans receivable 179,871 (433,895)
Purchases of mortgage securities available for sale (76,310) (603,444)
Net decrease in revolving warehouse lines of credit 228,049 51,517
Net (increase) decrease in manufactured housing loans held for investment (25,421) 2,410
Net increase in home improvement loans held for investment (50,474) -
Net (increase) decrease in advances to IndyMac, Inc. net of cash
payments 71,984 (138,395)
Sales of and payments from available for sale and trading mortgage
securities 16,381 331,535
Payments from collateral for collateralized mortgage obligations 51,923 58,617
------------ ------------
Net cash provided by investing activities 628,860 15,471
------------ ------------
Cash flows from financing activities:
Net increase (decrease) in loans and securities sold under agreements
to repurchase (1,171,381) 169,966
Net increase (decrease) in syndicated bank lines and commercial paper
conduit (168,089) 422,159
Principal payments on collateralized mortgage obligations (52,259) (59,035)
Net proceeds from issuance of common stock 59,627 222,087
Acquisition of treasury stock (41,003) -
Cash dividends paid (89,259) (102,612)
------------ ------------
Net cash provided by (used in) financing activities (1,462,364) 652,565
------------ ------------
Net increase (decrease) in cash and cash equivalents 10,978 (9,327)
Cash and cash equivalents at beginning of period 815 13,676
------------ ------------
Cash and cash equivalents at end of period $ 11,793 $ 4,349
============ ============
Supplemental cash flow information:
Cash paid for interest $ 143,054 $ 275,601
============ ============
Supplemental disclosure of noncash investing and financing activities:
Transfer of manufactured housing loans held for sale to loans held
for investment $ 91,559 $ 1,716
============ ============
Transfer of home improvement loans held for sale to loans held for
investment $ 223,181 $ -
============ ============
The accompanying notes are an integral part of these statements.
4
INDYMAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHARESHOLDERS' EQUITY
(Dollars in thousands)
(Unaudited)
Additional
Common Paid-in Treasury Accumulated other comprehensive income (loss)
---------------------------------------------
Stock Capital Stock REIT Operating Total
-------- ---------- --------- ----------- --------- ----------
Balance at December 31, 1997 $ 634 $ 773,475 $ - $ (2,006) $ 501 $ (1,505)
Common stock options exercised 1 3,913 - - - -
Director's and officer's notes
receivable 10 (8,140) - - - -
Deferred compensation,
restricted stock 1 760 - - - -
401(k) contribution - 546 - - - -
Net gain (loss) on available for sale
mortgage securities - - - (6,334) 1,390 (4,944)
Dividend reinvestment plan 100 224,896 - - - -
Net earnings - - - - - -
Dividends paid - - - - - -
-------- ---------- --------- ---------- --------- ---------
Net change 112 221,975 - (6,334) 1,390 (4,944)
-------- ---------- --------- ---------- --------- ---------
Balance at September 30, 1998 $ 746 $ 995,450 $ - $ (8,340) $ 1,891 $ (6,449)
======== ========== ========= ========== ========= =========
Balance at December 31, 1998 $ 758 $1,018,859 $ (13,062) $ (18,366) $ (410) $ (18,776)
Common stock options exercised 2 1,705 - - - -
Director's and officer's notes receivable - 8,435 - - - -
Deferred compensation,
restricted stock 2 1,909 - - - -
401(k) contribution - 539 - - - -
Net gain on available for sale mortgage
securities - - 15,454 5,460 20,914
Dividend reinvestment plan 44 46,991 - - - -
Acquisition of treasury stock - - (41,003) - - -
Net earnings - - - - - -
Dividends paid - - - - - -
-------- ---------- --------- ---------- --------- ---------
Net change 48 59,579 (41,003) 15,454 5,460 20,914
-------- ---------- --------- ---------- --------- ---------
Balance at September 30, 1999 $ 806 $1,078,438 $ (54,065) $ (2,912) $ 5,050 $ 2,138
======== ========== ========= ========== ========= =========
Cumulative Total
Cumulative Comprehensive Distributions to Shareholders'
Earnings Income Shareholders Equity
---------- ------------- --------------- ------------
Balance at December 31, 1997 $ 243,430 $ (312,140) $ 703,894
Common stock options exercised - - - 3,914
Director's and officer's notes
receivable - - - (8,130)
Deferred compensation,
restricted stock - - - 761
401(k) contribution - - - 546
Net gain (loss) on available for sale
mortgage securities - (4,944) - (4,944)
Dividend reinvestment plan - - - 224,996
Net earnings 107,519 107,519 - 107,519
Dividends paid - - (102,612) (102,612)
--------- ----------- ----------- -----------
Net change 107,519 102,575 (102,612) 222,050
--------- ----------- ----------- -----------
Balance at September 30, 1998 $ 350,949 $ (414,752) $ 925,944
========= =========== ===========
Balance at December 31, 1998 $ 277,220 $ (442,896) $ 822,103
Common stock options exercised - - - 1,707
Director's and officer's notes receivable - - - 8,435
Deferred compensation,
restricted stock - - - 1,911
401(k) contribution - - - 539
Net gain on available for sale mortgage
securities - 20,914 - 20,914
Dividend reinvestment plan - - - 47,035
Acquisition of treasury stock - - - (41,003)
Net earnings 84,563 84,563 - 84,563
Dividends paid - - (89,259) (89,259)
---------- ----------- ----------- -----------
Net change 84,563 105,477 (89,259) 34,842
---------- ----------- ------------ -----------
Balance at September 30, 1999 $ 361,783 $ (532,155) $ 856,945
========== ============ ===========
The accompanying notes are an integral part of these statements.
5
INDYMAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 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 GAAP 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, and was established in 1993. IndyMac REIT
owns all the preferred non-voting stock and has a 99% economic interest in
IndyMac Operating. IndyMac REIT's investment in IndyMac Operating is accounted
for under a method similar to the equity method 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 September 30, 1998 to conform to the September 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 September 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 the Company's ongoing risk assessment process. IndyMac REIT
recognized a $4.4 million provision for loan losses during the third quarter of
1999, compared to a $1.2 million provision for loan losses during the second
quarter of 1999. The allowance for loan losses was increased through the
provision for loan losses during the quarter ended September 30, 1999 to
maintain the allowance at levels judged prudent given the composition of the
Company's loan portfolio and management's assessment of the losses inherent
therein at September 30, 1999. The $53.8 million allowance for loan losses was
considered adequate to cover losses inherent in the loan portfolio at September
30, 1999. However, no assurance can be given that IndyMac REIT will not, in any
particular period, sustain loan losses that exceed the amount provided for, or
that subsequent evaluations of the loan portfolio, in light of the then-
prevailing factors, including economic conditions, the credit quality of the
assets comprising IndyMac REIT's portfolio and the Company's ongoing risk
assessment 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
three and nine months ended September 30, 1999:
(Dollars in thousands) Three months ended Nine months ended
September 30, 1999 September 30, 1999
------------------ ------------------
Beginning balance $52,077 $50,112
Provision 4,412 12,310
Net charge-offs (2,675) (8,608)
------- -------
Ending balance $53,814 $53,814
======= =======
NOTE C - AVAILABLE FOR SALE MORTGAGE SECURITIES
A summary of IndyMac REIT's available for sale mortgage securities as of
September 30, 1999 and December 31, 1998 follows:
(Dollars in thousands) September 30, December 31,
1999 1998
------------- ------------
Amortized cost $263,981 $253,398
Gross unrealized gains 13,398 317
Gross unrealized losses (16,310) (18,683)
-------- --------
Estimated fair value $261,069 $235,032
======== ========
At September 30, 1999, IndyMac REIT's available for sale mortgage securities
included $128.8 million of AAA-rated interest-only securities, $48.5 million of
senior securities, $41.2 million of residual securities, $27.4 million of agency
securities, $12.3 million of other investment grade securities, and $2.9 million
of non-investment grade securities.
The fair value of IndyMac REIT's interest-only and residual securities is
determined by estimating net future cash flows using estimates of future
prepayment rates and, for residual securities, credit losses. The estimated
cash flows are discounted using discount rates that approximate current market
rates. Prepayment speed assumptions used to estimate the value of IndyMac
REIT's interest-only and residual securities are based primarily on expectations
of future prepayment levels based on collateral coupon, seasoning and historical
experience.
At September 30, 1999, the fair value of interest-only securities of $2.9
million was estimated using an average constant prepayment rate assumption of
approximately 14%, and weighted average discount rates ranging from 12% to 13%.
The fair values of residual securities, collateralized by prime, subprime and
manufactured housing loans, was estimated using a weighted average discount rate
of 20%, assumed weighted average annual credit losses on underlying collateral
of 1.2% and average annual constant prepayment rates ranging from 30% to 35%.
The estimated fair value of the non-investment grade securities of $2.9 million
at September 30, 1999 was net of a $5.5 million discount to face and valuation
allowance for credit losses.
NOTE D - SEGMENT REPORTING
IndyMac REIT's reportable operating segments include Mortgage Banking,
Investments and Lending. The Mortgage Banking segment purchases and sells
conforming, jumbo and non-conforming mortgage loans from third party originators
of mortgage loans, loans funded directly to consumers through LoanWorks (a
division of IndyMac Operating), and to a lesser extent, 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 residential construction, land and lot loan programs
for builders and developers and third party customers through its Construction
Lending Corporation of America division and Construction Lending Division. This
segment also engages in secured warehouse lending operations.
7
Segment information for the three and nine months ended September 30, 1999 and
1998 were as follows:
(Dollars in thousands) Mortgage
Banking Investments Lending Adjustment(1) Consolidated
------- ----------- ------- ---------- ------------
Three months ended September 30, 1999
Net interest income before provision for
loan losses $ 12,896 $ 6,480 $ 18,331 $ 5,112 $ 42,819
Net revenues 6,416 4,090 22,895 6,793 40,194
Net earnings 6,108 3,320 15,628 6,793 31,849
Three months ended September 30, 1998
Net interest income before provision for
loan losses $ 18,604 $ 7,953 $ 18,408 $ 5,134 $ 50,099
Net revenues 15,809 3,108 17,263 9,960 46,140
Net earnings 15,045 2,737 11,281 9,960 39,023
Nine months ended September 30, 1999
Net interest income before provision for
loan losses $ 32,003 $ 16,752 $ 57,003 $ 16,023 $ 121,781
Net revenues 23,583 23,849 48,891 13,376 109,699
Net earnings 22,911 21,185 27,091 13,376 84,563
Nine months ended September 30, 1998
Net interest income before provision for
loan losses $ 45,413 $ 30,946 $ 52,544 $ 12,920 $ 141,823
Net revenues 41,094 15,207 49,063 22,637 128,001
Net earnings 39,335 13,552 31,995 22,637 107,519
Assets as of September 30, 1999 $ 647,657 $ 1,168,362 $ 1,470,618 $210,913 $ 3,497,550
Assets as of September 30, 1998 $2,068,534 $ 2,326,483 $ 1,875,934 $335,739 $ 6,606,690
(1) Represents intercompany interest and earnings from investment in IndyMac
Operating.
8
NOTE E - INVESTMENT IN INDYMAC OPERATING
Summarized financial information for IndyMac Operating follows:
(Dollars in thousands) September 30, December 31,
1999 1998
--------------- ---------------
Loans held for sale, net $ 43,126 $ 210,086
Mortgage securities available for sale 379,100 398,094
Treasury securities - 302,313
Mortgage servicing rights 129,433 127,229
Other assets 66,722 65,074
-------- ----------
Total assets $618,381 $1,102,796
======== ==========
Loans and securities sold under agreements to repurchase $281,235 $ 697,406
Syndicated bank lines 89,139 89,139
Due to IndyMac Mortgage Holdings, Inc. 124,170 196,154
Accounts payable and accrued liabilities 36,218 35,714
Shareholders' equity 87,619 84,383
-------- ----------
Total liabilities and shareholders' equity $618,381 $1,102,796
======== ==========
(Dollars in thousands) Three months ended Nine months ended
September 30, September 30,
1999 1998 1999 1998
------------- ------------ ------------- -------------
Interest income
Loans held for sale, net $ 3,549 $ 3,541 $ 14,156 $ 9,560
Mortgage securities available for sale 10,235 8,308 23,397 25,288
Treasury securities 1,374 4,299 8,530 11,337
------- ------- -------- -------
Total interest income 15,158 16,148 46,083 46,185
Interest expense 12,367 16,828 41,313 45,025
------- ------- -------- -------
Net interest income (expense) before provision
for loan losses 2,791 (680) 4,770 1,160
Provision for loan losses 599 - 1,027 36
------- ------- -------- -------
Net interest income (expense) 2,192 (680) 3,743 1,124
Gain on sale of mortgage loans, net 17,401 39,846 81,310 84,334
Gain (loss) on sale of securities, net 375 (1,109) (32,065) (4,568)
Service fee income (expense) 5,873 (2,748) 16,215 1,812
Other income 5,954 5,769 15,573 12,023
------- ------- -------- -------
Net revenues 31,795 41,078 84,776 94,725
Total expenses 28,882 32,600 89,426 77,655
------- ------- -------- -------
Earnings (loss) before income tax provision (benefit) 2,913 8,478 (4,650) 17,070
Income tax provision (benefit) 1,238 3,603 (1,976) 7,255
------- ------- -------- -------
Net earnings (loss) $ 1,675 $ 4,875 ($2,674) $ 9,815
======= ======= ======== =======
Allowance for Loan Losses
IndyMac Operating's allowance for loss on sale of loans related to loans held
for sale totaled $267 thousand at September 30, 1999.
9
Available for Sale Mortgage Securities
A summary of IndyMac Operating's available for sale mortgage securities as of
September 30, 1999 and December 31, 1998 follows:
(Dollars in thousands) September 30, December 31,
1999 1998
------------- ------------
Amortized cost $370,228 $397,859
Gross unrealized gains 21,006 408
Gross unrealized losses (12,134) (173)
-------- --------
Estimated fair value $379,100 $398,094
======== ========
At September 30, 1999, IndyMac Operating's available for sale mortgage
securities included $215.2 million of AAA-rated interest-only securities, $127.6
million of investment grade securities, $26.7 million of non-investment grade
securities, a $5.2 million residual security, and $4.4 million of principal-only
securities.
The fair value of IndyMac Operating's interest-only and residual securities is
determined by estimating net future cash flows using estimates of future
prepayment rates and, for residual securities, credit losses. The estimated
cash flows are discounted using discount rates that approximate current market
rates. Prepayment speed assumptions used to value IndyMac Operating's interest-
only and residual securities are based primarily on expectations of future
prepayment levels based on collateral coupon, seasoning and historical
experience.
At September 30, 1999, the fair value of IndyMac Operating's interest-only
securities was estimated using an average constant prepayment rate assumption of
approximately 14%, and weighted average discount rates ranging from 13% to 14%.
The estimated fair value of the non-investment grade securities of $26.7 million
at September 30, 1999 was net of a $11.1 million discount to face and valuation
allowance for credit losses.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- ------------------------------------------------------------------------
RESULTS OF OPERATIONS
- ---------------------
GENERAL
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 originations through the use of its proprietary
Internet-based 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.
IndyMac Operating also originates conforming, jumbo and other non-conforming
mortgage loans through its direct-to-consumer LoanWorks/2/ division through its
proprietary website at www.loanworks.com, other internet relationships, and
-----------------
direct-to-consumer marketing methods.
IndyMac Operating, through its LoanWorks Servicing division, services loans that
it has purchased 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.
_____________________________
/1/ Registered in the U.S. Patent and Trademark Office. Patent pending.
/2/ Registered in the U.S. Patent and Trademark Office.
10
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, and primary and master loan servicing fee income.
In addition to its prime and subprime mortgage loans, the Company earns net
interest income and fee income through its other consumer 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 from consumers; and LoanWorks Servicing, which
performs servicing for mortgage loans acquired by the Company or originated
through LoanWorks. The Company's commercial lending operations include
Construction Lending Corporation of America ("CLCA"), which provides a variety
of residential 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, subject to
shareholder approval, the termination of its status as a REIT, to be effective
after December 31, 1999. If the termination of its status as a REIT is
approved, the Company will no longer be required to distribute 95% of its
taxable income to its shareholders, but will be taxed on its earnings. This
taxable structure will provide the Company with the ability to support its
lending and trading/securitization businesses with a more stable and diverse
funding base, grow through reinvestment of its retained earnings and create new
product marketing opportunities.
In July of 1999, the Company announced that it had signed a definitive agreement
to acquire SGV Bancorp, Inc. ("SGVB"), the holding company for First Federal
Savings and Loan Association of San Gabriel Valley. SGVB is a Southern
California-based, federally chartered savings and loan holding company whose
savings and loan subsidiary had nine branches, $363 million in deposits, and
27,000 customer accounts as of September 30, 1999.
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 and 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 is subject to Office
of Thrift Supervision ("OTS") approval as well as approval by the shareholders
of both the Company and SGVB. The Company filed an application on September 1,
1999 with the OTS to approve the acquisition and filed a response to the OTS'
request for additional information on October 29, 1999. The Company and SGVB
mailed a joint proxy statement to their respective shareholders in the beginning
of November 1999 in conjunction with the special shareholder meetings being
held by the Company and SGVB on December 14, 1999.
OVERVIEW OF OPERATIONS
Third Party Lending: IndyMac TPL produced $1.2 billion of prime and subprime
loans during the third quarter of 1999, compared with $1.4 billion and $3.9
billion during the second quarter of 1999 and the third quarter of 1998,
respectively. This decline was due to the effect of increasing mortgage
interest rates on loan demand since the beginning of the year. IndyMac TPL loan
production was financed on an interim basis using equity and short-term
financing in the form of repurchase agreements and other credit facilities. The
Company sold $1.5 billion of loans during the third quarter of 1999, compared
with $1.7 billion sold during the second quarter of 1999 and $4.3 billion sold
in the third quarter of 1998.
During 1999, the Company refocused its third party lending business to
concentrate on soliciting origination from smaller mortgage originators, for
whom it can add value through the use of its proprietary website, www.e-
------
MITS.com. Loans funded through e-MITS in the third quarter of 1999 totaled $694
- --------
million,
11
representing 53 percent of IndyMac's third party prime and subprime mortgage
production for this period, up from $486 million or 36 percent of production
during the second quarter of 1999.
LoanWorks funded $125 million of mortgage loans during the third quarter of
1999, a reduction of 25 percent in comparison to $166 million of loans during
the second quarter of 1999. LoanWorks' purchase mortgage volume as a percentage
of total volume increased from 21 percent in the second quarter to 36 percent
during the third quarter of 1999. The number of loans funded totaled 839 and 739
in the second and third quarters of 1999, respectively.
At September 30, 1999 and December 31, 1998, IndyMac Operating's master
servicing portfolio had an aggregate outstanding principal balance of $14.0
billion and $15.8 billion, respectively, with a weighted average coupon of 8.2%
for both periods, while LoanWorks Servicing's portfolio at September 30, 1999
and December 31, 1998 was $7.0 billion and $7.1 billion, respectively, with a
weighted average coupon of 8.2% as of September 30, 1999 and 8.3% as of December
31, 1998. The decrease in the master servicing portfolio of $1.8 million was
primarily due to principal payments and amortization totaling $2.9 billion,
offset by net additions of $1.1 billion during the year.
Construction Lending: At September 30, 1999, CLCA had commitments to fund
construction loans of $1.5 billion, with outstanding balances of $666.3 million
compared to commitments of $1.6 billion with outstanding balances of $731.0
million at December 31, 1998. At September 30, 1998, CLCA had commitments to
fund construction loans of $1.6 billion, with outstanding balances of $722.7
million.
CLCA's Income Property division had commitments to fund construction loans of
$155.1 million and $290.8 million at September 30, 1999 and December 31, 1998,
respectively. CLCA's Income Property division had outstanding balances on term
and construction loans of $56.9 million and $110.7 million, respectively, at
September 30, 1999, and $53.6 million and $125.2 million, respectively, at
December 31, 1998. At September 30, 1998, CLCA's Income Property division had
outstanding balances on its term and construction loans totaling $162.0 million.
At September 30, 1999, IndyMac CLD had commitments to fund construction-to-
permanent loans, lot loans and home improvement loans of $556.3 million with
outstanding balances of $382.3 million compared with commitments of $797.7
million and outstanding balances of $508.7 million at December 31, 1998. At
September 30, 1998, IndyMac CLD had commitments to fund construction-to-
permanent loans, lot loans and home improvement loans of $880.7 million with
outstanding balances of $487.1 million. Included in consumer construction loans
were $28.7 million of manufactured housing loans at December 31, 1998 and $20.7
million of manufactured housing loans at September 30, 1998.
CLCA's outstanding balances of $666.3 million and $731.0 million at September
30, 1999 and December 31, 1998, respectively, included $663.1 million and $3.2
million of builder and consumer products at September 30, 1999 and $728.8
million and $2.2 million at December 31, 1998, respectively. IndyMac CLD's
outstanding balances of $382.3 million and $508.7 million at September 30, 1999
and December 31, 1998, respectively, included $54.6 million and $327.7 million
of builder and consumer products at September 30, 1999, respectively and $70.9
million and $437.8 million at December 31, 1998, respectively.
Warehouse Lending: At September 30, 1999, IndyMac REIT had extended commitments
to make warehouse and related lines of credit in an aggregate amount of $1.0
billion, of which $215.7 million was outstanding, compared to $443.9 million
outstanding at December 31, 1998. The decrease in the outstanding balances
resulted primarily from lower production volumes and a significant reduction in
the average length of time that customer borrowings remain outstanding.
FINANCIAL CONDITION
Loans Held for Sale, Net: The Company's $565.5 million portfolio of loans held
for sale, net, at September 30, 1999 consisted of $503.8 million and $61.7
million of prime and subprime products, respectively. The Company's $1.8
billion loans held for sale, net, portfolio balance at December 31, 1998
consisted of $1.1 billion, $164.3 million, $243.2 million, and $278.3 million of
prime, subprime, manufactured housing, and home improvement loans, respectively.
The overall 68% decrease in the loans held for sale, net, from December 31, 1998
to September 30, 1999 was primarily due to the following two factors:
12
. Loan production decreased due to overall lower demand in the market caused
by the increase in interest rates during 1999, and
. At September 30, 1999, the Company transferred its $91.6 million
outstanding balance of manufactured housing loans held for sale and its
$223.2 million balance of home improvement loans held for sale to its held
for investment portfolio given management's decision during 1999 to de-
emphasize its focus on these business lines. The Company has both the
ability and the intent to hold these loans for the foreseeable future.
Loans Held For Investment, Net: The Company's $873.6 million portfolio of loans
held for investment, net (excluding construction and warehouse lending
operations) at September 30, 1999 consisted of $159.4 million of varying types
of adjustable-rate loans which contractually reprice in monthly, semi-annual or
annual periods; $180.2 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 $202.6 million of fixed-rate loans. The
Company's loans held for investment, net portfolio included $531.5 million and
$640.7 million of prime loans at September 30, 1999 and December 31, 1998,
respectively. Also included in the loans held for investment, net portfolio at
September 30, 1999 was $108.2 million of manufactured housing loans, $223.2
million of home improvement loans, and $10.7 million of subprime loans. At
December 31, 1998 the Company held $25.0 million of manufactured housing loans
and $2.8 million of subprime loans in its held for investment portfolio. The
increase of $205.1 million from December 31, 1998 to September 30, 1999 in the
balance of loans held for investment, net, was due to the transfer of $91.6
million of manufactured housing loans and $223.2 million of home improvement
loans from the held for sale classification. The weighted average coupon of the
prime product held in the mortgage loans held for investment, net portfolio at
September 30, 1999 and December 31,1998 was 8.3% and 8.4%, respectively.
Available for Sale Mortgage and Treasury Securities: At September 30, 1999 and
December 31, 1998, the Company's mortgage and treasury securities portfolio, at
fair value, totaled $640.2 million and $935.4 million, respectively. The
Company's portfolio included $344.0 million of AAA rated interest-only
securities, $135.2 million of agency securities, $84.9 million of investment
grade private-label mortgage-backed securities, $46.4 million of non-investment
grade residuals, and $29.7 million of non-investment grade securities. The
decrease in the balance of mortgage and treasury securities of $295.2 million
from December 31, 1998 was primarily due to the sale of 100% of the Company's
treasury securities portfolio (balance totaled $302.3 million at December 31,
1998), and the sale of investment and non-investment grade securities totaling
$108.0 million during 1999. These sales were made as a result of the Company's
continued focus on portfolio management and cash flow. The decrease of $410.3
million of the mortgage private-labeled mortgage backed securities balance
resulting from these sales was partially offset by the purchase of $102.5
million of agency securities.
Collateralized mortgage obligations (CMO): At September 30, 1999 and December
31, 1998, the Company's CMO balance totaled $90.0 million and $140.8 million,
respectively, and the corresponding balance of collateral for CMO totaled $111.1
million and $162.7 million at September 30, 1999 and December 31, 1998,
respectively. The decrease in the CMO balance and related collateral was due to
principal repayments on the underlying loan balances.
Borrowings: At September 30, 1999 and December 31, 1998, the Company's balance
of loans and securities sold under agreements to repurchase totaled $2.1 billion
and $3.6 billion, respectively. The
13
balance of syndicated bank lines and commercial paper conduit totaled $764.3
million and $932.4 million at September 30, 1999 and December 31, 1998,
respectively. The overall $1.8 billion decrease in these borrowings was due to
the Company's emphasis on improved liquidity, cash flows, and lower leverage.
The Company is continuing to pursue strategic alternatives to manage its
liabilities, with an emphasis on procuring committed financing, and longer-term
facilities where advances are not subject to fluctuations in the fair values of
underlying collateral. It is anticipated that the merger with SGVB will enhance
the stability of the Company's liquidity and capital resources due to access to
deposits and FHLB borrowings.
Asset Quality
A summary of the Company's non-performing loans as of September 30, 1999 and
December 31, 1998 follows:
September 30, December 31,
1999 1998
-------------------------------- ----------------------------
% of % of
Amount Portfolio Amount Portfolio
-------------- ------------ --------- -------------
Non-performing Loans/6/:
Single Family Residential ("SFR") Mortgage Loans $50,022 4.46% $58,326 3.05%
Builder Construction and Income Property Loans 26,062 2.87% 16,253 1.64%
Consumer Construction Loans 5,279 1.57% 9,504 2.01%
Revolving Warehouse Lines of Credit 7,307 3.35% 9,806 2.19%
Manufactured Home Loans 6,677 5.85% 3,599 1.33%
Home Improvement Loans 3,859 1.69% 2,222 0.79%
------- -------
Totals $99,206 3.39% $99,710 2.28%
======= =======
SFR Mortgage Loans: Non-performing loans decreased $8.3 million to $50.0 million
at September 30, 1999 from $58.3 million at December 31, 1998 due to decreases
in the size of the Company's loan portfolio, along with management's efforts
aimed at improving the quality and efficiency of the Company's collection
efforts. Non-performing loans as a percent of the portfolio increased 141 basis
points to 4.46% at September 30, 1999 from 3.05% at December 31, 1998 primarily
due to the decrease of the portfolio balance from $1.9 billion at December 31,
1998 to $1.1 billion at September 30, 1999.
Builder Construction and Income Property Loans: Non-performing loans increased
$9.8 million to $26.1 million at September 30, 1999 from $16.3 million at
December 31, 1998. The increase was primarily related to one loan totaling $7.8
million. This loan is secured by a property that is currently in the process of
foreclosure, with no losses anticipated. There were two additional non-
performing loans at September 30, 1999 totaling $4.3 million that are subject to
forebearance agreements. Subsequent to September 30, 1999, $7.1 million of the
non-performing loans at September 30, 1999 were brought current, or paid off,
with no losses incurred by the Company. All non-performing loans at September
30, 1999 consist of subdivision construction collateral, and have been
thoroughly evaluated and appraised. Non-performing loans as a percent of the
builder construction and income property portfolio increased 123 basis points to
2.87% at September 30, 1999 from 1.64% at December 31, 1998 as a result of the
increase in the non-performing loans balance.
Consumer Construction: Non-performing loans decreased $4.2 million to $5.3
million at September 30, 1999 from $9.5 million at December 31, 1998 due to
significant improvements in collections. As a result of the decrease in the
non-performing loans balance (partially offset by decreasing unpaid principal
balances), the percent of non-performing loans to the portfolio decreased from
2.01% at December 31, 1998 to 1.57% at September 30, 1999.
_____________________
/6/ Non-performing loans are loans delinquent 90 days or more plus loans
identified through individual analysis for cessation of interest accruals.
14
Revolving Warehouse Lines of Credit: Non-performing loans decreased $2.5 million
to $7.3 million at September 30, 1999 from $9.8 million at December 31, 1998.
The $7.3 million of non-performing loans at September 30, 1999 was primarily
concentrated in one borrower, which represented $4.5 million, or 61% of the
total. Although the balance of non-performing loans decreased from December 31,
1998 to September 30, 1999, non-performing loans as a percent of the portfolio
increased 116 basis to 3.35% at September 30, 1999 from 2.19% at December 31,
1998. This was a result of the decrease in WLCA's outstanding balances from
$443.9 million at December 31, 1998 to $215.7 million at September 30, 1999,
primarily due to market-wide reductions in new loan volume resulting from rising
interest rates during the nine months ended September 30, 1999.
Manufactured Home Loans: Non-performing loans increased $3.1 million to $6.7
million at September 30, 1999 from $3.4 million at December 31, 1998.
Inconsistent loan quality from the dealer channel and the reduced demand in the
secondary market for manufactured home loans, among other factors, led to the
Company's decision during the second quarter of 1999 to restructure its
manufactured home loan business.
Home Improvement Loans: Non-performing loans increased $1.6 million to $3.9
million at September 30, 1999 from $2.2 million at December 31, 1998. Due to
management efforts at improving the effectiveness and efficiency of collections,
the Company has experienced stabilization of delinquencies since April of 1999.
With continued focus on collection efforts, the Company expects the non-
performing loan balance to decrease going forward.
Allowance for Loan Losses: The Company's allowance for loan losses totaled $54.1
million at September 30, 1999, or 1.85% of the book value of loans, compared to
$51.1 million at December 31, 1998, or 1.17% of the book value of loans. The
allowance for loan losses was increased through the provision for loan losses
during the nine months ended September 30, 1999 to maintain the allowance at
prudent levels given the composition and management's assessment of the level of
losses inherent in the Company's loan portfolio at September 30, 1999. Net
charge-offs totaled $10.3 million during the nine months ended September 30,
1999, compared to $9.9 million during the nine months ended September 30, 1998.
RESULTS OF OPERATIONS
Three months ended September 30, 1999 compared to three months ended September
30, 1998
Highlights for the three months ended September 30, 1999 and 1998
(Dollars in thousands) For the three months ended
September 30, September 30,
1999 1998
-------- --------
Net interest income before provision for loan losses $ 42,819 $ 50,099
Net earnings 31,849 39,023
Return on average assets 3.33% 2.10%
Return on average equity 14.20% 17.38%
Interest spread
Yield on interest-earning assets 9.89% 8.30%
Cost of interest-bearing liabilities 6.04% 6.29%
Interest spread 3.85% 2.01%
Net interest margin 4.93% 2.47%
Net earnings
IndyMac REIT's net earnings were $31.8 million, or $0.40 basic and $0.39 diluted
earnings per share for the three months ended September 30, 1999, compared to
net earnings of $39.0 million, or $0.54 basic and diluted earnings per share for
the three months ended September 30, 1998. The $7.2 million decrease in net
earnings was primarily due to a decrease in the average outstanding balances of
loans held for sale,
15
loans held for investment and mortgage securities as a result of the Company's
balance sheet restructuring effort to improve liquidity, cash flow and reduce
leverage. This decrease in the outstanding loan balance and mortgage securities
resulted in a decrease in interest income of $67.4 million from the three months
ended September 30, 1998 to September 30, 1999. The decrease in interest income
was partially offset by a decrease of $60.1 million in interest expense as a
result of the Company's lower outstanding borrowings during the same period. The
provision for loan losses decreased $2.9 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
$3.1 million primarily due to a $22.4 million decrease in IndyMac Operating's
net gain on sale of mortgage loans due to lower sales volumes. This decrease in
IndyMac Operating's net gain on sale of mortgage loans was partially offset by
increases in net interest income of $2.9 million, net gain on sale of
securities, service fee income, and other income totaling $10.3 million, and a
decrease in expenses of $3.7 million.
Interest Income
Total interest income decreased $67.4 million for the third quarter of 1999 to
$85.7 million, from $153.1 million for the third quarter of 1998. This decrease
was the result of a reduction in the average outstanding loan balances resulting
from lower production volumes in 1999. The reduction in interest income was
primarily comprised of a reduction in interest income on loans held for sale of
$36.6 million, mortgage loans held for investment of $13.7 million, mortgage
securities of $8.0 million, and revolving warehouse lines of credit of $6.0
million, partially offset by an increase in interest income on income property
loans of $793 thousand.
Loans held for sale
-------------------
Interest income on loans held for sale decreased $36.6 million to $22.9
million for the third quarter of 1999, from $59.5 million for the third
quarter of 1998. This decrease was primarily the result of a decrease in
the average balance of such loans to $979.8 million for the third quarter
of 1999, from $2.8 billion for the third quarter of 1998. This reduction
was partially offset by an increase in the effective yield to 9.1% from
8.3%.
Loans held for investment
-------------------------
Interest income on mortgage loans held for investment decreased $13.7
million to $10.6 million for the third quarter of 1999, from $24.3 million
for the third quarter of 1998. This decrease was primarily the result of a
decrease in the average balance of such loans to $529.3 million for the
third quarter of 1999, from $1.3 billion for the third quarter of 1998.
This reduction was partially offset by an increase in the effective yield
to 7.9% from 7.2%. The decrease in the average balance of loans held for
investment was due to the Company's strategy to reduce its assets and
borrowing levels under uncommitted lines of credit. During the fourth
quarter of 1998, as a result of the financial market disruption, the
Company sold $443.6 million of whole loans from its held for investment
portfolio to third parties through IndyMac Operating thereby increasing
liquidity.
Residential construction loans
------------------------------
Interest income on residential construction loans totaled $28.6 million and
$30.9 million for the three months ended September 30, 1999 and 1998,
respectively. Interest was earned at an effective yield of 10.6% during the
three months ended September 30, 1999 and 1998. The average balance of
residential construction loans outstanding decreased $94.4 million to $1.1
billion at September 30, 1999 from $1.2 billion at September 30, 1998.
Revolving warehouse lines of credit
-----------------------------------
Interest income on revolving warehouse lines of credit decreased $6.0
million to $4.9 million for the third quarter of 1999, from $11.0 million
for the third quarter of 1998. This decrease was primarily the result of a
decrease in the average balance of such lines to $257.3 million for the
third quarter of 1999, from $495.1 million for the third quarter of 1998.
16
This decrease was compounded by a decrease in the effective yield to 8.2%
from 9.1%.
Income property loans
---------------------
Interest income on income property loans increased $793 thousand to $4.5
million for the third quarter of 1999, from $3.8 million for the third
quarter of 1998. This increase was primarily the result of an increase in
the average balance of such loans to $191.4 million for the third quarter
of 1999, from $156.1 million for the third quarter of 1998. This increase
was partially offset by a decrease in the effective yield to 9.4% from
9.5%.
Mortgage securities
-------------------
Interest income on mortgage securities decreased $8.0 million to $6.8
million for the third quarter of 1999, from $14.8 million for the third
quarter of 1998. This decrease was primarily the result of a decrease in
the average principal balance of securities to $272.0 million for the third
quarter of 1999, from $908.3 million for the third quarter of 1998. This
reduction was partially offset by an increase in the effective yield to
9.8% from 6.4%. 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 Company's strategy to reduce the balance sheet. The
increase in the yield period to period was a result of $2.0 million in
impairment losses recorded during the three months ended September 30, 1998
whereas no impairment was recorded during the three months ended September
30, 1999.
Interest expense
Total interest expense decreased $60.1 million to $42.9 million for the third
quarter of 1999, from $103.0 million for the third 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 $2.8 billion,
from $6.5 billion at September 30, 1998, coupled with a decrease in the
Company's cost of funds to 6.0% from 6.3%.
Provision for loan losses
The provision for loan losses decreased from $7.3 million in the third quarter
of 1998 to $4.4 million in the third 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.
Equity in earnings (loss) of IndyMac Operating
IndyMac REIT has a 99% equity interest in IndyMac Operating. IndyMac Operating
earned $1.7 million for the third quarter of 1999, down $3.2 million from
earnings of $4.8 million for the third quarter of 1998. This decrease was
primarily the result of IndyMac's decrease in net gain on sale of loans of $22.4
million to $17.4 million for the three months ended September 30, 1999 from
$39.8 million for the three months ended September 30, 1998 due to lower sales
volumes period to period. The volume of loans sold decreased from $4.3 billion
during the three months ended September 30, 1998 to $1.5 billion during the
three months ended September 30, 1999. IndyMac Operating's third quarter of 1999
net income was also impacted by increases in net interest income of $2.9
million, net gain on sale of securities, service fee income, and other income
totaling $10.3 million, and a decrease in expenses of $3.7 million.
17
Nine months ended September 30, 1999 compared to nine months ended September 30,
1998
Highlights for the nine months ended September 30, 1999 and 1998
(Dollars in thousands) For the nine months ended
September 30, September 30,
1999 1998
-------------- --------------
Net interest income before provision for loan losses $121,781 $141,823
Net earnings 84,563 107,519
Return on average assets 2.79% 2.11%
Return on average equity 12.86% 17.34%
Interest spread
Yield on interest-earning assets 9.27% 8.45%
Cost of interest-bearing liabilities 5.91% 6.32%
Interest spread 3.36% 2.13%
Net interest margin 4.30% 2.62%
Net earnings
IndyMac REIT's net earnings were $84.6 million, or $1.06 earnings per diluted
share and $1.07 earnings per basic share, for the nine months ended September
30, 1999, compared to $107.5 million, or $1.57 basic and diluted earnings per
share for the nine months ended September 30, 1998. The decrease in net
earnings of $22.9 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 balance sheet restructuring effort to
improve liquidity, cash flow and reduce leverage. This decrease in the
outstanding loan balances and mortgage securities resulted in a decrease in
interest income of $158.8 million partially offset by a decrease of $138.7
million in interest expense as a result of the Company's lower outstanding
borrowings. IndyMac REIT's equity in earnings of IndyMac Operating decreased
$12.4 million primarily due to an increase of $27.5 million in net loss on
securities, a $3.0 million decrease in net gain on sale of mortgage loans, and a
$3.2 million charge to IndyMac Operating's other expenses for the restructuring
of its manufactured housing dealer business. These losses were partially offset
by an $18.0 million increase in service fee and other income.
Interest Income
Total interest income was $262.9 million for the nine months ended September 30,
1999 and $421.6 million for the nine months ended September 30, 1998. The
$158.8 million decrease in interest income was the result of a reduction in the
average outstanding loan balances in 1999 resulting from the Company's strategy
to reduce balance sheet size through sales of loans and securities and to lower
production volumes in 1999. This resulted in decreases in interest income
related to mortgage loans held for sale of $60.7 million, loans held for
investment of $49.3 million, mortgage securities of $39.3 million and revolving
warehouse lines of credit of $18.7 million, partially offset by increases
related to income property loans of $8.6 million, residential construction loans
of $1.6 million and advances to IndyMac Operating of $3.1 million.
Loans held for sale
-------------------
Interest income on mortgage loans held for sale totaled $77.0 million and
$137.6 million for the nine months ended September 30, 1999 and
1998,respectively. The decrease of $60.6 million resulted primarily from a
decrease in the average principal balance of such loans to $1.2 billion
from $2.2 billion for the nine months ended September 30, 1999 and 1998,
respectively. This reduction was partially offset by an increase in the
effective yield to 8.6% from 8.4%.
Loans held for investment
-------------------------
Interest income on mortgage loans held for investment decreased $49.3
million for the nine months ended September 30, 1999 to $33.3 million, from
$82.7 million for the nine months ended September
18
30, 1998. This decrease was primarily the result of a decrease of $939.5
million in the average balance of such loans to $566.0 million for the nine
months ended September 30, 1999, from $1.5 billion for the nine months
ended September 30, 1998. This reduction was partially offset by an
increase in the effective yield to 7.8% from 7.3%.
Residential construction loans
------------------------------
Interest income on residential construction loans totaled $88.4 million and
$86.9 million for the nine months ended September 30, 1999 and 1998,
respectively. Interest was earned at an effective yield of 10.2% and 10.6%
for the nine months ended September 30, 1999 and 1998, respectively. The
average balance of construction loans outstanding increased $59.3 million
to $1.2 billion during the nine months ended September 30, 1999 from $1.1
billion during the nine months ended September 30, 1998.
Income property loans
---------------------
Interest income on income property loans increased $8.5 million to $13.3
million for the nine months ended September 30, 1999, from $4.7 million for
the nine months ended September 30, 1998. This increase was primarily the
result of an increase of $118.1 million in the average balance of such
loans to $189.7 million for the nine months ended September 30, 1999, from
$71.6 million for the nine months ended September 30, 1998. The effective
yield increased from 8.9% to 9.4%, period to period.
Revolving warehouse lines of credit
-----------------------------------
Interest income on revolving warehouse lines of credit decreased $18.7
million to $16.7 million for the nine months ended September 30, 1999, from
$35.4 million for the corresponding period of 1998. This decrease resulted
primarily from a decrease in the average balance of such loans to $274.3
million for the nine months ended September 30, 1999, down $242.5 million
from the average of $516.8 million for the nine months ended September 30,
1998. This decrease was compounded by a decrease in the effective yield to
8.1% from 9.2%.
Mortgage securities
-------------------
Interest income on mortgage securities decreased $39.3 million to $9.8
million for the nine months ended September 30, 1999, from $49.1 million
for the nine months ended September 30, 1998. This decrease was primarily
the result of a decrease in the average principal balance of securities to
$240.5 million for the nine months ended September 30, 1999, down $626.2
million from $866.7 million for the nine months ended September 30, 1998.
This decrease was compounded by a decrease in the effective yield to 5.3%
from 7.5%. 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 Company's strategy to reduce the balance sheet size to
improve liquidity and cash flows. Impairment losses on residual and
interest-only securities of $8.3 million were recognized as a reduction in
interest income during nine months ended September 30, 1999 (of which $5.3
million related to manufactured housing residuals), compared to $2.0
million in impairment losses recognized during the nine months ended
September 30, 1998.
Interest Expense
For the nine months ended September 30, 1999 and 1998, total interest expense
was $141.1 million and $279.8 million, respectively. The $138.7 million
decrease in interest expense was primarily due to a decrease of $2.8 billion in
the average balance outstanding of repurchase agreements and other credit
facilities to $3.2 billion for the nine months ended September 30, 1999 from
$5.9 billion for the nine months ended September 30, 1998, coupled with a
decrease in the cost of funds to 5.9% from 6.3% for the nine months ended
September 30, 1999 and 1998, respectively.
19
Provision for loan losses
The provision for loan losses decreased from $22.9 million during the nine
months ended September 30, 1998 to $12.3 million during the nine months ended
September 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.
Equity in earnings (loss) of IndyMac Operating
IndyMac Operating incurred a $2.7 million loss for the nine months ended
September 30, 1999, compared to earnings of $9.8 million for the nine months
ended September 30, 1998. This decrease was primarily the result of realized
losses on sale of treasury securities of $32.4 million during the nine months
ended September 30, 1999, compared to a $4.6 million loss on sale of securities
in the nine months ended September 30, 1998, as well as a $3.2 million charge to
other expenses related to the restructuring of its manufactured housing dealer
business. Due to lower sales volumes, IndyMac Operating's net gain on sale of
loans decreased $3.0 million to $81.3 million. These reductions were offset by
an increase in service fee income of $14.4 million to $16.2 million from $1.8
million for the nine months ended September 30, 1999 and 1998, respectively. The
increase in service fee income was due primarily to an increase of $17.6 million
in the valuation allowance during the nine months ended September 30, 1998
compared to a reduction of $1.5 million in the valuation allowance during the
nine months ended September 30, 1999 due to changes in market conditions. This
$19.1 million difference in the valuation allowance was partially offset by
increased amortization due to higher prepayment speeds (i.e. faster collateral
paydowns).
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, principal and/or
interest on mortgage securities, committed borrowings, structured financing,
proceeds from the sale of loans and other assets, issuance of REMIC and asset-
backed securities, and master and primary servicing fees.
At September 30, 1999, the Company had liquidity approximating $324 million,
with a leverage ratio of 3.6:1 compared to 5.9:1 at December 31, 1998 and 6.9:1
at September 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 anticipated that the merger with SGVB will enhance
the stability of the Company's liquidity and capital resources due to access to
deposits and FHLB borrowings.
In June of 1999, IndyMac REIT's Board of Directors approved a $100 million share
repurchase plan. Through September 30, 1999, the Company had repurchased 2.9
million shares in open market transactions at an average price of approximately
$14.22 per share, completing $41 million of the $100 million plan.
20
The table below summarizes the Company's sources of financing as of September
30, 1999:
Committed Outstanding Maturity
(Dollars in millions) Financing Balances Date
------------------------------------------
Merrill Lynch $1,500 $1,408 May 2001
First Union Bank Syndicate 900 572 February 2001
Paine Webber 500 377 September 2001
Morgan Stanley 500 63 June 2001
Bank of America 200 192 December 1999
Bank of America 50 - September 2000
Senior unsecured notes 60 60 October 2002
Uncommitted borrowings - 147 -
------ ------
Total $3,710 $2,819
====== ======
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 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, 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.
SYSTEMS ISSUES ASSOCIATED WITH THE YEAR 2000
Summary
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 was to identify all systems that
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 were to determine its state of readiness, identify risks
and develop and implement plans including contingency plans to mitigate those
risks and to identify costs associated with Year 2000 issues.
State of Readiness and Identification of Risk
The identification and assessment of internal systems, remediation, testing, and
implementation phases have all been completed. 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. All critical outside
vendors have confirmed that they will be Year 2000 compliant by year-end 1999.
The Company will continue to monitor the progress of critical and non-critical
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
21
equipment, machinery or building infrastructure that are controlled, monitored
or operated by embedded computer devices.
The Company has completed its review of its computer systems and has received
certification from a nationally recognized Year 2000 consulting firm that the
Company's systems are Year 2000 compliant. Included in the Year 2000 validation
process were the Company's consumer mortgage servicing and origination systems
as well as the Company's critical service providers and outside vendors.
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 assurances that the computer systems of its lenders, depository
institutions, collateral custodians, business partners, and service bureaus,
will be Year 2000 compliant by year-end 1999.
The Company has developed contingency plans for dealing with potential Year 2000
issues at year-end 1999 and beyond. 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 $1.4 million of expenses year-to-date to
ensure the readiness of the Company's computer systems for Year 2000 compliance.
No significant additional 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 risk affecting market risk sensitive instruments is
interest rate risk. When interest rates fluctuate, the Company can be adversely
impacted because the fair 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 affect 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.
Financial instruments of the Company that tend to decrease in value as interest
rates decrease include interest-only securities and mortgage 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, off-balance sheet
instruments such as futures, call options, floors, and purchase commitments.
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.
22
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 September 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
$1.7 million. The combined after tax loss on available for sale mortgage
securities, recorded as a component of other comprehensive income would be $6.6
million. The net result would be a reduction to comprehensive income of $8.3
million. The Company estimates that a parallel upward 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 increase to after tax income for IndyMac
REIT and IndyMac Operating of $1.1 million. The combined after tax gain on
available for sale mortgage securities, recorded as a component of other
comprehensive income would be $2.5 million. The net result would be an increase
to comprehensive income of $3.6 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 are 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 that 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 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 the
assimilation of SGVB operations upon completion of the acquisition; and (7)
other risks and uncertainties detailed in this Management's Discussion and
Analysis of Financial Condition and Results of Operations.
23
PART II
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
(a) Exhibits
--------
2.1 Agreement and Plan of Merger by and between SGV Bancorp, Inc. and
IndyMac Mortgage Holdings, Inc., dated as of July 12, 1999
(incorporated by reference to Exhibit 2.1 to the Company's Form 8-K
filed with the SEC on July 14, 1999)
10.1 Employment agreement dated January 1, 1998 between IndyMac, Inc. and
Gary D. Clark
10.2 Amendment to employment agreement dated September 1, 1998, between
IndyMac, Inc. and Gary D. Clark
10.3 Employment agreement dated April 1, 1999 between IndyMac Mortgage
Holdings, Inc. and Mark C. Nelson
27 Financial Data Schedule
(b) Reports on Form 8-K
-------------------
None
24
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Pasadena,
State of California, on November 12, 1999 for the nine months ended September
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
25