1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE PERIOD ENDED SEPTEMBER 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________ .
COMMISSION FILE NUMBER 1-8972
INDYMAC BANCORP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 95-3983415
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
155 NORTH LAKE AVENUE, PASADENA, CALIFORNIA 91101-7211
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (800) 669-2300
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Common stock outstanding as of October 31, 2000: 62,791,915 shares
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2
INDYMAC BANCORP, INC
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
ASSETS
SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
2000 1999 1999
------------- ------------ ------------
(UNAUDITED) (UNAUDITED)
PRO FORMA(1)
Cash and due from banks..................................... $ 53,267 $ 4,960 $ 4,488
Investment securities available for sale, amortized cost of
$23,491, $0 and $0, respectively.......................... 23,579 -- --
Mortgage-backed securities available for sale, amortized
cost of $703,765, $743,564 and $458,578, respectively..... 701,342 650,586 471,231
Loans receivable:
Loans held for sale
Prime................................................... 835,138 543,751 504,755
Subprime................................................ 315,737 115,087 110,488
Income property......................................... 76,377 -- --
Loans held for investment
Mortgage and consumer................................... 1,420,324 1,180,757 1,180,757
Builder construction.................................... 598,674 670,911 670,911
Consumer construction................................... 319,129 249,618 249,618
Income property......................................... 53,274 137,062 137,062
Revolving warehouse lines of credit..................... 166,298 243,630 243,630
Allowance for loan losses................................. (58,864) (53,880) (53,880)
---------- ---------- ----------
Total loans receivable............................. 3,726,087 3,086,936 3,043,341
Mortgage servicing rights................................... 196,411 140,309 --
Foreclosed assets........................................... 20,317 22,323 21,286
Investment in Federal Home Loan Bank stock, at cost......... 11,582 -- --
Interest receivable......................................... 44,150 28,158 41,290
Goodwill and other intangible assets........................ 39,509 435 --
Other assets................................................ 385,570 91,304 144,886
---------- ---------- ----------
Total assets....................................... $5,201,814 $4,025,011 $3,726,522
========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits.................................................... $ 554,312 $ -- $ --
Advances from Federal Home Loan Bank........................ 232,297 -- --
Borrowings.................................................. 3,583,545 3,123,865 2,863,973
Other liabilities........................................... 86,068 73,616 35,019
---------- ---------- ----------
Total liabilities.................................. 4,456,222 3,197,481 2,898,992
Shareholders' Equity
Preferred Stock -- authorized, 10,000,000 shares of $.01
par value; none issued.................................. -- -- --
Common stock -- authorized, 200,000,000 shares of $.01 par
value; issued 81,163,093 shares (64,114,896 outstanding)
at September 30, 2000 and issued 80,720,129 shares
(75,076,868 outstanding) at December 31, 1999........... 812 807 807
Additional paid-in-capital................................ 904,580 895,668 1,080,327
Accumulated other comprehensive income...................... 2,771 7,433 7,433
Cumulative distributions to shareholders.................... -- -- (577,808)
Retained earnings........................................... 95,086 -- 393,149
Treasury stock, 17,048,197 shares and 5,643,261 shares,
respectively.............................................. (257,657) (76,378) (76,378)
---------- ---------- ----------
Total shareholders' equity......................... 745,592 827,530 827,530
---------- ---------- ----------
Total liabilities and shareholders' equity......... $5,201,814 $4,025,011 $3,726,522
========== ========== ==========
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(1) Pro forma gives effect to the change in the Company's structure to a fully
taxable entity and the buyout of the minority interest to IndyMac, Inc.
effective January 2000.
The accompanying notes are an integral part of these statements.
1
3
INDYMAC BANCORP, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------- ----------------------------------
2000 1999 1999 2000 1999 1999
-------- ------------ ------- -------- ------------ --------
PRO FORMA(1) PRO FORMA(1)
Interest income
Investment securities available for sale.......... $ 917 $ -- $ -- $ 917 $ -- $ --
Mortgage-backed securities available for sale..... 19,833 18,276 6,830 56,502 41,603 9,840
Loans held for sale
Prime........................................... 23,476 15,409 13,831 55,275 48,460 41,582
Subprime........................................ 5,626 2,554 2,285 14,466 8,137 7,360
Income property................................. 1,663 -- -- 1,663 -- --
Manufactured housing............................ -- 1,935 1,832 -- 14,329 13,038
Home improvement................................ -- 6,528 4,929 -- 20,203 14,995
Loans held for investment
Mortgage and consumer........................... 32,998 17,057 17,057 88,840 53,900 53,900
Builder construction............................ 17,484 21,590 21,590 59,799 64,594 64,594
Consumer construction........................... 6,953 5,461 5,461 19,471 18,803 18,803
Income property................................. 1,181 1,794 1,794 3,539 5,295 5,295
Revolving warehouse lines of credit............. 4,782 4,920 4,920 14,409 16,706 16,706
Other............................................. 266 233 5,182 479 886 16,744
-------- ------- ------- -------- -------- --------
Total interest income.................... 115,179 95,757 85,711 315,360 292,916 262,857
Interest expense
Deposits.......................................... 6,104 -- -- 6,104 -- --
Advances from Federal Home Loan Bank.............. 2,039 -- -- 2,039 -- --
Borrowings........................................ 70,843 50,147 42,892 189,507 166,365 141,076
-------- ------- ------- -------- -------- --------
Total interest expense................... 78,986 50,147 42,892 197,650 166,365 141,076
-------- ------- ------- -------- -------- --------
Net interest income............................. 36,193 45,610 42,819 117,710 126,551 121,781
Provision for loan losses......................... 3,386 5,011 4,412 12,108 13,337 12,310
-------- ------- ------- -------- -------- --------
Net interest income after provision for loan
losses........................................ 32,807 40,599 38,407 105,602 113,214 109,471
Other income
Gain on sale of loans, net...................... 32,809 17,401 -- 77,340 81,310 --
Service fee income.............................. 9,866 5,795 -- 27,132 15,962 --
Gain (loss) on sale of mortgage-backed
securities, net............................... 2,254 375 -- 4,406 (679) --
Loss on sale of other securities, net........... -- -- -- -- (31,386) --
Equity in earnings (loss) of IndyMac, Inc....... -- -- 1,658 -- -- (2,647)
Fee income...................................... 8,916 6,144 129 23,452 18,473 2,875
-------- ------- ------- -------- -------- --------
Total other income....................... 53,845 29,715 1,787 132,330 83,680 228
-------- ------- ------- -------- -------- --------
Net revenues.................................. 86,652 70,314 40,194 237,932 196,894 109,699
Other expense
Salaries and related............................ 28,740 20,558 5,554 75,590 65,305 17,308
General and administrative expenses............. 16,267 16,655 2,791 43,282 48,958 7,828
Amortization of goodwill and other intangible
assets........................................ 1,125 14 -- 1,152 44 --
Non-recurring, acquisitions, and other
charges....................................... 4,641 -- -- 16,209 -- --
-------- ------- ------- -------- -------- --------
Total other expense...................... 50,773 37,227 8,345 136,233 114,307 25,136
-------- ------- ------- -------- -------- --------
Earnings before provision for income tax.......... 35,879 33,087 31,849 101,699 82,587 84,563
Provision for income tax........................ 15,069 14,069 -- 42,713 35,107 --
Income tax benefit from termination of REIT
status........................................ -- -- -- (36,100) -- --
-------- ------- ------- -------- -------- --------
Net earnings.................................. $ 20,810 $19,018 $31,849 $ 95,086 $ 47,480 $ 84,563
======== ======= ======= ======== ======== ========
Earnings per share
Basic........................................... $ 0.31 $ 0.24 $ 0.40 $ 1.35 $ 0.60 $ 1.07
Diluted......................................... $ 0.31 $ 0.23 $ 0.39 $ 1.33 $ 0.60 $ 1.06
Weighted average shares outstanding
Basic........................................... 66,069 79,998 79,998 70,414 79,014 79,014
Diluted......................................... 67,704 81,082 81,082 71,396 79,759 79,759
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(1) Pro forma gives effect to the change in the Company's structure to a fully
taxable entity and the buyout of the minority interest in IndyMac, Inc.
effective January 2000.
The accompanying notes are an integral part of these statements.
2
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INDYMAC BANCORP, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
(DOLLARS IN THOUSANDS)
(UNAUDITED)
ACCUMULATED
OTHER CUMULATIVE
ADDITIONAL COMPREHENSIVE DISTRIBUTIONS
COMMON PAID-IN INCOME CUMULATIVE COMPREHENSIVE TO TREASURY
STOCK CAPITAL (LOSS) EARNINGS INCOME SHAREHOLDERS STOCK
------ ---------- ------------- ---------- ------------- ------------- ---------
Balance at December 31,
1998...................... $758 $1,018,859 $(18,776) $ 277,220 $(442,896) $ (13,062)
Stock options exercised..... 2 1,705 -- -- -- --
Directors' and officers'
notes receivable.......... -- 8,435 -- -- -- -- --
Deferred compensation,
restricted stock.......... 2 1,909 -- -- -- -- --
401(k) contribution......... -- 539 -- -- -- -- --
Net gain on available for
sale securities........... -- -- 20,914 -- 20,914 -- --
Dividend reinvestment
plan...................... 44 46,991 -- -- -- -- --
Acquisition of treasury
stock..................... (41,003)
Net earnings................ -- -- -- 84,563 84,563 -- --
Dividends paid.............. -- -- -- -- -- (89,259) --
---- ---------- -------- --------- -------- --------- ---------
Net change.................. 48 59,579 20,914 84,563 105,477 (89,259) (41,003)
---- ---------- -------- --------- -------- --------- ---------
Balance at September 30,
1999...................... $806 $1,078,438 $ 2,138 $ 361,783 $(532,155) $ (54,065)
==== ========== ======== ========= ========= =========
Balance at December 31,
1999...................... $807 $1,080,327 $ 7,433 $ 393,149 $(577,808) $ (76,378)
Stock options exercised..... 5 4,714 -- -- -- -- --
Directors' and officers'
notes receivable.......... -- 29 -- -- -- -- --
Deferred compensation,
restricted stock.......... -- 3,204 -- -- -- -- --
401(k) contribution......... 830
Net loss on available for
sale securities........... -- -- (4,662) -- (4,662) -- --
Dividend reinvestment
plan...................... -- 135 -- -- -- -- --
Acquisition of treasury
stock..................... -- -- -- -- -- -- (181,279)
Close-out of cumulative
earnings and distributions
to additional paid-in
capital................... -- (184,659) -- (393,149) -- 577,808 --
Net earnings................ -- -- -- 95,086 95,086 -- --
---- ---------- -------- --------- -------- --------- ---------
Net change.................. 5 (175,747) (4,662) (298,063) 90,424 577,808 (181,279)
---- ---------- -------- --------- -------- --------- ---------
Balance at September 30,
2000...................... $812 $ 904,580 $ 2,771 $ 95,086 $ -- $(257,657)
==== ========== ======== ========= ========= =========
TOTAL
SHAREHOLDERS'
EQUITY
-------------
Balance at December 31,
1998...................... $ 822,103
Stock options exercised..... 1,707
Directors' and officers'
notes receivable.......... 8,435
Deferred compensation,
restricted stock.......... 1,911
401(k) contribution......... 539
Net gain on available for
sale securities........... 20,914
Dividend reinvestment
plan...................... 47,035
Acquisition of treasury
stock..................... (41,003)
Net earnings................ 84,563
Dividends paid.............. (89,259)
---------
Net change.................. 34,842
---------
Balance at September 30,
1999...................... $ 856,945
=========
Balance at December 31,
1999...................... $ 827,530
Stock options exercised..... 4,719
Directors' and officers'
notes receivable.......... 29
Deferred compensation,
restricted stock.......... 3,204
401(k) contribution......... 830
Net loss on available for
sale securities........... (4,662)
Dividend reinvestment
plan...................... 135
Acquisition of treasury
stock..................... (181,279)
Close-out of cumulative
earnings and distributions
to additional paid-in
capital................... --
Net earnings................ 95,086
---------
Net change.................. (81,938)
---------
Balance at September 30,
2000...................... $ 745,592
=========
The accompanying notes are an integral part of these statements.
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INDYMAC BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
2000 1999
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings.............................................. $ 95,086 $ 84,563
Adjustments to reconcile net earnings to net cash provided
by (used in) operating activities:
Amortization of goodwill and other intangible
assets............................................... 1,152 --
Other depreciation and amortization................... 111,366 46,642
Gain on sale of loans................................. (77,340) --
Gain on sale of securities............................ (4,406) --
Non-cash compensation expense......................... 13,796 2,450
Provision for loan losses............................. 12,108 12,310
Equity in (earnings) loss of IndyMac, Inc............. -- 2,647
Sale of and payments from mortgage and other loans held
for sale................................................ 5,166,094 5,168,943
Purchases of mortgage and other loans held for sale....... (5,693,521) (4,470,603)
Net (increase) decrease in other assets................... (38,822) 866
Net decrease in other liabilities......................... (17,241) (886)
----------- -----------
Net cash provided by (used in) operating activities... (431,728) 846,932
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of mortgage loans held for investment........... (72,985) (9,869)
Payments and sales from mortgage loans held for
investment.............................................. 137,667 298,469
Net increase in manufactured housing loans held for
investment.............................................. (8,298) (25,421)
Net decrease (increase) in home improvement loans held for
investment.............................................. 23,857 (50,474)
Net decrease in construction loans receivable............. 59,064 176,051
Net decrease in revolving warehouse lines of credit....... 77,332 228,049
Purchases of securities available for sale................ (333,268) (76,310)
Sales of and payments from securities available for
sale.................................................... 75,280 16,381
Purchases of mortgage servicing rights.................... (663) --
Net increase in investment in Federal Home Loan Bank
stock, at cost.......................................... (6,068) --
Net cash purchase of SGV Bancorp.......................... (53,357) --
Net cash purchase PNB Mortgage............................ (35,291) --
Net decrease in advances to IndyMac, Inc.................. -- 71,984
----------- -----------
Net cash provided by (used in) investing activities... (136,730) 628,860
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits.................................. 199,034 --
Net increase in advances from Federal Home Loan Bank...... 138,360 --
Net increase (decrease) in borrowings..................... 457,652 (1,391,729)
Net proceeds from issuance of common stock................ 3,470 57,177
Acquisition of common stock............................... (181,279) (41,003)
Cash dividends paid....................................... -- (89,259)
----------- -----------
Net cash provided by (used in) financing activities... 617,237 (1,464,814)
----------- -----------
Net increase in cash and cash equivalents................... 48,779 10,978
Cash and cash equivalents at beginning of period............ 4,488 815
----------- -----------
Cash and cash equivalents at end of period.................. $ 53,267 $ 11,793
=========== ===========
Supplemental cash flow information:
Cash paid for interest................................ $ 192,196 $ 143,054
=========== ===========
Cash paid for income taxes............................ $ 22,354 $ --
=========== ===========
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
The fair value of noncash assets acquired and
liabilities assumed in the Company's purchases of
IndyMac, Inc. and SGVB during 2000 was approximately
$868 million and $783 million, respectively.
Transfer of manufactured housing loans held for sale
to loans held for investment......................... $ -- $ 91,559
=========== ===========
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.
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INDYMAC BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
(UNAUDITED)
NOTE A -- BASIS OF PRESENTATION
IndyMac Bancorp, Inc., formerly known as IndyMac Mortgage Holdings, Inc.
("IndyMac"), conducts a diversified mortgage lending business, including the
origination and purchase of and investment in conforming, non-conforming and
jumbo residential loans, subprime loans, construction loans, mortgage-backed
securities and other mortgage-related assets. Beginning July 1, 2000 the
Company's operations also include consumer banking operations as a result of the
Company's acquisition of SGV Bancorp, Inc. ("SGVB"). See further discussion in
Note B -- Acquisitions. References to "IndyMac" refer to the parent company
alone, while references to the "Company" mean the parent company and its
consolidated subsidiaries. The accompanying consolidated financial statements of
the Company have been prepared in accordance with accounting principles
generally accepted in the United States of America ("US 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 US GAAP for complete financial statements.
Prior to January of 2000, IndyMac elected to be treated as a real estate
investment trust ("REIT") under the Internal Revenue Code of 1986, as amended.
The consolidated financial statements as of and for the nine months ended
September 30, 1999 include the accounts of IndyMac and its qualified REIT
subsidiaries. Through December 31, 1999, IndyMac owned all the preferred
non-voting stock and had a 99% economic interest in IndyMac, Inc. ("IndyMac
Operating"). Accordingly, IndyMac's investment in IndyMac Operating was
accounted for under a method similar to the equity method because IndyMac had
the ability to exercise influence over the financial and operating policies of
IndyMac Operating through its ownership of the preferred stock and other
contracts. In January of 2000, IndyMac acquired all of the voting stock of
IndyMac Operating. See Note B -- Acquisitions, for further information.
During 1999, IndyMac's Board of Directors and shareholders approved the
termination of its income tax status as a REIT, effective in January of 2000. As
a result of its conversion to a fully taxable status, an income tax benefit and
related deferred tax asset of $36.1 million was recorded in January of 2000. In
addition, the Company's $393.1 million and $577.8 million balances of cumulative
earnings and distributions to shareholders, respectively, were closed against
additional paid in capital. As a fully taxable entity, IndyMac will not be
required to distribute 95% of its taxable income to its shareholders, but will
be taxed on its earnings based on currently enacted tax rates.
Certain reclassifications have been made to the financial statements for
the period ended September 30, 1999 to conform to the September 30, 2000
presentation. In the opinion of management, all adjustments considered necessary
for a fair presentation have been included. Operating results for the nine
months ended September 30, 2000 are not necessarily indicative of the results
that may be expected for the year ending December 31, 2000. For further
information, refer to the consolidated financial statements and footnotes
thereto included in the Company's annual report on Form 10-K for the year ended
December 31, 1999.
All significant intercompany balances and transactions with the Company's
consolidated subsidiaries have been eliminated in consolidation of the Company.
NOTE B -- ACQUISITIONS
Acquisition of IndyMac Operating's Common Stock
In January of 2000, IndyMac purchased all of IndyMac Operating's
outstanding common stock, which was held by Countrywide Home Loans, Inc.
("CHL"), for $1.8 million (the "acquisition"). IndyMac Operating's total assets
and shareholder's equity on the date of the acquisition were approximately $424
million and $92 million, respectively. CHL's minority interest investment of 1%
in IndyMac Operating as of the effective date of the purchase was $922,300. As
IndyMac owns 100% of the outstanding common and
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INDYMAC BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2000
(UNAUDITED)
preferred stock of IndyMac Operating subsequent to the acquisition of CHL's
common stock, the consolidation method of accounting is used for IndyMac's
investment in IndyMac Operating beginning January 1, 2000. Included on the
consolidated balance sheets and consolidated income statements is the pro forma
effect to IndyMac's financial statements as of December 31, 1999 and for the
nine months ended September 30, 1999, had IndyMac been a fully taxable entity
and used the consolidation method of accounting for its investment in IndyMac
Operating during such time period.
Acquisition of SGVB
On July 1, 2000, IndyMac effected its merger with SGVB. SGVB was the parent
of First Federal Savings and Loan Association of San Gabriel Valley. As of the
date of the merger, SGVB had assets of $490.8 million, deposits of $355.7
million, and shareholders' equity of $37.5 million. IndyMac paid $25.00 per
share, or $59.5 million, for all of the SGVB shares outstanding and subject to
option. Goodwill and core deposit intangible assets totaling $37.8 million were
recorded as of the date of acquisition, using the purchase method of accounting.
The goodwill will be amortized using the straight-line method of amortization
over a period of 20 years. The core deposit intangible asset will be amortized
using an accelerated method of amortization over a period of 10 years, which is
the estimated life of the deposits acquired.
The operating results for SGVB and the Company as though SGVB was purchased
at the beginning of the respective periods follow:
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------
2000 1999(1)
--------- ---------
(DOLLARS IN THOUSANDS)
Net revenues
IndyMac.............................................. $237,932 $196,894
SGVB................................................. 8,161 6,989
-------- --------
Combined............................................. $246,093 $203,883
======== ========
Net earnings
IndyMac.............................................. $ 92,964 $ 45,599
SGVB................................................. 966 1,358
-------- --------
Combined............................................. $ 93,930 $ 46,957
======== ========
Diluted earnings per share............................. $ 1.32 $ 0.59
- ---------------
(1) IndyMac's balances presented on a pro forma basis to give effect to the
change in the Company's structure to a fully taxable entity and the buyout
of the minority interest in IndyMac, Inc. effective in January of 2000.
Acquisition of PNB Mortgage
In August of 2000, the Company announced that it signed a definitive
agreement to acquire certain assets and operations of PNB Mortgage ("PNB"), a
wholesale loan originator owned by U.S. Bancorp that specializes in FHA and VA
mortgage lending. This acquisition will provide IndyMac with the ability to
expand its mortgage services to the FHA and VA market. The Company acquired
PNB's loans and certain other assets in a cash purchase transaction for fair
market value, as defined in the asset purchase agreement. The acquisition
included $35.3 million of mortgage loans and certain non-mortgage assets, and
resulted in goodwill of $1.5 million. The total balance of mortgage loans
acquired, and related goodwill, is subject to
6
8
INDYMAC BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2000
(UNAUDITED)
change during the quarter ended December 31, 2000 based on certain covenants
mandated in the purchase agreement.
The operating results for PNB prior to the acquisition date were not made
available to the Company. The net impact to the Company's net revenues and net
income is immaterial.
NOTE C -- SEGMENT REPORTING
The Company's reportable operating segments include Mortgage Banking,
Investment Portfolio and Commercial Lending. The Mortgage Banking segment
purchases conforming, jumbo and other non-conforming mortgage loans from
business-to-business ("B2B") customers, and funds loans directly to consumers
("B2C"). These loans are then securitized through the issuance of
mortgage-backed securities ("MBS"), sold to government sponsored enterprises,
resold in bulk whole loan sales to permanent investors, or retained by the
Company's Investment Portfolio segment. The Mortgage Banking segment also
administers the related construction advances for the purchase of
construction-to-permanent mortgage loans originated by or sourced through the
Company's B2B sellers and direct customers ("consumer construction"). The
Investment Portfolio segment conducts the Company's consumer banking operations
and invests in residential loans and mortgage securities on a long-term basis.
The Investment Portfolio also performs mortgage servicing activities. The
Commercial Lending segment makes residential construction loans to builders and
engages in secured warehouse lending operations for mortgage brokers and
mortgage bankers. Operating segments' profitability is measured on a
fully-leveraged basis. Corporate costs such as corporate salaries and related
expenses, excess capital, and non-recurring corporate items are unallocated and
included in the Other operating segment.
In connection with an internal reorganization in the first quarter of 2000,
the consumer construction business was moved to the Mortgage Banking segment and
servicing operations were moved to the Investment Portfolio Segment. In
addition, prior to 2000, corporate support costs were allocated to the operating
segments. Segment reporting for the three and nine months ended September 30,
1999 has been restated to conform to the current method of reporting segments.
7
9
INDYMAC BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2000
(UNAUDITED)
Segment information for the three and nine months ended September 30, 2000
and 1999 were as follows:
MORTGAGE INVESTMENT COMMERCIAL
BANKING PORTFOLIO LENDING OTHER CONSOLIDATED
---------- ---------- ---------- -------- ------------
(DOLLARS IN THOUSANDS)
Three months ended September 30, 2000
Net interest income.................. $ 9,382 $ 10,067 $ 10,628 $ 6,116 $ 36,193
Net revenues......................... 45,943 23,853 10,663 6,193 86,652
Tax provision (benefit).............. 9,524 6,285 3,064 (3,804) 15,069
Net earnings (loss).................. 13,152 12,823 4,233 (9,398) 20,810
Three months ended September 30,
1999(1)
Net interest income.................. $ 10,780 $ 17,280 $ 13,015 $ 4,535 $ 45,610
Net revenues......................... 41,905 9,630 14,238 4,541 70,314
Tax provision (benefit).............. 8,238 173 3,569 2,089 14,069
Net earnings (loss).................. 11,126 241 4,825 2,826 19,018
Nine months ended September 30, 2000
Net interest income.................. $ 28,085 $ 28,926 $ 35,280 $ 25,419 $ 117,710
Net revenues......................... 118,641 57,113 35,058 27,120 237,932
Tax provision (benefit).............. 23,780 15,990 10,527 (43,684) 6,613
Net earnings......................... 32,840 22,082 14,538 25,626 95,086
Nine months ended September 30, 1999(1)
Net interest income.................. $ 31,995 $ 42,944 $ 39,559 $ 12,053 $ 126,551
Net revenues......................... 140,604 10,600 33,364 12,326 196,894
Tax provision (benefit).............. 34,428 (11,461) 6,932 5,208 35,107
Net earnings (loss).................. 46,560 (15,498) 9,375 7,043 47,480
Assets as of September 30, 2000........ $1,654,087 $2,425,724 $1,006,788 $115,215 $5,201,814
Assets as of September 30, 1999(1)..... $ 970,227 $1,841,735 $1,071,025 $ 22,031 $3,905,018
- ---------------
(1) Balances presented on a pro forma basis to give effect to the change in the
Company's structure to a fully taxable entity and the buyout of the minority
interest in IndyMac, Inc. effective January of 2000.
NOTE D -- IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
On July 1, 2000, the Financial Accounting Standards Board ("FASB") issued
FASB Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation," an interpretation that requires retroactive identification of any
stock option repricing that occurred subsequent to December 15, 1998. Three
IndyMac directors hold 240,000 options that were repriced on January 26, 1999
following the unprecedented decline in the Company's stock price during the 1998
global financial disruption. The charge related to this new accounting
requirement for the quarter ended September 30, 2000 is $1.4 million, before
tax. In future periods, any change in the price of the Company's shares during
the quarter will be reflected in earnings to the extent that the options have
not been exercised, forfeited or expire unexercised. IndyMac experienced a
substantial increase of 51 percent in the price of its shares during the quarter
ended September 30, 2000.
In June of 1998, the FASB issued Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities," ("SFAS 133"), which was amended by Statement of Financial
Accounting Standards No. 137, "Accounting for Derivative Instruments and Hedging
Activities -- Deferral of the Effective Date of FASB Statement No. 133," and
Statement of Financial Accounting Standards No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities -- An
8
10
INDYMAC BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2000
(UNAUDITED)
Amendment of FASB Statement No. 133." In November of 1999, the Emerging Issues
Task Force issued EITF 99-20, "Recognition of Interest Income and Impairment on
Certain Investments" ("EITF 99-20"). These four pronouncements, which are
effective January 1, 2001 for the Company, mandate new hedge accounting rules
and impairment assessment guidelines for cash flow sensitive assets. SFAS 133
requires all hedge "ineffectiveness" to be recognized through the statement of
earnings. In connection with the adoption of SFAS 133, IndyMac plans to
reclassify its AAA-rated interest-only securities portfolio to "trading". As a
result, the AAA-rated interest-only securities and related hedging instruments
will be marked-to-market through earnings and will no longer be recorded in
other comprehensive income. With respect to the mortgage pipeline, while the
majority of the portfolio is forward traded into a security, the Company will
experience some level of hedge ineffectiveness. The Company is continuing its
assessment of the potential impact of the implementation of these pronouncements
to its financial statements upon adoption on January 1, 2001.
9
11
ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
IndyMac Bancorp, Inc., formerly known as IndyMac Mortgage Holdings, Inc.
("IndyMac"), conducts a diversified mortgage banking business, manages an
investment portfolio, and offers commercial lending products including builder
construction loans and warehouse lines of credit. References to "IndyMac" refer
to the parent company alone, while references to the "Company" mean the parent
company and its consolidated subsidiaries.
Through December 31, 1999, IndyMac elected to be taxed as a real estate
investment trust ("REIT") under the Internal Revenue Code of 1986, as amended
(the "Code"). As a result of this election, IndyMac was not, with certain
limited exceptions, taxed at the corporate level on the net income distributed
to IndyMac's shareholders. On December 14, 1999, the shareholders of IndyMac
approved the conversion of IndyMac from a REIT to a fully taxable entity,
effective in January of 2000. As a fully taxable entity, IndyMac is no longer
required to distribute 95% of its taxable income to its shareholders, but is
taxed on its earnings based on currently enacted tax rates. IndyMac no longer
pays a dividend and payment of future dividends will be at the discretion of
IndyMac's Board of Directors based upon its assessment of IndyMac's financial
condition, business strategy and other relevant factors.
On July 1, 2000, IndyMac effected its merger (the "merger") with SGV
Bancorp, Inc., ("SGVB"). SGVB was the parent of First Federal Savings and Loan
Association of San Gabriel Valley (the "bank"). As of the date of the merger,
SGVB had assets of $490.8 million, deposits of $355.7 million, and shareholders'
equity of $37.5 million. IndyMac paid $25.00 per share, or $59.5 million, for
all of the SGVB shares outstanding and subject to option. The merger represents
the culmination of IndyMac's transition to a growth oriented, technology driven
consumer depository institution. Substantially all of the assets and operations
of IndyMac and its subsidiaries were contributed to the bank, which is now a
wholly owned subsidiary of IndyMac and is known as IndyMac Bank, F.S.B.
("IndyMac Bank"). With more than $5 billion in assets, IndyMac Bank ranks in the
ten largest consumer depository institutions (in terms of assets) headquartered
in California.
MORTGAGE BANKING OPERATIONS
The Company's mortgage banking group represents the core of IndyMac Bank's
asset generation platform. It is a technology based, highly scalable operation
that includes the following distinct channels: (1) a business-to-business (B2B)
channel, with mortgage brokers, small mortgage bankers and community financial
institutions effectively providing the Company with access to a variable cost,
nationwide "virtual" branch network, (2) a branchless, technology driven,
business-to-consumer (B2C) channel, and (3) a business-to-realtor (B2R) channel,
LoanWorks.com, which allows real estate professionals to utilize the Company's
technology to fulfill the mortgage loan process for their customers in the
process of purchasing a home. The Company has been able to successfully expand
and leverage its proprietary system, e-MITS.com, across its B2B, B2C and B2R
channels. These channels provide the Company with comprehensive coverage of the
consumer market. The Company's principal sources of income from its mortgage
banking operations are gains recognized on the sale or securitization of
mortgage loans, fee income from the origination or purchase of such loans, and
the net spread between interest earned on mortgage loans and the interest costs
associated with the borrowings used to finance such loans pending their sale or
securitization.
B2B funded $2.1 billion of prime and subprime loans during the three months
ended September 30, 2000, compared with $1.7 billion and $1.3 billion during the
three months ended June 30, 2000 and September 30, 1999, respectively. B2B's
loan production was financed using equity and short-term financing in the form
of repurchase agreements and other credit facilities. The Company sold $2.1
billion of prime and subprime loans during the three months ended September 30,
2000, compared with $1.7 billion and $1.5 billion of sales during the three
months ended June 30, 2000 and September 30, 1999, respectively. The Company's
B2C group funded $221 million of mortgage loans during the three months ended
September 30, 2000, an increase of 25% in comparison to $177 million of loans
during the three months ended June 30, 2000.
10
12
At September 30, 2000, the Company had outstanding commitments to fund
consumer construction loans of $769.5 million compared to outstanding
commitments of $609.2 million at December 31, 1999.
During the third quarter of 2000, the Company enhanced e-MITS(1) so that it
now can underwrite the Company's consumer construction-to-perm mortgage
products. Total loans funded through e-MITS during the three months ended
September 30, 2000 totaled $1.8 billion, representing 81% of the Company's B2B
and consumer construction-to-perm mortgage production for the quarter. Loans
funded through e-MITS during the three months ended June 30, 2000 were $1.3
billion or 78% of the Company's B2B mortgage production, and $694 million or 53%
of production during the three months ended September 30, 1999. Loans funded by
the Company's B2C group via internet channels totaled $113 million, or 51% of
total funding for the three months ended September 30, 2000, compared to $94
million, or 53% of total funding for the three months ended June 30, 2000.
INVESTMENT PORTFOLIO OPERATIONS
The Company invests in residential loans and mortgage securities either
retained in connection with the issuance of mortgage-backed securities or
purchased from third parties. The Company acts as primary servicer and master
servicer with respect to substantially all of the mortgage loans it sells
pursuant to private-label securitizations, and a portion of those loans sold to
government sponsored entities ("GSEs"). The Company's principal sources of
income from its investment portfolio operations are fee income from servicing
contracts, and the net spread between interest earned on residential loans and
mortgage securities and the interest costs associated with the borrowings used
to finance such loans and securities.
IndyMac Bank Home Loan Servicing's portfolio at September 30, 2000 and
December 31, 1999 was $13.4 billion and $10.1 billion, respectively, with a
weighted average coupon of 8.8% as of September 30, 2000 and 8.6% as of December
31, 1999. At September 30, 2000 and December 31, 1999, the Company's master
servicing portfolio had aggregate outstanding principal balances of $17.4
billion and $16.1 billion, respectively, with weighted average coupons of 8.6%
and 8.2%, respectively.
Included in Investment Portfolio Operations is the Company's consumer
banking operations, offered to consumers through IndyMac Bank. IndyMac Bank
accepts deposits from the general public and offers consumer loans and
residential and commercial real estate loans through the Company's mortgage
banking and commercial lending divisions. In addition to deposits obtained in
California through IndyMac Bank's existing branch network and a centralized
telebanking operation, the Company expects to market deposits nationally through
the Internet.
The Company reported $554.3 million in deposits at September 30, 2000
compared to $353.8 million as of July 1, 2000 (date of merger with SGVB -- see
discussion above). At September 30, 2000, core deposits (defined as non-term
deposits, such as checking and non-term savings) represented 23% of total
deposits, while certificates of deposit represented 77% of total deposits.
COMMERCIAL LENDING OPERATIONS
The Company conducts its builder construction lending activities through
Construction Lending Corporation of America ("CLCA"), which offers a variety of
residential construction, land and lot loan programs for builders and
developers. Warehouse lending activities are conducted through IndyMac Bank,
Warehouse Lending, which provides various types of short-term revolving
financing to small-to-medium size mortgage bankers and brokers. The Company's
principal sources of income from its commercial lending operations are fee
income from the origination of such loans, and the net spread between interest
earned on mortgage loans and the interest costs associated with the borrowings
used to finance such loans.
In July of 2000, the Board of Directors approved management's decision to
begin a systematic wind-down of the Company's warehouse lending activities. The
Company will continue to honor its outstanding
- ---------------
(1) Registered in U.S. Patent and Trademark Office. Patent pending.
11
13
commitments, but will not enter into any new commitments. It is anticipated that
the wind-down of this division will be completely eliminated over the course of
the next year.
At September 30, 2000, CLCA had outstanding commitments to fund builder
construction loans of $1.4 billion compared to outstanding commitments of $1.3
billion at December 31, 1999. At September 30, 2000, the Company had extended
commitments to make warehouse and related lines of credit in an aggregate amount
of $595.3 million, compared to commitments of $985.5 million at December 31,
1999.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1999
The results of operations for the three months ended September 30, 1999 are
presented on a pro forma basis, which gives effect to the change in the
Company's structure to a fully taxable entity and the buyout of the minority
interest to IndyMac, Inc. effective in January of 2000.
Overview: The Company's net earnings were $20.8 million or $0.31 diluted
earnings per share for the three months ended September 30, 2000, compared to
$19.0 million or $0.23 diluted earnings per share, respectively, for the three
months ended September 30, 1999. The $1.8 million increase in net earnings was
primarily due to a $15.4 million increase in net gain on sale of loans, which
was offset in part by a $13.5 million increase in expenses. The increase in the
gain on sale of loans was due to an increase in volume ($2.1 billion sold during
the three months ended September 30, 2000, compared to $1.5 billion sold during
the three months ended September 30, 1999) and profit margin (1.54% and 1.08%,
respectively). The increase in expenses was primarily due to the acquisition of
SGVB in July of 2000, which increased salaries and general and administrative
costs, as well as overall growth of the Company year over year.
Interest Income: Interest income for the three months ended September 30,
2000 was $115.2 million, a 20% increase from $95.8 million during the three
months ended September 30, 1999. The $19.4 million increase was due to a $745.8
million increase in average interest-earning assets to $4.8 billion during the
three months ended September 30, 2000 from $4.1 billion during the three months
ended September 30, 1999. The increase in average interest-earning assets
quarter over quarter was primarily due to the Company's overall growth in
production year over year. The increase in interest income was also impacted by
the increase in the Company's yield on interest-earning assets to 9.45% from
9.26%, quarter over quarter, as a result of the general increase in mortgage
rates during the year.
Interest Expense: Interest expense for the three months ended September 30,
2000 was $79.0 million, a 58% increase from $50.1 million during the three
months ended September 30, 1999. The $28.9 million increase was primarily due to
a $1.0 billion increase in average interest-bearing borrowings to $4.3 billion
during the three months ended September 30, 2000 from $3.3 billion during the
three months ended September 30, 1999. The increase in average interest-bearing
borrowings quarter over quarter was primarily due to the Company's overall asset
growth, increased leverage attributable to the share repurchase program, and an
increase in interest rates year over year. The Company's cost of funds increased
to 7.23% from 5.97% during the three months ended September 30, 2000 and 1999,
respectively.
12
14
The following table sets forth information regarding the Company's
consolidated average balance sheets, together with the total dollar amounts of
interest income and interest expense and the weighted average interest rates for
the periods presented. Average balances are calculated on a daily basis.
Non-performing assets are included in the average balances for the periods
indicated. The allowance for loan losses is excluded from the average loan
balances. The yield on securities available for sale includes the impact from
impairment recorded on securities. The average loan balances for the three
months ended September 30, 1999 have been restated to conform to the
presentation for the three months ended September 30, 2000.
THREE MONTHS ENDED SEPTEMBER 30,
------------------------------------------
2000 1999
------------------- -------------------
AVERAGE YIELD AVERAGE YIELD
BALANCE RATE BALANCE RATE
---------- ----- ---------- -----
(DOLLARS IN THOUSANDS)
Investment securities available for sale............ $ 53,412 6.83% $ -- 0.00%
Mortgage-backed securities available for sale....... 850,726 9.27% 798,069 9.09%
Loans held for sale................................. 1,373,300 8.91% 1,108,723 9.46%
Loans held for investment........................... 2,555,631 9.87% 2,186,405 9.22%
Investment in Federal Home Loan Bank stock.......... 6,265 5.69% -- 0.00%
Other............................................... 9,877 7.11% 10,263 9.02%
---------- ----------
Total interest-earning assets............. 4,849,211 9.45% 4,103,460 9.26%
Other............................................... 367,949 187,620
---------- ----------
Total assets.............................. $5,217,160 $4,291,080
========== ==========
Deposits............................................ $ 426,243 5.70% $ -- 0.00%
Advances from Federal Home Loan Bank................ 119,353 6.80% -- 0.00%
Borrowings.......................................... 3,798,347 7.42% 3,333,803 5.97%
---------- ----------
Total interest-bearing liabilities........ 4,343,943 7.23% 3,333,803 5.97%
Other............................................... 73,546 73,339
---------- ----------
Total liabilities......................... 4,417,489 3,407,142
Shareholders' equity...................... 799,671 883,938
---------- ----------
Total liabilities and shareholders'
equity.................................. $5,217,160 $4,291,080
========== ==========
Net interest spread................................. 2.22% 3.29%
Net interest margin................................. 2.97% 4.41%
The net interest spread is the difference between the weighted average
yield on interest-earning assets and the weighted average cost of
interest-bearing liabilities. The net interest margin measures net interest
income as a percentage of average interest-earning assets. The decrease in net
interest spread and net interest margin quarter over quarter was due to the
increase in interest rates over the past year and the Company's strategy to
repurchase shares.
13
15
The dollar amounts of interest income and interest expense fluctuate
depending upon changes in the amounts (volume) and interest rates of
interest-earning assets and interest-bearing liabilities. The following table
details changes attributable to (i) changes in volume (changes in average
outstanding balances multiplied by the prior period's rate) and (ii) changes in
the rate (changes in the average interest rate multiplied by the prior period's
volume). Changes in rate/volume (changes in rates times the changes in volume)
are allocated proportionately to the changes in volume and the changes in rates.
THREE MONTHS ENDED SEPTEMBER 30,
2000 VS. 1999
-----------------------------------
INCREASE/(DECREASE) DUE TO
VOLUME RATE TOTAL CHANGE
------- -------- ------------
(DOLLARS IN THOUSANDS)
INTEREST INCOME
Investment securities available for sale.......... $ 827 $ -- $ 827
Mortgage-backed securities available for sale..... 1,184 373 1,557
Loans held for sale............................... 5,718 (1,379) 4,339
Loans held for investment......................... 11,316 1,260 12,576
Investment in Federal Home Loan Bank stock........ 90 -- 90
Other............................................. 63 (30) 33
------- -------- -------
Total interest income................... 19,198 224 19,422
INTEREST EXPENSE
Deposits.......................................... 6,104 -- 6,104
Advances from Federal Home Loan Bank.............. 2,039 -- 2,039
Borrowings........................................ 7,536 13,160 20,696
------- -------- -------
Total interest expense.................. 15,679 13,160 28,839
------- -------- -------
Net interest income..................... $ 3,519 $(12,936) $(9,417)
======= ======== =======
Provision for Loan Losses: The provision for loan losses decreased to $3.4
million from $5.0 million during the three months ended September 30, 2000 and
1999, respectively. The decrease in the provision for loan losses was due to
lower actual losses sustained during 2000 compared to 1999. IndyMac's
determination of the level of the allowance for loan losses and correspondingly,
the provision for loan losses, is based on various judgments and assumptions
regarding various matters, including general economic conditions, loan portfolio
composition, delinquency trends and prior loan loss experience.
Other Income: Other income was $53.8 million and $29.7 million for the
three months ended September 30, 2000 and 1999, respectively.
Gain on sale of loans, net, of $32.8 million for the three months
ended September 30, 2000 increased from $17.4 million for the same period
in 1999. The $15.4 million increase in gain on sale of loans, net was due
to a $640 million, or 43%, increase in loan sales, as well as a 46 bps
increase in profit margin to 1.54% from 1.08% quarter over quarter.
Service fee income of $9.9 million for the three months ended
September 30, 2000 increased from $5.8 million for the same period in 1999.
The $4.1 million increase in service fee income was primarily the result of
the $57.2 million increase in the average book balances.
Gain on sale of mortgage-backed securities, net, of $2.3 million
during the three months ended September 30, 2000 increased from $375
thousand for the same period in 1999. The $2.3 million gain during the
three months ended September 30, 2000 was primarily due to the sale of
$230.4 million of agency and senior securities. During the three months
ended September 30, 1999, the $375 thousand gain was primarily the result
of the sale of $200.0 million of U.S. Treasuries.
Fee income of $8.9 million during the three months ended September 30,
2000, increased from $6.1 million for the same period in 1999. The $2.8
million increase was due in part to a 145% increase in the number of
table-funded loans, as well as the addition of consumer banking fees
charged during the
14
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three months ended September 30, 2000 whereas there were no such fees
during the three months ended September 30, 1999.
Other Expense: Other expense was $50.8 million and $37.2 million for the
three months ended September 30, 2000 and 1999, respectively. Other expense
consisted of the following:
Salaries and related expense of $28.7 million for the three months
ended September 30, 2000 increased 40% from $20.6 million for the same
period in 1999 primarily due to the net increase in personnel. The average
number of employees for the three months ended September 30, 2000 was 1,455
as compared to 1,079 for the same period in 1999. The acquisition of SGVB
contributed 106 additional employees and approximately $1.5 million of
salaries and related benefits during the three months ended September 30,
2000. The remaining increase in headcount and related salaries expenses
were due to the Company's overall growth year over year.
General and administrative expenses of $16.3 million for the three
months ended September 30, 2000 decreased 2% from $16.7 million for the
same period in 1999 primarily due to a change in marketing strategies.
Marketing costs totaled $2.4 million during the three months ended
September 30, 2000, compared to $4.2 million during the three months ended
September 30, 1999. The decrease in marketing costs was offset in part by
increases in other general and administrative expenses as a result of the
Company's growth in assets and personnel year over year.
Amortization of goodwill and other intangible assets was $1.1 million
for the three months ended September 30, 2000 compared to $14 thousand for
the same period in 1999. The increase in amortization of goodwill and other
intangible assets was primarily a result of the acquisition of SGVB during
the three months ended September 30, 2000.
Nonrecurring, acquisitions, and other charges of $4.6 million for the
three months ended September 30, 2000 primarily consists of $2.9 million in
expenses related to the acquisition of SGVB and $1.4 million arising from
variable plan accounting for stock options repriced to directors subsequent
to December 15, 1998.
Provision for Income Tax: Provision for income tax includes federal and
applicable state income taxes. Income taxes of $15.1 million for the three
months ended September 30, 2000 represented an effective tax rate of 42%. Prior
to January of 2000, IndyMac was not, with certain limited exceptions, taxed at
the corporate level on the net income distributed to IndyMac's shareholders. Had
IndyMac been a fully taxable entity in 1999, the Company would have recorded
$14.1 million in federal and applicable state income taxes during the three
months ended September 30, 1999, representing a 42.5% effective tax rate.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1999
The results of operations for the nine months ended September 30, 1999 are
presented on a pro forma basis, which gives effect to the change in the
Company's structure to a fully taxable entity and the buyout of the minority
interest to IndyMac, Inc. effective January of 2000.
Overview: The Company's net earnings were $95.1 million, or $1.33 diluted
earnings per share for the nine months ended September 30, 2000, compared to
$47.5 million, or $0.60 diluted earnings per share for the nine months ended
September 30, 1999. The $47.6 million increase in net earnings was primarily due
to a $36.1 million income tax benefit recorded in January of 2000 as a result of
the termination of IndyMac's Real Estate Investment Trust ("REIT") status.
Additionally, in 1999, the Company recognized a $31.4 million loss on sale of
U.S. Treasuries. The remaining decrease in net earnings was primarily due to a
$7.6 million decrease in net interest income.
Interest Income: Interest income for the nine months ended September 30,
2000 was $315.4 million, an 8% increase from $292.9 million during the nine
months ended September 30, 1999. The $22.5 million increase was primarily due to
an increase in the Company's yield on interest-earning assets to 9.70% from
8.43% period over period. The impact to interest income due to the increase in
yield was offset in part by a
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$285.7 million decrease in average interest-earning assets to $4.3 billion
during the nine months ended September 30, 2000 from $4.6 billion during the
nine months ended September 30, 1999.
Interest Expense: Interest expense for the nine months ended September 30,
2000 was $197.7 million, a 19% increase from $166.4 million during the nine
months ended September 30, 1999. The $31.3 million increase was primarily due to
an increase in the Company's cost of funds to 7.08% from 5.76% during the nine
months ended September 30, 2000 and 1999, respectively, as a result of the
overall increase in interest rates year over year. The impact to interest
expense due to the increase in the cost of funds was offset in part by a $134.1
million decrease in the average balance of interest-bearing liabilities during
the nine months ended September 30, 2000 compared to the same period in 1999.
The following table sets forth information regarding the Company's
consolidated average balance sheets, together with the total dollar amounts of
interest income and interest expense and the weighted average interest rates for
the periods presented, in each case on the same basis as that used for the three
month comparison presented herein. Average balances are calculated on a daily
basis. Non-performing assets are included in the average balances for the
periods indicated. The allowance for loan losses is excluded from the average
loan balances. The yield on securities available for sale includes the impact
from impairment recorded on securities. The average loan balances for the three
months ended September 30, 1999 have been restated to conform to the
presentation for the three months ended September 30, 2000.
NINE MONTHS ENDED SEPTEMBER 30,
-----------------------------------------
2000 1999
------------------- ------------------
AVERAGE YIELD AVERAGE YIELD
BALANCE RATE BALANCE RATE
---------- ----- ---------- -----
(DOLLARS IN THOUSANDS)
Investment securities available for sale.............. $ 17,804 6.88% $ -- 0.00%
Mortgage-backed securities available for sale......... 771,816 9.78% 884,437 6.27%
Loans held for sale................................... 1,036,803 9.20% 1,360,563 8.96%
Loans held for investment............................. 2,505,541 9.92% 2,366,157 9.00%
Investment in Federal Home Loan Bank stock............ 2,088 5.73% -- 0.00%
Other................................................. 9,300 5.60% 17,941 6.60%
---------- ----------
Total interest-earning assets............... 4,343,352 9.70% 4,629,098 8.43%
Other................................................. 288,902 159,943
---------- ----------
Total assets................................ $4,632,254 $4,789,041
========== ==========
Deposits.............................................. $ 142,081 5.74% $ -- 0.00%
Advances from Federal Home Loan Bank.................. 39,784 6.85% -- 0.00%
Borrowings............................................ 3,545,136 7.14% 3,861,122 5.76%
---------- ----------
Total interest-bearing liabilities.......... 3,727,001 7.08% 3,861,122 5.76%
Other................................................. 50,335 73,515
---------- ----------
Total liabilities........................... 3,777,336 3,934,637
Shareholders' equity........................ 854,918 854,404
---------- ----------
Total liabilities and shareholders'
equity.................................... $4,632,254 $4,789,041
========== ==========
Net interest spread................................... 2.62% 2.67%
Net interest margin................................... 3.62% 3.64%
The net interest spread is the difference between the weighted average
yield on interest-earnings assets and the weighted average cost of
interest-bearing liabilities. The net interest margin measures the net interest
income as a percentage of average interest-earning assets.
16
18
The dollar amounts of interest income and interest expense fluctuate
depending upon changes in the amounts (volume) and upon changes in the interest
rates of interest-earning assets and interest-bearing liabilities. The following
table details changes attributable to (i) changes in volume (changes in average
outstanding balances multiplied by the prior period's rate) and (ii) changes in
the rate (changes in the average interest rate multiplied by the prior period's
volume). Changes in rate/volume (changes in rates times the changes in volume)
were allocated proportionately to the changes in volume and the changes in
rates.
NINE MONTHS ENDED SEPTEMBER 30,
2000 VS. 1999
-----------------------------------
INCREASE/(DECREASE) DUE TO
VOLUME RATE TOTAL CHANGE
-------- ------- ------------
(DOLLARS IN THOUSANDS)
INTEREST INCOME
Investment securities available for sale.................. $ 827 $ -- $ 827
Mortgage-backed securities available for sale............. (11,264) 26,163 14,899
Loans held for sale....................................... (22,278) 2,553 (19,725)
Loans held for investment................................. 169 26,591 26,760
Investment in Federal Home Loan Bank stock................ 90 -- 90
Other..................................................... (289) (118) (407)
-------- ------- --------
Total interest income........................... (32,745) 55,189 22,444
INTEREST EXPENSE
Deposits.................................................. 6,104 -- 6,104
Advances from Federal Home Loan Bank...................... 2,039 -- 2,039
Borrowings................................................ (15,110) 38,252 23,142
-------- ------- --------
Total interest expense.......................... (6,967) 38,252 31,285
-------- ------- --------
Net interest income............................. $(25,778) $16,937 $ (8,841)
======== ======= ========
Provision for Loan Losses: The provision for loan losses decreased to $12.1
million from $13.3 million during the nine months ended September 30, 2000 and
1999, respectively. The decrease in the provision for loan losses was due to
lower actual losses sustained during 2000 compared to 1999.
Other Income: Other income was $132.3 million and $83.7 million for the
nine months ended September 30, 2000 and 1999, respectively.
Gain on sale of loans, net, of $77.3 million for the nine months ended
September 30, 2000 decreased 4.9% from $81.3 million for the same period in
1999. The $4.0 million decrease in gain on sale of loans, net was primarily
due to a decrease in the principal sold to $5.1 billion during 2000
compared to $5.2 billion during 1999.
Service fee income of $27.1 million for the nine months ended
September 30, 2000 increased 70.0% from $16.0 million for the same period
in 1999. The $11.1 million increase in service fee income was primarily the
result of the $40.8 million increase in average collateral balances, as
well as an increase in valuation gains.
Gain (loss) on sale of mortgage backed securities, net, totaled $4.4
million during the nine months ended September 30, 2000 compared to a loss
of $679 thousand during the same period in 1999. The $4.4 million gain was
the result of the sales of AAA-rated interest only securities, investment
and non-investment grade securities, agency and senior securities during
the nine months ended September 30, 2000. The $679 thousand loss during the
nine months ended September 30, 1999 was primarily the result of losses on
the sale of investment and non-investment grade securities.
Loss on sale of other securities, net, totaled $31.4 million during
1999, whereas there were no losses in 2000. The loss on sale of other
securities, net in 1999 was due to the sale of U.S. Treasuries during the
first and second quarters of 1999.
17
19
Fee income of $23.5 million during the nine months ended September 30,
2000, increased 27.0% from $18.5 million for the same period in 1999. The
$5.0 million increase was due in part to an increase in the number of
table-funded loans.
Other Expense: Other expense was $136.2 million and $114.3 million for the
nine months ended September 30, 2000 and 1999, respectively.
Salaries and related expense of $75.6 million for the nine months
ended September 30, 2000 increased 16% from $65.3 million for the same
period in 1999 primarily due to net increases in personnel. The average
number of employees for the nine months ended September 30, 2000 was 1,219
as compared to 1,065 for the same period in 1999. The acquisition of SGVB
contributed to 106 additional employees and approximately $2.1 million of
salaries and related benefits during the nine months ended September 30,
2000. The remaining increase in headcount and related salaries expenses
were due to the Company's overall growth year over year.
General and administrative expenses of $43.3 million for the nine
months ended September 30, 2000 decreased 12% from $49.0 million for the
same period in 1999. The $5.7 million decrease was primarily due to a
change in marketing strategies whereby fewer expenses were incurred to
market the B2C channel during 2000 compared to 1999, as well as costs
incurred during the nine months ended September 30, 1999 related to the
winddown of the Company's manufactured housing and home improvement
channels.
Amortization of goodwill and other intangible assets was $1.2 million
for the nine months ended September 30, 2000 compared to $44 thousand for
the same period in 1999. The increase in amortization of goodwill and other
intangible assets was primarily the result of the acquisition of SGVB
during the three months ended September 30, 2000.
Nonrecurring, acquisitions, and other charges of $16.2 million for the
nine months ended September 30, 2000 primarily consists of $9.4 million in
compensation expense related to the resignation of Mr. Mozilo from the
Board of Directors during the first quarter of 2000, $0.8 million related
to the buyout of CHL's minority interest in IndyMac Operating, $4.3 million
in expenses related to the acquisition of SGVB, and $1.4 million arising
from variable plan accounting for stock options repriced to directors
subsequent to December 15, 1998.
Provision for Income Tax: Provision for income tax includes federal and
applicable state income taxes. Income taxes of $42.7 million for the nine months
ended September 30, 2000 represented an effective tax rate of 42%. Prior to
January of 2000, IndyMac was not, with certain limited exceptions, taxed at the
corporate level on the net income distributed to IndyMac's shareholders. As a
result of its conversion to a fully taxable status effective January of 2000, an
income tax benefit and related deferred tax asset of $36.1 million was recorded.
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FINANCIAL CONDITION
Investment and Mortgage-backed Securities: At September 30, 2000 and
December 31, 1999, the fair value of the Company's investment and
mortgage-backed securities portfolio totaled $724.9 million and $650.6 million,
respectively. The balances consisted of the following types of securities:
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
(DOLLARS IN THOUSANDS)
INVESTMENT SECURITIES
Agency notes.............................................. $ 10,806 $ --
Corporate notes........................................... 7,459 --
Other..................................................... 5,314 --
-------- --------
Total investment securities....................... $ 23,579 $ --
======== ========
MORTGAGED-BACKED SECURITIES
AAA rated interest-only securities........................ $296,766 $341,447
AAA rated agency securities............................... 178,166 140,372
AAA rated MBS securities.................................. 87,132 46,871
Other investment grade securities......................... 78,841 47,959
-------- --------
Total investment grade securities................. 640,905 576,649
-------- --------
Non-investment grade residual securities.................. 36,778 42,784
Other non-investment grade securities..................... 23,659 31,153
-------- --------
Total non-investment grade securities............. 60,437 73,937
-------- --------
Total mortgage securities......................... $701,342 $650,586
======== ========
The Company evaluates the carrying value of its AAA rated interest-only
securities and residual securities monthly by discounting estimated net future
cash flows. Adjustments to the carrying value are recorded as a component of
other comprehensive income in shareholders' equity. The assumptions used to
value these securities at September 30, 2000 and December 31, 1999 follow:
ACTUAL VALUATION ASSUMPTIONS
----------------------------------------------------------------- ------------------------------
3-MONTH WTD. ANNUAL
BOOK COLLATERAL GROSS INTEREST PREPAYMENT AVG. PREPAYMENT DISCOUNT LOSS
VALUE BALANCE WAC STRIP SPEEDS(1) MULTIPLE SPEEDS(1) YIELD RATE
-------- ----------- ----- -------- ---------- -------- ---------- -------- ------
(DOLLARS IN THOUSANDS)
SEPTEMBER 30, 2000
AAA rated interest-only
securities................. $296,766 $11,308,433 8.26% 0.85% 12.4% 3.10 14.7% 12.8% NA
======== =========== ===== ==== ======= ==== ======= ==== ===
Non-investment grade residual
securities
Prime residual
securities............... $ 6,284 $ 258,322 8.37% 1.68% 13.4% 1.45 23.2% 20.0% 0.4%
Subprime residual
securities............... 28,279 919,751 10.03% 2.14% 25.5% 1.44 30.0% 21.1% 1.3%
Manufactured housing
securities............... 2,215 366,578 10.24% 2.51% 109 MHP 0.24 180 MHP 25.0% 1.8%
-------- ----------- ----- ---- ---- ---- ---
Total non-investment grade
residual securities........ $ 36,778 $ 1,544,651 9.80% 2.15% 1.11 21.8% 1.3%
======== =========== ===== ==== ==== ==== ===
DECEMBER 31, 1999
AAA rated interest-only
securities................. $341,447 $11,019,669 8.14% 0.92% 15.8% 3.37 12.7% 12.7% NA
======== =========== ===== ==== ======= ==== ======= ==== ===
Non-investment grade residual
securities
Prime residual
securities............... $ 8,524 $ 294,189 8.38% 1.50% 17.3% 1.93 30.0% 20.0% 0.4%
Subprime residual
securities............... 31,579 890,281 9.56% 2.60% 28.6% 1.36 35.1% 20.0% 1.2%
Manufactured housing
securities............... 2,681 402,071 10.16% 2.47% 135 MHP 0.27 208 MHP 20.0% 1.8%
-------- ----------- ----- ---- ---- ---- ---
Total non-investment grade
residual securities........ $ 42,784 $ 1,586,541 9.49% 2.56% 1.04 20.0% 1.2%
======== =========== ===== ==== ==== ==== ===
- ---------------
(1) CPR, unless otherwise noted.
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The fair value for the Company's other investment and non-investment grade
mortgage-backed securities is estimated based on market quotes when available or
discounted cash flow techniques using assumptions for prepayment rates, market
yield requirements and credit losses. Adjustments to the carrying value are
recorded as a component of other comprehensive income in shareholders' equity.
The detail of other investment and non-investment grade mortgage-backed
securities by credit rating as of September 30, 2000 and December 31, 1999 were
as follows:
PREMIUM
CURRENT (DISCOUNT)
FACE TO FACE AMORTIZED BOOK
VALUE VALUE COST VALUE
-------- ---------- --------- --------
(DOLLARS IN THOUSANDS)
SEPTEMBER 30, 2000
AAA rated principal-only securities............ $ 6,909 $ (1,071) $ 5,838 $ 4,843
AA............................................. 18,377 (351) 18,026 17,952
A.............................................. 12,760 (403) 12,357 12,312
BBB............................................ 46,411 (2,219) 44,192 43,734
-------- -------- -------- --------
Total other investment grade
securities......................... 84,457 (4,044) 80,413 78,841
BB............................................. 28,201 (6,011) 22,190 17,031
B.............................................. 7,616 (988) 6,628 5,285
NR............................................. 6,719 (6,125) 594 1,343
-------- -------- -------- --------
Total other non-investment grade
securities......................... 42,536 (13,124) 29,412 23,659
-------- -------- -------- --------
Total other investment and
non-investment grade securities.... $126,993 $(17,168) $109,825 $102,500
======== ======== ======== ========
DECEMBER 31, 1999
AAA rated principal-only securities............ $ 5,948 $ (810) $ 5,138 $ 3,990
AA............................................. 208 8 216 206
A.............................................. 2,690 (117) 2,573 2,407
BBB............................................ 46,767 (4,464) 42,303 41,356
-------- -------- -------- --------
Total other investment grade
securities......................... 55,613 (5,383) 50,230 47,959
BB............................................. 43,987 (9,486) 34,501 28,365
B.............................................. 1,934 (808) 1,126 1,102
NR............................................. 9,209 (8,531) 678 1,686
-------- -------- -------- --------
Total other non-investment grade
securities......................... 55,130 (18,825) 36,305 31,153
-------- -------- -------- --------
Total other investment and
non-investment grade securities.... $110,743 $(24,208) $ 86,535 $ 79,112
======== ======== ======== ========
Loans: Total loans (net of allowance for loan losses) at September 30, 2000
were $3.7 billion, a 20.7% increase from $3.1 billion at December 31, 1999. The
increase was primarily due to the loans acquired from SGVB totaling $365.5
million in July of 2000, as well as an overall increase in production volumes
during the nine months ended September 30, 2000.
Loan held for sale at September 30, 2000 totaled $1.2 billion, a 86.3%
increase from $658.8 million at December 31, 1999. The 86.3% increase
during the nine months ended September 30, 2000 was due to a 107.5% growth
in prime and subprime mortgage production through the B2B channel
(comparing the fourth quarter of 1999 to the third quarter of 2000), as
well as the addition of the income property loans acquired from SGVB during
the three months ended September 30, 2000. Loans held for sale consisted of
$835.1 million, $315.7 million, and $76.4 million of prime, subprime, and
income property products, respectively, as of September 30, 2000.
Mortgage and consumer loans held for investment at September 30, 2000
totaled $1.4 billion, a 20.3% increase from $1.2 billion at December 31,
1999. The 20.3% increase during the nine months ended September 30, 2000
was primarily due to a $260.4 million increase in prime loans retained by
the Company from production. The Company's loans held for investment at
September 30, 2000 consisted of
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$1.1 billion of prime loans, $13.1 million of subprime loans, $189.0
million of home improvement loans, $110.5 million of manufactured housing
loans, and $4.3 million of other loans. At December 31, 1999, the Company
held $1.2 billion of mortgage and consumer loans for investment, which
consisted of $843.0 million of prime loans, $10.1 million of subprime
loans, $217.1 million of home improvement loans, and $110.1 million of
manufactured housing loans.
Residential Construction: At September 30, 2000, the Company had
outstanding balances of $917.8 million, consisting of $598.7 million and
$319.1 million of builder and consumer construction loans, respectively. At
December 31, 1999, the Company had outstanding balances of $920.5 million,
consisting of $670.9 million and $249.6 million of builder and consumer
construction loans, respectively. Outstanding commitments totaled $2.1
billion and $1.9 billion at September 30, 2000 and December 31, 1999,
respectively.
Mortgage Servicing Rights: At September 30, 2000 and December 31, 1999, the
Company's mortgage servicing rights balance totaled $196.4 million and $140.3
million, respectively. The increase in the mortgage servicing rights balance was
primarily due to assets retained totaling $74.9 million resulting from
securitizations and sales to government sponsored agencies during the nine
months ended September 30, 2000. The assumptions used to value mortgage
servicing rights at September 30, 2000 and December 31, 1999 follow:
ACTUAL
----------------------------------------------------- VALUATION ASSUMPTIONS
WTD. ---------------------
BOOK COLLATERAL GROSS SERVICING AVG. PREPAYMENT DISCOUNT
VALUE BALANCE WAC FEE MULTIPLE SPEEDS(1) YIELD
-------- ----------- ----- --------- -------- ---------- --------
SEPTEMBER 30, 2000
Master servicing............. $ 55,024 $14,544,907 8.46% 0.10% 3.69 15.7% 20.4%
-------- ----------- ----- ---- ---- ------- ----
Primary servicing
Prime/subprime............. 140,175 10,778,988 8.66% 0.36% 3.61 16.6% 13.1%
Manufactured housing....... 1,212 359,781 10.26% 1.00% 0.34 180 MHP 16.0%
-------- ----------- ----- ---- ---- ----
Total primary
servicing........ 141,387 $11,138,769 8.72% 0.38% 3.34 13.2%
-------- =========== ===== ==== ==== ====
Total mortgage
servicing
rights........... $196,411
========
DECEMBER 31, 1999
Master servicing............. $ 51,365 $13,829,264 8.21% 0.11% 3.27 14.3% 16.3%
-------- ----------- ----- ---- ---- ------- ----
Primary servicing
Prime/subprime............. 87,548 7,352,119 8.29% 0.34% 3.55 13.5% 12.1%
Manufactured housing....... 1,396 394,545 10.26% 1.01% 0.35 208 MHP 15.0%
-------- ----------- ----- ---- ---- ----
Total primary
servicing........ 88,944 $ 7,746,664 8.39% 0.37% 3.10 12.0%
-------- =========== ===== ==== ==== ====
Total mortgage
servicing
rights........... $140,309
========
- ---------------
(1) CPR, unless otherwise noted.
Other Assets: Other assets at September 30, 2000 totaled $385.6 million,
compared to $91.3 million at December 31, 1999. The $294.3 million increase was
primarily due to a receivable totaling $232.6 million for securities traded in
September of 2000 and settled in October of 2000. The remaining $61.7 million
increase was primarily due to (a) the $36.1 million deferred tax asset recorded
as a result of the Company's conversion to a fully taxable status effective
January of 2000, and (b) the acquisition of SGVB.
Liabilities: The Company's total liabilities increased to $4.5 billion at
September 30, 2000 from $3.2 billion at December 31, 1999.
Deposits totaled $554.3 million at September 30, 2000. Of this
balance, $353.8 million was acquired in July of 2000 upon acquisition of
SGVB, and the remaining $200.5 million was due to new customer
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growth resulting from the Company's marketing efforts during the third
quarter of 2000. The composition of the Company's deposits at September 30,
2000 were as follows:
(DOLLARS IN THOUSANDS)
Noninterest-bearing............................... $ 16,980
Interest-bearing checking......................... 22,884
Savings........................................... 89,602
--------
Core deposits................................... 129,466
Certificates of deposit........................... 424,846
--------
Total deposits.......................... $554,312
========
Advances from Federal Home Loan Bank totaled $232.3 million at
September 30, 2000. The Company's access to advances from the Federal Home
Loan Bank was made possible by its entrance into the consumer banking
business through the acquisition of SGVB during July of 2000.
Borrowings increased to $3.6 billion at September 30, 2000 from $3.1
billion at December 31, 1999. The increase was due to the acquisition of
SGVB during 2000, as well as an increase to fund the Company's asset growth
and share repurchase program.
ASSET QUALITY
Allowance for Loan Losses: The Company analyzes several important elements
in determining the level of the allowance for loan losses in any given period,
such as current and historical economic conditions, non-performing asset trends,
historical loan loss experience, and plans for problem loan administration and
resolution. The result of the analysis indicated continued improvement in asset
quality during the nine months ended September 30, 2000.
A breakdown of the allowance for loan losses by product type follows:
SEPTEMBER 30, 2000 DECEMBER 31, 1999
------------------------ ------------------------
ALLOWANCE ALLOWANCE ALLOWANCE ALLOWANCE
FOR LOAN AS A FOR LOAN AS A
LOSSES PERCENT OF LOSSES PERCENT OF
BALANCE TOTAL LOANS BALANCE TOTAL LOANS
--------- ----------- --------- -----------
(DOLLARS IN THOUSANDS)
Loans held for investment
Mortgage and consumer loans.................. $29,561 0.78% $28,082 0.89%
Residential construction..................... 23,262 0.61% 20,461 0.65%
Income property.............................. 2,830 0.07% 2,830 0.09%
Revolving warehouse lines of credit.......... 3,211 0.08% 2,507 0.08%
------- ---- ------- ----
Total allowance for loan losses...... $58,864 1.56% $53,880 1.72%
======= ==== ======= ====
Activity in the allowance for loan losses was as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -------------------
2000 1999 2000 1999
------- ------- ------- --------
(DOLLARS IN THOUSANDS)
Balance, beginning of period....................... $57,356 $53,103 $53,880 $ 51,061
Provision for loan losses.......................... 3,386 5,011 12,108 13,337
Charge-offs, net of recoveries..................... (1,878) (4,009) (7,124) (10,293)
------- ------- ------- --------
Balance, end of period............................. $58,864 $54,105 $58,864 $ 54,105
======= ======= ======= ========
Actual loss experience, as measured by net charge-offs, decreased to $1.9
million during the third quarter of 2000 from $4.0 million for the same period
in 1999. Net charge-offs decreased to $7.1 million for the nine months ended
September 30, 2000 from $10.3 million for the same period in 1999. Net
charge-offs as a
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percentage of average loans were 0.05% for the third quarter of 2000 compared to
0.13% during the third quarter of 1999.
Non-performing Assets: Loans are generally placed on non-performing status
when they are 90 days past due. Non-performing assets were $113.8 million or
2.19% of total assets at September 30, 2000 compared to $126.5 million or 3.14%
of total assets at December 31, 1999. At September 30, 2000 and December 31,
1999, the Company's foreclosed assets (properties acquired in foreclosure or by
deed in lieu of foreclosure) balance, which is recorded at estimated net
realizable value, totaled $20.3 million and $22.3 million, respectively. The
Company recognized a total of $157 thousand and $71 thousand in net losses on
sale of foreclosed assets during the three and nine months ended September 30,
2000, respectively.
Non-performing assets consisted of the following:
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
(DOLLARS IN THOUSANDS)
Loans held for sale......................................... $ 14,411 $ 8,706
Loans held for investment
Mortgage and consumer loans............................... 44,392 64,492
Residential construction.................................. 23,245 20,833
Income property........................................... 3,000 4,405
Revolving warehouse lines of credit....................... 8,462 5,731
-------- --------
Total non-performing loans........................ 93,510 104,167
Real estate acquired in settlement of loans............... 20,317 22,323
-------- --------
Total non-performing assets....................... $113,827 $126,490
======== ========
The average recorded investment in non-performing loans during the three
months ended September 30, 2000 was approximately $91.0 million.
LIQUIDITY
Liquidity management focuses on the need to meet both short-term funding
requirements and long-term growth objectives. The Company's long-term growth
objective is to attract and retain stable consumer deposits and to maintain
relatively stable sources of wholesale funds. In addition to continuing to
obtain deposits in California through IndyMac Bank's existing branch network and
a centralized telebanking operation, the Company expects to market deposits
nationally through the Internet. The Company anticipates that the availability
of these new funding sources will reduce its reliance on the capital markets for
its funding requirements, and will therefore make the Company less vulnerable to
future adverse changes in the capital markets. In the event the Company is not
able to increase deposits, its ability to grow would be dependent upon, and
limited by, its borrowing capacity.
The Company monitors its ability to meet short-term cash requirements using
guidelines established by its Board of Directors. These guidelines ensure that
short-term secured borrowing capacity is sufficient to satisfy unanticipated
cash needs. As of September 30, 2000, the Company's committed financing totaled
$5.7 billion, with outstanding balances of $3.6 million. Included in the
committed financing balance is $1.4 million in committed Federal Home Loan Bank
advances, of which $232.3 million was outstanding at September 30, 2000.
See "Consolidated Financial Statements -- Consolidated Statements of Cash
Flows" for further information on changes in the Company's liquidity position.
CAPITAL RESOURCES
The Company's capital (shareholders' equity) was $745.6 million at
September 30, 2000, a decrease of $81.9 million from $827.5 million at December
31, 1999. The primary factor that contributed to the decrease in capital was the
Company's stock repurchases. In June of 1999, IndyMac's Board of Directors
approved a
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$100 million share repurchase program. This has been amended twice during 2000
for a total of $300 million inception to date. Since the share repurchase
program's inception through September 30, 2000, the Company has repurchased 12.3
million shares in open market transactions at an average price of approximately
$14.34 per share, for a total of $176.4 million. In August of 2000, the Company
acquired an additional 3.6 million shares in a bulk purchase from Countrywide
Credit Industries, Inc. ("Countrywide") at a price of $18.70 per share. This
bulk purchase represented the entire holding of IndyMac stock by Countrywide.
The bulk purchase was completed separate from the share repurchase program and
does not impact the repurchase capacity remaining under the program.
OTS capital regulations require savings associations to satisfy three
minimum capital ratio requirements: tangible capital, core (leverage) capital
and risk-based capital. In general, an association's tangible capital, which
must be at least 1.5% of adjusted total assets, is the sum of common
shareholders' equity adjusted for the effects of other comprehensive income,
less goodwill and other disallowed assets. An association's ratio of core
capital to adjusted total assets (the "core capital" or "leverage" ratio) must
be at least 3%. Core capital generally is the sum of tangible capital plus
certain qualifying intangibles. Under the risk-based capital requirement, a
savings association must have total capital (core capital plus supplementary
capital) equal to at least 8% of risk-weighted assets. Supplementary capital
mainly consists of qualifying subordinate debt and allowance for loan losses.
The capital requirements are viewed as minimum standards by the OTS. The
OTS regulations also specify minimum requirements to be considered a
"well-capitalized institution." Most associations are expected to maintain
capital levels well above the minimum. As a result of the acquisition of SGVB in
July of 2000, IndyMac Bank was mandated by the OTS to hold Tier 1 core capital
at 8% for three years following the consummation of the transaction and to
maintain a well-capitalized risk based capital position. In addition, IndyMac
Bank must double the risk weighting assigned to subprime loans from 50% to 100%.
The regulatory capital ratios of IndyMac Bank and the minimum regulatory
requirements to be categorized as well-capitalized under OTS regulations were as
follows:
SEPTEMBER 30, 2000
--------------------------
ACTUAL WELL-CAPITALIZED
RATIOS MINIMUM
------ ----------------
(DOLLARS IN THOUSANDS)
Capital Ratios:
Tangible.................................................. 8.77% 2.00%
Core...................................................... 8.77% 5.00%
Tier 1 risk based......................................... 10.89% 6.00%
Risk-based................................................ 12.14% 10.00%
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company's primary market risk 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 may change. 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 cash flows over
time than would otherwise have been obtained in a stable or increasing interest
rate environment. Financial instruments that tend to increase in value as
interest rates decrease include senior securities, fixed rate investment and
non-investment grade securities, adjustable rate agency securities,
24
26
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. The Company also hedges or "match funds" a portion of
mortgage securities and mortgage loans held for investment to mitigate the
negative impact changing rates may have on spread income.
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, 2000, the Company estimates
that an instantaneous 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 the Company of $2.7
million. The combined after tax loss on available for sale mortgage securities,
recorded as a component of other comprehensive income would be $3.0 million. The
net result would be a reduction to comprehensive income of $5.7 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 the Company of $2.0
million. The Company would record an after tax gain on available for sale
mortgage securities of $12 thousand, recorded as a component of other
comprehensive income. Thus, the net result would be an increase to comprehensive
income of $2.0 million. The assumptions inherent in this model include an
instantaneous rate shock and a degree of correlation between the hedges and
hedged assets and as a result 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 within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
Forward-looking statements include the Company's statements regarding liquidity,
provisions for loan losses, capital resources, and anticipated future expense
levels and other anticipated aspects of future operations. Forward-looking
statements typically include the words "anticipate," "believe," "estimate,"
"expect," "intend," and other similar expressions. These statements reflect the
Company's current views with respect to future events and financial performance.
They are subject to risks and uncertainties, including those identified below,
which could cause future results to differ materially from historical results or
from the results anticipated. Readers are cautioned not to place undue reliance
on these forward-looking statements, which speak only as of their dates or as of
the date hereof if no other date is identified. The Company undertakes no
obligation to publicly update or revise any forward-looking statements, whether
as a result of new information, future events or otherwise.
The following factors could cause future results to differ materially from
historical results or those anticipated in any forward-looking statements
herein:
(1) the level of demand for consumer loans, mortgage loans and
construction loans, which is affected by such external factors as the level
of interest rates, the strength of various segments of the economy and
demographics of the Company's lending markets;
(2) the availability of funds from the Company's lenders and other
sources of financing to support the Company's lending activities;
(3) the direction of interest rates and the relationship between
interest rates and the cost of funds;
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(4) federal and state regulation of the Company's consumer lending
operations;
(5) the actions undertaken by both current and potential new
competitors;
(6) other risks and uncertainties detailed herein under "Item 2.
Management's Discussion and Analysis of Financial Condition and Results of
Operations."
PART II
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Restated Certificate of Incorporation
3.2 Amended and Restated Bylaws
4.1 2000 Stock Incentive Plan, as amended
27 Financial Data Schedule
(b) Reports on Form 8-K
None
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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 13, 2000 for the nine months ended
September 30, 2000.
INDYMAC BANCORP, INC.
By: /s/ MICHAEL W. PERRY
------------------------------------
Michael W. Perry
Vice Chairman of the Board of
Directors and
Chief Executive Officer
By: /s/ CARMELLA L. GRAHN
------------------------------------
Carmella L. Grahn
Executive Vice President and
Chief Financial Officer
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