1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the period ended June 30, 2001
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 July 31, 2001: 60,485,026 shares
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INDYMAC BANCORP, INC.
FORM 10-Q QUARTERLY REPORT
FOR THE PERIOD ENDED JUNE 30, 2001
TABLE OF CONTENTS
Page
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets........................................................................3
Consolidated Statements of Earnings................................................................4
Consolidated Statements of Shareholders' Equity and Comprehensive Income...........................5
Consolidated Statements of Cash Flows..............................................................6
Notes to Consolidated Financial Statements.........................................................7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.............12
Item 3. Quantitative and Qualitative Disclosure of Market Risk............................................25
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K..................................................................28
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INDYMAC BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
June 30, December 31,
2001 2000
----------- ------------
(Unaudited)
ASSETS
Cash and cash equivalents $ 41,764 $ 67,867
Investment securities available for sale, amortized cost of
$4,271 and $18,298, respectively 4,271 18,387
Mortgage-backed securities classified as trading securities 267,308 --
Mortgage-backed securities available for sale, amortized cost of
$1,085,394 and $1,147,376, respectively ($169.0 million pledged as
collateral for repurchase agreements at June 30, 2001) 1,097,707 1,135,916
Loans receivable:
Loans held for sale
Prime 2,548,269 1,219,737
Subprime 84,875 201,035
Loans held for investment
Mortgage 1,630,048 1,578,216
Builder construction 568,396 554,028
Consumer construction 543,300 372,394
Income property 58,103 57,717
Revolving warehouse lines of credit 3,873 57,492
Allowance for loan losses (64,016) (58,962)
----------- -----------
Total loans receivable ($3.0 billion pledged as collateral for
repurchase agreements at June 30, 2001) 5,372,848 3,981,657
Mortgage servicing rights 279,990 211,127
Investment in Federal Home Loan Bank stock, at cost 86,777 63,281
Interest receivable 56,783 51,432
Goodwill and other intangible assets 37,133 38,724
Foreclosed assets 23,776 16,265
Other assets 166,652 155,548
----------- -----------
Total assets $ 7,435,009 $ 5,740,204
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits $ 1,794,128 $ 797,935
Advances from Federal Home Loan Bank 1,714,770 1,264,457
Borrowings 3,049,627 2,850,189
Other liabilities 146,770 99,730
----------- -----------
Total liabilities 6,705,295 5,012,311
Shareholders' Equity
Preferred Stock - authorized, 10,000,000 shares of $0.01 par value;
none issued -- --
Common stock - authorized, 200,000,000 shares of $0.01 par
value; issued 82,831,828 shares (60,447,916 outstanding) at
June 30, 2001 and issued 81,758,312 shares
(62,176,316 outstanding) at December 31, 2000 828 818
Additional paid-in-capital 936,760 920,205
Accumulated other comprehensive income (loss) 3,546 (2,603)
Retained earnings 163,366 117,926
Treasury stock, 22,383,912 shares and 19,581,996 shares, respectively (374,786) (308,453)
----------- -----------
Total shareholders' equity 729,714 727,893
----------- -----------
Total liabilities and shareholders' equity $ 7,435,009 $ 5,740,204
=========== ===========
The accompanying notes are an integral part of these statements.
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INDYMAC BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
FOR THE QUARTER ENDED FOR THE SIX MONTHS ENDED
------------------------ ------------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2001 2000 2001 2000
--------- --------- --------- ---------
INTEREST INCOME
Mortgage-backed and other securities $ 30,467 $ 19,747 $ 62,026 $ 38,017
Loans held for sale
Prime 45,152 16,790 77,664 31,800
Subprime 4,519 4,828 9,935 8,840
Loans held for investment
Mortgage 35,088 29,040 70,267 56,127
Builder construction 14,111 19,385 29,123 42,035
Consumer construction 9,764 6,708 18,477 12,515
Income property 1,261 1,109 2,587 2,356
Revolving warehouse lines of credit 81 5,227 772 9,627
Other 1,560 61 3,112 211
--------- --------- --------- ---------
Total interest income 142,003 102,895 273,963 201,528
INTEREST EXPENSE
Deposits 20,302 -- 34,776 --
Advances from Federal Home Loan Bank 23,742 -- 46,158 --
Borrowings 45,720 63,380 97,733 118,664
--------- --------- --------- ---------
Total interest expense 89,764 63,380 178,667 118,664
--------- --------- --------- ---------
Net interest income 52,239 39,515 95,296 82,864
Provision for loan losses 3,026 4,406 12,026 8,722
--------- --------- --------- ---------
Net interest income after provision for loan losses 49,213 35,109 83,270 74,142
OTHER INCOME
Gain on sale of loans 52,714 25,962 101,913 44,533
Service fee income 2,906 10,391 14,368 20,068
Gain (loss) on mortgage-backed securities, net 1,572 (160) (915) 803
Fee and other income 13,413 6,434 24,360 11,737
--------- --------- --------- ---------
Total other income 70,605 42,627 139,726 77,141
--------- --------- --------- ---------
Net revenues 119,818 77,736 222,996 151,283
OTHER EXPENSE
Operating expenses 67,105 37,878 126,470 73,867
Amortization of goodwill and other intangible assets 935 13 1,895 27
Non-recurring and other charges (235) 1,344 (535) 11,567
--------- --------- --------- ---------
Total other expense 67,805 39,235 127,830 85,461
--------- --------- --------- ---------
Earnings before provision for income taxes and cumulative effect of
a change in accounting principle 52,013 38,501 95,166 65,822
Provision for income taxes 21,611 16,170 39,541 27,646
Income tax benefit from termination of REIT status -- -- -- (36,100)
--------- --------- --------- ---------
Earnings before cumulative effect of a
change in accounting principle 30,402 22,331 55,625 74,276
Cumulative effect of a change in accounting principle -- -- (10,185) --
--------- --------- --------- ---------
NET EARNINGS $ 30,402 $ 22,331 $ 45,440 $ 74,276
========= ========= ========= =========
EARNINGS PER SHARE BEFORE CUMULATIVE EFFECT OF A CHANGE
IN ACCOUNTING PRINCIPLE
Basic $ 0.50 $ 0.31 $ 0.90 $ 1.02
Diluted $ 0.48 $ 0.31 $ 0.87 $ 1.01
EARNINGS PER SHARE FROM CUMULATIVE EFFECT OF A CHANGE
IN ACCOUNTING PRINCIPLE
Basic $ -- $ -- $ (0.16) $ --
Diluted $ -- $ -- $ (0.16) $ --
NET EARNINGS PER SHARE
Basic $ 0.50 $ 0.31 $ 0.74 $ 1.02
Diluted $ 0.48 $ 0.31 $ 0.71 $ 1.01
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic 60,860 71,192 61,523 72,610
Diluted 63,217 72,324 63,916 73,613
The accompanying notes are an integral part of these statements.
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INDYMAC BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
(DOLLARS IN THOUSANDS)
(UNAUDITED)
Accumulated
Comprehensive
Other Cumulative
Additional Income (Loss) Total Distributions Total
Common Paid-in ------------- Retained Comprehensive to Treasury Shareholders'
Stock Capital MBS Earnings Income Shareholders Stock Equity
------ ----------- ------------- ---------- ------------- ------------- ---------- ------------
Balance at
December 31, 1999 $ 807 $ 1,080,327 $ 7,433 $ 393,149 $ (577,808) $ (76,378) $827,530
Common stock
options exercised 3 2,043 -- -- $ -- -- -- 2,046
Directors' and officers'
notes receivable -- 29 -- -- -- -- -- 29
Deferred compensation,
restricted stock -- 2,562 -- -- -- -- -- 2,562
401(k) contribution -- 566 -- -- -- -- -- 566
Net loss on mortgage
securities available
for sale -- -- (1,661) -- (1,661) -- -- (1,661)
Dividend reinvestment
plan -- 118 -- -- -- -- -- 118
Purchases of
common stock -- -- -- -- -- -- (71,030) (71,030)
Close-out of cumulative
earnings and
distributions to
additional
paid-in capital -- (184,659) -- (393,149) -- 577,808 -- --
Net earnings -- -- -- 74,276 74,276 -- -- 74,276
------ ----------- ----------- --------- ----------- ----------- --------- --------
Net change 3 (179,341) (1,661) (318,873) $ 72,615 577,808 (71,030) 6,906
------ ----------- ----------- --------- ----------- ----------- --------- --------
Balance at
June 30, 2000 $ 810 $ 900,986 $ 5,772 $ 74,276 $ -- $(147,408) $834,436
====== =========== =========== ========= =========== ========= ========
Balance at
December 31, 2000 $ 818 $ 920,205 $ (2,603) $ 117,926 $ -- $(308,453) $727,893
Common stock
options exercised 10 15,181 -- -- $ -- -- -- 15,191
Directors' and officers'
notes receivable -- (669) -- -- -- -- -- (669)
Deferred compensation,
restricted stock -- 1,020 -- -- -- -- -- 1,020
401(k) contribution -- 996 -- -- -- -- -- 996
Net gain on mortgage
securities available
for sale and interest
rate swap agreements -- -- 6,149 -- 6,149 -- -- 6,149
Dividend reinvestment
plan -- 27 -- -- -- -- -- 27
Purchases of
common stock -- -- -- -- -- -- (66,333) (66,333)
Net earnings -- -- -- 45,440 45,440 -- -- 45,440
------ ----------- ----------- --------- ----------- ----------- --------- --------
Net change 10 16,555 6,149 45,440 $ 51,589 -- (66,333) 1,821
------ ----------- ----------- --------- ----------- ----------- --------- --------
Balance at
June 30, 2001 $ 828 $ 936,760 $ 3,546 $ 163,366 $ -- $(374,786) $729,714
====== =========== =========== ========= =========== ========= ========
The accompanying notes are an integral part of these statements.
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INDYMAC BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
Six months ended June 30,
-------------------------------
2001 2000
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 45,440 $ 74,276
Adjustments to reconcile net earnings
to net cash used in operating activities:
Amortization and hedging of securities and mortgage servicing rights 56,475 78,308
Amortization of goodwill and other intangible assets 1,895 27
Other depreciation and amortization 6,243 1,067
Gain on sale of loans (101,913) (44,533)
Loss (gain) on securities 915 (803)
Provision for loan losses 12,026 8,722
Non-cash compensation expense 1,481 11,477
Cumulative effect of a change in accounting principle 10,185 --
Income tax benefit from termination of REIT status -- (36,100)
Purchases and originations of mortgage loans held for sale (7,102,533) (3,353,147)
Sale of and payments from mortgage loans held for sale 5,557,401 3,024,672
Net decrease (increase) in other assets and liabilities (15,610) 12,036
----------- -----------
Net cash used in operating activities (1,527,995) (223,998)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of mortgage loans held for investment (79,425) (6,612)
Payments from mortgage loans held for investment 332,717 302,498
Net increase in construction loans receivable (172,681) (267,194)
Net decrease in revolving warehouse lines of credit 51,805 16,870
Purchases of mortgage securities available for sale (553,111) (179,006)
Sales of and payments from mortgage securities available for sale 356,682 28,424
Net purchases of mortgage servicing rights (1,982) (349)
Purchase of SGV Bancorp, Inc. -- (59,523)
Net increase in investment in Federal Home Loan Bank stock, at cost (23,496) --
----------- -----------
Net cash used in investing activities (89,491) (164,892)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 996,063 --
Net increase in advances from Federal Home Loan Bank 449,927 --
Net increase in borrowings 196,490 512,068
Net proceeds from issuance of common stock and exercise of stock options 15,236 2,192
Purchases of common stock (66,333) (71,030)
----------- -----------
Net cash provided by financing activities 1,591,383 443,230
----------- -----------
Net (decrease) increase in cash and cash equivalents (26,103) 54,340
Cash and cash equivalents at beginning of period 67,867 4,488
----------- -----------
Cash and cash equivalents at end of period $ 41,764 $ 58,828
=========== ===========
Supplemental cash flow information:
Cash paid for interest $ 180,439 $ 105,966
=========== ===========
Cash paid for income taxes $ 2,054 $ 22,350
=========== ===========
Supplemental disclosure of noncash investing and financing activities:
The fair value of noncash assets acquired and liabilities assumed in
the purchase of IndyMac, Inc. in January of 2000 was approximately
$424 million and $332 million, respectively.
The accompanying notes are an integral part of these statements.
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INDYMAC BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
IndyMac Bancorp, Inc. ("IndyMac" and, together with its subsidiaries, "the
Company") conducts a diversified mortgage lending business, manages an
investment portfolio and offers commercial lending and retail banking products.
The consolidated financial statements include the accounts of IndyMac(SM) and
its subsidiaries, including IndyMac Bank, F.S.B. ("IndyMac Bank"). All
significant intercompany balances and transactions with IndyMac's consolidated
subsidiaries have been eliminated in consolidation. The financial statements of
the Company are prepared in conformity with accounting principles generally
accepted in the United States of America ("US GAAP"). Certain reclassifications
have been made to the financial statements for the period ended June 30, 2000 to
conform to the June 30, 2001 presentation. In the opinion of management, all
adjustments (consisting solely of normal recurring adjustments) considered
necessary for a fair presentation have been included. Operating results for the
six months ended June 30, 2001 are not necessarily indicative of the results
that may be expected for the year ending December 31, 2001. 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, 2000.
NOTE 2 - RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
Effective January of 2001, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"), as 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 Amendment of FASB
Statement No. 133," and Emerging Issues Task Force 99-20, "Recognition of
Interest Income and Impairment on Certain Investments" ("EITF 99-20").
Additionally, effective April 1, 2001, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities" ("SFAS
140"). Most recently, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 141, "Business Combinations" ("SFAS 141")
and No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142").
SFAS 133
SFAS 133 requires the recognition of all derivative financial instruments as
either assets or liabilities in the balance sheet and measurement of those
instruments at fair value. Changes in the fair values of those derivatives are
reported in earnings or other comprehensive income ("OCI") depending on the use
of the derivative and whether it qualifies for hedge accounting. The accounting
for gains and losses associated with changes in the fair value of a derivative
and the effect on the consolidated financial statements will depend on whether
hedge accounting has been elected, its hedge designation and whether the hedge
meets criteria for being considered effective in achieving offsetting changes in
the fair value or cash flows of the asset or liability hedged. Under the
provisions of SFAS 133, the method that will be used for assessing the
effectiveness of a hedging derivative, as well as the measurement approach for
determining the ineffective aspects of the hedge, must be established at the
inception of the hedge.
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The following derivative financial instruments were identified and recorded at
fair value as of January 1, 2001:
- FNMA and FHLMC forward contracts
- interest rate swap agreements
- interest rate floor agreements
- interest rate cap agreements
- loan commitments
Generally speaking, if interest rates increase, the value of the Company's
mortgage pipeline decreases and gain on sale margin are adversely impacted. The
Company hedges the risk of overall changes in fair value of loans held for sale
by selling forward contracts on securities of government sponsored entities to
economically hedge loan commitments and to create fair value hedges against the
funded loan portfolios. Under SFAS 133, these forward contracts qualify as a
fair value hedge of the funded loan portfolio. In January of 2001, a net after
tax gain of $21 thousand was recorded as a transition adjustment under SFAS 133
as a cumulative effect of a change in accounting principle on the forward
contracts and the funded loan portfolio. During the six months ended June 30,
2001, hedge ineffectiveness totaling $561 thousand was recorded as an increase
to the gain on sale of loans. As of June 30, 2001, the fair value of loan
commitments recorded on the Company's consolidated balance sheets was $(655)
thousand.
The Company uses interest rate swap agreements to reduce its exposure to
interest rate risk inherent in a portion of its repurchase agreement borrowings
and its mortgage servicing rights. A swap agreement is a contract between two
parties to exchange cash flows based on specified underlying notional amounts
and indices. Since the swap agreements used on the Company's repurchase
agreement borrowings qualify as a cash flow hedge under SFAS 133, the fair value
of these agreements, totaling $(2.5) million after tax, was recorded as a
reduction to OCI in shareholders' equity in January of 2001. Future changes in
fair value on these interest rate swap agreements will be adjusted through OCI
as long as the cash flow hedge requirements are met. During the six months ended
June 30, 2001, the change in the fair value of the Company's interest rate swap
agreements was $(3.9) million after tax, recorded as a component of OCI, with
actual ineffectiveness of $69 thousand being recorded through earnings as a
component of interest expense.
Although the Company has not elected SFAS 133 hedge accounting on its servicing
and servicing-related assets, interest rate floors, caps and swaps are used as
an economic hedge for these assets to mitigate losses that result from changes
and volatility in the interest rate environment. Gains and losses on these
derivative financial instruments are reported as a component of service fee
income for servicing assets, and as a component of gain (loss) on
mortgage-backed securities, net, for the Company's AAA rated interest-only
securities.
Under the provisions of SFAS 133, in January of 2001, the Company transferred
all of its AAA rated interest-only and principal-only securities from its
available for sale to its trading portfolio. The transfer of these securities
had the following effect on earnings and OCI upon adoption of SFAS 133:
After-tax
adjustment to
Other
Trading Comprehensive Net Equity
Security (at Fair Value) After-tax Loss Income (Loss) Impact
-------- --------------- -------------- -------------- ----------
(Dollars in thousands)
Principal-only securities $ 5,033 $ (437) $ 437 $ --
AAA rated interest-only securities 258,241 (530) 530 --
--------- --------- --------- ---------
$ 263,274 $ (967) $ 967 $ --
========= ========= ========= =========
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EITF 99-20
EITF 99-20 provides guidance on how transferors that retain an interest in a
securitization transaction, and companies that purchase a beneficial interest in
such a transaction, should account for interest income and impairment. The EITF
concluded that the holder of a beneficial interest should recognize interest
income over the life of the investment based on an anticipated yield determined
by periodically estimating cash flows. Interest income would be revised
prospectively for changes in cash flows. If the fair value of the beneficial
interest has declined below its carrying amount and the decline is
other-than-temporary, an entity should apply impairment of securities guidance
using the fair value method. This method differs significantly from the previous
accounting method whereby impairment was measured using a risk-free rate of
return. The Company periodically reviews its estimated cash flow streams on its
securities. As a result of its periodic reviews during the six months ended June
30, 2001, the Company recorded $6.2 million and $750 thousand in impairment
charges on subordinated and residual securities, respectively, in accordance
with EITF 99-20.
The adoption of EITF 99-20 in January of 2001 was recorded as a cumulative
effect of a change in accounting principle, and had the following effect on net
earnings and OCI during the first quarter of 2001:
Adjustments
-----------------------------------------------
Other
After-tax Comprehensive Net Equity
Earnings Income Impact
--------- ------------- ----------
(Dollars in thousands)
Core operations:
Investment grade securities $ (297) $ 297 $ --
Non-investment grade securities (459) 459 --
Residual securities (607) 607 --
-------- -------- --------
Total core operations (1,363) 1,363 --
Non-core operations:
Manufactured housing securities:
Non-investment grade securities (6,612) 4,867 (1,745)
Residual securities (2,231) 1,889 (342)
-------- -------- --------
Total non-core operations (8,843) 6,756 (2,087)
-------- -------- --------
Total cumulative effect of a
change in accounting principle $(10,206) $ 8,119 $ (2,087)
======== ======== ========
SFAS 140
SFAS 140 revises the standards for accounting for securitizations and other
transfers of financial assets and collateral and requires certain additional
disclosures. The Company adopted SFAS 140 effective December 31, 2000 for
disclosures relating to securitization transactions and collateral, and
effective April 1, 2001 for transfers and servicing of financial assets and
extinguishments of liabilities. Adoption of SFAS 140 did not have a material
impact on the Company's consolidated financial statements.
SFAS 141 and SFAS 142
SFAS 141 and SFAS 142 eliminate the "pooling of interests" method of accounting,
except for business combinations initiated prior to July 1, 2001. They require
that the acquirer's cost for an acquisition be allocated among the various
assets acquired, in proportion to their relative fair market values, and that
any unallocated cost be assigned to the "residue," or goodwill. Certain
intangible assets that are determined to have an indefinite useful life will not
be amortized. Additionally, goodwill will no longer be amortized, but will be
tested for impairment at least annually.
These two statements must be adopted in fiscal years beginning after December
15, 2001. The Company is currently analyzing the potential impact of the
implementation of SFAS 141 and SFAS 142 to its financial statements upon
adoption on January 1, 2002.
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NOTE 3 - 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 "B2B" customers (mortgage origination
companies), and funds loans directly to consumers ("B2C"). These loans are then
either 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"). Additionally, Mortgage Banking operates a "B2R" channel, which
allows real estate professionals to utilize the Company's technology to
facilitate the mortgage loan process for their customers in the process of
purchasing a home.
The Investment Portfolio segment invests in residential loans and mortgage
securities on a long-term basis. The Investment Portfolio segment also manages
mortgage servicing rights and conducts servicing and collection activities.
The Commercial Lending segment primarily makes residential construction loans to
builders. During the first six months of 2000, the Commercial Lending segment
also engaged in secured warehouse lending operations for mortgage brokers and
mortgage bankers. 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 continued to honor its outstanding commitments, but did
not enter into any new commitments.
Operating segment 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 are included in the
"Other" operating segment.
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Segment information for the three and six months ended June 30, 2001 and 2000
were as follows:
Mortgage Investment Commercial
Banking Portfolio Lending Other Consolidated
----------- ----------- ----------- ----------- ------------
(Dollars in thousands)
Three months ended June 30, 2001
Net interest income $ 23,178 $ 15,434 $ 8,466 $ 5,161 $ 52,239
Net revenues 88,111 17,886 8,362 5,459 119,818
Net earnings (loss) 28,134 5,942 3,643 (7,317) 30,402
Three months ended June 30, 2000
Net interest income $ 10,496 $ 8,439 $ 16,187 $ 4,393 $ 39,515
Net revenues 42,540 14,885 15,917 4,394 77,736
Net earnings 12,905 6,148 7,354 (4,076) 22,331
Six months ended June 30, 2001
Net interest income $ 37,192 $ 31,140 $ 17,453 $ 9,511 $ 95,296
Net revenues 160,750 34,387 17,826 10,033 222,996
Net earnings (loss) before cumulative
effect of a change in accounting principle 50,634 11,591 7,456 (14,056) 55,625
Cumulative effect of a change in
accounting principle 21 (10,206) -- -- (10,185)
Net earnings (loss) 50,655 1,385 7,456 (14,056) 45,440
Six months ended June 30, 2000
Net interest income $ 20,725 $ 18,706 $ 31,293 $ 12,140 $ 82,864
Net revenues 73,345 32,722 31,449 13,767 151,283
Net earnings 20,010 14,185 14,155 25,926 74,276
Assets as of June 30, 2001 $ 3,321,312 $ 3,223,856 $ 761,632 $ 128,209 $ 7,435,009
Assets as of June 30, 2000 $ 1,264,726 $ 2,124,566 $ 990,923 $ 168,093 $ 4,548,308
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
IndyMac Bancorp, Inc. ("IndyMac" and, together with its consolidated
subsidiaries, "the Company"), conducts a diversified mortgage banking business,
manages an investment portfolio, and offers commercial lending and retail
banking products. References to "IndyMac" refer to the parent company alone,
while references to the "Company" mean the parent company and its consolidated
subsidiaries.
MORTGAGE BANKING OPERATIONS
The Company's mortgage banking group is its core business. 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" or "LoanWorks") channel, 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 loan approval and
pricing system, e-MITS(R), across its mortgage banking channels. These channels
provide the Company with comprehensive coverage of the consumer mortgage 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
financing such loans pending their sale or securitization.
The B2B channel funded $3.6 billion of loans as follows:
(IN MILLIONS) Q2 01 Q2 00 % change Q1 01 % change
------ ------ -------- ------ --------
PRODUCTS
Prime $3,077 $1,450 112% $2,400 28%
Subprime 240 268 -10% 238 1%
Consumer Construction 310 165 88% 253 23%
------ ------ ------
Total $3,627 $1,883 93% $2,891 25%
====== ====== ======
e-MITS Production $3,213 $1,347 139% $2,653 21%
====== ====== ======
With its predominantly branchless, consumer-direct strategy, the B2C channel
funded $545 million of mortgage loans during the second quarter of 2001, up 16
percent over the first quarter of 2001 and up 208 percent over the second
quarter of 2000 as follows:
(IN MILLIONS) Q2 01 Q2 00 % change Q1 01 % change
----- ----- -------- ----- --------
PRODUCTION
Web-based Production
Direct at www.indymacmortgage.com $137 $ 11 1145% $101 36%
Indirect web-based leads 67 83 -19% 136 -51%
Cross-marketing and Portfolio Refinancing 288 67 330% 198 45%
Direct Telemarketing and Affinity Relationships 53 16 231% 35 51%
---- ---- ----
Total $545 $177 208% $470 16%
==== ==== ====
This channel has been a major beneficiary of a strong refinance market, and is
expected to continue to be more cyclical than the B2B and B2R channels, which
have closer associations with consumers in the market who are
-12-
13
purchasing homes. The combination of these three channels is intended to enhance
the Company's ability to efficiently generate loan production growth across a
variety of interest rate cycles.
B2R first began operations during April 2000. Our LoanWorks(R) division allows
real estate professionals to perform expanded mortgage services for their
customers in the home buying process via its Website www.loanworks.com. It
provides a solid new source of "purchase" volume for the Mortgage Banking Group,
without relying on a high cost sales force and branch infrastructure like more
traditional lenders. Loans funded through this new channel totaled $69 million
during the second quarter of 2001, up an annualized 346 percent from first
quarter production.
The Company sold $2.9 billion of loans during the second quarter of 2001,
compared with the $1.7 billion of loans sold during the second quarter of 2000.
The gain on loan sales for the second quarter of 2001 totaled $52.7 million, a
103 percent increase over the $26.0 million of such gain recorded in the second
quarter of 2000. In addition to selling more loans during the second quarter of
2001, the Company had improved loan sale margins.
Loans sold as a percentage of permanent home loan production during the second
quarter of 2001 were 72 percent compared to 91 percent in the year ago quarter.
The Company lengthened the holding period of its mortgage loans held for sale in
light of the favorable interest rate environment with short term financing at
low rates and to temporarily maximize the utilization of its excess capital.
INVESTMENT PORTFOLIO OPERATIONS
The Company invests in residential loans and mortgage securities retained in
connection with the issuance of mortgage-backed securities, purchased in the
secondary mortgage market, or originated through B2C. The Company acts as
primary servicer and master servicer with respect to substantially all the
mortgage loans it sells pursuant to private-label securitizations and 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.
At June 30, 2001 and December 31, 2000, the Company's master servicing portfolio
had aggregate outstanding principal balances of $12.1 billion and $14.1 billion,
respectively. The weighted average coupon of the Company's retained master
servicing portfolio decreased slightly to 8.4% as of June 30, 2001, from 8.5% as
of December 31, 2000. IndyMac Bank Home Loan Servicing's portfolio at June 30,
2001 and December 31, 2000 was $19.1 billion and $15.4 billion, respectively, of
which $15.3 billion and $12.8 billion, respectively, represented loans sold with
servicing retained for which a mortgage servicing asset was capitalized. The
weighted average coupon of the Company's retained primary servicing portfolio
decreased slightly to 8.7% as of June 30, 2001 from 8.8% as of December 31,
2000.
COMMERCIAL LENDING OPERATIONS
The Company conducts its builder construction lending activities through its
Construction Lending Corporation of America(R) ("CLCA") division, which offers a
variety of residential construction, land and lot loan programs for builders and
developers. 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/deposits used to finance such loans. CLCA(R) had
outstanding commitments to fund builder construction loans of $1.4 billion at
both June 30, 2001 and December 31, 2000.
-13-
14
RESULTS OF OPERATIONS
OVERVIEW: The Company's net earnings before provision for income taxes,
non-recurring and other charges, and cumulative effect of a change in accounting
principle were $51.8 million for the three months ended June 30, 2001, compared
to $39.8 million for the three months ended June 30, 2000. The $12.0 million
increase was primarily due to a $26.8 million increase in gain on sale of loans
coupled with a $12.7 million increase in net interest income, offset in part by
a $29.2 million increase in operating expenses.
For the six months ended June 30, 2001 and 2000, the Company's net earnings
before provision for income taxes, non-recurring and other charges, and
cumulative effect of a change in accounting principle were $94.6 million and
$77.4 million, respectively. The $17.2 million increase was primarily due to a
$57.4 million increase in gain on sale of loans in conjunction with a $12.4
million increase in net interest income, offset in part by a $52.6 million
increase in operating expenses.
The increase in net revenues and expense for both reporting periods was
primarily due to the Company's overall growth strategy, including the
acquisition of SGV Bancorp, Inc. ("SGVB") in July of 2000.
During January of 2001, the Company recognized a $10.2 million charge to
earnings, net of tax, which was recorded as a cumulative effect of a change in
accounting principle in connection with the adoption of Emerging Issues Task
Force Issue No. 99-20 "Recognition of Interest Income and Impairment on Certain
Investments" ("EITF 99-20"). This charge was primarily attributable to the
non-investment grade and residual securities portfolio associated with the
Company's discontinued manufactured housing product line. The Company
discontinued its manufactured housing product line with dealers during 1999. The
portfolio investments that were retained from this product line continue to be
impacted by declining trends in the industry. These securities had previously
been marked-to-market through other comprehensive income ("OCI"), a separate
component of shareholders' equity; as a result, this change did not have a
material effect on total shareholders' equity.
NET INTEREST INCOME: Net interest income was $52.2 million and $39.5 million for
the three months ended June 30, 2001 and 2000, respectively. The net interest
margin was 3.13% in the second quarter of 2001, compared to 3.80% in the second
quarter of 2000 while the net spread increased to 2.85% during the second
quarter of 2001 from 2.65% during the second quarter of 2000. 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 decline in the interest margin can be primarily
attributed to leverage. The increase in net interest spread was primarily due to
three factors. First, the average cost of funds decreased 157 basis points to
5.66% for the three months ended June 30, 2001, compared to 7.23% for the same
period ended June 30, 2000. The indices to which the Company's borrowings are
tied decreased, on average, approximately 223 basis points quarter over quarter,
but the Company's overall borrowing rate did not decrease in proportion to the
decrease in indices due to its change in mix. A portion of the Company's
borrowings are, through hedging, effectively made fixed rate borrowings to
better match the Company's investment in fixed rate interest-earning assets.
This decrease in cost of funds was partially offset by a decrease in asset
yields, primarily mortgage rates, which, on average, decreased 79 basis points
quarter over quarter. In addition, the Company's investment in higher grade
assets, consisting of AAA rated agency and non-agency securities, increased
$606.2 million year over year, resulting in a higher mix, in 2001, of lower
yielding assets compared to 2000. These lower risk securities earn a lower
weighted average yield (7.1% and 7.8% during the quarters ended June 30, 2001
and 2000, respectively) than other securities. The Company's investment in these
securities is in line with its strategy to increase leverage through asset
growth.
Net interest income was $95.3 million and $82.9 million for the six months ended
June 30, 2001 and 2000, respectively. During this period, the net interest
margin was 3.05% and 4.07%, respectively, and the net spread decreased to 2.70%
during the six months ended June 30, 2001 from 2.93% during the six months ended
June 30, 2000. The decrease in net interest spread was primarily due to a
decrease in the yield on average interest earning assets as a result of a
decrease in mortgage rates, on average, of 108 basis points year over year.
Partially offsetting this decease was a 92 basis points decrease in the average
cost of funds to 6.06% for the six months ended June 30, 2001 from 6.98% for the
same period in the year 2000. The indices to which the Company's borrowings are
tied, decreased, on average, approximately 128 basis points year over year.
-14-
15
The decrease in net interest margin was associated with the increase in leverage
through growth and share repurchases.
The following table sets forth information regarding the Company's consolidated
average balance sheets, together with the total 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-accrual loans
are included in the average balances for the periods indicated. The allowance
for loan losses is excluded from the average loan balances. The average loan
balances for the three and six months ended June 30, 2000 have been reclassified
to conform to the presentation for the three and six months ended June 30, 2001.
Three months ended June 30,
--------------------------------------------------------------------------------
2001 2000
-------------------------------------- --------------------------------------
Average Yield Average Yield
Balance Interest Rate Balance Interest Rate
---------- ---------- ---------- ---------- ---------- ----------
(Dollars in thousands)
Investment securities $ 5,093 $ 79 6.21% $ -- $ -- --
Mortgage-backed securities 1,379,212 30,388 8.84% 746,779 19,747 10.64%
Mortgage loans held for sale 2,476,951 49,671 8.04% 917,914 21,618 9.47%
Mortgage loans held for investment 2,738,393 60,305 8.83% 2,514,110 61,469 9.83%
Investment in Federal Home
Loan Bank stock and other 93,359 1,560 6.70% 8,500 61 2.89%
---------- ---------- ---------- ----------
Total interest-earning assets 6,693,008 142,003 8.51% 4,187,303 102,895 9.88%
Other 527,226 247,294
---------- ----------
Total assets $7,220,234 $4,434,597
========== ==========
Deposits $1,440,955 20,302 5.65% $ -- $ -- --
Advances from Federal Home Loan Bank 1,593,874 23,742 5.97% -- -- --
Borrowings 3,323,107 45,720 5.52% 3,527,888 63,380 7.23%
---------- ---------- ---------- ----------
Total interest-bearing liabilities 6,357,936 89,764 5.66% 3,527,888 63,380 7.23%
Other 118,203 49,545
---------- ----------
Total liabilities 6,476,139 3,577,433
Shareholders' equity 744,095 857,164
---------- ----------
Total liabilities and
shareholders' equity $7,220,234 $4,434,597
========== ==========
Net interest spread 2.85% 2.65%
========== ==========
Net interest margin 3.13% 3.80%
========== ==========
-15-
16
Six months ended June 30,
----------------------------------------------------------------------------------
2001 2000
-------------------------------------- ----------------------------------------
Average Yield Average Yield
Balance Interest Rate Balance Interest Rate
---------- ---------- ---------- ---------- ---------- ------------
(Dollars in thousands)
Investment securities $ 9,839 $ 327 6.71% $ -- $ -- --
Mortgage-backed securities 1,358,567 61,699 9.16% 732,361 38,017 10.44%
Mortgage loans held for sale 2,158,157 87,599 8.19% 868,628 40,640 9.41%
Mortgage loans held for investment 2,693,942 121,226 9.07% 2,480,502 122,660 9.94%
Investment in Federal Home Loan Bank
stock and other 89,118 3,112 7.04% 9,011 211 4.72%
---------- ---------- ---------- ----------
Total interest-earning assets 6,309,623 273,963 8.76% 4,090,502 201,528 9.91%
Other 485,425 247,251
---------- ----------
Total assets $6,795,048 $4,337,753
========== ==========
Deposits $1,190,257 34,776 5.89% $ -- $ -- --
Advances from Federal Home Loan Bank 1,521,149 46,158 6.12% -- -- --
Borrowings 3,229,508 97,733 6.10% 3,418,530 118,664 6.98%
---------- ---------- ---------- ----------
Total interest-bearing
liabilities 5,940,914 178,667 6.06% 3,418,530 118,664 6.98%
Other 112,413 61,852
---------- ----------
Total liabilities 6,053,327 3,480,382
Shareholders' equity 741,721 857,371
---------- ----------
Total liabilities and
shareholders' equity $6,795,048 $4,337,753
========== ==========
Net interest spread 2.70% 2.93%
========== ==========
Net interest margin 3.05% 4.07%
========== ==========
The dollar amounts of interest income and interest expense fluctuate depending
upon changes in the average balances (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 effect from the changes in volume and the
changes in rates.
Three months ended June 30, 2001 vs 2000
-----------------------------------------------------
Increase/(decrease) due to
Volume Rate Total Change
-------- -------- ------------
(Dollars in thousands)
INTEREST INCOME
Investment securities $ 79 $ -- $ 79
Mortgage-backed securities 13,295 (2,654) 10,641
Loans held for sale 30,787 (2,734) 28,053
Loans held for investment 8,281 (9,445) (1,164)
Investment in Federal Home Loan Bank stock and other 1,324 175 1,499
-------- -------- --------
Total interest income 53,766 (14,658) 39,108
INTEREST EXPENSE
Deposits 20,302 -- 20,302
Advances from Federal Home Loan Bank 23,742 -- 23,742
Borrowings (3,483) (14,177) (17,660)
-------- -------- --------
Total interest expense 40,561 (14,177) 26,384
-------- -------- --------
Net interest income $ 13,205 $ (481) $ 12,724
======== ======== ========
-16-
17
Six months ended June 30, 2001 vs 2000
-----------------------------------------------------
Increase/(decrease) due to
Volume Rate Total Change
--------- --------- ---------
(Dollars in thousands)
INTEREST INCOME
Investment securities $ 327 $ -- $ 327
Mortgage-backed securities 27,650 (3,968) 23,682
Loans held for sale 51,467 (4,508) 46,959
Loans held for investment 86,924 (88,358) (1,434)
Investment in Federal Home Loan Bank stock and other 2,748 153 2,901
--------- --------- ---------
Total interest income 169,116 (96,681) 72,435
INTEREST EXPENSE
Deposits 34,776 -- 34,776
Advances from Federal Home Loan Bank 46,158 -- 46,158
Borrowings (6,392) (14,539) (20,931)
--------- --------- ---------
Total interest expense 74,542 (14,539) 60,003
--------- --------- ---------
Net interest income $ 94,574 $ (82,142) $ 12,432
========= ========= =========
PROVISION FOR LOAN LOSSES: The provision for loan losses was $3.0 million and
$4.4 million for the three months ended June 30, 2001 and 2000, respectively,
and $12.0 million and $8.7 million for the six month periods then ended. The
$3.3 million increase during the six months ended June 30, 2001 compared to 2000
was primarily related to the $148 million product line of high
loan-to-value/debt consolidation home improvement loans, which are primarily
second trust deeds. While secured by equity in single-family residences, these
loans tend to perform more like unsecured consumer lines of credit with little
recourse to the secured property. The portfolio has declined from $250 million
at the time that the Company discontinued this line of business; however,
charge-offs in this portfolio have been significant. The Company determined
during the first quarter of 2001 that, to be prudent, it should bolster the
reserves associated with this portfolio. The Company believes that its allowance
for loan losses was adequate at June 30, 2001.
OTHER INCOME: Other income consisted of the following:
Three months ended June 30, Six months ended June 30,
------------------------------ -------------------------------
2001 2000 2001 2000
--------- --------- --------- ---------
(Dollars in thousands)
Gain on sale of loans $ 52,714 $ 25,962 $ 101,913 $ 44,533
Service fee income 2,906 10,391 14,368 20,068
Gain (loss) on mortgage-backed
securities, net 1,572 (160) (915) 803
Fee and other income 13,413 6,434 24,360 11,737
--------- --------- --------- ---------
Total other income $ 70,605 $ 42,627 $ 139,726 $ 77,141
========= ========= ========= =========
The gain on sale of loans was $52.7 million for the three months ended June 30,
2001, up from $26.0 million for the same period in 2000, and was $101.9 million
for the six months ended June 30, 2001, up from $44.5 million in the same period
a year ago. The results for both the quarter and year to date periods reflect
higher profit margins on sale of loans and an increase in the aggregate
principal amount of loans sold. During the quarter ended June 30, 2001, $2.9
billion of loans were sold at a 1.83% profit margin, compared to $1.7 billion at
1.50% a year ago. During the six months ended June 30, 2001, $5.5 billion of
loans were sold at a 1.85% profit margin, compared to $3.0 billion at 1.50% a
year ago.
Service fee income totaled $2.9 million for the three months ended June 30,
2001, compared to $10.4 million for the same period in 2000, and was $14.4
million for the six months ended June 30, 2001, down from $20.1 million in the
same period a year ago. The decrease in service fee income was primarily
attributable to a decrease in valuations (net of hedges) of $9.2 million quarter
over quarter. Partially offsetting this decrease was an increase
-17-
18
in the average balance of the Company's capitalized mortgage servicing rights,
which results in an increase in service fee income. This increase in the average
balance was primarily due to the capitalization of servicing rights as a result
of the Company's loan sales to government-sponsored entities, whole loan sales,
and securitizations during the year.
The Company recorded a net gain on sale of mortgage-backed securities of $1.6
million for the three months ended June 30, 2001, compared to a net loss of $160
thousand for the same period in 2000. For the six months ended June 30, 2001 and
2000, the Company recorded a net loss on sale of mortgage-backed securities of
$915 thousand and a net gain of $803 thousand, respectively. The $1.7 million
increase in gain quarter over quarter was primarily due to a $4.2 million
increase in recorded net realized gain on sale of securities resulting from an
increase of $90.4 million in mortgage-backed securities sales, offset in part by
a $2.5 million increase in unrealized impairment on mortgage-backed securities.
Fee income increased to $13.4 million for the three months ended June 30, 2001
from $6.4 million for the same period in 2000, and was $24.4 million for the six
months ended June 30, 2001, up from $11.7 million in the same period a year ago.
The 109% increase during the second quarter of 2001 compared to the second
quarter of 2000, and the 108% increase during the six months ended June 30, 2001
compared to the six months ended June 30, 2000, were primarily due to fees such
as table funding and application fees, resulting from an increase in mortgage
production volume. The mortgage production volume increased 106% and 103% during
the respective periods.
TOTAL EXPENSE: Total expense consisted of the following:
For the three months ended For the six months ended
June 30, June 30,
----------------------------- -----------------------------
(Dollars in thousands) 2001 2000 2001 2000
--------- --------- --------- ---------
Salaries and related $ 41,249 $ 24,354 $ 77,998 $ 46,850
Premises and equipment 5,507 3,831 10,250 7,233
Data processing 3,733 1,930 6,855 3,544
Office 4,297 1,606 7,187 3,214
Advertising and promotion 2,338 1,736 5,035 3,557
Professional services 3,159 1,476 7,087 3,070
Loan purchase costs 4,464 1,463 6,836 2,583
Foreclosure related activities 164 5 1,318 1,009
Amortization of goodwill and
other intangible assets 935 13 1,895 27
Non-recurring and other charges (235) 1,344 (535) 11,567
Other 2,194 1,477 3,904 2,807
--------- --------- --------- ---------
Total expense $ 67,805 $ 39,235 $ 127,830 $ 85,461
========= ========= ========= =========
The increase in salaries and related and general and administrative expenses is
due to the Company's overall growth, including the acquisitions of SGVB in July
of 2000 and PNB Mortgage in September of 2000, and the expansion of mortgage
banking operations to Sacramento, California and Atlanta, Georgia.
During the three months ended June 30, 2001, amortization of goodwill and
intangibles was $935 thousand, up from $13 thousand for the same period in 2000,
and was $1.9 million for the six months ended June 30, 2001, compared to $27
thousand in the same period a year ago. The increase in amortization primarily
resulted from the recording of goodwill and core deposit intangible assets
totaling $37.8 million on July 1, 2000 in conjunction with the Company's
acquisition of SGVB, which was accounted for using the purchase method.
Non-recurring and other charges during the six months ended June 30, 2001 and
the three months ended June 30, 2000 represent variable plan accounting for
director stock options repriced subsequent to December 15, 1998. Additionally,
$9.4 million in compensation expense related to the resignation of the former
Vice Chairman and President was incurred in the first quarter of 2000.
INCOME TAXES: Income taxes of $21.6 million and $39.5 million for the three and
six months ended June 30, 2001 represented an effective tax rate of 41.55%. For
the three months ended June 30, 2000, the Company recorded a tax expense of
$16.2 million, or a 42% effective tax rate. For the six months ended June 30,
2000, the Company recorded a net tax benefit of $8.5 million, which consisted of
$27.6 million in income tax expense offset by a one-time tax benefit of $36.1
million due to IndyMac's conversion from a real estate investment trust to a
fully taxable entity, effective January of 2000. Excluding this tax benefit, the
Company's effective tax rate for the six months ended June 30, 2000 would have
been approximately 42%.
-18-
19
FINANCIAL CONDITION
INVESTMENT AND MORTGAGE-BACKED SECURITIES: At June 30, 2001 and December 31,
2000, the carrying value of the Company's investment and mortgage-backed
securities portfolio totaled $1.4 billion and $1.2 billion, respectively. The
Company's AAA rated interest-only securities and AAA rated principal-only
securities were reclassified to the trading securities classification from the
available for sale classification upon adoption of SFAS 133 in January of 2001.
All other securities are classified as available for sale. The balances
consisted of the following types of securities:
June 30, December 31,
2001 2000
---------- ------------
(Dollars in thousands)
Investment securities:
Agency notes $ -- $ 10,829
Corporate notes and other 4,271 7,558
---------- ----------
Total investment securities 4,271 18,387
---------- ----------
Mortgage-backed securities:
AAA rated interest-only securities 262,586 258,241
AAA rated agency securities 166,693 261,225
AAA rated non-agency securities 759,363 484,138
Other investment grade securities 82,560 69,483
---------- ----------
Total investment grade mortgage-backed securities 1,271,202 1,073,087
---------- ----------
Non-investment grade residual securities 77,232 41,672
Other non-investment grade securities 16,580 21,157
---------- ----------
Total non-investment grade mortgage-backed securities 93,812 62,829
---------- ----------
Total mortgage-backed securities 1,365,014 1,135,916
---------- ----------
Total investment and mortgage-backed securities $1,369,285 $1,154,303
========== ==========
The Company evaluates the carrying value of its AAA rated interest-only
securities and its residual securities monthly by discounting estimated net
future cash flows. On these securities, estimated net future cash flows are
primarily based on assumptions related to prepayment speeds, in addition to
expected credit loss assumptions on the residual securities. Adjustments to the
carrying value of residual securities are recorded as a component of OCI in
shareholders' equity. Adjustments to the carrying value of AAA rated
interest-only securities were recorded as a component of OCI during 2000, and
gain (loss) on mortgage-backed securities through the statement of earnings
beginning January of 2001. The increase in the residual securities during the
six months ended June 30, 2001 was due to the retention of $27.5 million from
subprime securitizations, as well as the purchase of $11.4 million in residual
securities at a significant discount from third parties.
-19-
20
The assumptions used to value these securities at June 30, 2001 and December 31,
2000 follow:
Actual
---------------------------------------------------------------------------------------
3-Month Wtd.
Book Collateral Gross Prepayment Avg.
Value Balance WAC Interest Strip Speeds(1) Multiple
----------- ----------- ----------- -------------- ----------- -----------
(Dollars in thousands)
June 30, 2001
AAA rated interest-only
securities $ 262,586 $ 9,763,342 8.27% 0.85% 27.3% 3.16
=========== ===========
Residual securities $ 77,232 $ 2,235,027 10.13% 3.06% 24.8% 1.13
=========== ===========
December 31, 2000
AAA rated interest-only
securities $ 258,241 $11,089,253 8.27% 0.85% 12.6% 2.74
=========== ===========
Residual securities $ 41,672 $ 1,887,525 10.05% 1.95% 17.5% 1.13
=========== ===========
Valuation Assumptions
----------------------------------------
Remaining
Prepayment Discount Cum. Loss
Speeds(2) Yield Rate(3)
----------- ----------- -----------
June 30, 2001
AAA rated interest-only
securities 15.4% 10.9% NA
Residual securities 33.4% 21.0% 1.4%
December 31, 2000
AAA rated interest-only
securities 18.9% 12.9% NA
Residual securities 24.2% 21.4% 2.4%
(1) CPR
(2) Reflects lifetime prepayment speeds. Embedded in the lifetime prepayment
speeds as of June 30, 2001 are 6-month prepayment speeds of 21% for AAA
rated interest-only securities.
(3) As of June 30, 2001, the actual cumulative loss rate totaled 0.5% for
residuals. The weighted average seasoning of the underlying collateral was
23.6 months.
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 OCI in shareholders' equity except for the Company's
AAA rated principal-only securities, which are recorded as a component of gain
(loss) on mortgage-backed securities through the statement of earnings beginning
January of 2001. The detail of other investment and non-investment grade
securities by credit rating as of June 30, 2001 and December 31, 2000 follows:
Premium
Current (Discount)
Face To Face Amortized Book
Value Value Cost Value
-------- ---------- --------- --------
(Dollars in thousands)
June 30, 2001
AAA rated principal-only securities $ 6,593 $ (1,155) $ 5,438 $ 4,721
AA 21,470 (137) 21,333 21,127
A+ 123 6 129 125
A 12,391 (391) 12,000 11,943
A- 149 (9) 140 141
BBB 43,325 (2,219) 41,106 41,554
BBB- 3,194 (256) 2,938 2,949
-------- -------- -------- --------
Total other investment grade
mortgage-backed securities 87,245 (4,161) 83,084 82,560
-------- -------- -------- --------
BB+ 144 (38) 106 105
BB 10,604 (4,082) 6,522 6,559
B 7,506 (5,041) 2,465 2,563
CCC 19,219 (13,122) 6,097 6,213
NR 5,820 (5,360) 460 1,140
-------- -------- -------- --------
Total other non-investment grade
mortgage-backed securities 43,293 (27,643) 15,650 16,580
-------- -------- -------- --------
Total other investment and non-investment
grade mortgage-backed securities $130,538 $(31,804) $ 98,734 $ 99,140
======== ======== ======== ========
December 31, 2000
AAA rated principal-only securities $ 7,056 $ (1,271) $ 5,785 $ 5,033
AA 8,762 81 8,843 9,023
A 12,732 (388) 12,344 12,300
BBB 46,218 (3,358) 42,860 43,127
-------- -------- -------- --------
Total other investment grade
mortgage-backed securities 74,768 (4,936) 69,832 69,483
-------- -------- -------- --------
BB 17,665 (4,588) 13,077 10,561
B 17,928 (2,277) 15,651 9,350
NR 6,324 (5,749) 575 1,246
-------- -------- -------- --------
Total other non-investment grade
mortgage-backed securities 41,917 (12,614) 29,303 21,157
-------- -------- -------- --------
Total other investment and non-investment
grade mortgage-backed securities $116,685 $(17,550) $ 99,135 $ 90,640
======== ======== ======== ========
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LOANS RECEIVABLE: Total loans (exclusive of the allowance for loan losses)
increased to $5.4 billion at June 30, 2001, from $4.0 billion at December 31,
2000. The increase in loans receivable was primarily driven by the decrease in
loans sold as a percentage of permanent home loan production during the second
quarter of 2001 compared to 2000.
Non-Accrual Loans: Loans are generally placed on non-accrual status when they
are 90 days past due. Non-performing assets, which include non-accrual loans and
foreclosed assets, were $130.4 million or 1.8% of total assets at June 30, 2001,
compared to $113.9 million or 2.0% of total assets at December 31, 2000. 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 $23.8 million and $16.3 million at June 30, 2001, and December
31, 2000, respectively. The Company recognized a total of $1.2 million in net
gains on sale of foreclosed assets during the six months ended June 30, 2001.
A summary of the Company's non-performing assets follows:
June 30, December 31,
2001 2000
-------- ------------
(Dollars in thousands)
Loans held for sale $ 19,760 $ 13,235
Loans held for investment
Mortgage loans 52,504 45,044
Residential construction 30,587 32,826
Revolving warehouse lines of credit 3,744 6,509
-------- --------
Total non-performing loans 106,595 97,614
Foreclosed assets 23,776 16,265
-------- --------
Total non-performing assets $130,371 $113,879
======== ========
The average balance of non-performing loans during the three months ended June
30, 2001 was approximately $104.6 million. Non-performing loans as a percentage
of total loans decreased to 1.96% at June 30, 2001, compared to 2.41% at
December 31, 2000.
Allowance for Loan Losses: An allowance is maintained to absorb losses inherent
in the loan portfolio. The adequacy of the allowance is periodically evaluated
by management to ensure the allowance is maintained at a level that is
sufficient to absorb expected loan losses. The allowance for loan losses is
increased by provisions for loan losses, and is decreased by charge-offs (net of
recoveries). The Company charges current earnings with a provision for estimated
credit losses on loans receivable. The provision considers both specifically
identified problem loans as well as credit risks not specifically identified in
the loan portfolio. The adequacy of the allowance is based on past loan loss
experience, known and inherent risks in the loan portfolio, adverse situations
that may affect the borrower's ability to repay, the estimated value of
underlying collateral and economic conditions.
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The following table sets forth the allocation of the Company's allowance for
loan losses and the percentage of allowance in each loan category to total loans
at the dates indicated:
June 30, 2001 December 31, 2000
--------------------------- --------------------------
% of total % of total
Balance loans Balance loans
------- ---------- ------- ----------
(Dollars in thousands)
Residential construction $26,400 0.49% $26,329 0.65%
Prime and subprime loans 14,740 0.27% 17,021 0.42%
Discontinued product lines 22,876 0.42% 15,612 0.39%
------- ---- ------- ----
Total allowance for loan losses $64,016 1.18% $58,962 1.46%
======= ==== ======= ====
The following table summarizes the activity in the allowance for loan losses for
the periods indicated:
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ---------------------------
2001 2000 2001 2000
-------- -------- -------- --------
(Dollars in thousands) (Dollars in thousands)
Balance, beginning of period $ 65,113 $ 55,207 $ 58,962 $ 53,880
Provision for loan losses 3,026 4,406 12,026 8,722
Charge-offs, net of recoveries (4,123) (2,257) (6,972) (5,246)
-------- -------- -------- --------
Balance, end of period $ 64,016 $ 57,356 $ 64,016 $ 57,356
======== ======== ======== ========
Net charge-offs as a percentage of average loans were 0.06% for the second
quarter of 2001 and 0.07% for the second quarter of 2000.
MORTGAGE SERVICING RIGHTS: The Company's mortgage servicing rights balance
totaled $280.0 million at June 30, 2001, an increase of 33% from $211.1 million
at December 31, 2000. The increase in the mortgage servicing rights balance was
primarily due to mortgage servicing rights retained totaling $92.2 million
resulting from securitizations and sales to GSEs during the six months ended
June 30, 2001. The assumptions used to value mortgage servicing rights at June
30, 2001, and December 31, 2000, follow:
Actual Valuation Assumptions
------------------------------------------------------------------- -------------------------
Wtd.
Book Collateral Gross Servicing Avg. Prepayment Discount
Value Balance WAC Fee Multiple Speeds(1) Yield
----------- ----------- ----------- ----------- ----------- ----------- -----------
(Dollars in thousands)
June 30, 2001
Master Servicing(2) $ 48,385 $12,091,432 8.42% 0.10% 4.00 16.8% 18.3%
===========
Primary Servicing 231,605 $15,304,851 8.67% 0.46% 3.29 17.7% 12.8%
----------- ===========
Total mortgage servicing rights $ 279,990
===========
December 31, 2000
Master Servicing(2) $ 51,691 $14,118,761 8.47% 0.10% 3.60 18.4% 20.4%
===========
Primary Servicing 159,436 $12,759,143 8.80% 0.41% 3.05 20.3% 13.5%
----------- ===========
Total mortgage servicing rights $ 211,127
===========
- ----------
(1) CPR
(2) Included in the master servicing portfolio are loans included in the
primary servicing portfolio with an unpaid principal balance of $7.6
billion and $8.0 billion at June 30, 2001 and December 31, 2000,
respectively.
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23
DEPOSITS: Deposits totaled $1.8 billion at June 30, 2001, compared to $0.8
billion at December 31, 2000. The increase in deposits was primarily
attributable to the Company's marketing efforts to increase its certificates of
deposit ("CD") portfolio. The Company's strategy has been to focus on large
balance, low transaction cost deposits. The primary tool in this strategy has
been to be a price leader in CD rates for selected maturities. See "Liquidity
and Capital Resources" below.
The composition of the Company's deposits and the deposit rate at June 30, 2001,
and December 31, 2000, were as follows:
June 30, 2001 December 31, 2000
-------------------------- ---------------------------
Amount Rate Amount Rate
---------- ---------- ---------- ----------
(Dollars in thousands)
Noninterest-bearing checking $ 20,277 0.00% $ 16,324 0.00%
Interest-bearing checking 25,850 1.71% 23,588 1.94%
Savings 255,313 4.61% 99,980 5.02%
---------- ----------
Total core deposits 301,440 4.05% 139,892 3.91%
Certificates of deposit 1,492,688 5.56% 658,043 6.65%
---------- ----------
Total deposits $1,794,128 5.31% $ 797,935 6.17%
========== ==========
The weighted average remaining maturity of the Company's certificates of deposit
at June 30, 2001 was 10 months.
ADVANCES FROM FEDERAL HOME LOAN BANK: Advances from Federal Home Loan Bank of
San Francisco ("FHLB") totaled $1.7 billion at June 30, 2001, compared to $1.3
billion at December 31, 2000. The increase in advances from FHLB was primarily
due to the Company's strategy to diversify its borrowing facilities into
longer-term, lower-cost liabilities.
BORROWINGS: The Company's other borrowings totaled $3.0 billion at June 30,
2001, compared to $2.9 billion at December 31, 2000. Although the Company's
assets increased $1.7 billion, or 29.5%, borrowings only increased $199.4
million, or 7.0%. This is due to the Company's strategy to continue to diversify
its borrowing facilities into longer-term, lower-cost sources of funds such as
deposits and advances from the FHLB.
-23-
24
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal financing needs are the financing of its mortgage loan
inventory and its investment in mortgage loans and mortgage-backed securities.
The Company's primary sources of funds used to meet these financing needs
include cash flow from operations, committed borrowings, advances from the FHLB,
and deposits. The Company does not currently pay dividends to its shareholders
and has no current plans to institute such a policy.
At June 30, 2001, the Company had liquidity approximating $1.1 billion, with a
leverage ratio (debt to equity) of 9.2 to 1. Liquidity is defined as cash on
hand and borrowing availability under committed lines of credit on assets
certified as eligible by the Company's collateral custodian. The Company
believes that its liquidity levels and borrowing capacity are sufficient to meet
its current operating requirements. As of June 30, 2001, the Company's committed
financing totaled $6.5 billion, with outstanding balances of $4.8 billion.
Included in the committed financing balance is $1.9 billion in approved FHLB
credit, of which $1.7 billion was outstanding at June 30, 2001. During the
second quarter of 2001, the Company increased its financing commitments by $700
million, and extended the maturity dates on several of its repurchase agreement
facilities.
The Company's consumer bank, IndyMac Bank(SM), F.S.B. ("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 markets deposits nationally through the Internet. The
Company reported $1.8 billion in deposits at June 30, 2001 compared to $0.8
billion at December 31, 2000. At June 30, 2001, core deposits (defined as
non-term deposits, such as checking and non-term savings accounts) represented
17% of total deposits, while term CDs represented 83% of total deposits.
As presented in the consolidated statements of cash flows, the sources of
liquidity vary between periods. The statements of cash flows include operating,
investing, and financing categories. Net cash used in operating activities
totaled $1.5 billion and $224 million for the six months ended June 30, 2001 and
2000, respectively. The changes in amounts from period to period primarily
resulted from mortgage banking activity. Purchases and originations of mortgage
loans held for sale exceeded the subsequent sale of such loans. Net cash used in
investing activities totaled $89 million and $165 million for the six months
ended June 30, 2001 and 2000, respectively. The decrease during 2001 compared to
2000 was primarily due to slower growth in construction loans period over
period. Net cash provided from financing activities totaled $1.6 billion and
$443 million for the six months ended June 30, 2001 and 2000, respectively. Net
cash provided from financing activities increased during 2001 compared to 2000
due to the Company's strategy to increase net assets and their leverage.
The Company's ability to meet its long-term liquidity requirements is subject to
the renewal of its repurchase and credit facilities and/or obtaining other
sources of financing, including access to federally insured customer deposits
and advances from the FHLB, and issuing additional debt or equity from time to
time. Decisions by the Company's lenders and investors to make additional funds
available to the Company in the future will depend upon a number of factors.
These include the Company's compliance with the terms of its existing credit
arrangements, the Company's financial performance, industry and market trends in
the Company's various businesses, the general availability of, and rates
applicable to, financing and investments, such lenders' and/or investors' own
resources and policies concerning loans and investments, and the relative
attractiveness of alternative investment or lending opportunities.
During the second quarter of 2001, the Company continued to repurchase shares of
its outstanding common stock in accordance with the share repurchase program.
During the three months ended June 30, 2001, the Company repurchased 2.3 million
shares in open market transactions at an average price of approximately $23.23
per share, for a total of $52.9 million. In May of 2001, the Company's Board of
Directors approved an additional $100 million for the share repurchase program,
for a total of $400 million since inception of the program. From the share
repurchase program's inception through June 30, 2001, the Company has
repurchased 21.3 million shares, at an average cost of $17.00 per share, for a
total of $361.7 million.
OTS capital regulations require savings associations to satisfy three minimum
capital ratio requirements: tangible capital, Tier 1 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
-24-
25
adjusted for the effects of OCI, less goodwill and other disallowed assets. An
association's ratio of Tier 1 core capital to adjusted total assets (the "core
capital" or "leverage" ratio) must be at least 3% for the most highly rated
associations and 4% for others. Tier 1 core capital generally is the sum of
tangible capital less certain intangible assets, servicing assets, and
investments. 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. Most
associations are expected to maintain the above-mentioned capital ratios at
levels well above the minimum. Additionally, to qualify as a "well-capitalized
institution" a savings association's Tier 1 risk-based capital (core capital
plus supplementary capital less allowance for loan losses) must be equal to at
least 6% of risk-weighted assets. As a result of the acquisition of SGVB in July
of 2000, IndyMac Bank was mandated by the OTS to maintain its Tier 1 core
capital ratio 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. The regulatory capital ratios of IndyMac Bank and the minimum regulatory
requirements to be categorized as well-capitalized under OTS regulations were as
follows:
June 30, 2001
------------------------------------------------------
As Double risk- Well-Capitalized
reported weighted Minimum
-------- ------------ ----------------
Capital Ratios:
Tangible 8.38% 8.38% 2.00%
Tier 1 core 8.38% 8.38% 5.00%
Tier 1 risk-based 11.45% 11.32% 6.00%
Risk-based 12.43% 12.29% 10.00%
At June 30, 2001, the Company had $86.0 million of capital (on a consolidated
basis) in excess of that required to be held by IndyMac Bank under the core
capital ratio calculation, which excess capital is largely held at the holding
company.
In February of 2001 the OTS issued guidance for subprime lending programs which
requires a subprime lender to quantify the additional risks in its subprime
lending activities and determine the appropriate amounts of allowances for loan
and lease losses and capital it needs to offset those risks. The OTS guidance
suggests that subprime portfolios be supported by capital equal to one and
one-half to three times greater than what is appropriate for prime assets of a
similar type. As noted above, IndyMac Bank currently complies with a specific
mandate to double the risk-weighting otherwise assigned to subprime loans for
risk-based capital purposes.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Due to the characteristics of its financial assets and liabilities, and the
nature of its business activities, the Company's financial position and results
of operations may be materially affected by changes in interest rates in various
ways. With respect to its financial assets and liabilities, the Company has
devised and implemented a general asset/liability investment management strategy
that seeks, on an economic basis, to mitigate significant fluctuations in the
financial position and results of operations of the Company likely to be caused
by market interest rate changes. This strategy attempts, among other things, to
balance investments in various types of financial instruments whose values could
be expected to move inversely to each other in response to the movement in
market interest rate changes. The Company invests in servicing and servicing
related assets to hedge potential decreases in production volumes and gain on
sale of loans due to increases in interest rates. The Company also hedges its
servicing and servicing related assets to mitigate losses resulting from
increased prepayments in a declining interest rate environment. However, there
can be no assurance that this strategy (including assumptions concerning the
correlation thought to exist between different types of instruments) or its
implementation will be successful in any particular interest rate environment.
In addition, cash flow considerations may require the Company to utilize
different strategies with respect to hedging certain assets and/or production
pipelines, including utilizing options as opposed to futures contracts and
principal-only mortgage securities.
-25-
26
The Company is also subject to certain business and credit risks in connection
with interest rate changes. Increases in interest rates may discourage potential
mortgagors from borrowing or refinancing mortgage loans, thus decreasing the
volume of loans available to be purchased through the Company's B2B operations,
originated through B2C or B2R, or financed through the Company's construction
lending operations. Additionally, with respect to adjustable rate loans, the
rate of delinquency may increase in periods of increasing interest rates as
borrowers face higher adjusted mortgage payments. The Company's liquidity
position and net interest income could also be adversely affected by significant
interest rate fluctuations. Each of the Company's collateralized borrowing
facilities noted above in "Liquidity and Capital Resources" permits the lender
or lenders thereunder to require the Company to repay amounts outstanding and/or
pledge additional assets in the event that the value of the pledged collateral
declines due to changes in market interest rates. In addition, increases in
short-term borrowing rates relative to rates earned on asset holdings that have
not been financed to maturity through the issuance of CMOs or other debt
securities may also adversely affect the Company's "spread income" on such
assets and thus reduce the Company's earnings.
To hedge changes in the value of its AAA rated interest-only securities
portfolio and mortgage servicing rights, the Company generally chooses among
various strategies, consisting of options, swaps, futures, or buying
mortgage-backed or U.S. Treasury-based securities, depending on various factors.
The Company uses hedging instruments to reduce its exposure to interest rate
risk, not to speculate on the direction of market interest rates. The Company
has managed its interest rate risk during the six months ended June 30, 2001 as
described herein. As part of its interest rate risk management process, the
Company performs various interest rate calculations that quantify the financial
impact of changes in interest rates on its interest-earning assets, commitments
and hedges. As of June 30, 2001, the Company estimates that a parallel downward
shift in the U.S. Treasury bond rate of 50 basis points, or 0.50%, all else
being constant, would result in an increase in after tax income for the Company
of $218 thousand. The after tax gain on available for sale mortgage securities,
recorded as a component of OCI, would be $5.1 million. The combined result would
be an increase to comprehensive income of $5.3 million. The Company estimates
that a parallel upward shift in U.S. Treasury bond rates and short-term indices
of 50 basis points, or 0.50%, all else being constant, would result in a
reduction to after tax income for the Company of $593 thousand. The after tax
loss on available for sale mortgage securities, recorded as a component of OCI,
would be $6.3 million. The combined result would be a reduction to comprehensive
income of $6.9 million.
Given the current interest rate environment, the Company believes a 100 basis
point decrease in interest rates in the near future is remote. However, a 100
basis point decrease in interest rates was considered probable as of December
31, 2000. As of December 31, 2000, the Company estimated that a parallel
downward shift in the U.S. Treasury bond rate of 100 basis points, or 1.00%, all
else being constant, would result in a combined after tax gain to total
comprehensive income of $5.0 million. The Company's estimate of a parallel
upward shift in the U. S. Treasury bond rate of 100 basis points, or 1.00%, all
else being constant, was an $8.5 million after tax loss to total comprehensive
income as of December 31, 2000.
The assumptions include valuation changes in an instantaneous and parallel rate
shock and also include assumptions as to a degree of correlation between the
hedges and hedged assets and as a result are subject to basis risk (i.e., the
spread-widening or spread-tightening risk among the change in rates on U.S.
Treasury bonds, swaps and/or mortgage-backed securities). Changes in OCI do not
reflect fair value changes in liabilities. As a result, the impact on OCI
reported above tends to overstate gains and losses in decreasing and increasing
rate environments, respectively. In addition, the sensitivity analyses described
in the prior two paragraphs 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 increases in
income associated with the increase in production volume that could result from
the decrease in interest rates or the decrease in loan volume that could result
from interest rate increases. 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, anticipated future earnings and
expense levels and other anticipated aspects of future
-26-
27
operations. Forward-looking statements typically include the words "anticipate,"
"believe," "estimate," "expect," "project," "plan," "forecast," "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 respective dates or as
of the date hereof if no other date is identified. The Company undertakes no
obligation to update or revise any forward-looking statements, whether as a
result of new information, future events or otherwise.
The following factors, among others, 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 mortgage loans and construction loans, which can
be affected by such external factors as (a) the level of interest rates,
(b) tax laws, (c) the strength of various segments of the economy
(including the strength of the stock market), and (d) demographics of
the Company's lending markets;
(2) the direction of interest rates and the relationship between interest
rates and the Company's assets, liabilities, and hedging strategies;
(3) the accuracy of the Company's estimates used in determining the fair
value of certain assets such as AAA rated interest only securities,
mortgage servicing rights, non-investment grade securities, and residual
securities;
(4) the rate of loan losses incurred by the Company, the level of loss
reserves maintained by the Company, and Company management's judgments
regarding the collectibility of loans;
(5) liquidity requirements of the Company, which may change as a result of
fluctuations in assets and liabilities and off-balance sheet exposures
of the Company;
(6) the implementation of recently issued Financial Accounting Standards
Board pronouncements (SFAS 133, SFAS 137 and SFAS 138) may cause
increased volatility in the Company's earnings reported in accordance
with US GAAP;
(7) federal and state regulation of the Company's consumer lending and
banking operations - the Company's principal subsidiary is a regulated
federal savings bank;
(8) actions undertaken by current and potential competitors of the Company,
many of which have lower costs of funds or other competitive advantages
over the Company;
(9) the availability of funds from the Company's lenders and other sources
of financing that support the Company's lending activities;
(10) decisions by the Company to securitize, sell, or purchase loans or
securities;
(11) the Company's management of the borrower, product and geographic
concentrations represented in its loan portfolio;
(12) the degree of success of the Company in executing upon its growth plans
for its consumer and mortgage banking operations;
(13) economic downturns or natural disasters in the Company's principal
lending markets, including California, Florida, New Jersey and New York;
(14) other risks and uncertainties detailed herein under "Item 2.
Management's Discussion and Analysis of Financial Condition and Results
of Operations."
In addition, the banking industry in general is subject to various monetary and
fiscal policies and regulations, which include those determined by the Federal
Reserve Board, the FDIC and the OTS, which could affect the Company's results.
At the time of the filing of this Form 10-Q, there are, without limitation, new
rules and regulations concerning subprime lending and institutional capital
requirements that could impact the Company's operations or financial results.
Also, the Company's operations are centered in the State of California and are
heavily dependent upon the steady supply of electrical power. Although the
Company has not experienced energy shortages to date, at the time of the filing
of this Form 10-Q there exists uncertainty as to the steady availability of
electrical power throughout the State of California in the foreseeable future.
Extended shortages of energy could have an adverse impact on the Company.
-27-
28
PART II
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the annual meeting of IndyMac's shareholders held on May 22, 2001, the
shareholders voted to elect IndyMac's directors. The votes cast in this regard
were as follows:
For Withheld
---------- ---------
David S. Loeb 49,264,986 6,930,247
Michael W. Perry 49,255,803 6,939,430
Lyle E. Gramley 55,611,223 584,010
Hugh M. Grant 55,623,617 571,616
Patrick C. Haden 55,625,883 569,350
Thomas J. Kearns 55,587,065 608,168
Frederick J. Napolitano 55,618,311 576,922
James R. Ukropina 55,612,549 582,684
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None.
(b) Reports on Form 8-K
The Company filed a report on Form 8-K as of June 4, 2001 under Item 4
regarding a change in the Company's independent public accountants to
Ernst & Young LLP from Grant Thornton LLP.
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29
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Pasadena,
State of California, on August 13, 2001 for the six months ended June 30, 2001.
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