<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the period ended September 30, 1997
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
INMC MORTGAGE HOLDINGS, INC.
(formerly CWM Mortgage Holdings, 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 91101-1857
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (800) 669-2300
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the close of the period covered by this report.
Common stock outstanding as of September 30, 1997: 59,886,543 shares
<PAGE>
PART 1: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
INMC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
-------------- --------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Loans:
Mortgage loans held for investment, net $1,776,738 $1,210,891
Manufactured housing loans held for investment, net 29,295 25,822
Mortgage loans held for sale - prime 628,574 404,346
Mortgage loans held for sale - subprime 134,102 177,913
Manufactured housing loans held for sale 53,321 74,949
Construction loans receivable, net 848,152 460,546
Revolving warehouse lines of credit, net 371,623 251,032
Mortgage securities 455,387 231,780
Collateral for CMOs 258,959 289,054
Investment in and advances to IndyMac 182,245 169,730
Cash and cash equivalents 14,952 12,450
Other assets 77,352 47,546
---------- ----------
Total assets $4,830,700 $3,356,059
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Repurchase agreements and other credit facilities $3,880,988 $2,531,509
Collateralized mortgage obligations 234,643 264,080
Senior unsecured notes 59,854 59,759
Accounts payable and accrued liabilities 26,249 22,287
---------- ----------
Total liabilities 4,201,734 2,877,635
Shareholders' equity
Common stock - authorized, 100,000,000 shares of
$.01 par value; issued and outstanding, 59,886,543
shares at September 30, 1997 and 50,200,146 at
December 31, 1996 599 502
Additional paid-in capital 695,669 490,695
Net unrealized gain (loss) on available-for-sale mortgage securities:
Held by INMC 297 (7,166)
Held by IndyMac 2,294 (8,427)
Cumulative earnings 214,260 219,135
Cumulative distributions to shareholders (284,153) (216,315)
---------- ----------
Total shareholders' equity 628,966 478,424
---------- ----------
Total liabilities and shareholders' equity $4,830,700 $3,356,059
========== ==========
</TABLE>
2
<PAGE>
INMC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES
Interest income
Mortgage loans held for investment $ 32,984 $ 22,039 $ 88,206 $ 71,749
Manufactured housing loans held for investment 660 - 1,956 -
Mortgage loans held for sale 18,171 15,837 49,583 43,909
Manufactured housing loans held for sale 1,575 1,198 7,043 1,349
Construction loans 19,488 8,294 51,707 18,716
Revolving warehouse lines of credit 6,694 3,860 15,118 11,510
Mortgage securities 7,099 2,759 15,935 7,556
Collateral for CMOs 4,916 5,753 15,513 17,121
Advances to IndyMac 2,378 1,837 7,618 5,743
Other 85 116 468 256
----------- ----------- ----------- -----------
Total interest income 94,050 61,693 253,147 177,909
Interest expense
Repurchase agreements and other credit facilities 58,150 32,589 149,371 96,744
CMOs 4,758 5,658 14,859 17,183
Senior unsecured notes 1,379 1,379 4,136 4,121
----------- ----------- ----------- -----------
Total interest expense 64,287 39,626 168,366 118,048
----------- ----------- ----------- -----------
Net interest income 29,763 22,067 84,781 59,861
Provision for loan losses 6,300 3,924 14,100 8,973
----------- ----------- ----------- -----------
Net interest income after provision
for loan losses 23,463 18,143 70,681 50,888
Equity in earnings of IndyMac 7,540 4,877 14,534 12,068
Gain on mortgage loans and securities 198 - 1,316 -
Other 1,692 662 4,760 1,782
----------- ----------- ----------- -----------
Net revenues 32,893 23,682 91,291 64,738
EXPENSES
Salaries and related expenses 3,465 2,400 9,323 5,894
General and administrative 2,304 1,036 6,437 2,728
Management fees to affiliate - 2,356 4,406 6,499
Non-recurring charges 76,000 - 76,000 -
----------- ----------- ----------- -----------
Total expenses 81,769 5,792 96,166 15,121
NET EARNINGS $ (48,876) $ 17,890 $ (4,875) $ 49,617
============ =========== =========== ===========
EARNINGS PER SHARE $ (0.83) $ 0.39 $ (0.09) $ 1.11
Weighted average shares outstanding 58,690,733 46,206,369 54,427,901 44,649,235
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
INMC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar amounts in thousands) NINE MONTHS ENDED
(Unaudited) September 30,
---------------------------------
1997 1996
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings/(loss) $ (4,875) $ 49,617
Adjustments to reconcile net earnings to net cash
used in operating activities:
Amortization and depreciation 21,321 16,262
Provision for loan losses 14,100 8,973
Equity in earnings of IndyMac (14,534) (12,068)
Unrealized gain on trading securities (2,287) -
Issuance of common stock as settlement of management contract 72,000 -
Purchases of mortgage loans held for sale (3,101,601) (3,008,820)
Sale of and payments from mortgage loans held for sale 2,846,287 2,841,440
Net purchases of manufactured housing loans held for sale 21,284 (69,421)
Net purchases of trading securities (50,825) -
(Increases)/decreases in other assets (25,110) 1,860
Decreases in other liabilities 3,662 8,710
----------- -----------
Net cash used in operating activities (220,578) (163,447)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of mortgage loans held for investment (864,421) (45,910)
Payments from mortgage loans held for investment 356,573 231,033
Net increase in construction loans receivable (391,686) (208,612)
Purchases of mortgage securities available-for-sale (222,268) (19,519)
Sales and payments of mortgage securities available-for-sale 42,148 -
Net (increase) decrease in revolving warehouse lines of credit (121,041) 2,727
Net purchases of manufactured housing loans held for investment (3,473) -
Repayment of advances from IndyMac 12,738 22,075
Net payments from collateral for CMOs 30,057 38,412
----------- -----------
Net cash (used in) provided by investing activities (1,161,373) 20,206
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in repurchase agreements and other credit facilities 1,349,304 4,521
Net proceeds from issuance of common stock 133,071 79,156
Cash dividends paid (67,839) (48,073)
Proceeds from issuance of collateralized mortgage obligations - 146,152
Principal payments on collateralized mortgage obligations (30,083) (39,826)
----------- -----------
Net cash provided by financing activities 1,384,453 141,930
Net increase/(decrease) in cash and cash equivalents 2,502 (1,311)
Cash and cash equivalents at beginning of period 12,450 8,049
----------- -----------
Cash and cash equivalents at end of period $ 14,952 $ 6,738
=========== ===========
Supplemental cash flow information:
Cash paid for interest $ 164,256 $ 115,815
=========== ===========
Supplemental disclosure of non-cash activity:
$154.6 million of mortgage loans held for investment were transferred to
collateral for CMOs in 1996 in connection with the issuance of a CMO.
$72 million of additional equity added through the issuance of 3,440,860 shares of common stock to Countrywide
Credit Industries, Inc. to acquire all the outstanding stock of Countrywide Asset Management Corporation.
</TABLE>
4
<PAGE>
INMC Mortgage Holdings, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(UNAUDITED)
NOTE A - BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles ("GAAP") for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements.
INMC Mortgage Holdings, Inc. has elected to be treated as a real estate
investment trust ("REIT") under the Internal Revenue Code of 1986, as amended.
The consolidated financial statements include the accounts of INMC Mortgage
Holdings, Inc. and its qualified REIT subsidiaries ("INMC"). The mortgage loan
conduit operations are primarily conducted through IndyMac, Inc. ("IndyMac"), a
taxable corporation, which is not consolidated with INMC for financial reporting
or income tax purposes. INMC owns all of the preferred stock and a 99% economic
interest in IndyMac. INMC's investment in IndyMac is accounted for under a
method similar to the equity method. As used herein, the "Company" includes
INMC and IndyMac and their respective subsidiaries.
All significant intercompany balances and transactions have been eliminated in
consolidation of INMC. Certain reclassifications have been made to the financial
statements for the period ended September 30, 1996 to conform to the September
30, 1997 financial statement presentation.
In the opinion of management, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation have been included.
Operating results for the nine months ended September 30, 1997 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1997. For further information, refer to the consolidated financial
statements and footnotes thereto included in INMC's annual report on Form 10-K
for the year ended December 31, 1996.
NOTE B - ACQUISITION OF ASSET MANAGER
On July 1, 1997, INMC and Countrywide Credit Industries, Inc. ("CCR") completed
a transaction whereby INMC acquired all of the outstanding stock of its
manager, Countrywide Asset Management Corporation ("CAMC"), from CCR in
exchange for 3,440,860 new shares of common stock of INMC. The transaction was
approved in January, 1997 by a Special Committee consisting of the independent
directors of INMC, by the full Board of Directors of INMC, and by the full Board
of Directors of CCR. The transaction was then approved by INMC's shareholders
at their Annual Meeting held on June 24, 1997. Following consummation of the
transaction, CAMC was merged into INMC and INMC became a self-managed REIT.
INMC has accounted for this merger as the settlement of its management contract
for GAAP purposes, which resulted in a non-recurring charge for INMC of $76
million and a reported loss for the third quarter of $48.9 million. This charge
did not materially affect total shareholders' equity as $72 million represents a
reduction in retained earnings offset by a corresponding increase in common
stock and additional paid-in-capital. For tax purposes, the transaction
represents a tax-free exchange of shares with CCR, and the transaction will not
have a material affect on INMC's taxable income. Accordingly, since the charge
was taken for GAAP purposes only, and INMC pays dividends on the basis of its
taxable income, the taxable nature of the dividends payable to INMC's
shareholders for 1997 will not be materially affected. For the third quarter,
INMC had net earnings, prior to inclusion of the non-recurring charge of $27.1
million and earnings per share of $0.46.
On october 20, 1997, the Board of Directors of INMC declared a cash dividend of
$0.46 per share payable on December 8, 1997 to shareholders of record on October
31, 1997. See Subsequent Events.
NOTE C - ALLOWANCE FOR CREDIT LOSSES
During the nine months ended September 30, 1997, INMC added $14.1 million to its
allowance for credit losses. INMC's allowance for credit losses totaled $24.2
million at September 30, 1997, and primarily includes reserves for mortgage
loans held for investment, construction loans, warehouse lines of credit and
CMOs in the amounts of $16.0 million, $6.3 million, $1.7 million and $0.2
million respectively. INMC recorded chargeoffs of $5.1 million and $1.5 million
during the nine months ended September 30, 1997 and 1996, respectively.
NOTE D - MORTGAGE SECURITIES
Mortgage securities consist of subordinated securities, principal-only
securities, interest-only securities and inverse floater securities. Interest-
only securities are comprised primarily of excess master servicing fees sold by
IndyMac to INMC and subsequently securitized by INMC, which are classified and
accounted for as available for sale, and also include securitized excess master
servicing fees acquired by INMC in connection with the securitization of
mortgage loans held for sale by IndyMac, which are classified and accounted for
as trading securities. Contractual maturities on the mortgage securities range
from 10 to 30 years.
5
<PAGE>
NOTE D - MORTGAGE SECURITIES - CONTINUED
Following is the estimated fair value of INMC's mortgage securities as of
September 30, 1997 and December 31, 1996:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
(Dollars in thousands) Cost Gains Losses Value
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
September 30, 1997
Securitized master servicing fees $ 30,660 $ - $ - $ 30,660
Other mortgage securities 49,450 - - 49,450
-------- ------ -------- --------
Total trading 80,110 - - 80,110
Securitized master servicing fees 75,758 1,718 (4,769) 72,707
Other mortgage securities 299,222 3,663 (315) 302,570
-------- ------ -------- --------
Total available for sale 374,980 5,381 (5,084) 375,277
-------- ------ -------- --------
Total $455,090 $5,381 $ (5,084) $455,387
======== ====== ======== ========
December 31, 1996
Securitized master servicing fees $ 25,570 $ - $ - $ 25,570
Other mortgage securities 7,439 - - 7,439
-------- ------ -------- --------
Total trading 33,009 - - 33,009
Securitized master servicing fees 87,457 1,159 (10,486) 78,130
Other mortgage securities 118,480 2,209 (48) 120,641
-------- ------ -------- --------
Total available for sale 205,937 3,368 (10,534) 198,771
-------- ------ -------- --------
Total $238,946 $3,368 $(10,534) $231,780
======== ====== ======== ========
</TABLE>
As of September 30, 1997, all of INMC's mortgage securities were pledged to
secure repurchase borrowings intended to finance the holding of such securities.
NOTE E - INVESTMENT IN INDYMAC (Unaudited)
- ------------------------------------------
Summarized financial information for IndyMac follows:
<TABLE>
<CAPTION>
(Dollars in thousands) September 30, 1997 December 31, 1996
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Loans held for sale, net $245,804 $ 86,962
Mortgage securities 549,412 541,672
Master servicing fees receivable 44,860 44,239
Other assets 56,077 38,232
-------- --------
Total assets $896,153 $711,105
======== ========
Repurchase agreements and other credit facilities $656,759 $496,052
Due to INMC 116,536 130,153
Accounts payable and accrued liabilities 56,486 44,243
Shareholders' equity 66,372 40,657
-------- --------
Total liabilities and shareholders' equity $896,153 $711,105
======== ========
</TABLE>
6
<PAGE>
NOTE E - INVESTMENT IN INDYMAC (Unaudited) - continued
- ------------------------------------------------------
<TABLE>
<CAPTION>
Quarter ended Nine months, ended
September 30, September 30,
----------------------------------------------------------------------------
(Dollars in thousands) 1997 1996 1997 1996
----------------------------------------------------------------------------
(as adjusted) (as adjusted)
<S> <C> <C> <C> <C>
Interest income
Loans held for sale $ 5,446 $ 605 $10,714 $ 2,912
Mortgage securities 8,665 10,620 29,191 30,231
Master servicing fees receivable, net 2,724 2,353 7,547 3,538
------------------------------------------------------------------
Total interest income 16,835 13,578 47,452 36,681
Interest expense 13,668 9,172 36,728 28,027
------------------------------------------------------------------
Net interest income 3,167 4,406 10,724 8,654
Gain on sale of loans and securities 22,655 11,092 50,742 30,893
Other 1,134 586 2,227 1,312
------------------------------------------------------------------
Net revenues 26,956 16,084 63,693 40,859
Salaries and related expenses 8,452 4,932 23,222 13,515
General and administrative expense 5,158 2,808 13,855 6,393
Management fees to affiliate - 470 757 1,381
------------------------------------------------------------------
Total expenses 13,610 8,210 37,834 21,289
Earnings before income tax provision 13,346 7,874 25,859 19,570
Income tax provision 5,729 3,363 10,971 8,408
------------------------------------------------------------------
Net earnings $ 7,617 $ 4,511 $14,888 $11,162
==================================================================
</TABLE>
Allowance for Credit Losses. IndyMac's allowance for credit losses related to
loans held for sale totaled $1.0 million at September 30, 1997. IndyMac
recorded chargeoffs of $788,000 and $18,000 during the nine months ended
September 30, 1997 and 1996, respectively.
Mortgage Securities. Mortgage securities consist of subordinated securities,
principal-only securities and interest-only securities. Interest-only
securities are comprised primarily of securitized excess master servicing fees
retained in connection with the securitization of mortgage loans previously held
for sale. IndyMac restated its 1996 financial statements to classify and
account for certain subordinated securities, principal-only securities and
interest-only securities retained in connection with IndyMac's securitization
activities as trading, in accordance with SFAS No. 115. Contractual maturities
on the mortgage securities range from 10 to 30 years. Following is the
estimated fair value of IndyMac's mortgage securities as of September 30, 1997
and December 31, 1996:
7
<PAGE>
NOTE E - INVESTMENT IN INDYMAC (Unaudited) - continued
- ------------------------------------------------------
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
(Dollars in thousands) Cost Gains Losses Value
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
September 30, 1997
Securitized master servicing fees $242,886 $ - $ - $242,886
Other mortgage securities 229,823 - - 229,823
---------- --------- --------- ---------
Total trading 472,709 - - 472,709
Other mortgage securites available for sale 72,708 4,081 (86) 76,703
---------- --------- --------- ---------
Total $545,417 $4,081 $ (86) $549,412
========== ========= ========= ========
December 31, 1996
Securitized master servicing fees $209,190 $ - $ - $209,190
Other mortgate securities 199,676 - - 199,676
---------- --------- --------- ----------
Total trading 408,866 - - 408,866
Other mortgage securities available for sale 147,482 2,815 (17,491) 132,806
---------- --------- --------- ---------
Total $556,348 $2,815 $(17,491) $541,672
========== ========= ========= =========
</TABLE>
As of September 30, 1997, all of IndyMac's mortgage securities were pledged to
secure repurchase borrowings intended to finance the holding of such securities.
NOTE F - SUBSEQUENT EVENTS
On October 20, 1997, the Board of Directors declared a cash dividend of $0.46
per share payable on, December 8, 1997 to shareholders of record on October
31, 1997.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
INMC Mortgage Holdings, Inc. was incorporated in the state of Maryland in July
1985 and reincorporated in the state of Delaware in March 1987. References to
"INMC" mean either the parent company alone or the parent company and the
entities consolidated for financial reporting purposes, while references to the
"Company" mean the parent company, its consolidated subsidiaries and IndyMac and
its consolidated subsidiaries, which are not consolidated with INMC for
financial reporting or tax purposes.
In its mortgage loan conduit business, the Company acts as an intermediary
between the originators of mortgage loans and permanent investors in mortgage-
backed securities ("MBS") secured by or representing an ownership interest in
such mortgage loans. The Company purchases "jumbo" and other "nonconforming"
mortgage loans from mortgage originators, including subprime mortgage loans
(i.e., "A- through D paper" mortgages). The Company and its sellers negotiate
whether such sellers will retain, or the Company will purchase, the rights to
service the mortgage loans delivered by such sellers to the Company. All loans
purchased by INMC, for which a Real Estate Mortgage Investment Conduit ("REMIC")
transaction or whole loan sale is contemplated, are committed for sale to
IndyMac at the same price at which the loans were acquired by INMC pursuant to a
Master Forward Commitment and Services Agreement. At present, IndyMac does not
purchase any loans from entities other than INMC. Additionally, the Company's
conduit operations include the purchase or origination, securitization and sale
of consumer or mortgage loans for manufactured housing and home improvements.
The Company's principal sources of income from its conduit operations are gains
recognized on the sale or securitization of mortgage and consumer loans, the net
spread between interest earned on mortgage and consumer loans and the interest
costs associated with the borrowings used to finance such loans pending their
sale or securitization, and servicing and master servicing fee income.
In addition to its conduit operations, the Company earns fee income and net
interest income through its construction and warehouse lending programs and net
interest income on its investment portfolio of mortgage and manufactured housing
loans and mortgage securities. Construction Lending Corporation of America
("CLCA", and formerly known as the CLCA Builder Division) provides acquisition,
development and construction, builder custom home, and model home loan financing
on a nationwide basis to builders. IndyMac Construction Lending (formerly
known as the CLCA Consumer Division) provides the same products as CLCA to
IndyMac's third party customers as well as other construction related products
to individuals, including construction-to-permanent mortgage loans. The
Company's warehouse lending operation provides financing to small-to-medium-size
mortgage originators for the origination and sale of mortgage loans.
On July 1, 1997, INMC and CCR completed a transaction whereby INMC acquired all
of the outstanding stock of its manager, CAMC, from CCR in exchange for
3,440,860 new shares of common stock of INMC. The transaction was approved in
January, 1997 by a Special Committee consisting of the independent directors of
INMC, by the full Board of Directors of INMC, and by the full Board of Directors
of CCR. The transaction was then approved by INMC's shareholders at their Annual
Meeting held on June 24, 1997. Following consummation of the transaction, CAMC
was merged into INMC, and INMC became a self-managed REIT.
9
<PAGE>
INMC has accounted for this merger as the settlement of its management contract
for GAAP purposes, which resulted in a non-recurring charge for INMC of $76
million and a reported loss for the third quarter of $48.9 million. This charge
did not materially affect total shareholders' equity as $72 million represents a
reduction in retained earnings offset by a corresponding increase in common
stock and additional paid-in-capital. For tax purposes, the transaction
represents a tax-free exchange of shares with CCR, and the transaction will not
have a material effect on INMC's taxable income. Accordingly, since the charge
was taken for GAAP purposes only, and INMC pays dividends on the basis of its
taxable income, the taxable nature of the dividends payable on December 8, 1997
to INMC's shareholders will not be materially affected. For the third Quarter,
INMC had net earnings prior to Inclusion of the non-recurring charge of $27.1
million, and earnings per share of $0.46.
FINANCIAL CONDITION
CONDUIT OPERATIONS: During the first nine months of 1997, INMC purchased $3.9
billion of non-conforming mortgage loans, including $114 million of subprime
mortgage loans. In addition, the Company purchased $164 million of manufactured
housing loans. Loans purchased were financed on an interim basis using equity
and financing in the form of repurchase agreements and other credit
facilities. In general, the Company, through IndyMac, sells the loans in the
form of REMIC securities or whole loan sales or, alternatively, through INMC,
invests in the loans on a long-term basis using financing provided by CMOs or
repurchase agreements and other credit facilities. During the first nine months
of 1997, IndyMac sold $2.6 billion of its prime mortgage loans through the
issuance of nine series of multiple-class MBS in the form of REMIC securities
and four whole loan sales. There was one manufactured housing loan
securitization of $149 million and no subprime securitizations or loan sales
during the first nine months of 1997. At September 30, 1997, the Company had
committed to purchase $858 million of mortgage loans from various mortgage
originators. The IndyMac master servicing portfolio at September 30, 1997 had an
aggregate outstanding principal balance of $12.3 billion with a weighted average
coupon of 8.55%.
LOANS HELD FOR INVESTMENT: At September 30, 1997, INMC's $1.8 billion portfolio
of loans held for investment, which includes both mortgage and manufactured
housing loans, consisted of $1.2 billion of adjustable-rate products which
contractually reprice in monthly, semi-annual or annual periods, $421 million of
loans which have a fixed rate for a period of three to ten years and
subsequently convert to adjustable-rate loans that reprice annually, and $136
million of fixed-rate loans. The weighted average coupon of loans held for
investment by INMC at September 30, 1997 was 8.18%. INMC finances loans held for
investment with repurchase agreements and other credit facilities which reprice
at intervals ranging from overnight to two months as of September 30, 1997. INMC
also utilizes interest rate swap agreements to manage interest rate exposure on
its portfolio of loans held for investment. The allowance for losses related to
loans held for investment totaled $16 million at September 30, 1997. Chargeoffs
related to loans held for investment totaled $5 million for the nine months
ended September 30, 1997.
Deliquencies for loans held for sale and loans held for investment were at 5.46%
of principal at September 30, 1997 compared with 7.77% at December 31, 1996.
CONSTRUCTION LENDING OPERATIONS: At September 30, 1997, CLCA had commitments to
fund construction loans of $1.1 billion with outstanding principal balances of
$531 million. IndyMac Construction Lending had commitments to fund construction-
to-permanent and home improvement loans of $493 million at September 30, 1997
with outstanding principal balances of $317 million. The allowance for losses
related to construction loans totaled $6.3 million at September 30, 1997 and
chargeoffs totaled $70,000 related to construction loans during the nine months
ended September 30, 1997. Delinquencies for CLCA were 0.65% and .46% of
principal at September 30, 1997 and December 31, 1996, respectively.
Delinquencies for IndyMac Construction Lending were 1.07% and 1.12% of
principal, at September 30, 1997 and December 31, 1996, respectively. The
Company had outstanding borrowings under various revolving credit facilities
totaling $414 million at September 30, 1997 associated with the financing of
construction loans.
10
<PAGE>
WAREHOUSE LENDING OPERATIONS: At September 30, 1997, INMC had extended
commitments to make warehouse and related loans in an aggregate amount of $783
million, of which $372 million was outstanding, net of reserves. The allowance
for loan losses related to warehouse lines of credit totaled $1.7 million at
September 30, 1997. There were no chargeoffs against this allowance during the
nine months ended September 30, 1997. Repurchase agreements associated with
INMC's financing of these warehouse lines of credit totaled $316 million at
September 30, 1997. As of September 30, 1997 and December 31, 1996, there were
no delinquent warehouse lines of credit.
CMO PORTFOLIO: As of September 30, 1997, the CMO Portfolio was comprised of nine
series of CMOs. Collateral for CMOs decreased to $259 million at September 30,
1997 from $289 million at December 31, 1996. This decrease of $30.1 million is
primarily the result of repayments (including prepayments and premium and
discount amortization) of $29.0 million, a decrease in guaranteed investment
contracts ("GICs") held by trustees of $1.0 million and a decrease in accrued
interest receivable of $100,000. The fair value of the collateral for CMOs
totaled $262 million and $282 million at September 30, 1997 and December 31,
1996, respectively. INMC's CMOs outstanding decreased to $235 million at
September 30, 1997 from $264 million at December 31, 1996. This decrease of
$29.5 million resulted from principal payments and discount amortization on CMOs
of $29.1 million and a decrease in accrued interest payable on CMOs of $0.4
million.
RESULTS OF OPERATIONS
QUARTER ENDED SEPTEMBER 30, 1997 COMPARED TO QUARTER ENDED SEPTEMBER 30, 1996
NET EARNINGS: INMC's net loss was $48.9 million or $(0.83) per share, based on
58,690,733 weighted average shares outstanding for the quarter ended September
30, 1997, compared to earnings of $17.9 million or $0.39 per share, based on
46,206,369 weighted average shares outstanding for the quarter ended September
30, 1996. For the quarter ended September 30, 1997, INMC had net earnings of
$27.1 million or $.46 per share before the non-recurring charge related to the
buyout of its manager.
The decrease of $66.8 million in third quarter earnings resulted from the
aforementioned one time non-recurring charge of $76 million related to the
buyout of INMC'S manager. Not including the non-recurring charge, earnings
increased by $9.2 million resulting primarily from an increase in net interest
income of $7.7 million and an increase $2.7 million from equity in earnings of
IndyMac.
INTEREST INCOME: Total interest income was $94 million for the quarter ended
September 30, 1997 and $62 million for the quarter ended September 30, 1996.
The increase in interest income of $32 million is primarily due to increases in
interest earnings on construction loans, mortgage loans held for investment,
mortgage securities, warehouse lines of credit, and mortgage loans held for sale
of $11.2 million, $10.9 million, $4.3 million, $2.8 million, and $2.3 million,
respectively.
Interest income on mortgage loans held for investment, consisting primarily of
adjustable rate mortgages, totaled $33.0 million and $22.0 million, resulting
in effective yields of 7.57% and 8.11%, for the quarters ended September 30,
1997 and 1996, respectively. The average outstanding balance of such loans
increased to $1.7 billion for the third quarter of 1997 from $1.1 billion
during the third quarter of 1996.
Interest income earned on mortgage loans held for sale totaled $18.2 million and
$15.8 million, resulting in effective yields of 8.54% and 8.61%, for the
quarters ended September 30, 1997 and 1996, respectively. The average
outstanding balance of such loans increased to $846 million for the quarter
ended September 30, 1997 from $732 million for the quarter ended September 30,
1996.
Interest income on manufactured housing loans totaled $2.2 million and $1.2
million, with interest earned at effective yields of 10.03% and 9.15%, for the
quarters ended September 30, 1997 and 1996, respectively. The average
outstanding balance of such loans increased to $89 million during the third
quarter of 1997 from $52 million during the third quarter of 1996.
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<PAGE>
Interest income on construction loans totaled $19.5 million and $8.3 million
with interest earned at effective yields of 10.46% and 12.60%, for the quarters
ended September 30, 1997 and 1996, respectively. The average outstanding
balance of such loans increased to $741 million during the third quarter of 1997
from $262 million during the third quarter of 1996.
Interest income on collateral for CMOs was $4.9 million and $5.8 million for the
quarters ended September 30, 1997 and 1996, respectively. This decrease was
primarily attributable to a decrease in the average aggregate principal amount
of collateral for CMOs outstanding to $262 million for the quarter ended
September 30, 1997 compared to $301 million for the quarter ended September 30,
1996, and a decrease in the effective yield earned on the collateral for CMOs to
7.46% in the third quarter of 1997 from 7.60% in the third quarter of 1996.
Interest income on collateral for CMOs includes the impact of amortization of
premiums paid in connection with acquiring the loan portfolio, the delay in the
receipt of prepayments and the temporary investment of cash payments in lower
yielding short-term holdings (GICs) until such amounts are used to make payments
on CMOs.
Mortgage securities consist of subordinated securities, principal-only
securities, interest-only securities and inverse floater securities. Interest-
only securities are comprised primarily of excess master servicing fees sold by
IndyMac to INMC and subsequently securitized by INMC, which are classified and
accounted for as available for sale, and also include securitized excess master
servicing fees acquired by INMC in connection with the securitization of
mortgage loans previously held for sale by IndyMac, which are classified and
accounted for as trading securities. Net income related to mortgage securities
totaled $7.1 million during the third quarter of 1997 as compared to $2.8
million for the third quarter of 1996.
Interest income earned on revolving warehouse lines of credit totaled $6.7
million and $3.9 million, at effective yields of 8.70% and 9.12%, for the
quarters ended September 30, 1997 and 1996, respectively. The average
outstanding balance of such loans increased to $306 million during the third
quarter of 1997 from $176 million during the third quarter of 1996.
INTEREST EXPENSE: For the quarters ended September 30, 1997 and 1996, total
interest expense was $64.3 million and $39.6 million, respectively. This
increase in interest expense of $24.7 million was primarily due to an increase
in interest expense on repurchase agreements and other credit facilities of
$25.6 million, offset by a decline in interest expense related to CMOs of $0.9
million.
Interest expense on repurchase agreements and other credit facilities used to
finance mortgage loans held for sale and investment, revolving warehouse lines
of credit, construction loans, mortgage securities and master servicing fees
receivable totaled $58.2 million for the quarter ended September 30, 1997,
compared to $32.6 million for the quarter ended September 30, 1996. This
increase was principally the result of an increase in the aggregate average
balance of indebtedness outstanding to $3.7 billion for the quarter ended
September 30, 1997 compared to $2.1 billion for the quarter ended September 30,
1996 and an increase in the weighted average effective rate applicable to such
indebtedness to 6.24% for the quarter ended September 30, 1997 from 6.18% for
the quarter ended September 30, 1996.
Interest expense on senior unsecured notes totaled $1.4 million, resulting in an
effective rate of 9.22% for the both third quarter of 1997 and 1996.
Interest expense on CMOs was $4.8 million and $5.7 million for the quarters
ended September 30, 1997 and 1996, respectively. This decrease was primarily
attributable to a decrease in average aggregate CMOs outstanding to $239 million
for the quarter ended September 30, 1997 from $277 million for the quarter ended
September 30, 1996, combined with a decrease in the effective rate on the CMOs
to 7.93% in the third quarter of 1997 from 8.13% in the third quarter of 1996.
12
<PAGE>
EQUITY IN EARNINGS OF INDYMAC: IndyMac earned $7.6 million for the third
quarter of 1997, resulting principally from net interest income of $3.2 million
and gain on sale of mortgage loans and securities of $22.7 million, offset by
salaries, general and administrative expenses of $13.6 million, and income taxes
of $5.7 million.
During the third quarter of 1996, IndyMac's earnings totaled $4.5 million which
resulted principally from net interest income of $4.4 million and gain on sale
of mortgage loans and securities of $11.1 million, offset by salaries, general
and administrative expenses of $7.7 million, management fees of $470,000 and
income taxes of $3.4 million. IndyMac's interest income related to mortgage
securities totaled $8.7 million during the third quarter of 1997 compared to
$10.6 million during the third quarter of 1996.
SALARIES, GENERAL AND ADMINISTRATIVE EXPENSE: The increase of $2.3 million in
salaries, general and administrative expenses for the three months ended
September 30, 1997 compared to the three months ended September 30, 1996 is
primarily the result of the increased personnel and expenses deemed necessary to
support the growth in the operations of INMC and its qualified REIT
subsidiaries.
MANAGEMENT FEES: No management fees were paid by INMC to CAMC as a result of
the merger of the two companies on the first day of the third quarter.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1996
NET EARNINGS: INMC's net loss was $4.9 million or $(0.09) per share, based on
54,427,901 weighted average shares outstanding for the nine months ended
September 30, 1997, compared to earnings of $49.6 million or $1.11 per share,
based on 44,649,235 weighted average shares outstanding for the nine month ended
September 30, 1996. For the nine months ended September 30, 1997, INMC had net
earnings of $71.1 million or $1.31 per share before the non-recurring charge
related to the buyout of its manager.
The decrease of $54.5 million in year to date earnings resulted from the
aforementioned one time non-recurring charge of $76 million related to the
buyout of INMC's manager. Not including the non-recurring charge, earnings
increased by $21.5 million resulting primarily from an increase in net interest
income of $24.9 million and an increase of $2.5 from equity in earnings of
IndyMac, offset by an increase of $7.1 million in salaries, general and
administrative expenses.
INTEREST INCOME: Total interest income was $253.1 million for the nine months
ended September 30, 1997 and $177.9 million for the nine months ended September
30, 1996. The increase in interest income of $75.2 million is primarily due to
increases in interest earnings on construction loans, mortgage loans, mortgage
securities, and manufactured housing loans of $33.0 million, $22.1 million, $8.4
million, and $7.7 million, respectively.
Interest income on mortgage loans held for investment, consisting primarily of
adjustable rate mortgages, totaled $88.2 million and $71.7 million, resulting
in effective yields of 7.67% and 8.19%, for the nine months ended September 30,
1997 and 1996, respectively. The average outstanding balance of such loans
increased to $1.5 billion for the first nine months of 1997 from $1.2 billion
for the first nine months of 1996.
Interest income earned on mortgage loans held for sale totaled $49.6 million and
$43.9 million, resulting in effective yields of 8.64% and 8.73%, for the nine
months ended September 30, 1997 and 1996, respectively. The average outstanding
balance of such loans increased to $767 million for the nine months ended
September 30, 1997 from $672 million for the nine months ended September 30,
1996.
Interest income on manufactured housing loans totaled $9.0 million and $1.3
million, with interest earned at effective yields of 10.16% and 9.28%, for the
nine months ended September 30, 1997 and 1996,
13
<PAGE>
respectively. The average outstanding balance of such loans increased to $118
million for the first nine months of 1997 from $19 million for the first nine
months of 1996, due to the fact that the manufactured housing division commenced
operations during March of 1996.
Interest income on construction loans totaled $51.7 million and $18.7 million,
with interest earned at effective yields of 11.22% and 12.64%, for the nine
months ended September 30, 1997 and 1996, respectively. The average outstanding
balance of such loans increased to $616 million from $198 million for the nine
months ended September 30, 1997 and 1996, respectively.
Interest income on collateral for CMOs was $15.5 million and $17.1 million for
the nine months ended September 30, 1997 and 1996, respectively. This decrease
was primarily attributable to a decrease in the average aggregate principal
amount of collateral for CMOs outstanding to $272 million from $303 million for
the nine months ended September 30, 1997 and 1996, respectively, offset by an
increase in the effective yield earned on the collateral for CMOs to 7.62% from
7.55% in the first nine months of 1997 and 1996, respectively. Interest income
on collateral for CMOs includes the impact of amortization of premiums paid in
connection with acquiring the loan portfolio, the delay in the receipt of
prepayments and the temporary investment of cash payments in lower yielding
short-term holdings (GICs) until such amounts are used to make payments on CMOs.
Mortgage securities consist of subordinated securities, principal-only
securities, interest-only securities and inverse floater securities. Interest-
only securities are comprised primarily of excess master servicing fees sold by
IndyMac to INMC and subsequently securitized by INMC, which are classified and
accounted for as available for sale, and also include securitized excess master
servicing fees acquired by INMC in connection with the securitization of
mortgage loans previously held for sale by IndyMac, which are classified and
accounted for as trading securities. Interest income related to mortgage
securities totaled $15.9 million during the first nine months of 1997 as
compared to $7.6 million for the first nine months of 1996.
Interest income earned on revolving warehouse lines of credit totaled $15.1
million and $11.5 million, at effective yields of 8.92% and 8.85%, for the nine
months ended September 30, 1997 and 1996, respectively. The average outstanding
balance of such loans increased to $227 million for the nine months ended
September 30, 1997 from $174 million for the nine months ended September 30,
1996.
INTEREST EXPENSE: For the nine months ended September 30, 1997 and 1996, total
interest expense was $168.4 million and $118.0 million, respectively. This
increase in interest expense of $50.4 million was primarily due to an increase
in interest expense on repurchase agreements and other credit facilities of
$52.7 million, offset by a decline in interest expense related to CMOs of $2.3
million.
Interest expense on repurchase agreements and other credit facilities used to
finance mortgage loans held for sale and investment, revolving warehouse lines
of credit, construction loans, mortgage securities and master servicing fees
receivable totaled $149.4 million for the nine months ended September 30, 1997,
compared to $96.7 million for the nine months ended September 30, 1996. This
increase was principally the result of an increase in the aggregate average
balance of indebtedness outstanding to $3.2 billion for the nine months ended
September 30, 1997 compared to $2.1 billion for the nine months ended September
30, 1996, offset by a decrease in the weighted average effective rate applicable
to such indebtedness to 6.15% for the nine months ended September 30, 1997 from
6.24% for the nine months ended September 30, 1996.
Interest expense on senior unsecured notes totaled $4.1 million, resulting in an
effective rate of 9.22% for both the nine months ended September 30, 1997 and
1996.
Interest expense on CMOs was $14.9 million and $17.2 million for the nine months
ended September 30, 1997 and 1996, respectively. This decrease was primarily
attributable to a decrease in average aggregate CMOs outstanding to $249 million
for the nine months ended September 30, 1997 from $278 million for the nine
months ended September 30, 1996, combined with a decrease in the effective rate
on the CMOs to 7.97% in the nine months ended September 30, 1997 from 8.26% in
the nine months ended September 30, 1996.
14
<PAGE>
EQUITY IN EARNINGS OF INDYMAC: IndyMac earned $14.9 million fof the nine months
ended September 30, 1997, resulting principally from net interest income of
$10.7 million and gain on sale of mortgage loans and securities of $50.7
million, offset by salaries, general and administrative expenses of $37.1
million, and income taxes of $11.0 million.
During the first nine months of 1996, IndyMac's earnings totaled $11.2 million
which resulted principally from net interest income of $8.7 million and gain on
sale of mortgage loans and securities of $30.9 million, offset by salaries,
general and administrative expenses of $19.9 million, management fees of $1.4
million and income taxes of $8.4 million. IndyMac's interest income related to
mortgage securities totaled $29.2 million for the first nine months of 1997
compared to $30.2 million for the first nine months of 1996.
SALARIES, GENERAL AND ADMINISTRATIVE EXPENSE: The increase of $7.1 million in
salaries, general and administrative expenses for the nine months ended
September 30, 1997 compared to the nine months ended September 30, 1996 is
primarily the result of the increased personnel and expenses deemed necessary to
support the growth in the operations of INMC and its qualified REIT
subsidiaries.
MANAGEMENT FEES: For the nine months ended September 30, 1997, management fees
paid by INMC to CAMC were $4.4 million compared to $6.5 million for the nine
months ended September 30, 1996, due primarily to the fact that INMC paid no
fees to CAMC for the third quarter of 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company uses proceeds from the issuance of mortgage-backed securities, bank
debt, repurchase agreements, other borrowings and common stock to meet its
liquidity requirements.
The Company has established separate repurchase financing facilities with three
principal investment banking firms (Merrill Lynch, Nomura and Paine Webber) in
an aggregate committed principal amount of $1.8 billion, with the capacity to
borrow additional amounts on an uncommitted basis. The committed portions of
these facilities effective for a period of at least two years from their
respective dates of execution and, in the aggregate, currently permit the
Company to finance its mortgage conduit, mortgage loans and securities
portfolio, warehouse lending, IndyMac construction lending and manufactured
housing lending assets and operations. These facilities carry
floating rates of interest based on LIBOR, plus an applicable margin, which
varies by the type of asset financed.
The Company has established a credit facility with a syndicate of commercial
banks led by First Union National Bank. This facility primarily finances
construction loans to builders, mortgage loans, and master servicing assets. In
July 1997, the Company amended this credit facility to increase the available
committed borrowings from $405 million to $500 million. In October 1997, the
Company again amended this credit facility to increase the available committed
borrowings from $500 million to $600 million. The interest rates under this
credit facility are based, at the Company's election, on LIBOR or the federal
funds rate, plus an applicable margin, which varies by the type of asset
financed.
During the fourth quarter of 1995, the Company raised $59.6 million in
connection with the private placement of senior notes with a 6.5 year average
maturity with certain institutional lenders. These senior notes are unsecured,
and the proceeds are utilized by the Company in connection with its working
capital needs.
The Company has from time to time raised additional capital through secondary
public offerings. Since the inception of its new business plan in 1993, the
Company has raised a total of $205 million in connection with such secondary
offerings. The Company also raises new equity capital primarily through the
optional cash investment feature of its Dividend Reinvestment and Stock Purchase
Plan. During the three and nine months ended September 30, 1997, the Company
raised $49.6 million, and $129.2 million, respectively, through such Dividend
Reinvestment and Stock Purchase Plan. During the three and nine months ended
September 30, 1996, the Company raised $32.4 million and $79.0 million,
respectively, through such Dividend Reinvestment and Stock Purchase Plan.
The REIT provisions of the Internal Revenue Code restrict INMC's ability to
retain earnings and thereby replenish the capital committed to its mortgage
portfolio, conduit, commercial lending and other operations
15
<PAGE>
by requiring INMC to distribute to its shareholders substantially all of its
taxable income from operations. Certain of the Company's material businesses,
including its mortgage conduit and commercial lending operations, are known to
require significant and continuing commitments of capital resources.
The Company's liquidity and its ability to raise working capital have generally
improved during recent periods, and management believes that the Company's cash
flow from operations and the Company's existing debt and equity financing
arrangements are sufficient to meet the Company's current short-term liquidity
requirements. To the extent the Company possesses working capital in excess of
its current liquidity requirements, such working capital is as a general matter
utilized to repay borrowings under those tranches of the Company's lines of
credit which carry higher rates of interest, which borrowings would typically
remain available for reborrowing by the Company pursuant to the terms and
conditions of the applicable credit facility.
The Company's ability to meet its long-term liquidity requirements is subject to
the renewal of its repurchase and credit facilities and/or obtaining other
sources of financing, including issuing additional debt or equity from time to
time. Any decision by the Company's lenders and/or investors to make additional
funds available to the Company in the future will depend upon a number of
factors, such as the Company's compliance with the terms of its existing credit
arrangements, the Company's financial performance, industry and market trends in
the Company's various businesses, the general availability of and rates
applicable to financing and investments, such lenders' and/ or investors' own
resources and policies concerning loans and investments, and the relative
attractiveness of alternative investment or lending opportunities.
CASH FLOWS
Operating Activities - Net cash used in operating activities totaled $221
million for the nine months ended September 30, 1997 compared with $163 million
for the nine months ended September 30, 1996. The primary operating activity
for which cash was used during the nine months ended September 30, 1997 was the
acquisition of mortgage loans and manufactured housing loans held for sale.
Investing Activities - Net cash used in investing activities totaled $1.2
billion for the nine months ended September 30, 1997 compared with net cash
provided by investing activities of $20 million for the nine months ended
September 30, 1996. The primary investing activity for which cash was used
during the nine months ended September 30, 1997 was the funding of construction
loans receivable and acquisition of mortgage loans held for investment.
Financing Activities - Net cash provided by financing activities amounted to
$1.4 billion for the nine months ended September 30, 1997 compared to $142
million for the nine months ended September 30, 1996. The increase in cash
provided by financing activities was primarily the result of new borrowings
under repurchase agreements and other credit facilities and proceeds of common
stock issuances pursuant to the Dividend Reinvestment and Stock Purchase Plan
during the nine months ended September 30, 1997.
16
<PAGE>
EFFECT OF INTEREST RATE CHANGES
Due to the characteristics of certain financial assets and liabilities of the
Company, and the nature of the Company's business activities, the Company's
financial position and results of operations may be affected by changes in
market interest rates. With respect to its financial assets and liabilities,
the Company has devised and implemented a general asset/liability investment
management strategy which seeks, on an economic basis, to mitigate significant
fluctuations in the financial position and results of operations of the Company
caused by changes in market interest rates. This strategy attempts, among other
things, to balance investments in various types of financial instruments whose
values are expected to move inversely to each other in response to movements in
market interest rates. 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.
Financial assets of the Company that tend to increase in value as interest rates
increase, and decline in value as interest rates decrease, include securitized
excess master servicing fees and master servicing fees receivable. These
financial assets carry an implicit yield that is based upon estimates of future
cash flows on an underlying pool of mortgage loans. As interest rates increase,
the prepayments on the underlying pool of mortgage loans tends to slow,
resulting in higher residual cash flows than would otherwise have been
obtained, and therefore results in higher implicit yields. As of September 30,
1997, INMC and IndyMac on a combined basis held $391 million of securitized
excess master servicing fees and master servicing fees receivable. Of the $391
million aggregate amount, $274 million of such assets are classified as trading
securities in accordance with the requirements of SFAS 115, since they were
acquired in connection with the securitization of loans held for sale by
IndyMac.
Financial instruments of the Company that tend to decrease in value as interest
rates increase, and increase in value as interest rates decline, include fixed
rate subordinated securities, principal-only securities and inverse-floater
securities. Similar to the securitized master servicing fees, the principal-
only and inverse floater securities carry an implicit yield based upon estimates
of future cash flows on an underlying pool of mortgage loans. However, the
principal-only and inverse-floater securities generally sell at a discount,
similar to a "zero-coupon" bond, in order to yield an estimated return. If
interest rates increase and prepayments slow in comparison to assumed prepayment
rates, the repayment rate of the principal-only and inverse-floater security
would tend to lengthen and thus reduce the implicit yield on the security.
Conversely, if interest rates decrease, the rate of prepayment on the underlying
pool of loans would tend to increase, resulting in a more rapid rate of
repayment on the principal-only security and inverse floater security and
therefore a higher implicit yield. To a lesser extent, any mortgage securities
held by the Company and supported by adjustable rate mortgage loans may decline
in value as interest rates increase, if the timing or absolute level of interest
rate adjustments on the underlying loans do not correspond to applicable
increases in market interest rates. As of September 30, 1997, INMC and IndyMac
on a combined basis held $659 million of fixed and adjustable rate subordinated
securities, principal-only and inverse floater securities. Of the $659 million
aggregate amount, $279 million of such securities are classified as trading
securities.
In addition to the inherent risks in seeking to manage fluctuations in the value
of certain assets due to interest rate changes, there may be timing differences
in the recognition of the offsetting effects of gains and losses which are
attributable to specific instruments, depending upon whether a security is
classified as trading or available for sale. The unrealized holding gains and
losses on trading securities are recognized in earnings of the period for the
reporting entity. By comparison, the unrealized holding gains and losses of
securities available for sale are excluded from earnings of the reporting entity
and included as a separate component of shareholders' equity. Therefore, to the
extent that the Company is required under GAAP to classify certain securities as
trading, such identification and the resulting accounting could cause
additional volatility in the Company's future reported earnings in periods where
interest rates fluctuate.
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 or
17
<PAGE>
manufactured housing loans, thus decreasing the volume of loans available to be
purchased through the Company's mortgage conduit operations, or financed through
the Company's construction and warehouse 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 mortgage payments.
The Company's liquidity position and net interest income could also be adversely
impacted by significant interest rate fluctuations. Each of the Company's
collateralized borrowing facilities described above in Liquidity and Capital
Resources permit the lender 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 the
event of such a decrease in collateral values, it could be necessary for the
Company to provide additional funds and/or pledge additional assets to maintain
financing for its holdings that have not been financed to maturity through the
issuance of CMOs or other longer-term debt securities. 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.
The Company is subject to interest rate risk to a lesser degree in connection
with the operations of CLCA and the Company's warehouse lending operations
since these loans generally have a floating rate of interest.
18
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
--------
10.1 Employment Agreement dated September 1, 1997 between IndyMac,
Inc. and S. Blair Abernathy.
27 Financial Data Schedule
(b) Reports on Form 8-K.
--------------------
None
19
<PAGE>
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 14, 1997.
INMC MORTGAGE HOLDINGS, INC.
By: /s/ Michael W. Perry
------------------------------------------
Michael W. Perry
President and Chief Operating Officer
By: /s/ James P. Gross
------------------------------------------
James P. Gross
Senior Vice President and Chief Financial
Officer
20
<PAGE>
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") has been executed as of September 1,
1997 by and between IndyMac, Inc. ("Employer") and S. Blair Abernathy
("Officer").
WITNESSETH:
WHEREAS, Employer desires to obtain the benefit of continued services of Officer
and Officer desires to continue to render services to Employer and its
affiliates.
WHEREAS, Employer and Officer desire to set forth the terms and conditions of
Officer's employment with Employer and its affiliates under this Agreement.
NOW, THEREFORE, in consideration of the mutual promises and covenants herein
contained, the parties hereto agree as follows:
1. TERM. Employer agrees to employ Officer and Officer agrees to serve Employer
and its affiliates, in accordance with the terms hereof, for a term beginning
on the date first written above and ending on December 31, 2000, unless
earlier terminated in accordance with the provisions hereof.
2. POSITION, DUTIES AND RESPONSIBILITIES. Employer and Officer hereby agree
that, subject to the provisions of this Agreement, Employer will employ
Officer and Officer will serve Employer as Senior Vice President and Chief
Investment Officer of INMC Mortgage Holdings, Inc. ("Holdings") and as
Executive Vice President and Chief Investment Officer of Employer. Employer
agrees that Officer's duties hereunder shall be the usual and customary
duties of such office and such further duties shall not be inconsistent with
the provisions of applicable law. Officer shall have such executive power
and authority as shall reasonably be required to enable him to discharge his
duties in the offices which he may hold. All compensation paid to Officer by
Employer or any of its affiliates shall be aggregated in determining whether
Officer has received the benefits provided for herein, but without prejudice
to the allocation of costs among the entities to which Officer renders
services hereunder.
3. SCOPE OF THIS AGREEMENT AND OUTSIDE AFFILIATIONS. During the term of this
Agreement, Officer shall devote his full business time and energy, except as
expressly provided below, to the business, affairs and interests of Employer
and its affiliates, and matters related thereto, and shall use his best
efforts and abilities to promote their respective interests. Officer agrees
that he will diligently endeavor to promote the business, affairs and
interests of Employer and its affiliates and perform services contemplated
hereby, in accordance with the policies established by the Board, which
policies shall be consistent with this Agreement. Officer agrees to serve
without additional remuneration as an officer of Holdings or of one or more
(direct or indirect) subsidiaries or affiliates of Employer or Holdings as
the Board may from
<PAGE>
time to time request, subject to appropriate authorization by the affiliate or
subsidiary involved and any limitation under applicable law. Officer's failure
to discharge an order or perform a function because Officer reasonably and in
good faith believes such would violate a law or regulation or be dishonest
shall not be deemed a breach by him of his obligations or duties pursuant to
any of the provisions of this Agreement, including without limitation pursuant
to Section 5(c) hereof.
During the course of Officer's employment as a full-time officer hereunder,
Officer shall not, without the consent of the Board, compete, directly or
indirectly, with Employer in the business then conducted by Employer or any of
its affiliates.
Officer may make and manage personal business investments of his choice and
serve in any capacity with any civic, educational or charitable organization,
or any governmental entity or trade association, without seeking or obtaining
approval by the Board, provided such activities and services do not materially
interfere or conflict with the performance of his duties hereunder.
4. COMPENSATION AND BENEFITS.
a. BASE SALARY. Employer shall pay to Officer a base salary in respect of the
fiscal year of Employer (a "Fiscal Year") ending December 31, 1997 at the
annual rate of $195,000 (the "Annual Rate"). In respect of the Fiscal
Years ending in 1998, 1999, and 2000, the Compensation Committee of the
Board (the "Compensation Committee) may, based upon the recommendation of
Michael W. Perry and the performance of Officer and Employer, increase the
Annual Rate. While any such increase shall be at the discretion of the
Compensation Committee, it is anticipated that, for any Fiscal Year, an
earnings per share increase for Holdings of 15% would result in an increase
in the Annual Rate of 10%, but could exceed such percentage if warranted.
b. INCENTIVE COMPENSATION. Employer shall pay to Officer for each of the
Fiscal Years ending during the term of this Agreement an incentive
compensation award in an amount determined pursuant to the Annual Incentive
Plan attached hereto as Appendix A. The terms of the Annual Incentive Plan
shall be determined at the beginning of each Fiscal year during the term of
this Contract, as mutually agreed upon by Employer and Officer. The
incentive compensation award payable to Officer for any Fiscal Year shall
be paid no later than thirty (30) days after completion of the applicable
audited financial statements for such Fiscal Year. In the event of a
material one-time charge against earnings by Holdings associated with
Holdings' buyout of Countrywide Asset Management Corporation, as manager of
Holdings, the earnings of Holdings shall not be decreased for such charge
in the calculation of EPS in connection with the determination of Officer's
base and incentive compensation hereunder. In the event of a material one-
time charge against earnings by Holdings associated with increasing
Holdings' loan loss reserves, the earnings of Holdings shall not be
decreased for such charge in the calculation of EPS in connection with the
determination of Officer's base and incentive compensation hereunder.
<PAGE>
c. STOCK OPTIONS. Beginning with the 1997 Fiscal Year and in respect of each
of the following Fiscal Years during the term of this Agreement, Holdings
may grant to Officer stock options for such number of shares of Holdings'
common stock as the Compensation Committee in its sole discretion
determines, taking into account Officer's and Holdings' performance and the
competitive practices then prevailing regarding the granting of stock
options. Subject to the foregoing, it is anticipated that the number of
shares in respect of each annual stock option grant shall be in accordance
with the number of shares granted to senior executives of IndyMac. The
stock options described in this Section 4(c) in respect of a Fiscal Year
shall be granted at the same time as Holdings grants stock options to its
other senior executives in respect of such Fiscal Year.
All stock options granted in accordance with this Section 4(c): (i) shall
be granted pursuant to Holdings' current stock option plan, or such other
stock option plan or plans as may be or come into effect during the term of
this Agreement, (ii) shall have a per share exercise price equal to the
fair market value (as defined in the current Plan or such other plan or
plans) of the common stock at the time of grant, (iii) shall become
exercisable in three equal installments on each of the first three
anniversaries of the date of grant, (iv) shall become immediately and fully
exercisable in the event that Officer's employment is terminated due to
death or Disability or by Employer other than for Cause (as defined in
Section 5(c)), or in the event that this Agreement terminates according to
its terms (as provided in Section 5(g)), and (v) shall be subject to such
other reasonable and consistent terms and conditions as may be determined
by the Compensation Committee and set forth in the agreement evidencing the
award.
d. ADDITIONAL BENEFITS. Officer shall also be entitled to all rights and
benefits for which he is otherwise eligible under any bonus plan, stock
purchase plan, participation or extra compensation plan, executive
compensation plan, pension plan, profit-sharing plan, life and medical
insurance policy, or other plans or benefits, which Employer or its
subsidiaries may provide for him, or provided he is eligible to participate
therein, for senior officers generally or for employees generally, during
the term of this Agreement (collectively, "Additional Benefits"). Officer
shall also be entitled to four (4) weeks of vacation each Fiscal Year,
subject to all applicable policies of Employer relating to vacation time.
This Agreement shall not affect the provision of any other compensation,
retirement or other benefit program or plan of Employer. If Officer's
employment is terminated hereunder, pursuant to Section 5(a), 5(b) or 5(d),
Employer shall continue for the period specified in Section 5(a), 5(b) or
5(d) hereof, to provide benefits substantially equivalent to Additional
Benefits (other than qualified pension or profit sharing plan benefits and
option, equity or stock appreciation or other incentive plan benefits as
distinguished from health, disability and welfare type benefits) on behalf
of Officer and his dependents and beneficiaries which were being provided
to them immediately prior to Officer's Termination Date, but only to the
extent that Officer is not entitled to comparable benefits from other
employment.
<PAGE>
e. DEFERRAL OF AMOUNTS PAYABLE HEREUNDER. In the event Officer should desire
to defer receipt of any cash payments to which he would otherwise be
entitled hereunder, he may present such a written request to the
Compensation Committee which, in its sole discretion, may enter into a
separate deferred compensation agreement with Officer.
f. CERTAIN PERQUISITES.
(i) CLUB MEMBERSHIPS. Employer shall pay for the initial membership fee
(not to exceed $20,000), monthly dues and any business related charges for
Officer's membership in a country club, subject to the provisions of that
certain Note Agreement, attached hereto as EXHIBIT I, and to be executed at
the time that Officer requests payment of the initial membership fee.
5. TERMINATION. The compensation and benefits provided for herein and the
employment of Officer by Employer shall be terminated only as provided for
below in this Section 5:
a. DISABILITY. In the event that Officer shall fail, because of illness,
injury or similar incapacity ("Disability"), to render for four (4)
consecutive calendar months, or for shorter periods aggregating eighty (80)
or more business days in any twelve (12) month period, services
contemplated by this Agreement, Officer's full-time employment hereunder
may be terminated, by written Notice of Termination from Employer to
Officer; and thereafter, Employer shall continue, from the Termination Date
until Officer's death or December 31, 2000, whichever first occurs (the
"Disability Payment Period"), (i) to pay compensation to Officer, in the
same manner as in effect immediately prior to the Termination Date, in an
amount equal to (1) fifty percent (50%) of the then existing base salary
payable immediately prior to the termination, minus (2) the amount of any
cash payments due to him under the terms of Employer's disability insurance
or other disability benefit plans or Employer's tax-qualified Defined
Benefit Pension Plan, and any compensation he may receive pursuant to any
other employment, and (ii) to provide during the Disability Payment period
the benefits specified in the last sentence of Section 4(d) hereof.
The determination of Disability shall be made only after 30 days notice to
Officer and only if Officer has not returned to performance of his duties
during such 30-day period. In order to determine Disability, both Employer
and Officer shall have the right to provide medical evidence to support
their respective positions, with the ultimate decision regarding Disability
to be made by a majority of Employer's disinterested directors.
b. DEATH. In the event that Officer shall die during the term of this
Agreement, Employer shall pay Officer's base salary for a period of twelve
(12) months following the date of Officer's death and in the manner
otherwise payable hereunder, to such person or persons as Officer shall
have directed in writing or, in the absence of a designation, to his estate
(the "Beneficiary"). Employer shall also (1) pay to such Beneficiary (x)
an amount equal to the incentive compensation that would have been payable
to Officer pursuant to Section 4(b) in respect of the Fiscal Year in which
the Officer's death occurs multiplied by a fraction, the numerator of which
is the number of days in such Fiscal Year through
<PAGE>
the date of Officer's death and the denominator of which is 365 and (y) any
unpaid incentive compensation payable to Officer pursuant to Section 4(b)
in respect of the Fiscal Year immediately preceding the Fiscal Year in
which his death occurs and (2) provide during the twelve-month period
following the date of Officer's death the benefits specified in the last
sentence of Section 4(d) hereof. If Officer's death occurs while he is
receiving payments for Disability under Section 5(a) above, such payments
shall cease and the Beneficiary shall be entitled to the payments and
benefits under this Subsection 5(b), which shall continue for a period of
twelve months thereafter at the full rate of base salary in effect
immediately prior to the Disability. This Agreement in all other respects
will terminate upon the death of Officer; provided, however, that (i) the
termination of the Agreement shall not affect Officer's entitlement to all
other benefits in which he has become vested or which are otherwise payable
in respect of periods ending prior to its termination, and (ii) to the
extent not otherwise vested, all outstanding stock options granted to
Officer pursuant to Section 4(c) will vest upon his death.
c. CAUSE. Employer may terminate Officer's employment under this Agreement for
"Cause." A termination for Cause is a termination by reason of (i) a
material breach of this Agreement by Officer (other than as a result of
incapacity due to physical or mental illness) which is committed in bad
faith or without reasonable belief that such breach is in the best
interests of Employer and which is not remedied within a reasonable period
of time after receipt of written notice from Employer specifying such
breach, or (ii) Officer's conviction by a court of competent jurisdiction
of a felony, or (ii) entry of an order duly issued by any federal or state
regulatory agency having jurisdiction in the matter removing Officer from
office of Employer or its affiliates or permanently prohibiting him from
participation in the conduct of the affairs of Employer of any of its
affiliates. If Officer shall be convicted of a felony or shall be removed
from office and/or temporarily prohibited from participating in the conduct
of Employer's or any of its affiliates' affairs by any federal or state
regulatory authority having jurisdiction in the matter, Employer's
obligations under Sections 4(a), 4(b), 4(c), and 4(f) hereof shall be
automatically suspended provided, however, that if the charges resulting in
such removal or prohibition are finally dismissed or if a final judgment on
the merits of such charges is issued in favor of Officer, or if the
conviction is overturned on appeal, then Officer shall be reinstated in
full with back pay for the removal period plus accrued interest at the rate
then payable on judgments. During the period that Employer's obligations
under Sections 4(a), 4(b), 4(c), and 4(f) hereof are suspended, Officer
shall continue to be entitled to receive Additional Benefits under Section
4(d) until the conviction of the felony or removal from office has become
final and non-appealable. When the conviction of the felony or removal
from office has become final and non-appealable, all of Employer's
obligations hereunder shall terminate; provided, however, that the
termination of Officer's employment pursuant to this Section 5(c) shall not
affect Officer's entitlement to all benefits in which he has become vested
or which are otherwise payable in respect of periods ending prior to his
termination of employment. Anything herein to the contrary
notwithstanding, termination for Cause shall not include termination by
reason of Officer's job performance or a job performance rating given to
Officer for his job performance or the financial performance of Holdings or
any affiliated company.
<PAGE>
d. SEVERANCE. If during the term of this Agreement, Officer's employment
shall be terminated by Employer other than for Cause, then Employer shall
(1) pay Officer in a single payment as soon as practicable after the
Termination Date, but in no event later than thirty (30) days thereafter,
(A) an amount in cash equal to one year of Officer's base salary at the
Annual Rate at the Termination Date and (B) an amount equal to the
incentive compensation paid or payable to Officer pursuant to Section 4(b)
in respect of the Fiscal Year immediately preceding the Fiscal Year in
which Officer's Termination Date occurs (the "Bonus Rate"); provided,
however, that in the event the first anniversary of the Termination Date
occurs on a date prior to the end of a Fiscal Year, Employer shall also pay
Officer an amount equal to the product of (x) the Bonus Rate and (y) a
fraction, the numerator of which is (I) the number of days elapsed since
the end of the immediately preceding Fiscal Year through the end of the
Severance Period and (II) the denominator of which is 365, and (2) until
the first anniversary of the Termination Date, provide the benefits
specified in the last sentence of Section 4(d) hereof. Employer shall also
pay in a single payment as soon as practicable after the Termination Date,
but in no event later than thirty (30) days thereafter, any unpaid
incentive compensation payable to Officer pursuant to Section 4(b) in
respect of the Fiscal Year immediately preceding the Fiscal Year in which
Officer's Termination Date occurs.
e. RESIGNATION. If during the term of this Agreement, Officer shall resign
voluntarily, all of his rights to payment or benefits hereunder shall
immediately terminate; provided, however, that the termination of Officer's
employment pursuant to this Section 5(e) shall not affect Officer's
entitlement to all benefits in which he has become vested or which are
otherwise payable in respect of periods ending prior to his termination of
employment.
f. NOTICE OF TERMINATION. Any purported termination by Employer or by Officer
shall be communicated by a written Notice of Termination to the other party
hereto which indicates the specific termination provision in this
Agreement, if any, relied upon and which sets forth in reasonable detail
the facts and circumstances, if any, claimed to provide a basis for
termination of Officer's employment under the provision so indicated. For
purposes of this Agreement, no such purported termination shall be
effective without such Notice of Termination. The "Termination Date" shall
mean the date specified in the Notice of Termination, which shall be no
less than 30 or more than 60 days from the date of the Notice of
Termination. Notwithstanding any other provision of this Agreement, in the
event of any termination of Officer's employment hereunder for any reason,
Employer shall pay Officer his full base salary through the Termination
Date, plus any Additional Benefits which have been earned or become
payable, but which have not yet been paid as of such Termination Date.
g. NON-RENEWAL OF AGREEMENT. If Employer does not intend to renew this
Agreement, Employer shall provide written notice to Officer of such
intention, at least 90 days prior to the termination date of this
Agreement. If Employer fails to provide Officer with such notice, Officer
shall have the option of renewing the terms of the Agreement for a one year
period. In the event that this Agreement terminates according to its terms
on
<PAGE>
December 31, 2000, and is not renewed on terms mutually acceptable to
Employer and Officer, such termination of Officer's employment pursuant to
this Section 5(g) shall not affect Officer's entitlement to all benefits in
which he has become vested or which are otherwise payable with respect to
periods ending on or prior to his termination of employment, provided that,
to the extent not otherwise vested, all outstanding stock options granted
to Officer pursuant to Section 4(c) shall thereupon vest.
6. REIMBURSEMENT OF BUSINESS EXPENSES. During the term of this Agreement,
Employer shall reimburse Officer promptly for all business expenditures to
the extent that such expenditures meet the requirements of the Code for
deductibility by Employer for federal income tax purposes or are otherwise in
compliance with the rules and policies of Employer and are substantiated by
Officer as required by the Internal Revenue Service and rules and policies of
Employer.
7. INDEMNITY. To the extent permitted by applicable law, the Certificate of
Incorporation and the By-Laws of Employer (as from time to time in effect)
and any indemnity agreements entered into from time to time between Employer
and Officer, Employer shall indemnify Officer and hold him harmless for any
acts or decisions made by him in good faith while performing services for
Employer, and shall use reasonable efforts to obtain coverage for him under
liability insurance policies now in force or hereafter obtained during the
term of this Agreement covering the other officers or directors of Employer.
8. MISCELLANEOUS.
a. SUCCESSION. This Agreement shall inure to the benefit of and shall be
binding upon Employer, its successors and assigns, but without the prior
written consent of Officer, this Agreement may not be assigned other than
in connection with a merger or sale of substantially all the assets of
Employer or similar transaction. Notwithstanding the foregoing, Employer
may assign, whether by assignment agreement, merger, operation of law or
otherwise, this Agreement to Holdings or Indy Mac, or to any successor of
either of them, subject to such assignee's express assumption of all
obligations of Employer hereunder, and Officer hereby consents to any such
assignment. The failure of any successor to or assignee of the Employer's
business and/or assets in such transaction to expressly assume all
obligations of Employer hereunder shall be deemed a material breach of this
Agreement by Employer.
The obligations and duties of Officer hereby shall be personal and not
assignable.
b. NOTICES. Any notices provided for in this Agreement shall be sent to
Employer at its corporate headquarters, Attention: General
Counsel/Secretary, with a copy to the Chairman of the Compensation
Committee at the same address, or to such other address as Employer may
from time to time in writing designate, and to Officer at such address as
he may from time to time in writing designate (or his business address of
record in the absence of such designation). All notices shall be deemed to
have been given two (2) business days after they have been deposited as
certified mail, return receipt requested,
<PAGE>
postage paid and properly addressed to the designated address of the party
to receive the notices.
c. ENTIRE AGREEMENT This instrument contains the entire agreement of the
parties relating to the subject matter hereof, and it replaces and
supersedes any prior agreements between the parties relating to said
subject matter. No modifications or amendments of this Agreement shall be
valid unless made in writing and signed by the parties hereto.
d. WAIVER. The waiver of the breach of any term or of any condition of this
Agreement shall not be deemed to constitute the waiver of any other breach
of the same or any other term or condition.
e. CALIFORNIA LAW. This Agreement shall be construed and interpreted in
accordance with the laws of California.
f. ATTORNEYS' FEES IN ACTION ON CONTRACT. If any litigation shall occur
between the Officer and Employer, which litigation arises out of or as a
result of this Agreement or the acts of the parties hereto pursuant to this
Agreement, or which seeks an interpretation of this Agreement, the
prevailing party in such litigation, in addition to any other judgment or
award, shall be entitled to receive such sums as the court hearing the
matter shall find to be reasonable as and for the attorneys' fees of the
prevailing party.
g. CONFIDENTIALITY. Officer agrees that he will not divulge or otherwise
disclose, directly or indirectly, any trade secret or other confidential
information concerning the business or policies of Employer or any of its
subsidiaries which he may have learned as a result of his employment during
the term of this Agreement or prior thereto as an employee, officer or
director of or consultant to Employer or any of its subsidiaries, except to
the extent such use or disclosure is (i) necessary or appropriate to the
performance of this Agreement and in furtherance of Employer's best
interests, (ii) required by applicable law or in response to a lawful
inquiry from a governmental or regulatory authority, (iii) lawfully
obtainable from other sources, or (iv) authorized by Employer. The
provisions of this subsection shall survive the expiration, suspension or
termination, for any reason, of this Agreement.
h. REMEDIES OF EMPLOYER. Officer acknowledges that the services he is
obligated to render under the provisions of this Agreement are of a
special, unique, unusual, extraordinary and intellectual character, which
gives this Agreement peculiar value to Employer. The loss of these
services cannot be reasonably or adequately compensated in damages in an
action at law and it would be difficult (if not impossible) to replace
these services. By reason thereof, Officer agrees and consents that if he
violates any of the material provisions of this Agreement, Employer, in
addition to any other rights and remedies available under this Agreement or
under applicable law, shall be entitled during the remainder of the term to
seek injunctive relief, from a tribunal of competent jurisdiction,
restraining Officer from committing or continuing any violation of this
Agreement.
<PAGE>
i. SEVERABILITY. If any provision of this Agreement is held invalid or
unenforceable, the remainder of this Agreement shall nevertheless remain in
full force and effect, and if any provision is held invalid or
unenforceable with respect to particular circumstances, it shall
nevertheless remain in full force and effect in all other circumstances.
j. NO OBLIGATION TO MITIGATE. Officer shall not be required to mitigate the
amount of any payment provided for in this Agreement by seeking other
employment or otherwise and, except as provided in Section 5(a)(i)(2)
hereof, no payment hereunder shall be offset or reduced by the amount of
any compensation or benefits provided to Officer in any subsequent
employment.
k. COVENANT NOT TO COMPETE
(i) IN GENERAL. Officer agrees that while he is employed by Employer during
the term of this Agreement and for a period of one year after the
termination of such employment for whatever reason other than any
termination by Employer, either for Cause or other than for Cause (the
"Non-Compete Period"), he shall not, unless Officer shall have received
the prior written consent of Employer within North America:
(A) engage in any business, whether as an employee, consultant,
partner, principal, agent, representative or stockholder (other
than as a stockholder of less than a one percent (1%) equity
interest) or in any other corporate or representative capacity with
any other business whether in corporate, proprietorship, or
partnership form or otherwise, where such business is engaged in
any activity which competes with the business of Employer (or its
subsidiaries or affiliates) as conducted on the date Officer's
employment terminated or which will compete with any proposed
business activity of Employer (or its subsidiaries or affiliates)
in the planning stage on such date;
(B) solicit business from, or perform services for, any company or
other business entity which at any time during the two-year period
immediately preceding Officer's termination of employment with
Employer was a client of Employer (or its subsidiaries or
affiliates) (including without limitation any lessee, vendor or
supplier); or
(C) offer, or cause to be offered, employment, either on a full-time,
part-time or consulting basis, to any person who was employed by
Employer (or its subsidiaries or affiliates) on the date Officer's
employment terminated.
(ii) CONSIDERATION. The consideration for the foregoing covenant not to
compete, the sufficiency of which is hereby acknowledged, is
Employer's agreement to continue to employ Officer and provide
compensation and benefits pursuant to this Agreement, including but
not limited to Section 5(d).
<PAGE>
(iii) EQUITABLE RELIEF AND OTHER REMEDIES. Officer acknowledges and agrees
that Employer's remedies at law for a breach or threatened breach of
any of the provisions of this Section would be inadequate and, in
recognition of this fact, Officer agrees that, in the event of such a
breach or threatened breach, in addition to any remedies at law,
Employer, without posting any bond, shall be entitled to obtain
equitable relief in the form of specific performance, a temporary
restraining order, a temporary or permanent injunction or any other
equitable remedy which may then be available.
(iv) REFORMATION. If the foregoing covenant not to compete would otherwise
be determined invalid or unenforceable by a court of competent
jurisdiction, such court shall exercise its discretion in reforming
the provisions of this Section to the end that Officer be subject to
a covenant not to compete, reasonable under the circumstances,
enforceable by Employer.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
EMPLOYER
By:___________________________
Name:_________________________
Title:________________________
Officer:
______________________________
in his individual capacity
<PAGE>
APPENDIX A
ANNUAL INCENTIVE PLAN
Annual Incentive Award:
- ----------------------
Officer shall be eligible for an Annual Incentive Award which shall be
comprised of the following three components:
1. Earnings Per Share Growth
2. Meeting Specific Goals and Objectives
3. Discretionary/Subjective
These components shall be measured as follows:
1. EARNINGS PER SHARE GROWTH:
-------------------------
<TABLE>
<CAPTION>
1997 1998 1999 2000
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Earnings Per Share Target $ 1.74* $ 2.00 $ 2.30 $ 2.65
- --------------------------------------------------------------------------------------------------------
Target Incentive Award $100,000 $120,000 $144,000 $172,800
- --------------------------------------------------------------------------------------------------------
If Earnings Per Share $1,000 for each $1,250 for each $1,500 for each $1,750 for each
exceed target, incentive $.01 in excess $.01 in excess $.01 in excess $.01 in excess
award shall be increased of target of target of target of target
by: earnings per earnings per earnings per earnings per
share share share share
- --------------------------------------------------------------------------------------------------------
If Earnings Per Share do $2,000 for each $2,000 for each $2,000 for each $2,000 for each
not meet target, $.01 below $.01 below $.01 below $.01 below
incentive award shall be target earnings target earnings target earnings target earnings
decreased by: per share per share per share per share
- --------------------------------------------------------------------------------------------------------
</TABLE>
* Please refer to Section 4.b. regarding the non-applicability of certain one-
time charges in 1997.
<PAGE>
2. GOALS AND OBJECTIVES FOR SECONDARY MARKETING, HEDGING AND MANAGEMENT OF
-----------------------------------------------------------------------
INVESTMENT FOR 1997:
-------------------
<TABLE>
<CAPTION>
Maximum Potential Performance Percentage:
Discretionary Incentive Excellent/Good/Satisfactory/Poor
Goal/Objective Amount ----
- ------------- ------
<S> <C> <C>
a. Increase investment portfolio from $15,000 110% /100% / 50% / 0%
$1.9 billion to $3.5 billion by 12/31/97.
b. Increase net interest income from $15,000 110% /100% / 50% / 0%
$94.5 million in 1996 to $120 million in
1997.
c. Purchase prime and subprime loan $15,000 110% /100% / 50% / 0%
volume of $4.84 billion in 1997
compared to $4.1 billion in 1996.
d. Generate gain on sale of prime, $15,000 110% / 110% / 50% / 0%
subprime, and manufactured housing of $60
million in 1997 or 1.00% of loans sold.
e. Monitor and improve pipeline hedging $15,000 110% / 100% / 50% / 0%
and asset liability management.
Total discretionary incentive amount: $75,000 (max. $82,500)
- ------------------------------------
</TABLE>
The Potential Discretionary Incentive Award for Goals and Objectives for
Secondary Marketing, Hedging and Management of Investment shall be calculated by
(1) multiplying (x) the Performance Percentage for each Goal/Objective times (y)
-----
the Maximum Potential Discretionary Incentive Amount for such Goal/Objective,
and (2) adding all sums determined pursuant to the preceding clause (1) for each
Goal/Objective. The Maximum Potential Discretionary Incentive Award for Goals
and Objectives for Secondary Marketing, Hedging and Management of Investment for
1997 shall be $82,500.
The Maximum Potential Discretionary Incentive Award for Goals and Objectives
for Secondary Marketing, Hedging and Management of Investment for 1998 shall be
$90,000, for 1999 shall be $108,000 and for 2000 shall be $129,600. The Goals
and Objectives for 1998, 1999 and 2000 and the Incentive Award amount
applicable to each goal or objective shall be determined by January 31 of each
respective Fiscal Year, as mutually agreed upon by Employer and Officer.
<PAGE>
3. SUBJECTIVE:
----------
Officer shall be eligible for an additional Subjective Incentive Award. Whether
a Subjective Incentive Award shall be granted and the amount of any such award
shall be determined by the CEO and President of IndyMac, in his sole and
absolute discretion. The fact that a Subjective Incentive Award is granted in
any year is not a guarantee that such award shall be granted in following years.
The maximum Subjective Incentive Award that Officer shall be eligible for is as
follows:
1997: up to $30,000
1998: up to $36,000
1999: up to $43,200
2000: up to $51,840
TOTAL ANNUAL INCENTIVE AWARD
- ----------------------------
The total Annual Incentive Award shall be calculated by adding the amounts
determined pursuant to Paragraphs 1, 2 and 3 above.
<PAGE>
EXHIBIT I
NOTE AGREEMENT
This NOTE AGREEMENT is made and entered into as of the _______ day of
_____________, 199_ by and between IndyMac, Inc. ("IndyMac") and S. Blair
Abernathy with reference to the following facts:
A. Abernathy desires to become a member of ______________________ (the
"Club"); and
B. IndyMac desires to finance the membership initiation fees necessary for
Abernathy to join the Club;
NOW, THEREFORE, in consideration of the promises and agreements set forth
below, the parties hereto do hereby agree as follows:
1. IndyMac shall reimburse Abernathy on or before _____________, 199_,
the full amount of the Club's membership initiation fees amounting to
____________________________ dollars ($_________) (the "Membership Fee").
2. IndyMac agrees that the Club membership may be issued in Abernathy's
name, and IndyMac shall have no security interest in or to the Club
membership.
3. For so long as Abernathy remains a full time employee of IndyMac or
any affiliate of IndyMac, Abernathy shall have no obligation to repay the
Membership Fee. Within thirty (30) days of (a) the termination of
Abernathy's Club membership for any reason including, without limitation,
voluntary or involuntary termination, or (b) the termination of
Abernathy's employment by IndyMac for any reason including, without
limitation voluntary termination, involuntary termination or termination
by reason of death or disability, Abernathy or his successors and assigns,
as applicable, shall pay to IndyMac the greater of (i) the Membership
Amount or (ii) the fair market value of the Club membership less any
amount that would be treated as a commission or other amount payable to
the Club, all as determined in accordance with the rules and regulations
of the Club.
4. For so long as Abernathy remains a full time employee of IndyMac or
any affiliate of IndyMac, IndyMac shall reimburse Abernathy for all
monthly Club dues as well as for any company-related charges in accordance
with IndyMac's normal policy regarding expense reimbursement.
<PAGE>
5. If any payment required in accordance with Paragraph 3 above is
not paid when due (the "Overdue Membership Fee"), Abernathy promises to
pay interest of 5% of the Overdue Membership Fee so overdue and such rate
of interest shall continue to accrue on such Overdue Membership Fee until
the full amount or the Overdue Membership Fee plus all interest on such
amount is paid in full. Any interest amount not paid when due shall bear
like interest as the Overdue Membership Fees.
6. If IndyMac is required to enforce its rights under this Note
Agreement through collection efforts, Abernathy shall pay all costs and
expenses of IndyMac, including reasonable attorney's fees, whether or not
a suit is brought.
7. Abernathy hereby expressly waives diligence, demand, protest and
any type of notice.
8. This Note Agreement shall be governed and construed in accordance
with the laws of the State of California, without reference to its
conflict of laws principles.
IN WITNESS WHRREOF, the undersigned have executed this Note Agreement as
of the day and year first above written.
IndyMac, Inc. S. Blair Abernathy
By:______________________ By:___________________________
Name:_________________________
Title:________________________
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1997
<CASH> 14,952
<SECURITIES> 455,387
<RECEIVABLES> 4,384,609
<ALLOWANCES> (24,248)
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 4,830,700
<CURRENT-LIABILITIES> 26,249
<BONDS> 4,175,485
0
0
<COMMON> 599
<OTHER-SE> 628,367
<TOTAL-LIABILITY-AND-EQUITY> 4,830,700
<SALES> 0
<TOTAL-REVENUES> 39,193<F1>
<CGS> 0
<TOTAL-COSTS> 81,769
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 6,300
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (48,876)
<INCOME-TAX> 0
<INCOME-CONTINUING> (48,876)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (48,876)
<EPS-PRIMARY> (0.83)
<EPS-DILUTED> (0.83)
<FN>
<F1>
INCLUDES 64,287 OF INTEREST EXPENSE RELATED TO MORTGAGE LOAN ACTIVITIES.
</FN>
</TABLE>
