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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
______________
FORM 10-K
FOR FISCAL YEAR ENDED DECEMBER 31, 1997
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1997
OR
[_] TRANSITION REPORT PURSUANT TO THE SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from to
Commission file number: 1-8972
INMC MORTGAGE HOLDINGS, INC.
(DBA INDYMAC MORTGAGE HOLDINGS, INC.)
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 95-3983415
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION) 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
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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COMMON STOCK, $.01 PAR VALUE NEW YORK STOCK EXCHANGE
Securities registered pursuant to Section 12(g) of the Act: NONE
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
filing requirements for the past 90 days. YES X NO ___
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [_].
As of March 23, 1998 there were 65,082,991 shares of INMC Mortgage
Holdings, Inc. Common Stock, $.01 par value, outstanding. Based on the closing
price for shares of Common Stock on that date, the aggregate market value of
Common Stock held by non-affiliates of the registrant was approximately
$1,540,256,840. For the purposes of the foregoing calculation only, in addition
to affiliated companies, all directors and executive officers of the registrant
have been deemed affiliates.
DOCUMENTS INCORPORATED BY REFERENCE
PROXY STATEMENT FOR THE 1998 ANNUAL MEETING---PART III
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INMC MORTGAGE HOLDINGS, INC.
(dba , IndyMac Mortgage Holdings, Inc.)
1997 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
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Page
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PART I
<S> <C>
ITEM 1. BUSINESS...................................................... 1
ITEM 2. PROPERTIES.................................................... 14
ITEM 3. LEGAL PROCEEDINGS............................................. 14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........... 14
PART II
ITEM 5. MARKET FOR THE COMPANY'S STOCK
AND RELATED SECURITY HOLDER MATTERS........................ 14
ITEM 6. SELECTED FINANCIAL DATA....................................... 15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS........................ 16
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................... 27
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.......... 27
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............ 28
ITEM 11. EXECUTIVE COMPENSATION........................................ 28
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT...................................... 28
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................ 28
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K........................................ 29
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PART I
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ITEM 1. BUSINESS/1/
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GENERAL
INMC Mortgage Holdings, Inc., dba IndyMac Mortgage Holdings, Inc. ("IndyMac
REIT"), was incorporated in the State of Maryland on July 16, 1985 and
reincorporated in the State of Delaware on March 6, 1987. INMC Mortgage
Holdings, Inc. commenced using the dba IndyMac Mortgage Holdings, Inc. ("IndyMac
REIT"), effective January 1, 1998. IndyMac REIT will seek approval from its
shareholders to formally change its corporate name to IndyMac Mortgage Holdings,
Inc. at the annual shareholders meeting scheduled for May 19, 1998. References
to "IndyMac REIT" mean either the parent company alone or the parent company and
the entities consolidated for financial reporting purposes, while references to
the "Company" mean the parent company, its consolidated subsidiaries and
IndyMac, Inc. ("IndyMac Operating") and its subsidiary, which are not
consolidated with IndyMac REIT for financial reporting or tax purposes. All of
the outstanding voting common stock and 1% of the economic interest of IndyMac
Operating is owned by Countrywide Home Loans, Inc. ("CHL"), which is a
subsidiary of Countrywide Credit Industries, Inc. ("CCR"). All of the
outstanding non-voting preferred stock and 99% of the economic interest of
IndyMac Operating is owned by IndyMac REIT. Accordingly, IndyMac Operating is
accounted for under a method similar to the equity method because IndyMac REIT
has the ability to exercise influence over the financial and operating policies
of IndyMac Operating through its ownership of the preferred stock and other
contracts. IndyMac REIT has elected to be taxed as a real estate investment
trust ("REIT") under the Internal Revenue Code of 1986, as amended (the "Code").
As a result of this election, IndyMac REIT will not, with certain limited
exceptions, be taxed at the corporate level on the net income distributed to
IndyMac REIT's shareholders.
The Company conducts a diversified mortgage lending business, including the
origination and purchase of and investment in non-conforming and jumbo
residential loans, subprime loans, manufactured housing loans, home improvement
loans, mortgage-backed securities and other mortgage-related assets. The Company
conducts third party lending and mortgage conduit activities through IndyMac
Operating, which is not a qualified REIT subsidiary of IndyMac REIT and which is
subject to applicable federal and state income taxes. See "Certain Federal
Income Tax Considerations." The Company's other operations include (1)
Construction Lending Corporation of America ("CLCA"), which offers a variety of
construction, land and lot loan programs for builders and developers, (2)
Warehouse Lending Corporation of America ("WLCA"), which provides various types
of short-term revolving financing to small-to-medium size mortgage originators
and offers builder inventory lines of credit, (3) IndyMac Construction Lending
Division ("IndyMac CLD"), which facilitates the purchase of a variety of
construction, land and lot loans through IndyMac Operating's third party lending
customers, (4) IndyMac Manufactured Housing Division ("IndyMac MHD"), which
facilitates the direct origination or purchase of consumer loans and mortgage
loans secured by manufactured housing, (5) IndyMac Home Improvement Division
("IndyMac HID"), which facilitates the direct origination or purchase of home
improvement loans, and (6) LoanWorks, which facilitates the direct origination
of a variety of residential loans.
IndyMac Operating was established in 1993 as a nationwide, third-party lender
and securitizer of residential prime and, to a lesser extent, sub-prime mortgage
loans. IndyMac Operating also performs master servicing for all loans and
mortgage-backed securities owned or issued by it. Prior to 1993,
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/1/ Except for the historical information contained in this Form 10-K, certain
items herein, including without limitation, certain matters discussed under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in Part II, Item 7 of this Form 10-K ("MD&A") are forward-looking
statements. The matters referred to in such statements could be affected by the
risks and uncertainties involved in the Company's businesses, including without
limitation, the effect of economic and market conditions, the level and
volatility of interest rates, the actions undertaken by both current and
potential new competitors, the impact of current, pending or future legislation
and regulations and other risks and uncertainties detailed in the MD&A.
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IndyMac REIT was primarily a passive investor in single-family, first-lien,
residential mortgage loans and mortgage backed securities financed by
collateralized mortgage obligations (the "CMO Portfolio").
THIRD PARTY LENDING OPERATIONS
Mortgage Conduit Operations. The Company operates a jumbo and nonconforming
mortgage loan conduit. With respect to its nonconforming mortgage loan conduit
operations, the Company acts as an intermediary between (i) the third party
originators of mortgage loans that do not qualify for purchase by or inclusion
in loan guarantee programs sponsored by the government and government sponsored
entities ("GSEs") (i.e., Government National Mortgage Association ("GNMA"),
Federal National Mortgage Association ("Fannie Mae") and Federal Home Loan
Mortgage Corporation ("Freddie Mac")) ("nonconforming mortgage loans") and (ii)
permanent investors in mortgage-backed securities secured by or representing an
ownership interest in such mortgage loans. All loans purchased by IndyMac REIT
for which a real estate mortgage investment conduit ("REMIC") transaction or
whole loan sale is contemplated are committed for sale to IndyMac Operating at
the same price at which the loans were acquired by IndyMac REIT, pursuant to the
terms of a master forward commitment agreement between IndyMac REIT and IndyMac
Operating, which was originally entered into in 1993. The Company's mortgage
conduit operations consist of the purchase and securitization of mortgage loans
secured by first and second liens on single (one-to-four) family residential
properties that are originated in accordance with the Company's underwriting
guidelines. The Company and its third party lending customers ("sellers")
negotiate whether such sellers will retain, or the Company will purchase, the
rights to service the mortgage loans delivered by such sellers to the Company.
The Company subcontracts the servicing associated with the servicing rights
acquired primarily to CHL and, to a lesser extent, other third party servicers.
The Company's principal sources of income from its mortgage conduit operations
are gains recognized on the sale of mortgage loans and securities, master
servicing revenue, and the net spread between interest earned on mortgage loans
and the interest costs associated with the borrowings used to finance such loans
pending their securitization or sale.
Marketing Strategy. The Company's third party lending operations are designed
to attract both large and small sellers of nonconforming mortgage loans by
offering a variety of products, pricing,loan underwriting and funding methods
designed to be responsive to such sellers' needs, although during 1997 the
Company sought to focus on the smaller seller market where the Company believes
purchase margins may be higher. In this regard, the Company began a more
extensive table funding effort during 1997. Through this method of funding, the
Company provides the funds for the closing of mortgage loans that are arranged
by smaller sellers. Although the Company generally assumes more regulatory and
credit risk with respect to the mortgage loans funded in this manner, the
Company has established controls to ensure the loans comply with regulatory
requirements and meet the Company's credit guidelines.
The Company expects to continue to introduce niche loan products from time to
time, which may give the Company temporary competitive advantages. The
Company's products include fixed-rate and adjustable-rate mortgage loans, loans
to foreign nationals, reduced documentation loans, non-owner occupied loans,
loans secured by alternative types of collateral in addition to residential real
estate, subprime credit quality loans, consumer and mortgage loans secured by
manufactured housing, and home improvement loans. In response to the perceived
needs of nonconforming mortgage loan sellers, the Company's marketing strategy
seeks to offer competitive pricing, response time efficiencies in the purchase
process, direct and frequent contact through a trained sales force and flexible
commitment programs. In addition, through its construction lending division,
the Company offers combined construction-to-permanent mortgage loans,
subdivision construction loans, land acquisition and development loans, lot
loans, model home loans, certain condominium loans, income property construction
and terms loans and builder custom home loans. The Company's warehouse lending
division offers traditional revolving lines of credit to mortgage originators
secured by the financed mortgage loans.
The Company's third party lending sales and marketing staff, as well as certain
of its operations areas, are established to pursue business on a servicing-
released or servicing-retained basis and to market products
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effectively to mortgage bankers and brokers of all sizes. The third party
lending sales force cross-sells products for all of the Company's business
lines.
The Company has two principal underwriting methods designed to be responsive to
the needs of nonconforming mortgage loan sellers. The first method established
by the Company is a delegated underwriting program which is similar in concept
to the delegated underwriting programs established by Fannie Mae, Freddie Mac
and GNMA. Under this program, mortgage loans are underwritten in accordance
with the Company's guidelines by the seller and purchased, in reliance on the
seller's representations and warranties, on the basis of the seller's financial
strength, historical loan quality and other qualifications. Eligibility
requirements for the delegated underwriting program vary based upon the net
worth of a seller. The delegated underwriting program enables sellers to
deliver loans to the Company without time delay imposed by the Company's
underwriters or a third party underwriter. A sample of loans submitted by each
seller pursuant to the delegated underwriting program is subsequently reviewed
by the Company in accordance with its quality control guidelines. See "Quality
Control" herein. Under the Company's second underwriting method, sellers submit
to the Company mortgage loans that are underwritten by the Company in accordance
with its guidelines.
Mortgage Loans Acquired. Substantially all of the mortgage loans purchased
through the Company's mortgage conduit operations are nonconforming mortgage
loans. Nonconforming mortgage loans are loans which do not qualify for purchase
by Freddie Mac or Fannie Mae or for inclusion in a loan guarantee program
sponsored by GNMA. Nonconforming mortgage loans generally consist of jumbo
mortgage loans or loans which are not originated in accordance with other GSE
criteria. Currently, the maximum principal balance for a conforming loan is
$227,150. Loans that exceed such maximum principal balance are referred to as
"jumbo loans." The Company generally purchases jumbo loans with original
principal balances of up to $3 million. The Company's loan purchase activities
focus on those regions of the country where higher volumes of jumbo mortgage
loans are originated, including California, Connecticut, Florida, Hawaii,
Illinois, Maryland, Michigan, New Jersey, New York, Ohio, Texas, Virginia,
Washington and Washington, DC. The Company's highest concentration of mortgage
loans relates to properties in California because of the generally higher
property values and mortgage loan balances prevalent there. Mortgage loans
secured by California properties accounted for approximately 46% of the mortgage
loans purchased by the Company in 1997.
Mortgage loans acquired by the Company are secured by primarily first, and to a
lesser extent, second liens on single (one-to-four) family residential
properties with either fixed or adjustable interest rates. Fixed-rate mortgage
loans accounted for approximately 81% of the mortgage loans purchased by the
Company in 1997 compared to 79% for 1996. The number of adjustable rate
mortgage ("ARM") loans purchased by the Company has decreased from 21% of all
mortgage loans purchased in 1996 to 19% of 1997 mortgage loan purchases.
Seller Eligibility Requirements. The mortgage loans acquired pursuant to the
Company's third party lending operations are originated by various sellers,
including savings and loan associations, banks, mortgage bankers, mortgage
brokers and other mortgage lenders. Sellers are required to meet certain
regulatory, financial, insurance and performance requirements established by the
Company before they are eligible to participate in the Company's mortgage loan
purchase programs and must submit to periodic reviews by the Company to ensure
continued compliance with these requirements. The Company requires that sellers
that perform mortgage loan servicing for the Company and participate in the
Company's delegated underwriting program, have a minimum level of tangible net
worth, be approved as a Fannie Mae or Freddie Mac seller/servicer in good
standing, be approved as a U.S. Department of Housing and Urban Development
("HUD") approved mortgagee in good standing, or be a financial institution that
is insured by the Federal Deposit Insurance Corporation ("FDIC") or comparable
federal or state agency and is supervised and examined by a federal or state
authority. In addition, sellers are required to have comprehensive loan
origination quality control procedures. In connection with its qualification,
each seller enters into an agreement that provides for recourse by the Company
against such seller under various circumstances, including in the event of any
material breach of a representation
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or warranty made by the seller with respect to mortgage loans sold to the
Company, any fraud or misrepresentation during the mortgage loan origination or
acquisition process or upon early payment default on such loans.
Servicing Retention. Certain sellers of mortgage loans to the Company have
contracted with the Company to retain the rights to service the mortgage loans
purchased by the Company. Servicing includes collecting and remitting loan
payments, making required advances, accounting for principal and interest,
holding escrow or impound funds for payment of taxes and insurance, if
applicable, making required inspections of the mortgaged property, contacting
delinquent borrowers and supervising foreclosures and property dispositions, in
the event of unremedied defaults in accordance with the Company's guidelines.
The servicer is required to perform these servicing functions pursuant to
standards set forth in the Company's guidelines. The servicer receives fees
generally ranging from 1/4% to 1/2% per annum on the declining principal
balances of the loans serviced. If a seller/servicer breaches certain of its
representations and warranties made to the Company, the Company may terminate
the servicing rights of such seller/servicer and sell or assign such servicing
rights to another servicer. Under certain circumstances not involving default
by the seller/servicers, seller/servicers have the option to request the Company
to purchase such servicing rights at a price based on a current market
valuation. The Company subcontracts the servicing associated with the servicing
rights it acquires primarily to CHL and, to a lesser extent, other third party
servicers.
Master Servicing. The Company acts as master servicer with respect to
substantially all of the mortgage loans it sells pursuant to securitizations.
Master servicing includes collecting loan payments from seller/servicers of
loans and remitting loan payments, less master servicing fees and other fees,
to trustees. In addition, as master servicer, the Company monitors the
servicer's compliance with the Company's servicing guidelines and is required to
perform, or to contract with a third party to perform, all obligations not
adequately performed by any servicer. The master servicer may permit or require
the servicer to contract with approved subservicers to perform some or all of
the servicer's servicing duties, but the servicer is not thereby released from
its servicing obligations.
In connection with REMIC issuances and whole loan sales, the Company master
services on a non-recourse basis substantially all of the mortgage loans it
sells. Each series of mortgage-backed securities is typically fully payable
from the mortgage assets underlying such series and the recourse of investors is
generally limited to those assets and any credit enhancement features, such as
insurance. As a general rule, any losses in excess of the accompanying credit
enhancement obtained is borne by the security holders. Except in the case of a
breach of the standard representations and warranties made by the Company when
mortgage loans are securitized or sold, the securities or sales are non-recourse
to the Company. In most cases, the Company has recourse to the sellers of loans
for any such breaches, although there can be no assurance that the seller will
be able to honor its obligations.
Master Commitments. As part of its marketing strategy, the Company establishes
mortgage loan purchase commitments ("Master Commitments") with sellers that,
subject to certain conditions, entitle the seller to sell and the Company to
purchase a specified dollar amount of nonconforming mortgage loans over a period
generally ranging from three months to one year. The terms of each Master
Commitment specify whether a seller may sell loans to the Company on a mandatory
or best efforts basis, or a combination thereof. Master Commitments do not
obligate the Company to purchase loans at a specific price but rather provide
the seller with a future outlet for the sale of its originated loans based on
the Company's quoted prices at the time of rate lock, reduced by, with respect
to certain loan products, a negotiated price break. Master Commitments specify
the types of mortgage loans the seller is entitled to sell to the Company and
generally range from $5 million to $500 million in aggregate committed principal
amount. The Master Commitment also specifies whether the seller will retain or
release to the Company the right to service delivered mortgage loans.
Bulk and Other Rate-Locks. The Company also acquires mortgage loans from
sellers that are not purchased pursuant to Master Commitments. These purchases
may be made on a bulk or individual rate-lock basis. Bulk rate-locks obligate
the seller to sell and the Company to purchase a specific group of
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loans, generally ranging from $1 million to $50 million in aggregate committed
principal amount, at set prices on specific dates. Bulk rate-locks enable the
Company to acquire substantial quantities of loans on a more immediate basis.
The specific pricing, delivery and program requirements of these purchases are
determined by negotiation between the parties but are generally in accordance
with the provisions of the Company's Seller Guide. Due to the active
presence of investment banks and other substantial investors in this area,
purchasing loans under bulk pricing is extremely competitive. Loans are also
purchased from individual sellers (typically smaller originators of mortgage
loans) that do not wish to sell loans pursuant to either a Master Commitment or
bulk rate-lock. The terms of these individual purchases are based primarily on
the Company's Seller Guide and standard pricing provisions, and are offered on a
mandatory or best efforts basis.
Following the issuance of specific rate-locks related to loans held for sale,
IndyMac Operating is subject to the risk of interest rate fluctuations with
respect to the contractual rate of interest on such loans, and will enter into
hedging transactions to diminish such risk. Hedging transactions may include
mandatory or optional forward sales of mortgage loans or mortgage-backed
securities, mandatory forward sales or financings using REMICs, mandatory or
optional sales of futures and other financial futures transactions. See
"Securitization Process". The nature and quantity of hedging transactions will
be determined by management based on various factors, including market
conditions, the expected or contracted volume of mortgage loan purchases and the
product types or coupon rates to be purchased. In addition, the Company will not
engage in any financial futures transaction unless the Company would be exempt
from the registration requirements of the Commodity Exchange Act or otherwise
complies with the provisions thereof.
Purchase/Underwriting Guidelines. The Company has developed comprehensive
purchase guidelines for its acquisition of loans. Subject to certain
exceptions, each loan purchased must conform to the Company's loan eligibility
requirements specified in the Company's Seller Guide with respect to, among
other things, loan amount, type of property, loan-to-value ratio, type and
amount of insurance, credit history of the borrower, income ratios, sources of
funds, appraisal and loan documentation. The Company also performs a legal
documentation review prior to the purchase of any loan and where the seller is
not authorized to participate in one of the Company's delegated programs, the
Company performs a full credit review and analysis to ensure compliance with its
loan eligibility requirements. Generally, the latter review includes, among
other things, an analysis of the underlying property and associated appraisal
and an examination of the credit, employment and income history of the borrower.
For loans purchased pursuant to the Company's delegated underwriting program,
the Company relies on the credit review performed by the seller and the
Company's own follow-up quality control procedures. See discussion of the
Company's underwriting methods under "Marketing Strategy" herein.
Quality Control. Ongoing quality control reviews are conducted by the Company to
ensure that the loans purchased meet the Company's quality standards. The type
and extent of the quality control review depends on the nature of the seller and
the characteristics of the loans. The Company conducts a full post-purchase
underwriting review of all of the loans purchased during the first month of a
seller's participation in the delegated underwriting program to monitor ongoing
compliance with the Company's guidelines. The percentage of loans fully reviewed
is reduced to approximately 50% during the second month, and thereafter reduced
monthly in 10% increments to approximately 10% after six months, and maintained
at this level throughout the seller's participation in the delegated
underwriting program. A higher percentage of mortgage loans with certain
specified characteristics are reviewed by the Company following purchase,
including loans in excess of $650,000 in principal amount, loans originated by
sellers with a 60 day delinquency percentage (percentage of all loans sold by a
seller to the Company that are delinquent for 60 or more days) that is 1.25% of
the average 60 day delinquency percentage for all loans purchased by the Company
and all loans that are delinquent for 60 or more days. In performing a quality
control review on a loan, the Company analyzes the underlying property and
associated appraisal and examines the credit, employment and income history of
the borrower. In addition, all documents submitted in connection with the loan,
including all insurance policies, appraisals and credit records, and the closing
statement, sales contract and escrow instructions are examined for compliance
with the Company's underwriting guidelines. Furthermore, the Company reverifies
the employment, income and source of funds documentation, as appropriate, of
each borrower and obtains a
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new credit report and independent appraisal, with respect to approximately 10%
of the reviewed loan sample.
SECURITIZATION PROCESS
General. The Company primarily uses repurchase agreements, bank borrowings,
unsecured debt and equity to finance the initial acquisition of mortgage loans
from sellers. When a sufficient volume of fixed rate loans with similar
characteristics has been accumulated, generally $100 million to $500 million in
principal amount, such loans are securitized through the issuance of mortgage-
backed securities in the form of REMICs or CMOs or resold in bulk whole loan
sales. The length of time between when the Company commits to purchase a
mortgage loan and when it sells or securitizes such mortgage loan generally
ranges from ten to 90 days, depending on certain factors, including the length
of the purchase commitment period, the loan volume by product type, market
fluctuations in the prices of mortgage-backed securities and variations in the
securitization process. With respect to subprime, manufactured housing and home
improvement loans, this holding period generally will be longer, due to an
overall smaller market combined with the shorter period of time the Company has
been operating these programs.
The Company is subject to various risks due to potential interest rate
fluctuations during the period of time after the Company commits to purchase a
mortgage loan at a pre-determined price until such mortgage loan is ultimately
sold. The Company has attempted to mitigate such risks through the
implementation of hedging policies and procedures. In accordance with its
hedging policies and procedures, the Company seeks to utilize financial
instruments whose price sensitivity has very close inverse correlation to the
price sensitivity of the related mortgage loans as a result of changes in
applicable interest rates. With respect to the Company's portfolio of jumbo and
nonconforming fixed-rate loans, the financial instrument which has historically
demonstrated close inverse correlation, and also trades in a relatively liquid
and efficient manner, is a forward commitment to sell a Fannie Mae or Freddie
Mac security of comparable maturity and weighted average interest rate.
However, the Company's private-label mortgage securities typically trade at a
discount (or "spread") compared to the corresponding Fannie Mae or Freddie Mac
securities, due to the implied government guarantees of certain Fannie Mae or
Freddie Mac obligations. Accordingly, while the Company's hedging strategy may
mitigate the impact that changes in interest rates would have on the price of
agency mortgage securities (and therefore to some extent on the price of the
Company's private-label mortgage securities), such strategy does not protect the
Company against the effects of a widening or narrowing in the pricing spread
between agency mortgage securities and the Company's private-label mortgage
securities. Therefore, any significant widening or narrowing of the spread
commanded by agency mortgage securities compared to the Company's private-label
mortgage securities could have a positive or negative effect on the financial
performance of the Company, regardless of the efficiency of the Company's
execution of its hedging strategy.
With respect to the Company's portfolio of subprime, manufactured housing and
home improvement loans, the Company generally utilizes forward sales of Treasury
futures to hedge against the effects of interest rate fluctuations. Although
Treasury futures may protect the Company's subprime, manufactured housing and
home improvement loan portfolios against fluctuations of short-term interest
rates, such hedging activities may not always result in precise inverse
correlation to changes in the values of the underlying loans. The lack of exact
inverse correlation is due to such factors as changes in the relative pricing
discount between mortgage or asset backed securities and Treasury securities,
and perceived credit risks in the whole loan market. To the extent any changes
in the value of the instruments used to hedge the risk of interest rate
fluctuations do not inversely correlate precisely to the risks affecting the
value of the Company's subprime, manufactured housing and home improvement loan
portfolios, the financial performance of the Company could be negatively or
positively impacted.
The Company's decision to form REMICs or CMOs or to sell whole loans in bulk is
influenced by a variety of factors. REMIC transactions are generally accounted
for as sales of the mortgage loans and may eliminate or minimize any long-term
residual investment by the Company in such loans, depending on the
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extent to which the Company decides to retain residual or other interests. REMIC
securities typically consist of one or more classes of "regular interests" and a
single class of "residual interest." The regular interests are tailored to the
needs of investors and may be issued in multiple classes with varying
maturities, average lives and interest rates. These regular interests are
predominantly senior securities but, in conjunction with providing credit
enhancement, may be subordinated to the rights of other regular interests. The
residual interest represents the remainder of the cash flows from the loans
(including, in some instances, reinvestment income) over the amounts required to
be distributed to the regular interests. In some cases, the regular interests
may be structured so that there is no significant residual cash flow, thereby
allowing the Company to sell its entire interest in the loans. As a result, in
some cases the capital originally invested in the loans by the Company may be
redeployed in the third party lending operations. The Company may also retain
regular and residual interests on a short-term or long-term basis. The creation
of REMIC securities through IndyMac Operating is the Company's preferred method
of securitizing loans, because this method provides the maximum flexibility in
structuring securities for sale to the broadest group of investors and may
permit the redeployment of a portion of the capital of the Company. Beginning in
the third quarter of 1993, the Company began issuing all of its REMIC securities
utilizing a shelf registration statement established by CWMBS, Inc., a wholly
owned limited purpose finance subsidiary of CCR. Neither CWMBS, Inc. nor CCR
derives any financial benefit from such issuances, other than recoupment of a
portion of the allocable costs of establishing and maintaining the shelf
registration.
As an alternative to REMIC sales, the Company may issue CMOs to finance mortgage
loans to maturity. For accounting and tax purposes, the mortgage loans financed
through the issuance of CMOs are treated as assets of the Company, and the CMOs
are treated as debt of the Company. The Company earns the net interest spread
between the interest income on the mortgage loans and the interest and other
expenses associated with the CMO financing. The net interest spread will be
directly impacted by the levels of prepayment of the underlying mortgage loans
and, to the extent CMO classes have variable rates of interest, may be affected
by changes in short-term interest rates. The Company is required to retain a
residual interest in its issued CMOs. The Company may issue CMOs from time to
time based on the Company's current and future investment needs, market
conditions and other factors. CMOs, however, do not offer the Company the
structuring flexibility of REMICs and are expected to be a secondary method of
securitizing the Company's mortgage loans.
From time to time, the Company also may sell whole loans in bulk as an
alternative to REMIC sales or the issuance of CMOs. Such sales result in the
removal of the assets from the Company's balance sheet and immediate recognition
of a gain or loss.
Credit Enhancement. REMICs or CMOs created by the Company are structured so
that, in general, substantially all of such securities are rated investment
grade by at least one nationally recognized statistical rating agency. In
contrast to mortgage-backed securities in which the principal and interest
payments are guaranteed by the U.S. government or an agency thereof, securities
created by the Company do not benefit from any such guarantee. The ratings for
the Company's mortgage-backed securities are based on the perceived credit risk
by the applicable rating agency of the underlying mortgage loans, the structure
of the securities and the associated level of credit enhancement. Credit
enhancement is designed to provide protection to one or more classes of security
holders in the event of borrower defaults and to protect against other losses,
including those associated with fraud or reductions in the principal balances or
interest rates on loans as required by law or a bankruptcy court. The Company
can utilize multiple forms of credit enhancement, including bond insurance
guarantees, mortgage pool insurance, special hazard insurance, reserve funds,
letters of credit, surety bonds and subordination of certain classes of
interests to other classes, or any combination thereof.
In determining whether to provide credit enhancement through bond insurance,
subordination or other credit enhancement methods, the Company will take into
consideration the costs associated with each method. The Company principally
provides credit enhancement through the issuance of mortgage-backed
7
<PAGE>
securities in senior/subordinated structures. The subordinated securities may be
sold, retained by the Company and accumulated for sale in subsequent
transactions, or retained as long term investments.
Retention of Mortgage-Backed Securities and Other Investments. In connection
with the issuance of mortgage-backed securities or other investments in the form
of REMICs or CMOs, the Company may retain subordinated securities or regular or
residual interests (including residual interests that may be subordinated to
other classes of securities) on a short-term or long-term basis. Any such
retained residual or regular interest may include "principal-only" or "interest-
only" securities, mortgage servicing rights, or other interest rate- or
prepayment-sensitive securities or investments. The Company has assumed a
certain degree of credit risk in relation to its portfolio of subordinated
securities. See "Credit Risk" below.
Mortgage servicing rights have characteristics similar to interest-only
securities; accordingly, they have many of the same risks inherent in interest-
only securities, including the risk that they will lose a substantial portion of
their value as a result of rapid prepayments occasioned by declining interest
rates. It is also possible that under certain high prepayment scenarios, the
Company would not recoup its initial investment in mortgage servicing rights or
interest-only securities. Investments in mortgage servicing rights and interest-
only securities have values which tend to move inversely to the values of the
retained subordinated and principal-only securities as interest rates change.
For example, as interest rates decline, prepayments would tend to increase and
the value of the Company's mortgage servicing rights and interest-only
securities would tend to decrease. By contrast, in a declining interest rate
environment, the value of the Company's portfolio of subordinated securities and
principal-only securities would tend to increase because the rise in prepayments
would tend to accelerate return of the Company's investment in the principal
portion of the underlying loans. The Company seeks to manage the effects of
rising and falling interest rates through investing in financial instruments
with contrasting sensitivities to interest rates; however, there can be no
assurance that this strategy will succeed under any particular interest rate
scenario. In addition, the Company has used U.S. Treasury bonds, call options on
U.S. Treasury bonds and interest rates floors that react inversely to changes in
interest rates compared to the Company's mortgage servicing rights and interest-
only securities in an effort to further reduce the interest rate risk associated
with such mortgage servicing rights and interest-only securities.
In addition to its retention of subordinated securities or regular or residual
interests, the Company has also invested in AAA-rated securities for the purpose
of growing its investment portfolio and net interest income.
LOANS HELD FOR INVESTMENT
In an effort to generate continuing earnings that are less dependent upon the
Company's loan purchase volumes and securitization activities, the Company seeks
to selectively invest in residential loans on a long-term basis. The Company
finances the acquisition of such loans with its capital, borrowings under
repurchase agreements and other credit facilities referred to under "Financing
Sources" below. The Company has assumed a certain degree of credit risk in
relation to its portfolio of loans held for investment. See "Credit Risk"
below.
CONSTRUCTION LENDING
The Company's construction lending group consists of two operating divisions:
CLCA, which offers a variety of income property construction and term loan
programs, and residential construction, land and lot loan programs for builders
and developers, and IndyMac CLD, which offers a variety of residential
construction, land and lot loan programs through IndyMac Operating's third party
customers.
The baseline project for CLCA's residential construction loan program is a 15 to
100 unit subdivision, built in one to five phases, that will be marketed to
entry level/first-time or trade-up buyers. In general, the maximum loan size
per project is $15 million. The specific terms of any construction loan,
including the principal amount thereof and the applicable interest rate and
fees, are based upon, among other things, the location of the project, the value
of the land and the financial strength, historical performance and other
qualifications of the builder. All builder construction loans with principal
balances in excess of $1,000,000 are subject to the prior approval of a credit
committee comprised of senior officers of IndyMac REIT.
8
<PAGE>
Combined construction-to-permanent loans, home improvement loans and lot loans
are originated by IndyMac Operating's third party customers. IndyMac CLD
assists IndyMac REIT in the purchase of such loans and administers the
construction draws. Under these programs, all loans are prior-approved and
underwritten to the Company's standard guidelines for borrower qualifications,
as well as other detailed criteria. Criteria for the permanent loans are
similar to those applied by IndyMac Operating to loans purchased generally. In
general, the maximum construction-to-permanent loan size is $3 million. The
Company has assumed a certain degree of credit risk in relation to its
construction lending activities. See "Credit Risk" below.
WAREHOUSE LENDING
WLCA engages in secured warehouse lending operations for small- and medium-size
mortgage originators. WLCA also offers builder inventory lines of credit. The
Company's traditional warehouse lending facilities typically provide short-term
revolving financing to mortgage companies to finance the origination of mortgage
loans during the time between the closing of such loans and their sale to
investors. Loans financed by WLCA through its traditional warehouse lending
activities represent a broader line of mortgage products than those currently
purchased by the Company. Presently all of such loan products purchased by the
Company are eligible for financing by WLCA under the financing agreements used
by WLCA to fund its operations.
Under its standard program, WLCA offers credit facilities to otherwise qualified
mortgage originators with a minimum audited tangible net worth of $100,000 and
subject to a maximum debt-to-net-worth ratio of 22 to 1. Under its Advantage
Line and Captive Line programs, WLCA offers credit facilities to otherwise
qualified mortgage originators with no net worth requirement. Under its builder
inventory program, WLCA offers lines of credit to home builders to temporarily
finance inventories of residential homes. Under this program, builders generally
must have a minimum tangible net worth of $5 million, with a maximum leverage
ratio (total liabilities to tangible net worth) of 6 to 1. The specific terms of
any warehouse line of credit, including the maximum credit limit, are determined
based upon the financial strength, historical performance and other
qualifications of the mortgage originator. All lines of credit under the
standard program and the builder inventory program are subject to the prior
approval of a credit committee comprised of senior officers of IndyMac REIT. The
Company finances these WLCA programs through a combination of repurchase
agreements, equity and other borrowings. With respect to WLCA's operations, the
Company has three committed two-year repurchase agreement facilities with three
investment banks with sublimits in an aggregate amount of up to $500 million,
and one committed three-year credit facility with a syndicate of nine commercial
banks with sublimits in an aggregate amount of up to $225 million.
MANUFACTURED HOUSING
IndyMac MHD was established in December 1995 and facilitates the origination,
purchase, sale and servicing of loans to consumers who are purchasing or
refinancing a new or used manufactured home. This division solicits business
through established dealer networks, brokers, "in-park" marketing activities and
the Company's third party lending sales and marketing staff. The Manufactured
Housing Division operates five regional offices in San Diego, CA, Houston, TX,
Atlanta, GA, Vancouver, WA and Raleigh, NC.
HOME IMPROVEMENT DIVISION
IndyMac HID began operations in May 1997 and facilitates the origination,
purchase, sale and servicing of consumer home improvement and debt consolidation
loans secured by liens on improved real property. IndyMac HID's primary sales,
origination and servicing facility is located in Atlanta, GA. IndyMac HID also
operates six regional sales offices in Tampa, FL, Winston-Salem, NC, Newark, NJ,
Memphis, TN, Pittsburgh, PA and Kansas City, MO. IndyMac HID provides financing
through two primary distribution channels: home improvement dealers and
specialty brokers. IndyMac HID also facilitates the purchase of consumer home
improvement and debt consolidation loans through IndyMac Operating's third party
customers.
9
<PAGE>
LOANWORKS
LoanWorks, which offers a variety of residential mortgage loans directly to
consumers, including conforming conventional mortgage loans, and prime and sub-
prime, non-conforming mortgage loans, began operations in January 1997.
LoanWorks' operations are centralized in a telemarketing and processing center
located in Irvine, CA and LoanWorks' primary marketing tools are media
advertising in Southern California and internet advertising through its web site
at "http://www.loanworks.com". Through its telemarketing operations, LoanWorks
loan consultants counsel consumers with respect to the loan application process,
process loan applications and render lending decisions, providing for a
streamlined loan application process.
CREDIT RISK
The Company has assumed a certain degree of credit risk in connection with its
investments in mortgage securities and loans held for investment, as well as in
connection with its third party lending, construction lending and warehouse
lending operations. The Company evaluates and monitors its exposure to credit
losses and has established a reserve for anticipated credit losses based upon
estimated future losses on the loans, general economic conditions and trends in
portfolio volume. The Company likewise has assumed a certain degree of credit
risk in connection with its investment in subordinated securities. Such
securities are recorded net of a discount which represents the estimated credit
losses associated with such securities.
The Company has experienced a decrease in delinquencies associated with its held
for investment residential loans. Delinquencies on this portfolio declined to
6.3% from 8.7% for the periods ending December 31, 1997 and 1996, respectively.
Similarly, the Company has experienced a decrease in delinquencies associated
with its held for sale residential loans. Delinquencies on this portfolio
declined to 2.3% from 5.0% for the periods ending December 31, 1997 and 1996,
respectively.
As of December 31, 1997, the Company had accumulated $27.4 million in loan loss
reserves associated with the loans owned by both IndyMac REIT and IndyMac
Operating, and net charge-offs from inception to date totaled $10.8 million. In
addition, the Company suspends the accrual of income on loans 90 days or greater
past due where full collectibility is in doubt.
The Company has invested in interest-only securities, principal-only securities,
inverse floater securities and other mortgage-backed securities, which include
investment grade securities (i.e., rated BBB or higher) and non-investment grade
or subordinated securities (i.e., rated lower than BBB). As of December 31, 1997
investment grade securities comprised 58% of the Company's mortgage-backed
securities portfolio. In general, subordinated securities bear all losses prior
to the related senior securities and, therefore, the Company has credit risk
with respect to the subordinated securities in its mortgage-backed securities
portfolio. However, the Company's subordinated securities portfolio was acquired
at a discount of $61 million to such securities' face value. This discount
primarily reflects estimates of future expected credit losses on approximately
$3.8 billion of single-family mortgage loans which are related to the
subordinated securities.
With respect to its construction loan portfolio, warehouse lending operations
and manufactured housing lending operations, the Company has sought to institute
significant operational controls in order to help minimize credit risk. Charge-
offs with respect to the Company's construction loans for the year ended
December 31, 1997 were $71,000. Since the Company's current actual experience is
not necessarily indicative of future losses, as of December 31, 1997, $7.2
million in loan loss reserves had been allocated to construction lending
activities. The warehouse lending program commenced in May 1993. Since that time
there has been one loan charge-off amounting to approximately $45,000 that was
not subsequently recovered. Since the Company's current actual experience is not
necessarily indicative of future losses, as of December 31, 1997, $1.8 million
in loan loss reserves had been allocated to warehouse lending activities. For
the year ended December 31, 1997, charge-offs with respect to the Company's
manufactured housing lending division, which began operations in December 1995,
were $220,000. As of December 31, 1997, $74,000 in loan loss reserves had been
allocated to manufactured housing lending operations.
In addition to the creation of reserves, the Company has established a risk
management committee to further manage the Company's exposure to credit losses.
This committee reviews the products the Company offers, the authority limits of
the Company's customers and personnel and customers' performance, and implements
changes that seek to balance the Company's credit risk with the Company's
production and profitability goals. Additionally, the Company deploys a risk-
based pricing approach in an effort to price products based in part on the
credit risks associated with each product. While management cannot offer any
assurance as to the extent to which the Company will incur credit losses
10
<PAGE>
and any related effects on earnings, controls are in place in an effort to
reduce exposure in this area.
FINANCING SOURCES
The Company uses proceeds from the sale of REMIC securities and CMOs, repurchase
agreements, other borrowings and issuance of common stock and unsecured debt to
meet its working capital needs. For further information on the material terms
of the borrowings utilized by the Company to finance its inventory of mortgage
loans and mortgage-backed securities, see "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Liquidity and Capital
Resources." The Company continues to investigate and pursue alternative and
supplementary methods to finance its operations through the public and private
capital and credit markets.
FEDERAL INCOME TAX CONSIDERATIONS
IndyMac REIT has elected to be taxed as a REIT under the Internal Revenue Code
and intends to continue to do so. IndyMac Operating is not a qualified REIT
subsidiary and is not consolidated with IndyMac REIT for either tax or financial
reporting purposes. Consequently, IndyMac Operating's earnings are subject to
applicable federal and state income taxes. IndyMac REIT will include in taxable
income amounts earned by IndyMac Operating only when IndyMac Operating remits
its after-tax earnings by dividend to IndyMac REIT.
On February 2, 1998, President Clinton announced his Fiscal Year 1999 Budget
Proposal ("the Budget Proposal"). One of the tax measures included in the Budget
Proposal would curtail a REIT's ability to utilize taxable subsidiaries. Under
this proposal, a REIT such as IndyMax REIT would be prohibited from owning
securities representing more than 10% of the vote or value of another
corporation (unless the other corporation is a wholly-owned qualified REIT
subsidiary). Although IndyMac REIT does not own any of the voting stock of
IndyMac Operating (IndyMac REIT owns 100% of the preferred stock of IndyMac
Operating), IndyMac REIT holds (through its preferred stock ownership) 99% of
the economic interest (or value) in IndyMac Operating. The proposal contains a
grandfather rule for taxable subsidiaries that are in existence on the date of
the first Congressional Committee action on the proposal, which would apply to
IndyMac Operating. However, the grandfathered status would be lost if a taxable
subsidiary acquired substantial new assets after a date to be specified.
If the taxable subsidiary proposal were enacted as proposed, IndyMac Operating
would be grandfathered. However, at this point it is unclear whether IndyMac
Operating would lose such grandfathered status if, in the ordinary course of
business, it acquired substantial new mortgage assets for securitization
purposes. If IndyMac Operating could not acquire new assets, and/or IndyMac
REIT's economic interest in IndyMac Operating were required to be reduced to no
more than 10%, IndyMac REIT would not receive the economic benefits it currently
receives from its ownership interest in IndyMac Operating. In this event,
IndyMac REIT could conduct directly only those activities of IndyMac Operating
that are compatible with IndyMac REIT's status as a REIT (i.e., activities other
than loan sales and REMIC securitizations). Additionally, IndyMac REIT's ability
to service mortgage loans and to hedge mortgage loans held for disposition would
be subject to relatively strict limitations. At this point, no bill has been
introduced containing language that would implement the Budget Proposal, and no
reasonable predictions can be made as to whether such a bill will be introduced
or enacted.
IndyMac REIT's election to be treated as a REIT will be terminated automatically
if IndyMac REIT fails to meet the requirements of the REIT provisions of the
Code. Qualification as a REIT requires that IndyMac REIT satisfy a variety of
tests relating to its income, assets, distribution, administration and
ownership. Although IndyMac REIT believes it has operated and intends to
continue to operate in such a manner as to qualify as a REIT, no assurance can
be given that IndyMac REIT will in fact continue to so qualify. If IndyMac REIT
fails to qualify as a REIT in any taxable year, it would be subject to federal
corporate income tax (including any alternative minimum tax) on its taxable
income at regular corporate rates, and distributions to its shareholders would
not be deductible by IndyMac REIT. In that event, IndyMac REIT would not be
eligible again to elect REIT status until the fifth taxable year which begins
after the year for which IndyMac REIT's election was terminated unless certain
relief provisions apply. IndyMac REIT may also voluntarily revoke its election,
although it has no present intention of doing so, in which event
11
<PAGE>
IndyMac REIT would be prohibited, without exception, from electing REIT status
for the year to which the revocation relates and the following four taxable
years.
Distributions to shareholders of IndyMac REIT with respect to any year in which
IndyMac REIT fails to qualify would not be deductible by IndyMac REIT nor would
they be required to be made to such shareholders. In such event, to the extent
of current and accumulated earnings and profits, any distributions to
shareholders would be taxable as ordinary income and, subject to certain
limitations in the Code, eligible for the dividends-received deduction for
corporations. Failure to qualify as a REIT would reduce the amount of IndyMac
REIT's after-tax earnings available for distribution to shareholders and could
result in IndyMac REIT's incurring substantial indebtedness (to the extent
borrowings are feasible), or disposing of substantial investments, in order to
pay the resulting taxes or, at the discretion of IndyMac REIT, to maintain the
level of IndyMac REIT's distributions to its shareholders.
Excess Inclusion Income. A portion of IndyMac REIT's assets may be in the form
of CMO residual interests. Part or all of the income derived by IndyMac REIT
from a residual interest of a CMO issued or invested in by IndyMac REIT after
December 31, 1991, may be "excess inclusion" income, as defined in the Code.
Such excess inclusion income generally is subject to federal income tax in all
events. If IndyMac REIT pays any dividends to its shareholders that are
attributable to excess inclusion income, the shareholders who receive such
dividends generally will be subject to the same tax consequences that would
apply if they derived excess inclusion income from a direct investment in a
REMIC residual interest. Excess inclusion income allocable to a shareholder may
not be offset by current deductions or net operating losses otherwise allowable
as deductions to such shareholder. Moreover, such excess inclusion income
constitutes unrelated business taxable income for tax-exempt entities (including
employee benefit plans). In addition, IndyMac REIT would be subject to tax on
the portion of excess inclusion income that would be allocable to a
"disqualified organization" holding IndyMac REIT shares. IndyMac REIT's bylaws
provide that disqualified organizations are ineligible to hold IndyMac REIT
shares. Approximately 4% of the 1997 dividends paid by IndyMac REIT were
attributable to excess inclusion income.
RELATIONSHIPS WITH COUNTRYWIDE ENTITIES
IndyMac REIT and CCR are each publicly-traded companies whose shares of common
stock are listed on the New York Stock Exchange. CCR directly or indirectly owns
approximately 6.8% of the common stock of IndyMac REIT. CHL, a wholly owned
subsidiary of CCR, owns all of the outstanding voting common stock and 1% of the
economic interest of IndyMac Operating. In addition, several directors and
officers of IndyMac REIT and IndyMac Operating also serve as directors and/or
officers of CCR and/or CHL. See "Part III, Item 13, Certain Relationships and
Related Transactions." IndyMac REIT owns all of the outstanding non-voting
preferred stock and a 99% economic interest in IndyMac Operating. Prior to July
1, 1997, Countrywide Asset Management Corporation, a wholly owned subsidiary of
CCR ("CAMC"), managed IndyMac REIT. See "Historical Operations" below.
HISTORICAL OPERATIONS
Prior to 1993, the Company was principally a long-term investor in single-
family, first-lien, residential mortgage loans and in mortgage-backed securities
representing interests in such loans. The Company's mortgage investment
portfolio consisted primarily of fixed-rate mortgage pass-through certificates
issued by Freddie Mac or Fannie Mae and nonconforming mortgage loans. The
principal source of earnings for the Company historically was interest income
generated from investments in such mortgage loans and mortgage-backed
securities, net of the interest expense on the CMOs or repurchase agreements
used to finance such mortgage investments.
During 1993 and continuing in the beginning of 1994, the CMO Portfolio
experienced substantial prepayments, resulting in significantly decreased net
earnings, and as mortgage loan premiums, original
12
<PAGE>
issue discount and bond issuance costs were required to be amortized, losses on
the CMO Portfolio were realized. Regardless of the level of interest rates or
prepayments, IndyMac REIT anticipates no significant earnings from this CMO
Portfolio, and IndyMac REIT could incur additional losses. Any continued
negative performance of this CMO Portfolio will continue to adversely impact the
earnings of IndyMac REIT to the extent of its investment in such portfolio.
On July 1, 1997, IndyMac REIT and CCR completed a transaction whereby IndyMac
REIT acquired all of the outstanding stock of its manager, CAMC, from CCR in
exchange for 3,440,860 new shares of common stock of IndyMac REIT. The
transaction was approved in January 1997 by a special committee consisting of
the independent directors of IndyMac REIT, by the full Board of Directors of
IndyMac REIT, and by the full Board of Directors of CCR. The transaction was
then approved by the IndyMac REIT shareholders at their Annual Meeting held on
June 24, 1997. Following consummation of the transaction, CAMC was merged into
IndyMac REIT ("Merger"), and IndyMac REIT became self-managed. See "Part III,
Item 13, Certain Relationships and Related Transactions."
COMPETITION
In its mortgage conduit operations, the Company competes with established
mortgage conduit programs, investment banking firms, banks, savings and loan
associations, GSEs, mortgage bankers and other lenders and entities purchasing
mortgage assets. Mortgage-backed securities issued through the Company's
mortgage conduit operations face competition from other investment opportunities
available to prospective investors.
The GSEs have made and will continue to make significant technological and
economic advances to broaden their customer bases. There has been much debate
and discussion in Congress and in the news media as to the proper role of these
agencies. If the GSEs contract or expand, there may be a positive or negative
impact on the Company's conduit operations. The Company seeks to address these
competitive pressures by making a strong effort to maximize its use of
technology, by diversifying into other lines of business that are less impacted
by GSEs and by operating in a more cost-effective manner compared to its
competitors, but there can be no assurance that these efforts will succeed.
Effective January 1, 1998, Fannie Mae and Freddie Mac are not permitted to
purchase mortgage loans with original principal balances above $227,150. If
this dollar limitation increases, Fannie Mae and Freddie Mac may be able to
purchase a greater percentage of the loans in the secondary market than they
currently acquire, and the Company's ability to maintain or increase its current
loan acquisition levels could be adversely affected.
WLCA, CLCA and IndyMac CLD face competition from banks and other financial
institutions. Many of these institutions have significantly greater financial
resources and a lower cost of funds than the Company. The Company seeks to
compete with these institutions through an emphasis on quality of service and
diversified products.
IndyMac MHD's primary competition is from banks and other financial
institutions, independent finance companies and captive manufactured housing
finance companies. IndyMac HID's primary competition is from diversified
mortgage banking companies, banks and other financial institutions, credit card
companies, financial services affiliates of dealers and independent financial
services companies. LoanWorks' primary competition is from banks and other
financial institutions and mortgage companies. The Company seeks to compete with
these various finance and mortgage companies and financial institutions through
an emphasis on quality of service, diversified products and maximum use of
technology.
EMPLOYEES
Beginning on July 1, 1997 in connection with the Merger, the former employees of
CAMC that conducted the operations of the Company became employees of either
IndyMac REIT or IndyMac Operating. As of December 31, 1997, IndyMac REIT had
171 employees and IndyMac Operating had 621 employees.
13
<PAGE>
ITEM 2. PROPERTIES
- ------- ----------
The primary executive and administrative offices of the Company and its
subsidiaries are located at 155 North Lake Avenue, Pasadena, California, and
consist of approximately 140,000 square feet. The principal lease relating to
such space expires in 2010. IndyMac Operating also maintains 7,500 square feet
of office space in Mount Laurel, NJ, and the primary lease associated with this
space expires in 2002. IndyMac MHD occupies space located in San Diego, CA, as
well as Atlanta, GA, Raleigh, NC, Vancouver, WA and Houston, TX. These locations
consist of approximately 36,000 square feet, and the principal lease associated
with these properties expires in 2001. IndyMac HID occupies space in Atlanta,
GA, consisting of approximately 10,340 square feet. The principal lease relating
to such space expires in 1999. LoanWorks occupies space in Irvine, CA,
consisting of approximately 6,000 square feet. The principal lease relating to
such space expires in 2002.
ITEM 3. LEGAL PROCEEDINGS
- ------- -----------------
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------- ---------------------------------------------------
None.
PART II
ITEM 5. MARKET FOR INDYMAC REIT'S STOCK AND RELATED SECURITY HOLDER MATTERS
- ------- -------------------------------------------------------------------
INMC Mortgage Holdings, Inc.'s common stock is traded on the New York
Stock Exchange ("NYSE") under the symbol "NDE."
The following table sets forth the high and low sales prices (as reported by the
NYSE) for common stock for the years ended December 31, 1997 and 1996 and cash
dividends declared for earnings of the period as indicated.
<TABLE>
<CAPTION>
1997 1996 Dividends Declared
------------------------------------------------------------------------------------------------------
High ($) Low ($) High ($) Low ($) 1997 1996
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
First Quarter 23 1/4 19 3/8 17 1/2 15 0.42 0.36
Second Quarter 23 15/16 19 1/2 17 7/8 15 0.43 0.37
Third Quarter 25 7/16 22 5/8 20 1/4 16 3/8 0.46 0.39
Fourth Quarter 25 13/16 21 5/8 21 7/8 19 1/2 0.48 0.40
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
As of March 23, 1998, 65,082,991 shares of INMC Mortgage Holdings, Inc.'s common
stock were held by 3,216 shareholders of record.
Pursuant to IndyMac REIT's Dividend Reinvestment and Stock Purchase Plan
("Plan"), shareholders can reinvest their cash dividends in additional shares of
IndyMac REIT's common stock at 99 percent (subject to change) of the average
high and low market prices on the investment date, as defined in the Plan.
Shareholders may also purchase additional shares of IndyMac REIT's common stock
through the cash investment option of the Plan at 97 percent (subject to change)
of the average high and low market prices for the 12 days preceding the
investment date, as defined in the Plan.
Investors not yet participating in the Plan, as well as brokers and custodians
who hold IndyMac REIT common stock for clients, can get a Prospectus relating to
the Plan by contacting IndyMac REIT's Investor Relations Department at (800)
669-2300.
14
<PAGE>
<TABLE>
<CAPTION>
ITEM 6. SELECTED FINANCIAL DATA
(Dollar amounts in thousands, except per share data)
December 31,
---------------------------------------------------------------------------
1997 1996 1995 1994 1993
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operating Results for the Year
Interest income $ 360,901 $ 242,303 $ 180,465 $ 92,119 $ 65,504
Interest expense 242,372 159,365 131,910 66,700 65,312
---------------------------------------------------------------------------
Net interest income 118,529 82,938 48,555 25,419 192
Provision for loan losses 18,622 12,991 4,037 500 -
Equity in earnings of IndyMac 18,414 19,533 13,801 5,624 2,523
Other income 8,315 2,470 1,427 885 1,714
---------------------------------------------------------------------------
Total revenues 126,636 91,950 59,746 31,428 4,429
Salaries, general and administrative 21,935 14,202 4,213 2,402 1,549
Management fees to affiliate 4,406 8,761 5,522 1,195 400
Non-recurring charges 76,000 - - - -
---------------------------------------------------------------------------
Total expenses 102,341 22,963 9,735 3,597 1,949
---------------------------------------------------------------------------
Net earnings $ 24,295 $ 68,987 $ 50,011 $ 27,831 $ 2,480
===========================================================================
Per Share Data
Basic 0.43 1.51 1.25 0.86 0.13
Diluted 0.43 1.51 1.25 0.86 0.13
Dividends declared per share 1.79 1.52 1.25 0.87 0.48
Book value per share 11.11 9.53 8.55 7.99 7.83
Average Common Shares
Basic 56,125 45,644 39,903 32,184 18,578
Diluted 56,454 45,806 39,941 32,327 18,720
Shares Outstanding at December 31, 63,352 50,200 42,414 32,281 32,020
Balance Sheet Data At Year-End
Loans held for sale $ 1,458,271 $ 657,208 $ 409,584 $ 608,240 $ 794,132
Loans held for investment, net 3,290,311 1,948,291 1,744,611 975,633 -
Mortgage securities 558,445 231,780 124,975 121,441 -
Collateral for CMOs 245,474 289,054 184,111 233,690 402,503
Total assets 5,849,110 3,356,059 2,643,360 1,999,541 1,396,738
Short-term borrowings 4,826,656 2,531,509 2,037,834 1,534,189 770,334
Collateralized mortgage obligations 221,154 264,080 164,760 202,259 365,886
Senior unsecured notes 59,888 59,759 59,649 - -
Shareholders' equity 703,894 478,424 362,731 257,917 250,608
Operating Data(dollar amounts in millions)
IndyMac master servicing portfolio $ 12,400 $ 11,131 $ 9,419 $ 6,818 $ 1,977
Loans acquired 6,319 4,186 4,186 5,985 3,420
</TABLE>
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
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OF OPERATIONS
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GENERAL
INMC Mortgage Holdings, Inc., dba IndyMac Mortgage Holdings, Inc. ("IndyMac
REIT"), was incorporated in the state of Maryland in July 1985 and
reincorporated in the state of Delaware in March 1987. References to "IndyMac
REIT" mean either the parent company alone or the parent company and the
entities consolidated for financial reporting purposes, while references to the
"Company" mean the parent company, its consolidated subsidiaries and IndyMac
REIT's affiliate, IndyMac, Inc. ("IndyMac Operating") and its consolidated
subsidiaries, which are not consolidated with IndyMac REIT for financial
reporting or tax purposes.
In its 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 primarily "jumbo" and other
"nonconforming" mortgage loans from mortgage originators, and also purchases to
a much lesser extent 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 IndyMac REIT,
for which a Real Estate Mortgage Investment Conduit ("REMIC") transaction or
whole loan sale is contemplated, are committed for sale to IndyMac Operating at
the same price at which the loans were acquired by IndyMac REIT pursuant to a
Master Forward Commitment and Services Agreement. At present, IndyMac Operating
does not purchase any loans from entities other than IndyMac REIT.
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") provides acquisition, development and construction, builder custom
home, model home, construction-to-permanent and lot loan financing on a
nationwide basis to builders, while IndyMac Construction Lending Division
("IndyMac CLD") provides the same products as CLCA to IndyMac Operating's third
party customers. Warehouse Lending Corporation of America ("WLCA"), 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, IndyMac REIT and Countrywide Credit Industries, Inc. ("CCR")
completed a transaction whereby IndyMac REIT 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 IndyMac REIT. The
transaction was approved in January, 1997 by a Special Committee consisting of
the independent directors of IndyMac REIT, by the full Board of Directors of
IndyMac REIT, and by the full Board of Directors of CCR. The transaction was
then approved by IndyMac REIT's shareholders at their Annual Meeting held on
June 24, 1997. Following consummation of the transaction, CAMC was merged into
IndyMac REIT, and IndyMac REIT became self-managed.
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IndyMac REIT accounted for this merger as the settlement of a management
contract for book purposes, which resulted in a non-recurring charge for IndyMac
REIT of $76 million during the third quarter of 1997. 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 did not
have a material effect on IndyMac REIT's taxable income. Accordingly, the
amount of the dividend and the tax status of IndyMac REIT's dividends were not
materially affected by the charge since the charge was taken for book purposes
only, not for tax purposes. For the year ended December 31, 1997, IndyMac REIT
had net earnings, prior to inclusion of the non-recurring charge, of $100.3
million, and basic and diluted earnings per share of $1.79 and $1.77,
respectively.
FINANCIAL CONDITION
CONDUIT OPERATIONS: During 1997, IndyMac REIT purchased $6.0 billion of non-
conforming mortgage loans, including $168 million of subprime mortgage loans.
In addition, the Company purchased $320 million of manufactured housing loans
and $82 million of home improvement loans. These loans were financed on an
interim basis using equity and short-term financing in the form of repurchase
agreements and other credit facilities. In general, the Company, through
IndyMac Operating, sells the loans in the form of REMIC securities or whole loan
sales or, alternatively, IndyMac REIT invests in the loans on a long-term basis
using financing provided by CMOs or repurchase agreements and other credit
facilities. During 1997, IndyMac Operating sold $3.4 billion of mortgage loans
through the issuance of thirteen series of multiple-class MBS in the form of
REMIC securities and sold $755 million of mortgage loans in the form of whole
loan sales transactions. At December 31, 1997, the Company was committed to
purchase $743 million of mortgage loans from various mortgage originators. The
IndyMac Operating master servicing portfolio at year-end had an aggregate
outstanding principal balance of $12.4 billion with a weighted average coupon of
8.5%. Delinquencies (30 days and over) for loans held for sale were 2.3% of
principal at December 31, 1997 compared with 5.0% at December 31, 1996.
RESIDENTIAL LOANS HELD FOR INVESTMENT: The $1.8 billion portfolio of
residential loans held for investment (exclusive of construction loans and
warehouse lines of credit) at December 31, 1997 consisted of $1.2 billion of
varying types of adjustable-rate products which contractually reprice in
monthly, semi-annual or annual periods; $473 million of loans which have a fixed
rate for a period of three, five, seven or ten years and subsequently convert to
adjustable-rate mortgage loans that reprice annually and $180 million of fixed-
rate loans. The weighted average coupon of the mortgage loans held for
investment at December 31, 1997 was 7.8%. The Company utilizes interest rate
swap agreements to manage the interest rate exposure on its portfolio of loans
held for investment. The Company finances loans held for investment with
repurchase agreements and other credit facilities which reprice from overnight
to one month, as of December 31, 1997. The allowance for losses related to
loans held for investment totaled $17.4 million at year end. Chargeoffs related
to loans held for investment totaled $7.2 million for the year ended December
31, 1997. Delinquencies (30 days and over) for loans held For investment were
6.3% of principal at December 31, 1997 compared with 8.7% at December 31, 1996.
CONSTRUCTION LENDING OPERATIONS: At December 31, 1997, CLCA had commitments to
fund construction loans of $1.3 billion, with outstanding principal balances of
$603.8 million. The allowance for losses related to CLCA loans totaled $6.9
million at December 31, 1997, and chargeoffs totaled $71,000 related to CLCA
loans for the year ended December 31, 1997. Delinquencies (30 days and over)
for CLCA were 0.9% and 0.5% of principal at December 31, 1997 and 1996,
respectively. The Company had outstanding borrowings under various revolving
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credit facilities totaling $270 million at December 31, 1997 associated with the
financing of CLCA loans.
At December 31, 1997, IndyMac CLD had commitments to fund construction-to-
permanent and home improvement loans of $603.7 million at December 31, 1997 with
outstanding principal balances of $343 million. The allowance for losses
related to IndyMac CLD loans totaled $328,000 at December 31, 1997, and there
were no chargeoffs for the year ended December 31, 1997. Delinquencies for
IndyMac CLD were 1.5% and 1.1% of principal, at December 31, 1997 and 1996,
respectively. The Company had outstanding borrowings under various revolving
credit facilities totaling $362 million at December 31, 1997 associated with the
financing of IndyMac CLD loans.
WAREHOUSE LENDING OPERATIONS: At December 31, 1997, IndyMac REIT had extended
commitments to make warehouse and related lines of credit in an aggregate amount
of $768 million, of which $512 million was outstanding, net of reserves. The
allowance for loan losses related to warehouse lines of credit totaled $1.8
million at December 31, 1997. There were no chargeoffs against such allowance
during the year ended December 31, 1997. Repurchase debt outstanding associated
with IndyMac REIT's financing of these warehouse lines of credit totaled $524
million at December 31, 1997. As of December 31, 1997 and 1996, there were no
delinquent (30 days and over) warehouse lines of credit.
CMO PORTFOLIO: As of December 31, 1997, IndyMac REIT had a portfolio comprised
of nine series of CMOs (the "CMO Portfolio"). Collateral for CMOs decreased to
$245.5 million at December 31, 1997 from $289.1 million at December 31, 1996.
This decrease of $43.6 million is primarily the result of repayments (including
prepayments and premium and discount amortization) of $43.2 million and a
decrease in guaranteed investment contracts ("GICs") held by trustees of
$400,000. IndyMac REIT's CMOs outstanding decreased to $221.2 million at
December 31, 1997 from $264.1 million at December 31, 1996. This decrease of
$42.9 million resulted from principal payments and discount amortization on CMOs
of $42.5 million and a decrease in accrued interest payable on CMOs of $400,000.
RESULTS OF OPERATIONS 1997 COMPARED TO 1996
NET EARNINGS: As a result of the non-recurring charge related to IndyMac REIT's
acquisition of CAMC, IndyMac REIT's net earnings were $24.3 million, or $0.43
basic and diluted earnings per share, based on 56,124,537 and 56,453,634
weighted average shares outstanding for 1997, respectively, compared to $69.0
million, or $1.51 basic earnings per share and $1.50 diluted earnings per share,
based on 45,643,885 and 45,805,509 weighted average shares outstanding for 1996,
respectively.
Earnings before the non-recurring charge related to the acquisition of CAMC were
$100.3 million, with $1.79 basic earnings per share and $1.77 diluted earnings
per share, respectively, for the year ended December 31, 1997.
The increase in net earnings of $31.3 million before the non-recurring charge
was principally due to an increase in net interest income of $35.6 million, a
decrease in management fees to affiliate of $4.4 million, and an increase in
other income of $3.9 million, offset, in part, by increases in the provision for
loan losses, salaries and general and administrative expenses of $5.6 million,
$4.9 million and $2.8 million, respectively.
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INTEREST INCOME: Total interest income was $360.9 million for 1997 and $242.3
million for 1996. The increase in interest income of $118.6 million was
primarily the result of increases in interest earnings on the following:
construction loans, $44.8 million; mortgage loans held for investment, $28.2
million; mortgage securities, $14.7 million; mortgage loans held for sale, $11.2
million; revolving warehouse lines of credit, $9.3 million; manufactured housing
loans held for sale, $6.9 million; advances to IndyMac Operating, $2.3 million;
home improvement loans held for sale, $1.7 million; and manufactured housing
loans held for investment, $1.4 million. These increases were partially offset
by a reduction in the interest income related to collateral for CMOs of $2.4
million.
Interest income on mortgage loans held for sale totaled $68.9 million and $57.7
million, resulting in effective yields of 8.5% and 8.8%, respectively, for the
years ended December 31, 1997 and 1996. The average principal balance of such
loans increased to $806.9 million for the year ended December 31, 1997, from
$659.2 million for the year ended December 31, 1996.
Interest income on manufactured housing loans held for sale totaled $9.2 million
and $2.3 million, with interest earned at effective yields of 9.7% and 9.8%, for
the years ended December 31, 1997 and 1996, respectively. The average principal
balance of such loans increased by $71.3 million to $94.5 million during 1997,
from $23.2 million for 1996. This increase is partly attributable to the
Manufactured Housing Division's commencement of operations in March 1996.
Interest income on mortgage loans held for investment totaled $122.5 million
during 1997 compared to $94.2 million during 1996. The increase from 1996 was
the result of an increase in the average amount of loans held for investment
during the year of $451.2 million partially offset by a decrease in the average
yield. The average principal balance of mortgage loans held for investment was
$1.6 billion during 1997 with interest earned at an effective yield of 7.6%,
compared to the average principal balance of mortgage loans held for investment
during 1996 of $1.2 billion with interest earned at an effective rate of 8.1%.
Interest income on manufactured housing loans held for investment totaled $2.7
million and $1.3 million, with interest earned at effective yields of 10.5% and
10.4% for the years ended December 31, 1997 and 1996, respectively. The average
principal balance of such loans increased by $13.0 million to $25.6 million
during 1997, from $12.6 million for 1996.
Interest income on construction loans totaled $75.0 million and $30.2 million,
with interest earned at an effective yield of 11.1% and 12.6% for the years
ended December 31, 1997 and 1996, respectively. The average principal balance
of construction loans outstanding increased $437.3 million to $677.6 million
during 1997 from $240.3 million during 1996.
Interest income on revolving warehouse lines of credit totaled $24.8 million and
$15.5 million, with interest earned at effective yields of 9.1% and 8.7% for the
years ended December 31, 1997 and 1996, respectively. The average principal
balance outstanding increased to $272.3 million from $177.6 million for the
years ended December 31, 1997 and 1996, respectively.
Interest income on mortgage securities totaled $25.3 million and $10.5 million,
with interest earned at effective yields of 7.3% and 8.1% for the years ended
December 31, 1997 and 1996, respectively. During 1997, the average principal
balance increased to $348.5 million from $129.5 million in 1996. Mortgage
securities consisted of senior securities, adjustable rate agency securities,
subordinated securities, principal-only securities, interest-only securities and
inverse floater securities. Interest-only securities were comprised primarily
of excess master servicing fees sold by IndyMac Operating to IndyMac REIT and
subsequently securitized by IndyMac REIT, which were classified and accounted
for as available for sale, and also include interest-only securities acquired by
IndyMac REIT in connection with the securitization of mortgage loans held for
sale by IndyMac Operating, which were classified and accounted for as trading
securities.
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Interest income on collateral for CMOs was $20.2 million and $22.6 million for
the years ended December 31, 1997 and 1996, respectively. This decrease was
primarily attributable to a decrease in the average aggregate principal amount
of collateral for CMOs outstanding to $267.0 million from $299.8 million for the
years ended December 31, 1997 and 1996, respectively. Interest income on
collateral for CMOs includes the impact of amortization of net premiums paid in
connection with acquiring the CMO Portfolio and the impact of the delay in the
receipt of prepayments and temporary investment in lower yielding short-term
holdings (GICs) until such amounts are used to repay CMOs.
INTEREST EXPENSE: For 1997 and 1996, total interest expense was $242.4 million
and $159.4 million, respectively. This increase in interest expense of $83.0
million was primarily due to an increase in interest expense on repurchase
agreements and other credit facilities of $86.1 million, offset in part by a
decline in interest expense on CMOs of $3.1 million..
Interest expense on repurchase agreements and other credit facilities used to
finance loans held for sale and investment, revolving warehouse lines of credit,
construction loans and mortgage securities totaled $217.5 million during 1997
compared to $131.4 million during 1996. This increase of $86.1 million was
primarily the result of an increase in the aggregate average balance of
indebtedness outstanding for the year to $3.5 billion in 1997 from $2.1 billion
in 1996. The effective interest rate on such borrowings was 6.2% and 6.3% for
the years ended December 31, 1997 and 1996, respectively.
Interest expense on CMOs was $19.4 million and $22.5 million for the years ended
December 31, 1997 and 1996, respectively. The decrease was primarily
attributable to a decrease in average aggregate CMOs outstanding to $243.9
million for 1997 from $275.0 million for 1996, combined with a decrease in the
weighted average cost of CMOs to 7.9% in 1997 from 8.2% in 1996.
Interest expense on senior unsecured notes totaled $5.5 million for each of the
years ended December 31, 1997 and 1996, respectively. The weighted average
interest rate of 9.2% and average outstanding balance of $59.8 million were also
the same for each of the years ended December 31, 1997 and 1996.
EQUITY IN EARNINGS OF INDYMAC OPERATING: The 1997 earnings for IndyMac Operating
of $18.8 million, in which IndyMac REIT has a 99% economic interest, resulted
principally from net interest income of $2.0 million and gain on sale of
mortgage loans and securities of $71.7 million, offset by salaries, general and
administrative expenses of $56.5 million, management fee expense of $0.7 million
and income taxes of $13.9 million. During 1996, earnings for IndyMac Operating
of $18.1 million resulted principally from net interest income of $2.5 million
and gains on sale of mortgage loans and securities of $51.7 million, offset by
salaries, general and administrative expenses of $31.2 million, management fee
expense of $2.1 million and income taxes of $13.5 million.
SALARIES, GENERAL AND ADMINISTRATIVE EXPENSES: The increase of $7.7 million for
the year ended December 31, 1997 compared to the year ended December 31, 1996 is
primarily the result of the increased personnel and expenses required to support
the growth in the operations of IndyMac REIT, including CLCA, IndyMac CLD, and
WLCA as well as the expense of putting in place certain administrative and
accounting functions as part of IndyMac REIT becoming self-managed.
MANAGEMENT FEES: For 1997, management fees were $4.4 million compared to $8.8
million for 1996. The decrease in the management fee was primarily due to
IndyMac REIT's aforementioned acquisition of its manager on July 1, 1997as a
result of which IndyMac REIT became self-managed and the management fee was
eliminated.
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RESULTS OF OPERATIONS 1996 COMPARED TO 1995
NET EARNINGS: IndyMac REIT's net earnings were $69.0 million, or $1.51 basic
earnings per share and $1.50 diluted earnings per share, based on 45,643,885 and
45,805,509 weighted average shares outstanding for 1996, respectively, compared
to $50.0 million, or $1.25 basic and diluted earnings per share, based on
39,902,680 and 39,941,433 weighted average shares outstanding for 1995.
The increase in net earnings is principally due to an increase in net interest
income and equity in earnings of IndyMac Operating of $34.4 million and $5.7
million, respectively, offset, in part, by increases in the provision for loan
losses and expenses of $9.0 million and $13.2 million, respectively.
INTEREST INCOME: Total interest income was $242.3 million for 1996 and $180.5
million for 1995. The increase of $61.8 million in interest income was
primarily the result of an increase in interest on the following: construction
loans, $23.6 million; mortgage loans held for sale, $23.0 million; warehouse
lines of credit, $5.5 million; collateral for CMOs, $5.4 million; mortgage
securities, $3.1 million; manufactured housing loans held for sale, $2.3
million; and manufactured housing loans held for investment, $1.3 million.
These increases were offset by a reduction in the interest income related to
mortgage loans held for investment of $3.5 million.
Interest income on mortgage loans held for sale totaled $57.7 million and $34.7
million, resulting in effective yields of 8.8% and 9.2%, respectively, for the
years ended December 31, 1996 and 1995. The average outstanding balance of such
loans increased to $659.2 million for the year ended December 31, 1996, from
$377 million for the year ended December 31, 1995.
Interest income on manufactured housing loans held for sale totaled $2.3 million
during 1996, resulting in an effective yield of 9.8% for the year ended December
31, 1996. There were no manufactured housing loans held for sale during 1995.
Interest income on mortgage loans held for investment, consisting primarily of
adjustable-rate mortgages, totaled $94.2 million and $97.7 million, resulting
in effective yields of 8.1% and 8.1%, for the years ended December 31, 1996 and
1995, respectively. The average balance of such loans outstanding decreased
slightly to $1.16 billion in 1996 from $1.21 billion in 1995.
Interest income on manufactured housing loans held for investment totaled $1.3
million during 1996. There were no manufactured housing loans held for
investment during 1995.
Interest income on construction loans totaled $30.2 million and $6.5 million
during 1996 and 1995, respectively. The average principal balance of
construction loans outstanding totaled $240.3 million during 1996, representing
an increase of $190.8 million from the average principal balance of $49.5
million during 1995. Interest was earned at an effective yield of 12.6% and
13.2% in 1996 and 1995, respectively.
Interest income on revolving warehouse lines of credit totaled $15.5 million and
$10.0 million with interest earned at an effective yield of 8.7% and 9.5% for
the years ended December 31, 1996 and 1995, respectively. The average principal
balance outstanding increased by $72.1 million to $177.6 million in 1996 from
$105.5 million in 1995.
Interest income on mortgage securities totaled $10.5 million compared with $7.4
million for the years ended December 31, 1996 and 1995, respectively. The
average outstanding balance of mortgage securities decreased slightly to $129.5
million in 1996 from $132.1 million in 1995. The yield on mortgage securities
increased to 8.1% in 1996 from 5.6% in 1995. Mortgage securities consisted of
subordinated securities, principal-only securities, interest-only securities and
inverse
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floater securities. Interest-only securities were comprised primarily of excess
master servicing fees sold by IndyMac Operating to IndyMac REIT and subsequently
securitized by IndyMac REIT, which were classified and accounted for as
available for sale, and also include interest-only securities acquired by
IndyMac REIT in connection with the securitization of mortgage loans held for
sale by IndyMac Operating, which were classified and accounted for as trading
securities.
Interest income on collateral for CMOs was $22.6 million and $17.3 million for
the years ended December 31, 1996 and 1995, respectively. The increase was
attributable to an increase in the average aggregate principal amount of
collateral for CMOs outstanding to $300 million for 1996 from $213 million for
1995, offset by a decrease in the effective yield earned on the collateral from
8.1% in 1995 to 7.6% in 1996. Interest income on collateral for CMOs includes
the impact of amortization of net premiums paid in connection with acquiring the
CMO Portfolio and the impact of the delay in the receipt of prepayments and
temporary investment in lower yielding short-term holdings (GICs) until such
amounts are used to repay CMOs.
INTEREST EXPENSE: For 1996 and 1995, total interest expense was $159.4 million
and $131.9 million, respectively. The increase of $27.5 million in interest
expense was the result of increases in the interest expense on repurchase
agreements and other credit facilities, collateral for CMOs, and senior
unsecured notes of $18.0 million, $4.9 million, and $4.5 million respectively.
Interest expense on repurchase agreements and other credit facilities totaled
$131.4 million during 1996 compared to $113.4 million during 1995. The increase
of $18.0 million was primarily the result of an increase in the aggregate
average balance of indebtedness outstanding for the year to $2.2 billion in 1996
from $1.7 billion in 1995, partially offset by a decrease in the weighted
average effective interest rate to 6.1% in 1996 from 6.7% in 1995.
Interest expense on CMOs was $22.5 million and $17.5 million for 1996 and 1995,
respectively. This increase was primarily attributable to an increase in average
aggregate CMOs outstanding to $275 million for 1996 from $185 million for 1995,
combined with a decrease in the weighted average cost of CMOs to 8.2% in 1996
from 9.5% in 1995. The increase in the average balance of CMOs was directly
related to the issuance of CMO 1996-1 in January, 1996.
Interest expense on senior unsecured notes totaled $5.5 million and $1.0 million
for the years ended December 31, 1996 and December 31, 1995 respectively. The
senior unsecured notes were issued in October 1995 at an effective rate,
including issuance costs, of 9.2%.
EQUITY IN EARNINGS OF INDYMAC OPERATING: The 1996 earnings of $18.1 million for
IndyMac Operating, in which IndyMac REIT has a 99% economic interest, resulted
principally from net interest income of $2.5 million and gain on sale of
mortgage loans and securities of $51.7 million, offset by operating expenses of
$31.2 million, management fee expense of $2.1 million and income taxes of $13.5
million. During 1995, earnings of IndyMac Operating resulted principally from
net interest income of $12.4 million and gains on sales of mortgage loans and
securities of $35.8 million, offset by operating expenses of $20.7 million,
management fee expense of $1.8 million and income taxes of $12.5 million.
SALARIES, GENERAL AND ADMINISTRATIVE EXPENSES: The increase of $10.0 million in
operating expenses for the year ended December 31, 1996 compared to the year
ended December 31, 1995 is primarily the result of the increased personnel and
expenses required to support the growth in the operations of IndyMac REIT and
its qualified REIT subsidiaries.
MANAGEMENT FEES: For 1996, management fees were $8.8 million compared to $5.5
million for 1995. The increase in the management fee was primarily due to an
increase in incentive compensation payable to CAMC in 1996, directly related to
the increase in IndyMac REIT's earnings during 1996 in comparison to 1995.
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LIQUIDITY AND CAPITAL RESOURCES
The Company's primary source of funds includes monthly principal and interest
payments on its investment portfolio, short-term borrowings, proceeds from the
sales of assets and issuance of REMIC and asset-backed securities, master
servicing fees and other servicing-related revenues and proceeds from the
Company's Dividend Reinvestment and Stock Purchase Plan ("DRIP"). Additionally,
the Company incurs certain charges to earnings, including amortization and
depreciation, loan loss provisions and unrealized losses on trading securities,
which do not require an outlay of funds. The Company believes these funds are
sufficient for growth of its lending activities, acquisition of investment
assets, repayment of short-term borrowings and the payment of cash dividends.
It is the Company's policy to maintain adequate capital and to comply with
leverage and other financial covenants set forth in the Company's debt
covenants.
The Company has entered into a repurchase facility with Merrill Lynch, Pierce,
Fenner & Smith Incorporated and certain of its affiliates, in an aggregate
committed principal amount of $1.0 billion. The agreement is committed for a
period of at least two years from the date of execution and currently permits
the Company to finance its mortgage conduit, mortgage portfolio, warehouse
lending, IndyMac CLD lending and manufactured housing lending assets and
operations. The repurchase facility carries a floating rate of interest based
on LIBOR, plus an applicable margin, which varies by the type of asset financed.
The Company is permitted to borrow additional uncommitted amounts under this
repurchase facility, and as of December 31, 1997, the total balance of
outstanding loans from Merrill Lynch was $3.6 billion.
The Company has entered into a repurchase facility with Nomura Asset Capital
Corporation in an aggregate principal amount of $300 million. Such repurchase
facility is committed for a two-year period from the date of execution and
currently permits the Company to finance its mortgage conduit, mortgage
portfolio, warehouse lending and consumer construction lending assets and
operations. This repurchase facility carries a floating rate of interest based
on LIBOR, plus an applicable margin, which varies by the type of asset financed.
The Company has entered into a repurchase facility with Paine Webber Real Estate
Securities, Inc. in an aggregate principal amount of $500 million. Such
repurchase facility is committed for a one-year period from the date of
execution and currently permits the Company to finance its mortgage conduit,
warehouse lending and mortgage portfolio assets and operations. Such repurchase
facility carries a floating rate of interest based on LIBOR, plus an applicable
margin, which varies by the type of asset financed.
In May, 1995, the Company entered into a two-year committed credit facility with
a syndicate of nine commercial banks led by First Union National Bank of North
Carolina. This facility primarily finances mortgage loans, construction loans,
and master servicing assets. In 1997, the Company amended this credit facility
to expand the number of lenders and the available committed borrowings from $405
million to $500 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. On February 25,
1998, the Company amended this facility, by among other things, increasing the
available committed borrowings to $900 million, expanding the types of
collateral which can be financed thereunder and extending the term of the
commitment to three years.
During the fourth quarter of 1995, the Company raised $59.6 million in
connection with the private placement of senior notes 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 effective rate of
interest on such senior notes is fixed at 9.2% for a period of seven years from
the date of issuance. In 1995, the, the notes were rated "BBB-" by Duff &
Phelps Credit Rating Co.,
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and subsequently raised to "BBB" in 1997. At December 31, 1997, the notes were
rated "BBB " by Fitch IBCA Inc., and "BB+" by Standard & Poor's Rating Services,
Inc.
The Company has from time to time raised additional capital through secondary
public offerings, the most recent of which involved the issuance of the
Company's common stock with net proceeds totaling $68.7 million in February,
1995. The Company also raises new equity capital primarily through the optional
cash payment feature of its Dividend Reinvestment and Stock Purchase Plan.
During 1997 and 1996, the Company raised $206 million and $133 million,
respectively, through such Dividend Reinvestment and Stock Purchase Plan.
The Company has filed a shelf registration statement with the Securities and
Exchange Commission in an aggregate amount of $500 million which became
effective in January, 1998. Under the terms of the registration statement, the
Company is permitted to offer a variety of debt and / or equity instruments.
The Company has not determined what debt or equity instruments it may offer
pursuant to the shelf registration statement or when any such offerings may
occur.
The REIT provisions of the Internal Revenue Code restrict IndyMac REIT's ability
to retain earnings and thereby replenish the capital committed to its mortgage
portfolio, conduit operations, commercial lending and other operations by
requiring IndyMac REIT 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.
Management believes that the Company's cash flow from operations and the
Company's existing financing arrangements are currently 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 - During the year ended December 31, 1997, the Company's
operating activities required cash of approximately $820 million. The primary
operating activity for which cash was used during the year ended December 31,
1997 was the acquisition of mortgage loans and manufactured housing loans held
for sale.
Investing Activities - The primary investing activities for which cash was used
during the year ended December 31, 1997 were the acquisition of mortgage loans
held for investment, the purchase of mortgage securities and the funding of
construction loans receivable . The net cash used in investing activities
totaled $1.5 billion for the year ended December 31, 1997.
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<PAGE>
Financing Activities - Net cash provided by financing activities amounted to
$2.4 billion for the year ended December 31, 1997. The cash provided by
financing activities was primarily the result of additional borrowings under
repurchase agreements and other credit facilities during 1997 and proceeds of
common stock issuances pursuant to the Dividend Reinvestment and Stock Purchase
Plan during the year ended December 31, 1997.
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 materially affected by
changes in interest rates in various ways. With respect to its financial assets
and liabilities, the Company has devised and implemented a general
asset/liability investment management strategy which seeks, on an economic
basis, to mitigate significant fluctuations in the financial position and
results of operations of the Company likely to be caused by changes in market
interest rates. This strategy attempts, among other things, to balance
investments in various types of financial instruments whose values could be
expected to move inversely to each other in response to 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 would include
interest-only securities. 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 December 31, 1997, IndyMac REIT and IndyMac Operating on a
combined basis held $381 million of interest-only securities. Of the $381
million aggregate amount, $279 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
Operating.
Financial instruments of the Company that tend to decrease in value as interest
rates increase, and increase in value as interest rates decline, would include
REMIC senior securities, fixed rate subordinated securities, adjustable rate
agency securities, principal-only securities, US Treasury bonds and inverse-
floater securities. Similar to the interest-only securities, 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 IndyMac REIT or IndyMac Operating 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 December 31,
1997, IndyMac REIT and IndyMac Operating on a combined basis held $779 million
of REMIC senior securities, fixed and adjustable rate subordinated securities,
adjustable rate agency securities, principal-only securities, US Treasury bonds
and inverse floater securities. Of the $779 million aggregate amount, $359
million of such securities are classified as trading securities.
25
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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
Company. By comparison, the unrealized holding gains and losses of securities
available for sale are excluded from earnings of the Company 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 manufactured
housing loans, thus decreasing the volume of loans available to be purchased
through the Company's 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 permits the lender or lenders thereunder to require the Company to
repay amounts outstanding and/or pledge additional assets in the event that the
value of the pledged collateral declines due to changes in market interest
rates. In 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.
SYSTEMS ISSUES ASSOCIATED WITH THE YEAR 2000
The Company is conducting a comprehensive review of its computer systems to
determine if they will be affected by the Year 2000 issue - computer programs
and embedded logic devices that utilize two digits rather than four to define
the applicable year may fail to properly recognize date sensitive information
when the year changes to 2000. Generally, the Company is not affected by issues
resulting from the use of "legacy" computer systems and software because it
commenced its active operating businesses within the past five years.
Accordingly, the Company does not anticipate incurring Year 2000 systems
compliance costs that would be material to its financial position, results of
operations, or cash flows in future periods. However, there can be no assurance
that the Company's depository institutions, lenders, custodians, vendors, and
clients will timely resolve their own Year 2000 compliance issues or that any
failure by these other parties to resolve such issues would not have an adverse
effect on the Company's operations and financial condition. Management believes
it is devoting the necessary resources to timely address all Year 2000 issues
over which it has control.
26
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ----------------------------------------------------
The information called for by this item 8 is already incorporated by reference
to IndyMac REIT's Consolidated Financial Statements and Report of Independent
Certified Public Accountants beginning at page F-1 of this form 10-K.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
- -------------------------------------------------------------
None.
27
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- ------------------------------------------------------------
The information required by this Item 10 as to directors and executive officers
of IndyMac REIT is hereby incorporated by reference to IndyMac REIT's definitive
proxy statement, to be filed pursuant to Regulation 14A within 120 days after
the end of IndyMac REIT's 1997 fiscal year.
ITEM 11. EXECUTIVE COMPENSATION
- --------------------------------
The information required by this Item 11 is hereby incorporated by reference to
IndyMac REIT's definitive proxy statement, to be filed pursuant to Regulation
14A within 120 days after the end of IndyMac REIT's 1997 fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- ------------------------------------------------------------------------
The information required by this Item 12 is hereby incorporated by reference to
IndyMac REIT's definitive proxy statement, to be filed pursuant to Regulation
14A within 120 days after the end of IndyMac REIT's 1997 fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------
The information required by this Item 13 is hereby incorporated by reference to
IndyMac REIT's definitive proxy statement, to be filed pursuant to Regulation
14A within 120 days after the end of IndyMac REIT's 1997 fiscal year.
28
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
- -------- ---------------------------------------------------------------
(a) (1) and (2) - Financial Statements and Schedules
The information called for by this section of item 14 is set forth in the
Index to Financial Statements and Schedules at page F-1 of this Form 10 - K.
(3) - Exhibits
Exhibit
No. Description
- ------- -----------
2.1* Agreement and Plan of Merger dated as of January 29, 1997 among INMC
Mortgage Holdings, Inc., formerly known as CWM Mortgage Holdings, Inc.
("CWM" or the "Company"), Countrywide Asset Management Corporation
("CAMC"), and Countrywide Credit Industries, Inc. ("CCR") (incorporated
by reference to Appendix A to the Company's Definitive Proxy Statement
filed with the SEC on May 21, 1997).
2.2* Registration Rights Agreement dated as of July 1, 1997 between the
Company and CCR (incorporated by reference to Exhibit A to the Company's
Definitive Proxy Statement filed with the SEC on May 21, 1997).
3.1* Certificate of Incorporation of the Company, as amended (incorporated by
reference to Exhibit 3.1 to the Company's Form 10-Q for the quarter ended
June 30, 1997).
3.2* Bylaws of the Company, as amended (incorporated by reference to Exhibit
3.2 to the Company's Form 10-Q for the quarter ended June 30, 1997).
4.1* Indenture (the "Indenture"), dated as of December 1, 1985, between
Countrywide Mortgage Obligations, Inc. ("CMO, Inc.") and Bankers Trust
Company, as Trustee ("BTC") (incorporated by reference to Exhibit 4.1 to
CMO, Inc.'s Form 8-K filed with the SEC on January 24, 1986).
4.2* Series A Supplement, dated as of December 1, 1985, to the Indenture
(incorporated by reference to Exhibit 4.2 to CMO, Inc.'s Form 8-K filed
with the SEC on January 24, 1986).
4.3* Series B Supplement, dated as of February 1, 1986, to the Indenture
(incorporated by reference to Exhibit 4.1 to CMO, Inc.'s Form 8-K filed
with the SEC on March 31, 1986).
4.4* Series C Supplement, dated as of April 1, 1986, to the Indenture
(incorporated by reference to Exhibit 4.4 to CMO, Inc.'s Amendment No. 1
to S-11 Registration Statement (No. 33-3274) filed with the SEC on May
13, 1986).
4.5* Series D Supplement, dated as of May 1, 1986, to the Indenture
(incorporated by reference to Exhibit 4.5 to the Company's S-11
Registration Statement (No. 33-6787) filed with the SEC on June 26,
1986).
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4.6* Series E Supplement, dated as of June 1, 1986, to the Indenture
(incorporated by reference to Exhibit 4.6 to the Company's Amendment No.
1 to S-11 Registration Statement (No. 33-6787) filed with the SEC on July
30, 1986).
4.7* Series F Supplement, dated as of August 1, 1986, to the Indenture
(incorporated by reference to Exhibit 4.1 to CMO, Inc.'s Form 8-K filed
with the SEC on August 14, 1986).
4.8* Series G Supplement, dated as of August 1, 1986, to the Indenture
(incorporated by reference to Exhibit 4.8 to CMO, Inc.'s S-11
Registration Statement (No.33-8705) filed with the SEC on September 12,
1986).
4.9* Series H Supplement, dated as of September 1, 1986, to the Indenture
(incorporated by reference to Exhibit 4.1 to CMO, Inc's Form 8-K filed
with the SEC on October 7, 1986).
4.10* Series I Supplement, dated as of October 1, 1986, to the Indenture
(incorporated by reference to Exhibit 4.11 to CMO, Inc.'s Amendment No. 1
to S-11 Registration Statement (No. 33-8705) filed with the SEC on
October 27, 1986).
4.11* Series J Supplement, dated as of October 15, 1986, to the Indenture
(incorporated by reference to Exhibit 4.1 to CMO, Inc.'s Form 8-K filed
with the SEC on November 12, 1986).
4.12* Series K Supplement, dated as of December 1, 1986, to the Indenture
(incorporated by reference to 4.1 to CMO, Inc.'s Form 8-K filed with the
SEC on March 16, 1987).
4.13* Series M Supplement, dated as of January 1, 1987, to the Indenture
(incorporated by reference to Exhibit 4.3 to CMO, Inc.'s Form 8-K filed
with the SEC on March 16, 1987).
4.14* Indenture (the "SPNB Indenture"), dated as of December 1, 1986, between
CMO, Inc. and Security Pacific National Bank, as Trustee ("SPNB")
(incorporated by reference to Exhibit 4.1 to CMO, Inc.'s Form 8-K filed
with the SEC on January 9, 1987).
4.15* Series W-1 Supplement, dated as of December 1, 1986, to the SPNB
Indenture (incorporated by reference to Exhibit 4.2 to CMO, Inc.'s Form
8-K filed with the SEC on January 9, 1987).
4.16* Series N Supplement, dated as of February 1, 1987, to the SPNB Indenture
(incorporated by reference to Exhibit 4.1 to CMO, Inc.'s Form 8-K filed
with the SEC on March 16, 1987).
4.17* Indenture, dated as of February 1, 1987, between Countrywide Mortgage
Trust 1987-I (the "1987-I Trust") and SPNB (incorporated by reference to
Exhibit 4.18 to the Company's Form 10-K for the year ended December 31,
1986).
4.18* Indenture Supplement, dated as of September 1, 1987, among Countrywide
Mortgage Obligations III, Inc. ("CMO III, Inc."), CMO, Inc. and BTC
(incorporated by reference to Exhibit 4.1 to CMO III, Inc.'s Form 8-K
filed with the SEC on October 9, 1987).
4.19* Indenture Supplement, dated as of September 1, 1987, among CMO III, Inc.,
CMO, Inc. and SPNB (incorporated by reference to Exhibit 4.2 to CMO III,
Inc.'s. Form 8-K filed with the SEC on October 9, 1987).
4.20* Indenture dated as of November 20, 1990, between the Countrywide Cash
Flow Bond Trust ("CCFBT") and BTC (incorporated by referenced to Exhibit
4.22 to the Company's Form 10-K for the year ended December 31, 1990).
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<PAGE>
4.21* Indenture dated as of March 30, 1993 between Countrywide Mortgage Trust
1993-I (the "1993-I Trust") and State Street Bank and Trust Company (the
"Bond Trustee") (incorporated by reference to Exhibit 4.1 to the
Company's Form 10-Q for the quarter ended March 31, 1993).
4.22* Indenture dated as of April 14, 1993 between Countrywide Mortgage Trust
1993-II (the "1993-II Trust") and the Bond Trustee (incorporated by
reference to Exhibit 4.2 to the Company's Form 10-Q for the quarter ended
March 31, 1993).
4.23* First Supplemental Indenture dated as of May 24, 1993 between the 1993-II
Trust and the Bond Trustee (incorporated by reference to Exhibit 4.25 to
the Company's Form 10-K for the year ended December 31, 1994.)
4.24* 1994 Stock Incentive Plan adopted May 17, 1994 (incorporated by reference
to Exhibit 4.1 to the Company's Form 10-Q for the quarter ended September
30, 1994).
4.25* 1996 Stock Incentive Plan adopted May 29, 1996, as amended June 24, 1997
(incorporated by reference to Exhibit 4.1 to the Company's Form 10-Q for
the quarter ended June 30, 1997).
10.1* 1996 Amended and Extended Management Agreement, extended as of June 1,
1996, between CWM and CAMC (the "Manager") (incorporated by reference to
Exhibit 10.1 to the Company's Form 10-Q for the quarter ended June 30,
1996).
10.2* 1987 Amended and Restated Servicing Agreement, dated as of May 15, 1987,
between Countrywide Mortgage Investments, Inc. (now known as INMC
Mortgage Holdings, Inc.) ("CMI") and Countrywide Funding Corporation
("CFC") (incorporated by reference to Exhibit 10.2 to the Company's Form
10-Q filed for the quarter ended June 30, 1987).
10.3* 1996 Amended and Extended Loan Purchase and Administrative Services
Agreement, dated as of June 1, 1996, between CWM and CFC (incorporated by
reference to Exhibit 10.1 to the Company's Form 10-Q for the quarter
ended June 30, 1996).
10.4* 1988 Amended and Restated Submanagement Agreement, dated as of May 15,
1988, between CFC and the Manager (incorporated by reference to Exhibit
10.4 to the Company's Form 10-Q for the quarter ended March 31, 1988).
10.5* Form of Indemnity Agreement between CMI and the Company's directors and
officers (incorporated by reference to Exhibit 10.5 to the Company's Form
10-Q for the quarter ended June 30, 1987).
10.6* Form of Guaranty of Indemnity Agreement made by CCR to CMI and the
Company's directors and officers (incorporated by reference to Exhibit
10.6 to the Company's Form 10-Q for the quarter ended June 30, 1987).
10.7* Servicing Agreement, dated as of November 15, 1986, among CMO, Inc., SPNB
and CFC (incorporated by reference to Exhibit 10.1 to CMO, Inc.'s Form 8-
K filed with the SEC on January 9, 1987).
10.8* Deposit Trust Agreement (the "1987-I Deposit Trust Agreement"), dated
January 16, 1987, between Countrywide Mortgage Obligations II, Inc. ("CMO
II, Inc.") and Wilmington Trust Company, as Owner Trustee of the 1987-I
Trust (incorporated by reference to Exhibit 10.15 to the Company's Form
10-K for the year ended December 31, 1986).
31
<PAGE>
10.9* Management Agreement, dated as of February 1, 1987, between Wilmington
Trust Company, as Owner Trustee of the 1987-I Trust, and the Manager
(incorporated by reference to Exhibit 10.17 to the Company's Form 10-K
for the year ended December 31, 1986).
10.10* Servicing Agreement, dated as of February 1, 1987, among the 1987-I
Trust, SPNB and CFC (incorporated by reference to Exhibit 10.18 to the
Company's Form 10-K filed for the year ended December 31, 1985).
10.11* Agreement between CMO, II, Inc. and CMI, dated as of February 1, 1987,
regarding certain bankruptcy matters (incorporated by reference to
Exhibit 10.19 to the Company's Form 10-K for the year ended December 31,
1986).
10.12* Agreement among CMO II, Inc., the Manager and CFC, dated as of February
1, 1987, regarding certain bankruptcy matters (incorporated by reference
to Exhibit 10.20 to the Company's Form 10-K for the year ended December
31, 1986).
10.13* Deposit Trust Agreement (the "1987-II Deposit Trust Agreement"), dated
as of April 29, 1987, between CMO II, Inc. and Wilmington Trust Company,
as Owner Trustee of the 1987-II Trust (incorporated by reference to
Exhibit 10.7 to the Company's Form 10-Q for the quarter ended June 30,
1987).
10.14* First Amendment to 1987-II Deposit Trust Agreement, dated as of May 29,
1987, between CMO II, Inc. and Wilmington Trust Company, as Owner Trustee
of the 1987-II Trust (incorporated by reference to Exhibit 10.8 to the
Company's Form 10-Q for the quarter ended June 30, 1987).
10.15* Guaranty, dated as of May 29, 1987, by CMI of obligations of CMO II,
Inc. under the 1987-II Deposit Trust Agreement, as amended (incorporated
by reference to Exhibit 10.9 to the Company's Form 10-Q for the quarter
ended June 30, 1987).
10.16* Management Agreement, dated as of June 1, 1987, between Wilmington Trust
Company, as Owner Trustee of the 1987-II Trust, and the Manager
(incorporated by reference to Exhibit 10.10 to the Company's Form 10-Q
for the quarter ended June 30, 1987).
10.17* Servicing Agreement, dated as of June 1, 1987, among the 1987-II Trust,
SPNB and CFC (incorporated by reference to Exhibit 10.11 to the Company's
Form 10-Q for the quarter ended June 30, 1987).
10.18* Transfer Agreement, dated as of May 1, 1987, among CMI, CMO II, Inc. and
CMO III, Inc. (incorporated by reference to Exhibit 10.12 to the
Company's Form 10-Q for the quarter ended June 30, 1987).
10.19* Guaranty, dated as of May 1, 1987, by CMI of obligations of CMO III,
Inc. under the 1987-I Deposit Trust Agreement (incorporated by reference
to Exhibit 10.13 to the Company's Form 10-Q for the quarter ended June
30, 1987).
10.20* Agreement of Merger, dated as of September 11, 1987, between CMO, Inc.
and CMO III, Inc. (incorporated by reference to Exhibit 2 to CMO III,
Inc.'s Form 8-K filed with the SEC on October 9, 1987).
32
<PAGE>
10.21* 1985 Stock Option Plan adopted August 26, 1985, as amended February 12,
1987 and as further amended on February 15, 1989 (incorporated by
reference to Exhibit 10.30 to the Company's Form 10-K for the year ended
December 31, 1989).
10.22* Trust Agreement, dated as of November 20, 1990, between CMO III, Inc.
and Wilmington Trust Company relating to the CCFBT (the "CCFBT Trust
Agreement") (incorporated by reference to Exhibit 10.31 to the Company's
Form 10-K for the year ended December 31, 1990).
10.23* Guaranty, dated as of November 20, 1990, by CMI of obligations of CMO
III, Inc. under the CCFBT Trust Agreement (incorporated by reference to
Exhibit 10.32 to the Company's Form 10-K for the year ended December 31,
1990).
10.24* Management Agreement, dated as of November 20, 1990, between CCFBT and
the Manager (incorporated by reference to Exhibit 10.33 to the Company's
Form 10-K for the year ended December 31, 1990).
10.25* Assignment Agreement, dated as of November 21, 1990, between CMO III,
Inc. and CCFBT (incorporated by reference to Exhibit 10.35 to the
Company's Form 10-K for the year ended December 31, 1990).
10.26* Deposit Trust Agreement dated as of March 24, 1993 between Countrywide
Mortgage Obligations II, Inc. and Wilmington Trust Company (incorporated
by reference to Exhibit 10.1 to the Company's Form 10-Q for the quarter
ended March 31, 1993).
10.27* Master Servicing Agreement dated as of March 30, 1993 by and among the
1993-I Trust, CMI and the Bond Trustee (incorporated by reference to
Exhibit 10.2 to the Company's Form 10-Q for the quarter ended March 31,
1993).
10.28* Servicing Agreement dated as of March 30, 1993 by and among the 1993-I
Trust, Countrywide Funding Corporation and the Bond Trustee (incorporated
by reference to Exhibit 10.3 to the Company's Form 10-Q for the quarter
ended March 31, 1993).
10.29* Management Agreement, dated as of March 30, 1993 between Countrywide
Asset Management Corporation and the 1993-I Trust (incorporated by
reference to Exhibit 10.4 to the Company's Form 10-Q for the quarter
ended March 31, 1993).
10.30* First Amendment dated as of March 30, 1993 to Agreement between
Countrywide Mortgage Obligations II, Inc. and CMI (incorporated by
reference to Exhibit 10.5 to the Company's Form 10-Q for the quarter
ended March 31, 1993).
10.31* First Amendment dated as of March 30, 1993 to Agreement between
Countrywide Mortgage Obligations II, Inc., Countrywide Asset Management
Corporation and Countrywide Funding Corporation (incorporated by
reference to Exhibit 10.6 to the Company's Form 10-Q for the quarter
ended March 31, 1993).
10.32* Deposit Trust Agreement dated as of April 7, 1993 between Countrywide
Mortgage Obligations II, Inc. and Wilmington Trust Company (incorporated
by reference to Exhibit 10.7 to the Company's Form 10-Q for the quarter
ended March 31, 1993).
10.33* Master Servicing Agreement dated as of April 14, 1993 by and among the
1993-II Trust, CMI and the Bond Trustee (incorporated by reference to
Exhibit 10.8 to the Company's Form 10-Q for the quarter ended March 31,
1993).
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<PAGE>
10.34* Servicing Agreement dated as of April 14, 1993 by and among the 1993-II
Trust, Countrywide Funding Corporation and the Bond Trustee (incorporated
by reference to Exhibit 10.9 to the Company's Form 10-Q for the quarter
ended March 31, 1993).
10.35* Management Agreement, dated as of April 14, 1993 between Countrywide
Asset Management Corporation and the 1993-II Trust (incorporated by
reference to Exhibit 10.10 to the Company's Form 10-Q for the quarter
ended March 31, 1993).
10.36* First Amendment to Deposit Trust Agreement dated as of April 13, 1993
between Countrywide Mortgage Obligations II, Inc. and Wilmington Trust
Company, as Owner Trustee (incorporated by reference to Exhibit 10.11 to
the Company's Form 10-Q for the quarter ended March 31, 1993).
10.37* Contribution and Mortgage Loan Acquisition Agreement dated as of April
19, 1993 between CMI and Countrywide Funding Corporation (incorporated by
reference to Exhibit 10.2 to the Company's Amendment No. 3 to S-3
Registration Statement (No. 33-63034) filed with the SEC on July 16,
1993).
10.38* First Amendment to Deposit Trust Agreement dated as of April 16, 1993
between Countrywide Mortgage Obligations II, Inc. and Wilmington Trust
Company (incorporated by reference to Exhibit 10.8 to the Company's Form
10-Q for the quarter ended June 30, 1993).
10.39* Custody Agreement dated as of April 5, 1993 among CMI, Merrill Lynch
Mortgage Capital, Inc. and State Street Bank and Trust Company of
California, N.A., Custodian (incorporated by reference to Exhibit 10.10
to the Company's Form 10-Q for the quarter ended June 30, 1993).
10.40* Employment agreement dated November, 1996 between CAMC and Michael W.
Perry (incorporated by reference to Exhibit 10.40 to the Company's Form
10-K for the year ended December 31, 1996).
10.41* First Amendment to 1996 Amended and Extended Management Agreement dated
as of July 25, 1996 between CWM and CAMC (incorporated by reference to
Exhibit 10.1 to the Company's Form 10-Q for the quarter ended September
30, 1996).
10.42* Master Forward Commitment and Services Agreement effective January 1,
1996 between CWM and Independent National Mortgage Corporation
(incorporated by reference to Exhibit 10.8 to the Company's Form 10-Q for
the quarter ended March 31, 1996).
10.43* Independent National Mortgage Corporation Capitalization Agreement,
effective as of January 1, 1996, by and among CWM, CFC and Independent
National Mortgage Corporation (incorporated by reference to Exhibit 10.8
to the Company's Form 10-Q for the quarter ended March 31, 1996).
10.44* Revolving Working Capital Credit Facility and Credit Support Agreement,
effective as of January 1, 1996, between CWM and Independent National
Mortgage Corporation (incorporated by reference to Exhibit 10.8 to the
Company's Form 10-Q for the quarter ended March 31, 1996).
10.45* Second Amendment to 1996 Amended and Extended Management Agreement dated
as of April 28, 1997 between CWM and CAMC (incorporated by reference to
Exhibit 10.1 to the Company's Form 10-Q for the quarter ended March 31,
1997).
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<PAGE>
10.46* First Amendment to 1996 Amended and Extended Loan Purchase and
Administrative Services Agreement dated as of April 28, 1997 between CWM
and Countrywide Home Loans, Inc. (incorporated by reference to Exhibit
10.2 to the Company's Form 10-Q for the quarter ended March 31, 1997).
10.47* First Amendment to Employment Agreement dated as of April 1, 1997
between CAMC and Michael W. Perry (incorporated by reference to Exhibit
10.3 to the Company's Form 10-Q for the quarter ended March 31, 1997).
10.48* Employment Agreement dated January 1, 1997 between CAMC and Richard H.
Wohl (incorporated by reference to Exhibit 10.1 to the Company's Form 10-
Q for the quarter ended June 30, 1997).
10.49* Employment Agreement dated September 1, 1997 between IndyMac, Inc. and
S. Blair Abernathy (incorporated by reference to Exhibit 10.1 to the
Company's Form 10-Q for the quarter ended September 30, 1997).
10.50 Employment Agreement dated January 1, 1997 between CAMC and Kathleen H.
Rezzo.
21.1 List of Subsidiaries.
23.1 Consent of Grant Thornton LLP
27 Financial Data Schedule
*Incorporated by reference.
(b) - REPORTS ON FORM 8-K
None.
35
<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 March 31, 1998.
INMC MORTGAGE HOLDINGS, INC.
BY: S:/ MICHAEL W. PERRY
-------------------------------------
Michael W. Perry
President and Chief Operating Officer
POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and appoints
Michael W. Perry and Richard H. Wohl his true and lawful attorneys-in-fact and
agents, each acting alone, with full powers of substitution, and resubstitution,
for him and in his name, place and stead, in any and all capacities, to sign any
and all amendments to this report, and to file the same with all exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, each
acting alone, full power and authority to do and perform each and every act and
thing requisite and necessary to be done in and about the premises, as fully to
all intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, each acting alone, or his
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the Registrant in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
S:/ DAVID S. LOEB Director and Chairman of the Board of March 31, 1998
- ------------------------------------------ Directors
David S. Loeb
S:/ ANGELO R. MOZILO Director, Chief Executive Officer and March 31, 1998
- ------------------------------------------ Vice Chairman of the Board of Directors
Angelo R. Mozilo (Principal Executive Officer)
S:/ MICHAEL W. PERRY Director, President and March 31, 1998
- ------------------------------------------ Chief Operating Officer
Michael W. Perry
S:/ JAMES P. GROSS Executive Vice President March 31, 1998
- ------------------------------------------ and Chief Financial Officer
James P. Gross (Principal Accounting and
Financial Officer)
S:/ LYLE E. GRAMLEY Director March 31, 1998
- ------------------------------------------
Lyle E. Gramley
</TABLE>
36
<PAGE>
<TABLE>
<S> <C> <C>
S:/ THOMAS J. KEARNS Director March 31, 1998
- ------------------------------------------
Thomas J. Kearns
S:/ FREDERICK J. NAPOLITANO Director March 31, 1998
- ------------------------------------------
Frederick J. Napolitano
</TABLE>
37
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS AND
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
INMC MORTGAGE HOLDINGS, INC.
AND SUBSIDIARIES
December 31, 1997, 1996 and 1995
F-1
<PAGE>
INMC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
(dba, IndyMac Mortgage Holdings, Inc.)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
December 31, 1997, 1996, 1995
INMC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
- ---------------------------------------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Certified Public Accountants F-3
Financial Statements
Consolidated Balance Sheets F-4
Consolidated Statements of Earnings F-5
Consolidated Statement of Shareholders' Equity F-6
Consolidated Statements of Cash Flows F-7
Notes to Financial Statements F-8
Schedules
Schedule IV - Mortgage Loans on Real Estate F-25
</TABLE>
All other schedules have been omitted since the required information is not
present or not present in amounts sufficient to require submission of the
schedules, or because the information required is included in the
consolidated financial statements or notes thereto.
INDYMAC, INCORPORATED AND SUBSIDIARY
- ------------------------------------
<TABLE>
<S> <C>
Report of Independent Certified Public Accountants F-26
Financial Statements
Balance Sheet F-27
Statement of Earnings F-28
Statement of Shareholders' Equity F-29
Statement of Cash Flows F-30
Notes to Financial Statements F-31
</TABLE>
F-2
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
--------------------------------------------------
Board of Directors and Shareholders
INMC Mortgage Holdings, Inc. and Subsidiaries
dba, IndyMac Mortgage Holdings, Inc.
We have audited the accompanying consolidated balance sheets of INMC Mortgage
Holdings, Inc. and Subsidiaries dba, IndyMac Mortgage Holdings, Inc. as of
December 31, 1997 and 1996, and the related consolidated statements of earnings,
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to the above present fairly,
in all material respects, the consolidated financial position of INMC Mortgage
Holdings, Inc. and Subsidiaries dba, IndyMac Mortgage Holdings, Inc. as of
December 31, 1997 and 1996, and the consolidated results of their operations and
their consolidated cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
We have also audited Schedule IV as of December 31, 1997 of INMC Mortgage
Holdings, Inc. and Subsidiaries dba, IndyMac Mortgage Holdings, Inc. In our
opinion, this schedule presents fairly, in all material respects, the
information required to be set forth therein.
GRANT THORNTON LLP
Los Angeles, California
February 27, 1998
F-3
<PAGE>
INMC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
(dba, IndyMac Mortgage Holdings, Inc.)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(Dollar amounts in thousands)
December 31, December 31,
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
Loans held for sale
Mortgages-prime $1,091,908 $ 404,346
Mortgages-subprime 75,770 177,913
Manufactured housing 208,830 74,949
Home improvement 81,763 -
---------- ----------
1,458,271 657,208
Loans held for investment, net
Mortgages-prime 1,801,014 1,210,891
Manufactured housing 30,033 25,822
Construction 946,806 460,546
Revolving warehouse lines of credit, net 512,458 251,032
---------- ----------
3,290,311 1,948,291
Mortgage securities 558,445 231,780
Collateral for CMOs 245,474 289,054
Investment in and advances to IndyMac, Inc. 185,715 170,609
Cash and cash equivalents 13,676 12,450
Interest receivable 54,442 22,660
Other assets 42,776 24,007
---------- ----------
Total assets $5,849,110 $3,356,059
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Repurchase agreements and other credit facilities $4,826,656 $2,531,509
Collateralized mortgage obligations 221,154 264,080
Senior unsecured notes 59,888 59,759
Accounts payable and accrued liabilities 37,518 22,287
---------- ----------
Total liabilities 5,145,216 2,877,635
Shareholders' equity
Common stock - authorized, 100,000,000 shares of
$.01 par value; issued and outstanding, 63,351,616 shares
at December 31, 1997 and 50,200,146 at December 31, 1996 634 502
Additional paid-in capital 773,475 490,695
Net unrealized gain (loss) on mortgage securities available for sale:
Held by IndyMac REIT (2,006) (7,166)
Held by IndyMac, Inc. 501 (8,427)
Cumulative earnings 243,430 219,135
Cumulative distributions to shareholders (312,140) (216,315)
---------- ----------
Total shareholders' equity 703,894 478,424
---------- ----------
Total liabilities and shareholders' equity $5,849,110 $3,356,059
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements
F-4
<PAGE>
INMC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
(dba, IndyMac Mortgage Holdings, Inc.)
CONSOLIDATED STATEMENTS OF EARNINGS
(Dollar amounts in thousands, except per share data)
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------
1997 1996 1995
----------------------------------
<S> <C> <C> <C>
REVENUES
Interest income
Loans held for sale
Mortgages-prime $ 56,148 $ 42,436 $ 34,733
Mortgages-subprime 12,752 15,310 -
Manufactured housing 9,184 2,259 -
Home improvement 1,727 - -
-------- -------- --------
79,811 60,005 34,733
Loans held for investment
Mortgages-prime 122,477 94,237 97,720
Manufactured housing 2,697 1,308 -
Construction 74,997 30,158 6,548
Revolving warehouse lines of credit 24,801 15,523 10,024
-------- -------- --------
224,972 141,226 114,292
Mortgage securities 25,250 10,504 7,405
Collateral for CMOs 20,202 22,648 17,257
Advances to IndyMac, Inc. 10,075 7,676 6,502
Other 591 244 276
-------- -------- --------
Total interest income 360,901 242,303 180,465
Interest expense
Repurchase agreements and other credit facilities 217,492 131,389 113,379
Collateralized mortgage obligations 19,363 22,478 17,532
Senior unsecured notes 5,517 5,498 999
-------- -------- --------
Total interest expense 242,372 159,365 131,910
-------- -------- --------
Net interest income 118,529 82,938 48,555
Provision for loan losses 18,622 12,991 4,037
-------- -------- --------
Net interest income after provision for loan losses 99,907 69,947 44,518
Equity in earnings of IndyMac, Inc. 18,414 19,533 13,801
Gain (Loss) on mortgage loans and securities 997 (906) (591)
Other income 7,318 3,376 2,018
-------- -------- -------
Net revenues 126,636 91,950 59,746
EXPENSES
Salaries 14,844 9,940 2,260
General and Administrative 7,091 4,262 1,953
Management fees to affiliate 4,406 8,761 5,522
Non-recurring charges 76,000 - -
-------- -------- --------
Total expenses 102,341 22,963 9,735
-------- -------- --------
NET EARNINGS $ 24,295 $ 68,987 $ 50,011
======== ======== ========
EARNINGS PER SHARE
Basic EPS $0.43 $1.51 $1.25
Diluted EPS 0.43 1.50 1.25
WEIGHTED AVERAGE SHARES OUTSTANDING (in thousands)
Basic 56,125 45,644 39,903
Diluted 56,454 45,806 39,941
</TABLE>
The accompanying notes are an integral part of these statements
F-5
<PAGE>
INMC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
(dba, IndyMac Mortgage Holdings, Inc.)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
(Dollar amounts in thousands)
Years Ended December 31,
-----------------------------------
1997 1996 1995
-----------------------------------
<S> <C> <C> <C>
COMMON STOCK
Balance, beginning of year $502 $424 $323
Common stock issued 129 74 98
Common stock options exercised 3 4 3
------------------------------------
Balance, end of year 634 502 424
ADDITIONAL PAID IN CAPITAL
Balance, beginning of year 490,695 353,965 258,240
Common stock issued 278,404 132,982 93,565
Common stock options exercised 4,376 3,748 2,160
------------------------------------
Balance, end of year 773,475 490,695 353,965
NET UNREALIZED GAIN (LOSS) ON MORTGAGE
SECURITIES AVAILABLE FOR SALE
HELD BY INDYMAC REIT
Balance, beginning of year (7,166) 4,694 487
Valuation adjustments 5,160 (11,860) 4,207
------------------------------------
Balance, end of year (2,006) (7,166) 4,694
HELD BY INDYMAC
Balance, beginning of year (8,427) 2,898 520
Valuation adjustments, net of related income taxes 8,928 (11,325) 2,378
------------------------------------
Balance, end of year 501 (8,427) 2,898
CUMULATIVE EARNINGS
Balance, beginning of year 219,135 150,148 100,137
Net earnings 24,295 68,987 50,011
------------------------------------
Balance, end of year 243,430 219,135 150,148
CUMULATIVE DISTRIBUTION TO SHAREHOLDERS
Balance, beginning of year (216,315) (149,398) (101,790)
Dividends paid (95,825) (66,917) (47,608)
------------------------------------
Balance, end of year (312,140) (216,315) (149,398)
------------------------------------
Total Stockholders' Equity $703,894 $478,424 $362,731
====================================
</TABLE>
The accompanying notes are an integral part of these statements
F-6
<PAGE>
INMC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
(dba, IndyMac Mortgage Holdings, Inc.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(Dollar amounts in thousands)
Year Ended December 31,
------------------------------------------
1997 1996 1995
----------- ----------- ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings $ 24,295 $ 68,987 $ 50,011
Adjustments to reconcile net earnings
to net cash provided by (used in) operating activities:
Amortization and depreciation 29,144 24,911 22,456
Provision for loan losses 18,622 12,991 4,037
Equity in earnings of IndyMac (18,414) (19,533) (13,801)
Unrealized gain on trading securities (2,206) - -
Issuance of common stock as settlement of management contract 72,000 - -
Purchases of mortgage loans held for sale (4,912,560) (3,872,783) (3,779,914)
Sale of and payments from mortgage loans held for sale 4,210,331 3,646,046 3,670,576
Net purchases of manufactured housing loans held for sale (134,510) (74,949) -
Purchases of trading securities (70,740) (17,369) (19,118)
Principal payments on trading securities 4,044 - -
Net increases in other assets (54,789) (5,758) (8,911)
Net increases in other liabilities 14,790 4,972 8,298
----------- ----------- ------------
Net cash (used in) operating activities (819,993) (232,485) (66,366)
Cash flows from investing activities:
Purchases of mortgage loans held for investment (1,086,583) (207,825) (406,478)
Payments from mortgage loans held for investment 601,245 297,709 183,200
Net increase in construction loans receivable (572,997) (333,011) (111,646)
Purchases of mortgage securities (356,808) (118,783) -
Sales and payments of mortgage securities 80,704 - -
Net increase in revolving warehouse lines of credit (262,026) (60,927) (121,606)
Investment in IndyMac, net of dividends received - 24,750 (15,840)
Net purchases of manufactured housing loans held for investment (4,387) (25,822) -
(Increase)/decrease in advances to IndyMac, net of cash payment 12,236 (46,561) (67,128)
Payments from collateral for CMOs 43,139 46,106 38,180
Net change in GICs held by trustees as collateral for CMOs 390 98 953
----------- ----------- ------------
Net cash (used in) provided by investing activities (1,545,087) (424,266) (500,365)
Cash flows from financing activities:
Net increase in repurchase agreements and other credit faciliti 2,294,974 493,675 503,642
Net proceeds from issuance of unsecured debt - - 59,623
Net proceeds from issuance of common stock 210,912 136,808 95,827
Cash dividends paid (95,825) (66,917) (47,608)
Proceeds from issuance of collateralized mortgage obligations - 146,152 -
Principal payments on collateralized mortgage obligations (43,755) (48,566) (39,309)
----------- ----------- ------------
Net cash provided by financing activities 2,366,306 661,152 572,175
Net increase in cash and cash equivalents 1,226 4,401 5,444
Cash and cash equivalents at beginning of period 12,450 8,049 2,605
----------- ----------- ------------
Cash and cash equivalents at end of period $ 13,676 $ 12,450 $ 8,049
=========== =========== ============
Supplemental cash flow information:
Cash paid for interest $ 218,122 $156,880 $ 121,288
============= =========== ============
Supplemental disclosure of non-cash activity:
$154.6 million of mortgage loans held for investment were transferred to
collateral for CMOs in 1996 in association with the issuance of a CMO.
</TABLE>
The accompanying notes are an integral part of these statements.
F-7
<PAGE>
INMC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
(dba, Indymac Mortgage Holdings, Inc. And Subsidiaries)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1997, 1996 and 1995
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements of INMC Mortgage Holdings, Inc., dba
IndyMac Mortgage Holdings, Inc. ("IndyMac REIT") are prepared in conformity with
generally accepted accounting principles (GAAP). In preparing financial
statements in conformity with GAAP, management is required to make estimates and
assumptions that affect the reported amounts. Actual results could differ from
those estimates. The following is a summary of the more significant accounting
and reporting policies used in preparing the consolidated financial statements.
1. Financial Statement Presentation
The consolidated financial statements include the accounts of IndyMac REIT
and its qualified REIT subsidiaries. The mortgage loan conduit activities are
primarily conducted through IndyMac, Inc. ("IndyMac Operating"), a taxable
affiliate of IndyMac REIT established in 1993. IndyMac REIT owns all the
preferred stock and has a 99% economic interest in IndyMac Operating.
Accordingly, IndyMac REIT's investment in IndyMac Operating is accounted for
under a method similar to the equity method because IndyMac REIT has the
ability to exercise influence over the financial and operating policies of
IndyMac Operating through its ownership of the preferred stock and other
contracts. Under this method, original investments are recorded at cost and
adjusted by IndyMac REIT's share of earnings or losses and decreased by
dividends received. References to the "Company" mean the parent company, its
consolidated subsidiaries, and IndyMac Operating and its consolidated
subsidiary.
All significant intercompany balances and transactions with IndyMac REIT's
consolidated subsidiaries have been eliminated in consolidation of IndyMac
REIT. Certain reclassifications have been made to the financial statements
for the periods ended December 31, 1996 and 1995 to conform to the December
31, 1997 presentation.
2. Loans Held for Sale
Mortgage, manufactured housing and home improvement loans held for sale,
consisting primarily of one to four family residential units, are carried at
the lower of cost or market, computed by the aggregate method. Premiums paid
and discounts obtained on such loans held for sale are deferred as an
adjustment to the carrying value of the loans until the loans are sold.
Interest is recognized as revenue when earned according to the terms of the
loans and when, in the opinion of management, it is collectible. Loans are
evaluated for collectibility, and, if appropriate, previously accrued
interest is reversed.
Pursuant to the Master Forward Committment and Services Agreement between
IndyMac REIT and IndyMac Operating, all loans purchased by IndyMac REIT for
which a REMIC transaction, securitization or whole loan sale is contemplated
are committed for sale to IndyMac Operating at the same price for which the
loans were acquired by IndyMac REIT. Fair value is therefore equal to the
commitment price which is the carrying value of the loans. At present,
IndyMac REIT does not sell any loans to entities other than IndyMac
Operating.
3. Loans Held for Investment, Net
IndyMac REIT purchases certain mortgage and manufactured housing loans to be
held as long-term investments. In addition IndyMac REIT may, pursuant to its
forward commitment contract with IndyMac Operating, transfer loans held for
sale to the "held for investment" designation. Such transfers are recorded at
the lower of cost or market on the date of transfer. The resulting market
discount is amortized to interest income over the estimated life
F-8
<PAGE>
INMC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
(dba, Indymac Mortgage Holdings, Inc. And Subsidiaries)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1997, 1996 and 1995
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
of the loan using a level-yield method. IndyMac REIT also provides financing
for construction loans and warehouse lines of credit, which are held for
investment.
Premiums paid and discounts obtained on loans held for investment are
recorded as an adjustment to the carrying amount of the loan and amortized to
income over the estimated life of the loans using the level-yield method.
Interest is recognized as revenue when earned according to the terms of the
loans and when, in the opinion of management, it is collectible. Loans are
evaluated for collectibility, and, if appropriate, previously accrued
interest is reversed. Loans held for investment are carried at the principal
amount outstanding, adjusted for net unamortized premiums or discounts, and
net of the allowance for loan losses.
4. Collateral for CMOs
Collateral for CMOs, consisting of mortgage loans and mortgage-backed
securities, is carried at the outstanding principal balances, net of
unamortized purchase discounts or premiums. Also included in collateral for
CMOs are guaranteed investment contracts (GICs) held by trustees and accrued
interest receivable related to CMO collateral.
5. Mortgage Securities
Mortgage securities identified as available for sale consist primarily of
REMIC senior securities, adjustable-rate agency securities and AAA rated
interest-only securities. Interest-only securities not originally issued in
security form at settlement of an IndyMac REMIC transaction, and subsequently
purchased from IndyMac Operating by IndyMac REIT, are classified and
accounted for as available for sale in accordance with Statement of Financial
Accounting Standards (SFAS) No. 115. Securities are classified at
acquisition as available for sale when IndyMac REIT intends to hold the
securities for a period of time, but not necessarily to maturity.
Accordingly, such securities are recorded at fair value with material
unrealized gains and losses excluded from earnings and included as a separate
component of shareholders' equity.
Interest income on interest-only securities is recognized at the effective
yield based upon current estimates of prepayment rates. IndyMac REIT
evaluates the recoverability of interest-only securities classified as
available for sale by computing the present value of the asset, given current
estimates for prepayment rates, using a risk-free rate of return. An
impairment write-down to fair value is charged to earnings for those
securities whose amortized cost exceeds the present value at the risk-free
rate. The value of interest-only securities is sensitive to variations in
estimates of prepayment rates and changes in the risk-free rate. IndyMac REIT
estimates future prepayment rates based upon current interest rate levels,
economic conditions, and market forecasts, as well as relevant
characteristics of the collateral underlying the assets, such as loan types,
interest rates and recent prepayment experience. The estimates of prepayment
rates may change in the near term due to changes in interest rates and market
conditions.
Mortgage securities invested in at settlement of an IndyMac REMIC transaction
are classified and accounted for as trading securities in accordance with
SFAS No. 115. Accordingly, such securities are recorded at fair value with
material unrealized gains and losses included in earnings of the period.
Estimated fair value is determined based on market quotes, when available, or
by estimating the present value of future discounted cash flows.
F-9
<PAGE>
INMC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
(dba, Indymac Mortgage Holdings, Inc. And Subsidiaries)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1997, 1996 and 1995
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
6. Allowance for Loan Losses
IndyMac REIT maintains an allowance for possible credit losses on loans held
for investment. Additions to the allowance are based on an assessment of
certain factors, including but not limited to estimated future losses on the
loans, general economic conditions, and trends in portfolio volume,
composition, borrower credit quality, maturity and delinquency. Additions to
the allowance are provided through a charge to earnings. Actual losses on
loans are recorded as a reduction to the allowance. Subsequent recoveries of
items previously charged off are credited to the allowance.
7. Collateralized Mortgage Obligations (CMOs) and Deferred Issuance Costs
CMOs are carried at their outstanding principal balances, net of unamortized
original issue discounts. Also included in CMOs is accrued interest payable
on such obligations. Issuance costs have been deferred and are amortized to
expense over the estimated life of the CMOs using an effective interest
method or methods which approximate the effective interest method.
Unamortized deferred issuance costs are included in Other Assets in IndyMac
REIT's consolidated balance sheets. Premiums paid and discounts obtained on
collateral for CMOs are amortized to interest income over the estimated life
of the mortgage loans using the interest method with effect given to
principal reductions.
8. Interest Rate Swap Agreements
IndyMac REIT utilizes interest rate swap agreements to synthetically fix the
interest rate and term of certain repurchase agreements to help mitigate the
interest rate risk inherent in its portfolio of loans held for investment.
The differential to be received or paid under the agreements is accrued and
is recognized as an adjustment to net interest income. The related amount
payable to or receivable from counterparties is included in Accounts Payable
and Accrued Liabilities.
9. Income Taxes
IndyMac REIT intends to operate so as to continue to qualify as a real estate
investment trust (REIT) under the requirements of the Internal Revenue Code.
Requirements for qualification as a REIT include various restrictions on
ownership of IndyMac REIT's stock, requirements concerning distribution of
taxable income, and certain restrictions on the nature of assets and sources
of income. Among other things, a REIT must distribute at least 95% of its
taxable income to its shareholders, the distribution of which may extend
until timely filing of its tax return for its subsequent taxable year.
Qualifying distributions of its taxable income are deductible by a REIT in
computing its taxable income. Accordingly, no provision for income taxes has
been made for IndyMac REIT. If in any tax year IndyMac REIT should not
qualify as a REIT, it would be taxed as a corporation, and distributions to
the shareholders would not be deductible in computing taxable income. If
IndyMac REIT were to fail to qualify as a REIT in any tax year, it would not
be permitted to qualify for that year and the succeeding four years.
F-10
<PAGE>
INMC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
(dba, Indymac Mortgage Holdings, Inc. And Subsidiaries)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1997, 1996 and 1995
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
10. Earnings Per Share
The Financial Accounting Standards Board (FASB) issued SFAS No. 128,
"Earnings Per Share" which is effective for fiscal years ending after
December 15, 1997 and requires presentation of basic earnings per share and
diluted earnings per share. Basic earnings per share are computed by
dividing income available to common stockholders by the weighted average
number of common shares outstanding, which were 56,124,537, 45,643,885 and
39,902,680 for 1997, 1996 and 1995, respectively. Diluted earnings per share
takes into consideration common shares outstanding and dilutive potential
common shares, such as stock options. The weighted average number of common
shares outstanding for diluted earnings per share were 56,453,634 ,
45,805,509 and 39,941,433 for 1997, 1996 and 1995, respectively. All
earnings per share have been restated, as necessary. Of the total dividends
per share paid in 1997, 1996 and 1995, approximately $0.06 per share, $0.18
per share and $0.20 per share, respectively, represented a return of
capital.
11. Stock Based Compensation
IndyMac REIT grants stock options for a fixed number of shares to officers
and employees with an exercise price equal to the average market price of
the shares at the date of grant. The Company accounts for stock option
grants in accordance with Accounting Principles Board Opinion (APB) No. 25,
"Accounting for Stock Issued to Employees" and, accordingly, recognizes no
compensation expense for the stock option grants. SFAS No. 123, "Accounting
for Stock-Based Compensation", issued in 1995, allows companies to continue
to recognize compensation expense pursuant to APB No. 25 but requires
companies to disclose the effect on earnings of compensation expense for
stock options based on the fair value of the options at the grant date. The
effect on net income and earnings per share, had the Company adopted the
expense recognition provisions of SFAS No. 123, would not have been
material.
12. Recent Accounting Pronouncement
The FASB issued SFAS No. 130, "Reporting Comprehensive Income" which is
effective for fiscal years beginning after December 15, 1997 and requires
restatement of earlier financial statements for comparative purposes. SFAS
No. 130 requires that items meeting the criteria of a component of
comprehensive income, including foreign currency items and unrealized gains
and losses on certain investments in debt and equity securities, including
securities classified as available for sale, be shown in the financial
statements as adjustments to reported net income to arrive at a disclosure
of "comprehensive income" as defined. SFAS No. 130 does not require a
specific format for disclosure of comprehensive income and its components in
the financial statements. SFAS No. 130 provides informative disclosure but
does not and will not impact previously reported or future net earnings and
earnings per share. Management has not yet determined where in its financial
statements such additional disclosure will be presented when SFAS No. 130
becomes effective.
The FASB has also issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." This standard requires that a public
business enterprise report financial and descriptive information about its
reportable operating segments. Operating segments are components of an
enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performance. SFAS No. 131 also requires
that all public business enterprises report information about the revenues
derived from the enterprise's products or services (or groups of similar
products and services), about the countries in
F-11
<PAGE>
INMC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
(dba, Indymac Mortgage Holdings, Inc. And Subsidiaries)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1997, 1996 and 1995
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
which the enterprise earns revenues and hold assets, and about major
customers regardless of whether that information is used in making operating
decisions. However, this Statement does not require an enterprise to report
information that is not prepared for internal use if reporting it would be
impractical. This statement is effective for financial statements for
periods beginning after December 15, 1997. In the initial year of
application, comparative information for earlier years is required to be
restated. Comparative information for interim periods is not required until
the second year of application. SFAS No. 131 provides informative disclosure
but does not and will not impact previously reported or future net earnings
and earnings per share. Management is in the process of determining its
reportable operating segments, product, and customer disclosures under SFAS
No. 131 for reporting in IndyMac REIT's 1998 financial statements.
NOTE B - ACQUISITION OF MANAGER
On July 1, 1997, IndyMac REIT and Countrywide Credit Industries, Inc. ("CCR")
completed a transaction whereby IndyMac REIT 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 IndyMac REIT.
Following consummation of the transaction, CAMC was merged into IndyMac REIT,
and IndyMac REIT became self-managed. IndyMac REIT accounted for this merger as
the settlement of its management contract for accounting purposes, which
resulted in a non-recurring charge of $76 million. For tax purposes, the
transaction represents a tax-free exchange of shares with CCR; accordingly the
transaction did not have a material effect on IndyMac REIT's taxable income.
NOTE C - LOANS HELD FOR SALE
Substantially all of the loans purchased by IndyMac REIT are fixed-rate and
adjustable-rate nonconforming loans secured by first liens on single-family
residential properties. Approximately 46 percent of the principal amount of
loans held for sale at December 31, 1997 were collateralized by properties
located in California. In 1997, IndyMac REIT purchased loans held for sale with
an aggregate principal balance of $5.3 billion and sold loans with an aggregate
principal balance of $4.3 billion to IndyMac Operating.
NOTE D - RESIDENTIAL LOANS HELD FOR INVESTMENT
Residential loans held for investment (exclusive of construction loans and
warehouse lines of credit) consist of various types of fixed- and adjustable-
rate nonconforming loans secured primarily by first liens on single-family
residential properties as follows:
F-12
<PAGE>
INMC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
(dba, Indymac Mortgage Holdings, Inc. And Subsidiaries)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1997, 1996 and 1995
NOTE D - RESIDENTIAL LOANS HELD FOR INVESTMENT (CONTINUED)
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------
(Dollar amounts in thousands) 1997 1996
----------------------- -------------------------
Weighted Weighted
Principal Average Principal Average
Product Type Amount Coupon Amount Coupon
- ---------------------------------------------------------- -------------------------
<S> <C> <C> <C> <C>
Adjustable-rate loans:
Monthly LIBOR $ 127,469 8.30% $ 183,851 8.23%
Monthly COFI 89,668 7.76 108,761 7.96
6-Month LIBOR 190,010 8.83 241,442 9.00
1-Year CMT 779,293 7.13 336,903 8.30
3/1 CMT 212,589 8.24 135,653 8.89
5/1 CMT 198,593 7.75 70,542 8.76
10/1 CMT 5,269 7.70 5,963 8.28
Other adjustable-rate loans 56,844 7.48 12,707 7.65
Fixed-rate loans 179,922 9.79 149,934 10.63
----------------------- -------------------------
1,839,657 7.88% 1,245,756 8.76%
----------------------- -------------------------
Unamortized net premium 8,749 -- 2,448 --
Allowance for loan losses (17,359) -- (11,491) --
-----------------------------------------------------
Total $1,831,047 $1,236,713
======================= =========================
</TABLE>
In reference to the above chart, "LIBOR" refers to London Interbank Offered Rate
index, CMT refers to the Constant Maturity Treasury index, and COFI refers to
the Cost Of Funds Index.
Included in loans held for investment at December 31, 1997 are $47.0 million of
loans on which the Company was not currently accruing interest income due to the
delinquent status of such loans. If interest on such loans had been accrued,
interest income would have increased $3.1 million for the year ended December
31, 1997. Non-accrual loans at December 31, 1996 totaled $40.9 million and
would have resulted in an additional $3.5 million of interest income for the
year then ended.
NOTE E - MORTGAGE SECURITIES
The following table summarizes the amortized cost and estimated fair value of
mortgage securities classified as available for sale, and the fair value of
mortgage securities classified as trading, as of December 31, 1997 and 1996.
Contractual maturities on the mortgage securities range from 10 to 30 years.
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
--------------------- --------------------
(Dollar amounts in thousands)
Available- Available-
Trading for-sale Trading for-sale
------- -------- ------- --------
<S> <C> <C> <C> <C>
Amortized cost $93,199 $467,252 $33,008 $205,938
Gross unrealized gains -- 5,711 -- 3,368
Gross unrealized losses -- (7,717) -- (10,534)
------- -------- ------- --------
Estimated fair value $93,199 $465,246 $33,008 $198,772
======= ======== ======= ========
</TABLE>
During the year ended December 31, 1996, IndyMac REIT purchased certain inverse-
floater securities totaling $8 million from IndyMac Operating at fair value on
the date of transfer.
As of December 31, 1997 and 1996, all of IndyMac REIT's mortgage securities were
pledged as collateral under repurchase agreements.
F-13
<PAGE>
INMC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
(dba, Indymac Mortgage Holdings, Inc. And Subsidiaries)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1997, 1996 and 1995
NOTE F - ALLOWANCE FOR LOAN LOSSES
Transactions in the allowance for loan losses were as follows:
<TABLE>
<CAPTION>
(Dollars amounts in thousands) 1997 1996 1995
------- ------- ------
<S> <C> <C> <C>
Balance at January 1 $15,264 $ 4,331 $ 500
Provision for the year 18,622 12,991 4,037
Charge-offs (7,204) (2,058) (249)
Recoveries -- -- --
------- ------- ------
Balance at December 31 $26,682 $15,264 $4,331
======= ======= ======
</TABLE>
The allowance for loan losses at December 31, 1997 is comprised of the
following: (1) $17.4 million for mortgage loans held for investment, (2) $7.2
million for construction loans receivable, (3) $1.8 million for warehouse lines
of credit, (4) $241,000 for CMO collateral and (5) $74,000 for manufactured
housing.
NOTE G - COLLATERAL FOR CMOS
Collateral for CMOs consists primarily of fixed-rate mortgage loans, secured by
first liens on single-family residential real estate, and mortgage-backed
securities.
All principal and interest on the collateral is remitted to a trustee and,
together with any reinvestment income earned thereon, is available for payment
on the CMOs. Credit risk on the mortgage loans is minimized to an extent,
under a pool insurance policy provided by a private mortgage insurer on certain
of the CMOs. Furthermore, IndyMac REIT's mortgage-backed securities pledged to
secure CMOs are guaranteed as to the repayment of principal and interest of the
underlying mortgages by Freddie Mac. The maximum amount of credit risk related
to IndyMac REIT's investment in mortgage loans is represented by the outstanding
principal balance of the mortgage loans plus accrued interest.
Collateral for CMOs is summarized as follows:
<TABLE>
<CAPTION>
December 31,
--------------------
(Dollar amounts in thousands) 1997 1996
-------- --------
<S> <C> <C>
Mortgage loans $189,330 $217,483
Mortgage-backed securities 52,870 67,609
GICs held by trustees 2,419 2,809
Accrued Interest receivable 1,923 2,325
-------- --------
246,542 290,226
Unamortized net discount and reserves (1,068) (1,172)
-------- --------
Collateral for CMOs $245,474 $289,054
======== ========
</TABLE>
The mortgage loans and mortgage-backed securities, together with GICs, which are
all held by trustees, collateralized nine series of CMOs at December 31, 1997. A
time lag of 24 to 45 days exists from the date the underlying mortgage is
prepaid to the date IndyMac REIT actually receives the cash related to the
prepayment. During this interim period, IndyMac REIT does not earn interest
income on the portion of the mortgage loan or mortgage-backed security that has
been prepaid, yet IndyMac REIT is obligated to continue to pay interest during
such period to the applicable investor.
The weighted average coupon on collateral for CMOs, net of the related servicing
fees, was 7.6% at both December 31, 1997 and 1996.
F-14
<PAGE>
INMC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
(dba, Indymac Mortgage Holdings, Inc. And Subsidiaries)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1997, 1996 and 1995
NOTE H - REPURCHASE AGREEMENTS AND OTHER CREDIT FACILITIES
Repurchase agreements and other credit facilities consisted of the following at
December 31, 1997 and 1996.
<TABLE>
<CAPTION>
December 31,
-----------------------
(Dollar amounts in thousands) 1997 1996
---------- ----------
<S> <C> <C>
Repurchase agreements $4,410,798 $2,302,752
Revolving credit facilities 415,858 228,757
---------- ----------
$4,826,656 $2,531,509
========== ==========
</TABLE>
REPURCHASE AGREEMENTS
The Company has established a committed and renewable repurchase facility with
Merrill Lynch, Pierce, Fenner & Smith Inc. and certain of its affiliates in an
aggregate committed amount up to $1.0 billion to finance its mortgage conduit,
mortgage asset portfolio, warehouse lending, IndyMac Construction Lending
Division ("IndyMac CLD") lending and manufactured housing assets and operations.
This agreement is committed for a period of at least two years from the date of
execution. The Company is permitted to borrow additional uncommitted amounts
under this repurchase facility, and as of December 31, 1997, the total balance
of outstanding loans from Merrill Lynch was $3.6 billion.
The Company has entered into an additional committed and renewable repurchase
facility, with Nomura Asset Capital Corporation, in an aggregate amount of $300
million to finance the Company's mortgage conduit and warehouse lending
operations, mortgage investment portfolio and IndyMac CLD lending. The Nomura
facility is committed for a two-year period from the date of execution.
The Company has also entered into a repurchase facility with Paine Webber Real
Estate Securities, Inc. in an aggregate principal amount of $500 million. Such
repurchase facility is committed for a one-year period from the date of
execution and currently permits the Company to finance its mortgage conduit,
warehouse lending and mortgage portfolio assets and operations.
A repurchase facility with Lehman Commercial Paper matured in May 1997 and was
not renewed.
At December 31, 1997, substantially all of the Company's mortgage loans,
manufactured housing loans and revolving warehouse lines of credit were pledged
to secure the Company's borrowings under repurchase facilities. The amount
outstanding at December 31, 1997 under IndyMac REIT's repurchase facilitieswas
$4.4 billion. These facilities generally reprice on an overnight to one month
basis. The carrying amount of the assets pledged as collateral exceeded the
repurchase liability by $371 million under these facilities as of December 31,
1997.
IndyMac Operating may borrow under each of the Company's agreements as a co-
borrower. As of December 31, 1997, IndyMac Operating had $524 million
outstanding under repurchase agreements, including $54 million in borrowings
priced at an overnight rate.
These repurchase agreements bear interest at rates indexed to the London
Interbank Offered Rates ("LIBOR") or the federal funds rate, plus an applicable
margin. For the months ending December 31, 1997 and 1996, the weighted average
borrowing rate on these repurchase agreements was 6.2% and 6.0%, respectively.
None of the counterparties is affiliated with the Company. At December 31, 1997,
the Company was in compliance with all material representations, warranties and
covenants under its repurchase agreements.
F-15
<PAGE>
INMC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
(dba, Indymac Mortgage Holdings, Inc. And Subsidiaries)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1997, 1996 and 1995
NOTE H - REPURCHASE AGREEMENTS AND OTHER CREDIT FACILITIES
REVOLVING CREDIT FACILITY
In 1995, the Company entered into a two-year committed credit facility with a
syndicate of commercial banks. This facility finances mortgage loans,
construction loans, and master servicing assets. In 1997, the Company amended
this credit facility to increase the number of lenders and expand the available
committed borrowings from $405 million to $500 million. As of December 31,
1997, IndyMac REIT had $415 million outstanding in borrowings under this
facility. The interest rate is based upon a margin over selected indices,
including the weekly average federal funds rate and the LIBOR for U.S. dollar
deposits. For the months ending December 31, 1997 and 1996, the weighted
average borrowing rate under this facility was 6.5% and 6.1%, respectively. At
December 31, 1997, the Company was in compliance with all material
representations, warranties and covenants under this revolving credit facility.
IndyMac Operating may borrow under this facility as a co-borrower. As of
December 31, 1997, IndyMac Operating had $55 million outstanding in borrowings
under this facility.
NOTE I - COLLATERALIZED MORTGAGE OBLIGATIONS
Collateralized mortgage obligations are secured by a pledge of mortgage loans,
mortgage-backed securities and residual cash flows from such securities. As
required by the indentures relating to the CMOs, the pledged collateral is held
in the custody of trustees. The trustees collectively also held investments in
GICs amounting to $2.4 million and $2.8 million on the CMO collateral as of
December 31, 1997 and 1996, respectively, as additional collateral which is
legally restricted to use in servicing the CMOs. The trustees collect principal
and interest payments on the underlying collateral, reinvest such amounts in the
GICs, and make corresponding principal and interest payments on the CMOs to the
bondholders.
In general, each CMO series consists of various classes which are retired in
order of maturity, with the shortest maturity class receiving all principal
payments until it is paid in full. After the first class is fully retired, the
second class will receive principal until retired, and so forth. Each series is
also subject to redemption according to specific terms of the respective
indentures. As a result, the actual maturity of any class of a CMO series may
occur earlier than its stated maturity.
Interest is payable monthly or quarterly, in accordance with the respective
indenture, for all classes other than deferred interest classes. Interest on
deferred interest classes is accrued and added to the principal balance and will
not be paid until all other classes in the series have been paid in full. The
weighted average coupon on CMOs was 7.3% and 7.4% at December 31, 1997 and 1996,
respectively.
IndyMac REIT's investment in CMO residuals amounted to $24 million and $23
million at December 31, 1997 and 1996, respectively.
F-16
<PAGE>
INMC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
(dba, Indymac Mortgage Holdings, Inc. And Subsidiaries)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1997, 1996 and 1995
NOTE I - COLLATERALIZED MORTGAGE OBLIGATIONS (CONTINUED)
CMOs are summarized as follows:
<TABLE>
<CAPTION>
December 31,
-------------------------------
(Dollar amounts in thousands) 1997 1996
----------- -----------
<S> <C> <C>
Collateralized mortgage obligations $223,986 $267,740
Accrued interest payable 1,492 1,928
----------- -----------
225,478 269,668
Unamortized discounts, net (4,324) (5,588)
----------- -----------
Collateralized mortgage obligations, net $221,154 $264,080
=========== ===========
Range of weighted average interest rates, by series 6.8%-11.0% 6.8%-11.0%
Range of stated maturities 2000 - 2025 1998 - 2025
Number of series 9 11
</TABLE>
NOTE J - SENIOR UNSECURED NOTES
In October 1995, the Company completed the private placement of senior unsecured
notes in the aggregate amount of $60.5 million with certain institutional
lenders. The notes bear interest at 8.9% and mature October 15, 2002. The notes
require principal repayment in three equal installments of $20.17 million on
October 15 in each of 2000, 2001 and 2002. The notes are carried net of issuance
costs which are amortized to interest expense over the life of the notes using
the interest method. The effective interest rate on the notes, including costs
of issuance, is 9.2%.
NOTE K - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the estimated fair values of the various classes of
financial instruments held by IndyMac REIT as of December 31, 1997 and 1996. The
estimated fair value amounts have been determined by IndyMac REIT using
available market information and valuation methodologies which the Company
believes are appropriate under the circumstances. These estimates are inherently
subjective in nature and involve matters of significant uncertainty and judgment
to interpret relevant market and other data. The use of different market
assumptions and/or estimation methodologies may have a material effect on the
estimated fair value amounts. Accordingly, the estimates presented herein are
not necessarily indicative of the amounts IndyMac REIT could realize in a
current market exchange.
F-17
<PAGE>
INMC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
(dba, Indymac Mortgage Holdings, Inc. And Subsidiaries)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1997, 1996 and 1995
NOTE K - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
------------------------ -----------------------
(Dollar amounts in thousands) Carrying Estimated Carrying Estimated
amount fair value amount fair value
------------------------ -----------------------
<S> <C> <C> <C> <C>
Assets:
Loans held for sale $1,458,271 $1,458,271 $ 657,208 $ 657,208
Loans held for investment
Mortgage loans 1,801,014 1,832,161 1,210,891 1,232,524
Manufactured housing loans 30,033 30,169 25,822 25,822
Construction loans receivable 946,806 946,806 460,546 460,546
Warehouse lines of credit 512,458 512,458 251,032 251,032
Mortgage securities 558,445 558,445 231,780 230,410
Collateral for CMO's 245,474 248,422 289,054 282,353
Liabilities:
Repurchase agreements 4,826,656 4,826,656 2,531,509 2,531,509
Collateralized mortgage obligations 221,154 222,269 264,080 269,424
Senior unsecured notes 59,888 63,505 59,759 61,310
Off-balance sheet gains (losses):
Interest rate swaps -- (284) -- (1,106)
</TABLE>
The fair value estimates as of December 31, 1997 and 1996 are based on pertinent
information available to management as of those dates. The estimates have not
been comprehensively reevaluated or updated since those dates for purposes of
these financial statements and, therefore, current estimates of fair value may
differ significantly from the amounts presented herein.
The following describes the methods and assumptions used by IndyMac REIT in
estimating fair values.
Loans Held for Sale The fair value of mortgage, manufactured housing and home
improvement loans held for sale is equivalent to the carrying value. All loans
purchased by IndyMac REIT for which a REMIC transaction, securitization or whole
loan sale is contemplated are committed for sale to IndyMac Operating at the
same price at which the loans were acquired by IndyMac REIT. IndyMac REIT does
not sell any loans to entities other than IndyMac Operating.
Residential Loans Held for Investment Fair value is estimated using either
prices offered by the Company for similar types of loans or quoted market prices
from dealers and brokers for similar types of loans.
Construction Loans Receivable and Warehouse Lines of Credit Fair values
approximate the carrying amounts of each of the aforementioned assets and
liabilities due to their respective short-term nature or short-term repricing
characteristics.
Mortgage Securities Fair value is estimated using quoted market prices and by
discounting future cash flows using discount rates that approximate current
market rates and prepayment expectations for securities with the same or
analogous characteristics.
F-18
<PAGE>
INMC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
(dba, Indymac Mortgage Holdings, Inc. And Subsidiaries)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1997, 1996 and 1995
NOTE K - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
Collateral for CMOs Fair value is estimated using either offer prices by the
Company for similar types of loans or quoted market prices from dealers and
brokers for loans and for securities backed by similar types of loans.
Collateral for CMOs cannot be sold until the related obligations mature or are
otherwise paid or redeemed. As a consequence, the aggregate market values
indicated above may not be realizable. As a REIT, IndyMac REIT's ability to sell
these assets for a gain also is subject to restrictions under the Internal
Revenue Code and any such sale may result in substantial and even punitive
additional tax liability.
Repurchase Agreements and Other Credit Facilities Fair values approximate the
carrying amounts for repurchase agreements with remaining maturities of one year
or less. Fair value for repurchase agreements with longer maturities is
estimated using discounted cash flow analyses based on current market rates.
Collateralized Mortgage Obligations Fair value is estimated using cash flow
analyses based on current interest rates and prepayment expectations.
Senior Unsecured Notes Fair values are estimated by discounting future cash
flows using rates currently available to the Company for debt with similar terms
and remaining maturities.
Short-Term Commitments to Extend Credit There are currently no commitment fees
associated with IndyMac REIT's lines of credit extended under the warehouse
lending program. Accordingly, these commitments do not have an estimated fair
value.
Commitments to Purchase and Sell Loans There is no fair value of commitments to
purchase loans as all loans committed for purchase by IndyMac REIT are committed
for sale to IndyMac Operating at IndyMac REIT's purchase price.
Interest Rate Swaps Fair value is estimated using discounted cash flow analyses
based on current market yields for similar instruments and remaining maturities.
NOTE L - COMMITMENTS AND CONTINGENCIES - FINANCIAL INSTRUMENTS WITH OFF-BALANCE
SHEET RISK
In the normal course of business, IndyMac REIT is a party to financial
instruments with off-balance sheet risk. These financial instruments include
short-term commitments to extend credit to borrowers which involve elements of
credit risk.
Additionally, IndyMac REIT is exposed to credit losses in the event of
nonperformance by counterparties to the various agreements associated with loan
purchases. However, IndyMac REIT does not anticipate nonperformance by such
borrowers or counterparties. Unless noted otherwise, IndyMac REIT does not
require collateral or other security to support such commitments.
IndyMac REIT also uses interest rate swaps to help manage interest rate risk.
While IndyMac REIT does not anticipate nonperformance by the counterparties, the
Company manages credit risk with respect to such financial instruments by
entering into agreements with entities approved by senior management and
initially having a long-term credit rating of single A or better (by one or more
nationally recognized credit rating agencies) at the time the relevant swap is
consummated. These entities are Wall Street firms having primary dealer status.
The Company's exposure to credit risk in the event of default by the
counterparty is the difference between the contract price and the current market
price of the instrument being utilized. Unless noted otherwise, the
F-19
<PAGE>
INMC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
(dba, Indymac Mortgage Holdings, Inc. And Subsidiaries)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1997, 1996 and 1995
NOTE L - COMMITMENTS AND CONTINGENCIES - FINANCIAL INSTRUMENTS WITH OFF-BALANCE
SHEET RISK (CONTINUED)
Company does not require collateral or other security to support financial
instruments with credit risk with approved counterparties.
The following various types of commitments were outstanding at year end:
Commitments to Purchase and Sell Loans As of December 31, 1997 and 1996, IndyMac
REIT had entered into commitments to purchase loans totaling $743 million and
$741 million, respectively, subject to origination or acquisition of such loans
by various approved originators. In addition, as of December 31, 1997 and 1996,
IndyMac REIT had committed to sell $2.2 billion and $1.4 billion, respectively,
of loans to IndyMac Operating. After the purchase and sale of the loans, IndyMac
REIT's exposure to credit loss in the event of nonperformance by the mortgagor
is limited.
Construction Lending Credit Commitments IndyMac REIT's construction lending
program consists of CLCA, which provides acquisition, development and
construction, builder custom home, model home, construction-to-permanent and lot
loan financing on a nationwide basis to builders, while IndyMac CLD provides the
same products as CLCA to IndyMac Operating's third party customers. At December
31, 1997 and 1996, IndyMac REIT had aggregate undisbursed construction loan
commitments totaling $888 million and $490 million, respectively.
Revolving Warehouse Credit Commitments IndyMac REIT's warehouse lending program
provides secured short-term revolving financing to small- and medium-size
mortgage originators to finance mortgage loans from the closing of the loans
until they are sold to permanent investors. At December 31, 1997 and 1996,
IndyMac REIT had extended lines of credit under this program in the aggregate
amount of $768 million and $597 million, respectively, of which $512 million and
$251 million, respectively, was outstanding.
Interest Rate Swaps As of December 31, 1997 and 1996, IndyMac REIT had two
interest rate swap agreements with certain securities dealers with a combined
notional amount of $125 million and $200 million, respectively. The effect of
these agreements is to convert a portion of short-term repurchase agreement
financing to a medium-term fixed rate borrowing facility. IndyMac REIT pays a
weighted average fixed interest rate of 6.3% and receives a floating interest
rate based on one month LIBOR. The weighted average floating rate at December
31, 1997 was 5.6%. These contracts expire between June 1998 and October 1999.
NOTE M - STOCK OPTION PLANS
The Company has three stock option plans (the "Plans") that provide for the
granting of both non-qualified and incentive stock options to officers,
employees and directors. Options are granted at the average market price of the
Company's common stock on the date of grant, vest over varying periods beginning
at least one year from the date of grant, and expire five years from date of
grant.
F-20
<PAGE>
INMC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
(dba, Indymac Mortgage Holdings, Inc. And Subsidiaries)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1997, 1996 and 1995
NOTE M - STOCK OPTION PLANS (CONTINUED)
As of December 31, 1997, options to purchase 818,089 shares were exercisable.
Additionally, there were 1,450,428 shares reserved for options outstanding and
future grants under the plans as of December 31, 1997. Stock option transactions
for the years ended December 31, 1997, 1996 and 1995, respectively, are
summarized as follows:
<TABLE>
<CAPTION>
----------------------------------------------
Number of Shares
----------------------------------------------
1997 1996 1995
----------------------------------------------
<S> <C> <C> <C>
Options outstanding at beginning of year 1,493,839 801,665 612,125
Options granted 1,517,969 1,163,247 521,290
Options exercised (312,612) (403,421) (331,000)
Options canceled (88,405) (67,652) (750)
----------------------------------------------
Options outstanding at end of year 2,610,791 1,493,839 801,665
==============================================
<CAPTION>
----------------------------------------------
Weighted Average Exercise Price
----------------------------------------------
1997 1996 1995
----------------------------------------------
<S> <C> <C> <C>
Options outstanding at beginning of year $ 16.36 $ 10.29 $ 6.97
Options granted 22.51 18.04 10.84
Options exercised 14.33 9.30 6.53
Options canceled 20.79 15.36 11.63
----------------------------------------------
Options outstanding at end of year $ 20.03 $ 16.36 $ 10.29
==============================================
</TABLE>
The weighted average fair value of options granted during 1997 and 1996 were
$3.24 per share and 2.39 per share, respectively. The fair value of each option
grant is estimated on the date of grant using the Black-Scholes option-pricing
model modified to consider cash dividends to be paid. The following weighted
average assumptions were used for grants in 1997 and 1996 respectively: dividend
yield of 8% and 9% for 1997 and 1996, respectively; expected volatility of 30%
for both years, risk-free interest rates of 6.2% and 6.3% for 1997 and 1996,
respectively; and expected lives of three years for options granted in both
years.
The following summarizes information about fixed stock options outstanding at
December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------- ------------------------
Weighted
Number Average Weighted Number Weighted
Outstanding Remaining Average Exercisable Average
Range Of At Period Contractual Exercise At Period Exercise
Exercise Prices End Life Price End Price
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$7.31 - $18.00 910,879 3.23 $16.14 732,782 $16.03
$18.01 - $21.00 950,174 4.32 20.68 85,307 19.97
$21.01 - $23.94 749,738 4.50 23.93 0 0.00
-----------------------------------------------------------------------
Totals 2,610,791 3.99 $20.03 818,089 $16.44
=======================================================================
</TABLE>
F-21
<PAGE>
INMC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
(dba, Indymac Mortgage Holdings, Inc. And Subsidiaries)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1997, 1996 and 1995
NOTE N - RELATED PARTY TRANSACTIONS
IndyMac Operating has a revolving credit facility and term borrowings up to one
year with IndyMac REIT whereby funds are advanced to IndyMac Operating primarily
to finance assets in which IndyMac Operating invests. As of December 31, 1997
and 1996, advances due to IndyMac REIT from IndyMac Operating totaled $118
million and $130 million, respectively. Such advances bear interest at rates
indexed to the London Interbank Offered Rate ("LIBOR"). Interest charged on
advances by IndyMac REIT to IndyMac Operating was at a rate of 10.5% at December
31, 1997 and 9.8% at December 31, 1996.
Prior to July 1, 1997, IndyMac REIT operated under an agreement (the "Management
Agreement") with CAMC (the "Manager") to advise the IndyMac REIT on various
facets of its business and manage its operations, subject to review and
supervision by the outside directors on IndyMac REIT's Board of Directors. The
Manager had entered into a subcontract with its affiliate, Countrywide Home
Loans, Inc. ("CHL"), to perform such services for the IndyMac REIT as the
Manager deemed necessary. For performing these services, the Manager received,
(1) a base management fee of 0.125% per annum of average invested mortgage-
related assets not pledged to secure CMOs and excluding loans held for sale, (2)
a separate management fee equal to 0.2% per annum of the average amounts
outstanding under traditional warehouse lines of credit, and (3) incentive
compensation equal to 25% of the amount by which IndyMac REIT's annualized
return on equity exceeded the ten-year U.S. Treasury Rate plus 2%. IndyMac REIT
paid management fees totaling $4.4 million, $8.8 million and $5.5 million for
the years ended December 31, 1997, 1996 and 1995, respectively.
Prior to July 1, 1997, the Manager incurred many of the operating expenses of
the Company, including personnel and related expenses, subject to full
reimbursement by the Company. The Company's conduit operations are primarily
conducted by IndyMac Operating and all other operations are primarily conducted
by IndyMac REIT. Accordingly, IndyMac Operating incurs the majority of the
conduit's costs and IndyMac REIT incurs the other operations' costs.
Prior to July 1, 1997, the Company reimbursed CHL for direct and indirect
expenses incurred by CHL on behalf of the Company. Since the allocation of
indirect expenses involves some judgment, the following highlights the amounts
allocated and the methods used for the six months ended June 30, 1997 and the
years ended December 31, 1996 and 1995:
<TABLE>
<CAPTION>
(Dollar amounts in thousands)
1997 1996 1995
------------------------
<S> <C> <C> <C>
Data processing $1,008 $1,549 $ 729
Occupancy 936 1,268 1,018
Human resources 50 100 100
------------------------
$1,994 $2,917 $1,847
========================
</TABLE>
Data processing and human resource charges were allocated on the basis of the
number of employees. Occupancy charges were allocated on the basis of square
footage occupied by the Company. The majority of these expenses were allocated
to IndyMac Operating as they related primarily to the Company's conduit
operations.
As part of its acquisition of CAMC, the Company entered into a Cooperation
Agreement with CCR whereby certain services previously provided to the Company
by CCR and its affiliates would be provided during a transition period. The
Cooperation Agreement specifies certain costs for the
F-22
<PAGE>
INMC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
(dba, Indymac Mortgage Holdings, Inc. And Subsidiaries)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1997, 1996 and 1995
NOTE N - RELATED PARTY TRANSACTIONS (CONTINUED)
Company to pay CCR for services during the transition period. Between July 1,
1997 and December 31, 1997, the Company incurred $2.2 million of charges from
CCR and its affiliates associated with the Cooperation Agreement.
During 1997, the Company entered into a sublease agreement for its corporate
headquarters with CCR, while at the same, CCR subleased space from the Company
in the Company's former headquarters. As a result, the Company paid CCR $1.1
million and received $189,000 in lease and sublease payments from CCR for the
year ended December 31, 1997.
During 1997 and 1996, IndyMac REIT purchased approximately $926,000 and $30.7
million, respectively, in nonconforming mortgage loans from CHL.
In 1987 and 1993, IndyMac REIT entered into servicing agreements appointing CHL
as servicer of pools of mortgage loans collateralizing five series of CMOs with
outstanding balances of approximately $68.6 million at December 31, 1997. CHL
is entitled to an annual fee of up to 0.32% of the aggregate unpaid principal
balance of the pledged mortgage loans. Servicing fees received by CHL under
such agreements were approximately $186,000, $200,000 and $250,000 in 1997, 1996
and 1995, respectively. In addition, CHL acts as a subservicer for the Company
with respect to the Company's servicing portfolio.
CHL is a wholly-owned subsidiary of CCR, a diversified financial services
company whose shares of common stock are traded on the New York Stock Exchange
(symbol: CCR). CCR owned 4,560,860 shares, or 7.2%, of IndyMac REIT's common
stock at December 31, 1997. CHL owns all of the common stock and has a 1%
economic interest in IndyMac Operating.
The Company, through CLCA, has, from time to time, made loans to builders of
residential construction projects, secured by real property, purchased by such
builders from a company doing business as Loeb Enterprises, LLC, in which
IndyMac REIT's chairman and former chief executive officer is a major investor
together with his family. The non-family executive managers of Loeb Enterprises,
LLC, who run the day-to-day operations of Loeb Enterprises, LLC, own
approximately 34% of the equity and profits of that company. Each project is
part of a master planned community being developed by Loeb Enterprises, LLC,
which includes various amenities, including an 18 hole golf course.
In the case of each project financed by CLCA, the builder is not affiliated with
either the Company or Loeb Enterprises, LLC, the general risk characteristics of
the construction loan are comparable to those for similar projects funded by
CLCA, and the construction loan facility between CLCA and the builder has been
negotiated at arms length on terms consistent with those of similar loans made
by CLCA to other unaffiliated builders. Moreover, the terms of each credit
facility have been disclosed to and approved by the disinterested members of the
Board of Directors of IndyMac REIT.
As of December 31, 1997, CLCA had extended six construction loan facilities to
builders secured by property originally purchased from Loeb Enterprises, LLC,
with total dollar commitments of $19,757,323, and total loans outstanding of
$7,162,256. Loeb Enterprises, LLC, has posted a bond for the completion of
certain infrastructure improvements, such as arterial roads, drainage, and
utilities in the portion of the master planned community in which builders are
currently building, and these improvements have been substantially completed. In
addition, the builders are contractually responsible to the city of Sparks,
Nevada for certain other improvements such as roads, drainage, and utilities,
within the specific subdivisions of property they have purchased.
F-23
<PAGE>
INMC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
(dba, Indymac Mortgage Holdings, Inc. And Subsidiaries)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1997, 1996 and 1995
NOTE O SUBSEQUENT EVENTS
On January 22, 1998, the Board of Directors declared a $0.48 cash dividend per
share payable on March 9, 1998 to shareholders of record on February 2,1998.
NOTE P - QUARTERLY FINANCIAL DATA - UNAUDITED
Selected quarterly financial data follows:
<TABLE>
<CAPTION>
Three Months Ended
(Dollar amounts in thousands --------------------------------------------------
except per share data) March 31 June 30 September 30 December 31
--------------------------------------------------
<S> <C> <C> <C> <C>
Year ended December 31, 1997
Net revenues $28,739 $29,659 $ 32,893 $35,344
Net earnings 21,345 22,656 (48,876) 29,170
Earnings per share: (1)
Basic 0.42 0.43 (0.83) 0.48
Diluted 0.41 0.42 (0.83) 0.47
Dividends declared for
earnings of the period 0.42 0.43 0.46 0.48
Year ended December 31, 1996
Net revenues $19,844 $21,215 $23,682 $27,209
Net earnings 15,360 16,368 17,890 19,369
Earnings per share: (1)
Basic 0.36 0.37 0.39 0.40
Diluted 0.35 0.36 0.39 0.40
Dividends declared for
earnings of the period 0.36 0.37 0.39 0.40
</TABLE>
(1) Earnings per share are computed independently for each of the quarters
presented. Therefore the sum of the quarterly earnings per share may not
equal the total for the year.
F-24
<PAGE>
IMNC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
(dba, IndyMac Mortgage Holdings, Inc.)
SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE
December 31, 1997
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E Column F
- ------------------ -------- ------------- ------------- ----------- ----------
Principal
Amount
of Loans Amount of
Range of Number Carrying Subject to Mortgage Range of
Carrying of Prior Amount of Delinquent Being Interest
Amounts of Loans Liens Mortgages Principal or Foreclosed Rates
Mortgages (1) (1) (1-5)(7)(9) Interest (1) (1)(8) (1)(6)
- ---------- -------- ------- ------------- ------------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
$0-$50 2,285 $0 $ 68,830 $ 2,758 $ 646 5.875-14.990
50-100 4,785 0 361,658 18,405 2,985 5.750-14.750
101-150 3,545 0 436,319 24,549 4,247 5.875-14.375
151-200 1,982 0 343,274 22,636 4,530 5.500-13.000
201 - 250 1,791 0 404,288 16,667 4,293 5.750-12.250
251 - 300 1,387 0 379,519 11,530 2,726 5.250-11.990
301 - 350 800 0 259,208 11,337 1,930 5.875-11.375
351 - 400 587 0 220,661 8,316 1,536 5.500-12.625
401 - 450 288 0 122,272 4,690 1,280 5.750-11.750
451 - 500 270 0 128,897 3,883 2,440 5.750-12.250
501 - 550 116 0 60,906 1,545 0 6.000-11.375
551 - 600 121 0 69,387 1,132 0 6.000-10.375
601 - 650 134 0 84,320 3,170 1,268 6.000-12.625
651 - 700 38 0 25,828 1,384 0 5.875-9.750
701 - 750 33 0 23,993 2,200 708 6.500-12.750
751 - 800 27 0 21,034 781 0 6.375-11.375
801 - 850 23 0 18,977 1,657 0 6.125-10.750
851 - 900 23 0 20,079 875 0 6.250-10.500
901 - 950 12 0 11,037 0 0 6.125-8.218
951 - 1,000 37 0 36,355 982 0 6.375-9.000
over 1,000 79 0 132,059 10,623 0 6.250-10.375
-------- ------ ------------- ------------- -------
18,363 0 $3,228,901 $149,120 $28,589
======== ====== ============= ============= =======
Premium 21,337
-------------
$3,250,238
=============
</TABLE>
- --------------------
(1) The above amounts are for the Company including both IndyMac REIT and
IndyMac Operating.
(2) All mortgage loans are fixed or adjustable-rate, conventional mortgage
loans secured by single (one-to-four) family residential properties with
initial maturities of 15 to 30 years.
(3) Total mortgage loans were comprised of $1,236,494 of mortgage held loans
for sale, $1,810,520 of mortgage loans held for investment and $181,887 of
whole loans pledged as collateral for CMOs.
(4) Information with respect to the geographic breakdown of first mortgages on
single family residential housing as of December 31, 1997 is as follows:
California 50% with no other state comprising more than 6%.
(5) The aggregate cost for federal income tax purposes is $3,250,238
(6) Interest earned on mortgages by range of carrying amounts is not reasonably
obtainable.
(7) $926 of mortgage loans purchased during 1997 were acquired from CHL, an
affiliate of the Company.
(8) Of the total amount of mortgages being foreclosed, $22,514 is related to
mortgage loans held for investment, and $6,075 is related to mortgage loans
held for sale.
<TABLE>
<CAPTION>
The Company IndyMac REIT Only
---------------------------- ------------------------
<S> <C> <C>
(9) Balance at beginning of period $2,111,475 $2,011,528
New mortgage loans 5,938,518 5,938,518
-------------- -------------
8,049,993 7,950,046
Deductions during period:
Sales of mortgage loans 4,039,312 4,128,546
Collections of principal 781,780 4,821,092 632,114 4,760,660
------------- -------------- ---------- -------------
Balance at close of period $3,228,901 $3,189,386
============== =============
</TABLE>
F-25
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
--------------------------------------------------
Board of Directors and Shareholders
IndyMac, Inc. and Subsidiary
We have audited the accompanying consolidated balance sheets of IndyMac, Inc.
and Subsidiary as of December 31, 1997 and 1996, and the related consolidated
statements of earnings, shareholders' equity and cash flows for each of the
three years in the period ended December 31, 1997. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of IndyMac, Inc. and
Subsidiary as of December 31, 1997 and 1996, and the consolidated results of
their operations and their consolidated cash flows for each of the three years
in the period ended December 31, 1997, in conformity with generally accepted
accounting principles.
GRANT THORNTON LLP
Los Angeles, California
February 27, 1998
F-26
<PAGE>
<TABLE>
<CAPTION>
INDYMAC, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands)
December 31, December 31,
1997 1996
---------------- --------------
<S> <C> <C>
ASSETS
Loans held for sale, net
Mortgages-prime $ 36,220 $ 70,893
Mortgages-subprime 38,697 12,030
Manufactured housing 23,917 -
-------------- ----------
98,834 82,923
Mortgage securities 601,669 541,672
Mortgage servicing rights 72,784 54,398
Interest receivable 26,053 18,378
Other assets 21,713 13,734
-------------- ----------
Total assets $ 821,053 $ 711,105
============== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Repurchase agreements and other credit facilities $ 578,763 $ 496,052
Due to IndyMac REIT 117,917 130,153
Income taxes payable 41,777 23,129
Accounts payable and accrued liabilities 14,114 21,114
-------------- ----------
Total liabilities 752,571 670,448
Shareholders' equity
Series A preferred stock - authorized, 10,000
shares of $.05 par value; issued and
outstanding, 9,900 shares - -
Common stock - authorized, 10,000 shares
of $.01 par value; issued and outstanding,
100 shares - -
Capital in excess of par value 32,476 32,476
Net unrealized gain (loss) on mortgage securities
available for sale, net of related taxes 506 (8,512)
Retained earnings 35,500 16,693
-------------- ----------
Total shareholders' equity 68,482 40,657
-------------- ----------
Total liabilities and shareholders' equity $ 821,053 $ 711,105
============== ==========
</TABLE>
The accompanying notes are an integral part of these statements
F-27
<PAGE>
INDYMAC, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
(Dollar amounts in thousands)
Years Ended December 31,
-----------------------------------
1997 1996 1995
-----------------------------------
<S> <C> <C> <C>
REVENUES
Interest income
Loans held for sale
Mortgages-prime $7,197 $3,725 $36,475
Mortgages-subprime 5,354 1,130 387
Manufactured housing 1,339 - -
------ ------ -------
13,890 4,855 36,862
Mortgage securities 36,962 35,553 23,358
------ ------ -------
Total interest income 50,852 40,408 60,220
Interest expense
Repurchase agreements and other credit facilities 38,736 30,204 41,345
Advances from IndyMac REIT 10,075 7,676 6,502
------ ------ -------
Total interest expense 48,811 37,880 47,847
------ ------ -------
Net interest income 2,041 2,528 12,373
Provision for loan losses 152 - 2,168
----- ----- -------
Net interest income after provision for
loan losses 1,889 2,528 10,205
Gain on mortgage loans and securities 71,725 51,692 35,799
Servicing fee income 12,940 8,880 5,692
Other income 3,422 1,809 36
------ ------ -------
Net revenues 89,976 64,909 51,732
EXPENSES
Salaries 32,611 20,562 12,979
General and administrative expenses 23,903 10,656 7,750
Management fees to affiliate 757 2,075 1,769
------ ------ -------
Total expenses 57,271 33,293 22,498
------ ------ -------
Earnings before income tax provision 32,705 31,616 29,234
Income tax provision 13,898 13,548 12,477
------- ------- -------
NET EARNINGS $18,807 $18,068 $16,757
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these statements
F-28
<PAGE>
INDYMAC, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
(Dollar amounts in thousands)
Years Ended December 31,
-------------------------------
1997 1996 1995
-------------------------------
<S> <C> <C> <C>
COMMON STOCK
Balance, beginning of year $ - $ - $ -
Common stock issued - - -
Common stock options exercised - - -
-------------------------------
Balance, end of year - - -
PREFERRED STOCK
Balance, beginning of year $ - $ - $ -
Preferred stock issued - - -
Preferred stock options exercised - - -
-------------------------------
Balance, end of year - - -
ADDITIONAL PAID IN CAPITAL
Balance, beginning of year 32,476 32,476 16,476
Common stock issued - - 16,000
Common stock options exercised - - -
-------------------------------
Balance, end of year 32,476 32,476 32,476
NET UNREALIZED GAIN (LOSS) ON MORTGAGE
SECURITIES AVAILABLE FOR SALE
Balance, beginning of year (8,512) 2,927 525
Valuation adjustments, net of related income taxes 9,018 (11,439) 2,402
-------------------------------
Balance, end of year 506 (8,512) 2,927
RETAINED EARNINGS
Balance, beginning of year 16,693 23,625 6,868
Net earnings 18,807 18,068 16,757
Dividends paid - (25,000) -
-------------------------------
Balance, end of year 35,500 16,693 23,625
-------------------------------
Total Stockholders' Equity $68,482 $ 40,657 $59,028
===============================
</TABLE>
The accompanying notes are an integral part of these statements
F-29
<PAGE>
INDYMAC, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
December 31,
------------- ------------- --------------
1997 1996 1995
------------- ------------- --------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings $ 18,807 $ 18,068 $ 16,757
Adjustments to reconcile net earnings to net cash provided
by (used in) operating activities:
Amortization and depreciation 34,692 57,626 16,098
Gain on sale of loans and securities (71,725) (51,692) (35,799)
Provision for loan losses 152 - 2,168
Purchases of loans from IndyMac REIT (4,281,911) (3,523,655) (3,641,760)
Principal repayments and sale of loans 4,348,801 3,578,966 3,748,695
Purchase of mortgage securities classified as trading (183,391) (276,946) (458,340)
Principal repayments and sale of mortgage securities classified as trading 109,731 223,784 168,197
Net increases in other assets (21,467) (13,331) (2,498)
Net increases (decreases) in income taxes payable 12,117 (5,841) 13,586
Net (decreases) increases in other liabilities (5,851) 28,964 (9,610)
------------- ------------- --------------
Net cash (used in) provided by operating activities (40,045) 35,943 (182,506)
------------- ------------- --------------
Cash flows from investing activities:
Purchase of mortgage securities available for sale (26,840) (134,526) (40,402)
Principal repayments and sale of mortgage securities classified as available
for sale 29,818 45,551 16,187
Additions to servicing rights (33,408) (23,276) (20,614)
Proceeds from sale of servicing - - 6,982
------------- ------------- --------------
Net cash used in investing activities (30,430) (112,251) (37,847)
------------- ------------- --------------
Cash flows from financing activities:
Increase/(decrease) in advances from IndyMac REIT, net of cash repayments (12,236) 46,561 67,128
Net proceeds of repurchase agreements 82,711 54,747 137,225
Proceeds from additional capital contribution - - 16,000
Cash dividends paid - (25,000) -
------------- ------------- --------------
Net cash provided by financing activities 70,475 76,308 220,353
------------- ------------- --------------
Net change in cash - - -
Cash at beginning of period - - -
------------- ------------- --------------
Cash at end of period $ - $ - $ -
============= ============= ==============
Supplemental cash flow information:
Cash paid for interest $ 49,540 $ 30,216 $ 40,510
Cash paid for income taxes 1,996 259 1,097
</TABLE>
The accompanying notes are an integral part of these statements.
F-30
<PAGE>
INDYMAC, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996, and 1995
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The financial statements of IndyMac, Inc. ("IndyMac Operating") are prepared in
conformity with generally accepted accounting principles (GAAP). In preparing
financial statements in accordance with GAAP, management is required to make
estimates and assumptions that affect the reported amounts. Actual results could
differ from those estimates. The following is a summary of significant
accounting and reporting policies used in preparing the financial statements.
1. Financial Statement Presentation
The consolidated financial statements include the accounts of IndyMac
Operating and its subsidiary. INMC Mortgage Holdings Inc., dba IndyMac
Mortgage Holdings Inc. ("IndyMac REIT") owns all the preferred stock and
has a 99% economic interest in IndyMac Operating. Accordingly, IndyMac
REIT's investment in IndyMac Operating is accounted for under a method
similar to the equity method in IndyMac REIT's financial statements because
IndyMac REIT has the ability to exercise influence over the financial and
operating policies of IndyMac Operating through its ownership of the
preferred stock and other contracts. References to the "Company" mean the
parent company, its consolidated subsidiary, and IndyMac REIT and its
consolidated subsidiaries. All significant intercompany balances and
transactions with IndyMac Operating's consolidated subsidiary have been
eliminated in consolidation. Certain reclassifications have been made to
the financial statements for the periods ended December 31, 1996 and 1995
to conform to the December 31, 1997 presentation.
2. Loans Held for Sale
Loans held for sale are carried at the lower of cost or market, which is
computed by the aggregate method. The cost of loans held for sale is
adjusted by gains and losses from hedging transactions, principally using
forward commitments and futures contracts, entered into to protect the
inventory value of the loans from increases in interest rates. Hedge
positions are also used to protect the pipeline of commitments to purchase
loans from IndyMac REIT from changes in interest rates. Gains and losses
resulting from changes in the market value of the inventory, pipeline, and
open hedge positions are netted. Any net gain that results is deferred; any
net loss that results is recognized when incurred. Hedging gains and losses
realized during the commitment and warehousing period related to the
pipeline and loans held for sale are deferred. Hedging losses are
recognized currently if deferring such losses would result in loans held
for sale and the pipeline being valued in excess of their estimated net
realizable value.
3. Mortgage Securities
Mortgage securities consist of mortgage derivative products including REMIC
senior securities, subordinated securities, AAA rated interest-only
securities, principal-only securities, US Treasury bonds and inverse-
floater securities. These securities consist of securities retained upon
the issuance of IndyMac Operating's REMIC securities and securities issued
by other financial institutions and purchased by IndyMac Operating.
Securities retained upon the issuance of IndyMac Operating's REMIC
securities, including interest-only securities, are classified as trading
securities. Accordingly, pursuant to Statement of Financial Accounting
Standards (SFAS) 115, such securities classified as trading are carried at
fair value with unrealized gains and losses included in earnings of the
period.
F-31
<PAGE>
INDYMAC, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996, and 1995
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Interest income on the interest-only securities is recognized at an
effective yield based upon current estimates of prepayment rates. Cash
received in excess of the effective yield is applied to amortize the asset.
Estimated fair value is determined based on discounted cash flow techniques
using assumptions for prepayment rates and market yield requirements.
Interest-only security fair values are sensitive to variations in estimates
of prepayment rates and changes in interest rates. IndyMac Operating
estimates future prepayment rates based upon current interest rate levels,
economic conditions, and market forecasts as well as relevant
characteristics of the collateral underlying the assets, such as loan
types, interest rates and past prepayment experience. The estimates of
prepayment rates may change in the near term due to changes in interest
rates and market conditions.
Purchased securities are classified as available for sale when IndyMac
Operating intends to hold the securities for a period of time, but not
necessarily to maturity. A decision to sell a security classified as
available for sale is based on a variety of factors including movements in
interest rates and other changes in economic conditions. Mortgage
securities classified and accounted for as available for sale are carried
at fair value with unrealized gains and losses excluded from earnings and
included as a separate component of shareholders' equity, net of related
income tax effects.
Estimated fair value is determined based on market quotes when available or
discounted cash flow techniques using assumptions for prepayment rates and
market yield requirements. Such assumptions are estimates and may change in
the near term as interest rates or economic conditions change.
4. Mortgage Servicing Rights
On January 1, 1997, the Company adopted SFAS No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities". SFAS No. 125 supersedes, but generally retains, the
requirements of SFAS No. 122, "Accounting for Mortgage Servicing Rights",
which the Company adopted in January 1995. Both Statements require the
recognition of mortgage servicing rights as assets by allocating total
costs incurred between the loan and the servicing rights retained based on
their relative fair values. In addition, SFAS No. 125 eliminates the
distinction between normal and excess servicing to the extent the servicing
fee does not exceed that specified in the contract. The adoption of SFAS
No. 125 did not have a material effect on the Company's financial position
or results of operations for the year ended December 31, 1997.
IndyMac Operating retains mortgage servicing rights in connection with the
master servicing responsibilities associated with sales of loans and
securities. IndyMac Operating also acquires, from time to time, the
rights to service, as opposed to master service, loans in connection with
the purchase of such loans. Mortgage servicing rights are amortized over
the lives of the underlying mortgages in proportion to estimated net
servicing revenues. Gains on the sale of servicing rights are recognized
when title and all risks and rewards have irrevocably passed to the buyer
(subject to customary representations and warranties) and there are no
significant unresolved contingencies.
In determining the appropriate discount rate to compute the initial
carrying amount, IndyMac Operating considers the discount rate inherent in
the fair values of similar investments such as interest-only securities,
historical and expected prepayment assumptions and required spreads against
alternative investments.
F-32
<PAGE>
INDYMAC, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996, and 1995
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
5. Call Options and Interest Rate Floors
In seeking to protect the value of interest-only securities and mortgage
servicing rights from the effects of increased prepayment activity, IndyMac
Operating has acquired financial instruments, including derivative
contracts, that tend to increase in value when interest rates decline.
These financial instruments include call options on U.S. Treasury
securities and interest rate floors and are entered into for purposes other
than trading. The value of call options and interest rate floors are
derived from an underlying instrument or index, however, the notional or
contractual amount is not recognized on the balance sheet. IndyMac
Operating had $300 million notional amount of interest rate floors
outstanding as of both December 31, 1997 and 1996. The cost of these
financial instruments is amortized to expense over the contractual life of
the contracts. Unamortized costs are included in other assets on the
balance sheet. IndyMac Operating is not exposed to loss or additional cash
outlays beyond its initial cost to acquire the hedge instruments. Realized
gains related to these financial instruments are recognized first as an
offset to the unscheduled amortization. To the extent the realized gains
exceed the unscheduled amortization, the Company reduces the carrying
amount of the interest-only securities and mortgage servicing rights by
such excess through additional amortization. For the years ended December
31, 1997 and 1996, IndyMac Operating did not have realized gains or losses
on interest rate floors. For the year ended December 31, 1996, IndyMac
Operating recognized $128,000 of realized gains on the divestiture of its
call options as an offset to amortization.
While IndyMac Operating does not anticipate nonperformance by the
counterparties, the IndyMac Operating manages credit risk with respect to
such financial instruments by entering into agreements with entities
approved by senior management and initially having a long term credit
rating of single A or better (by one or more nationally recognized credit
rating agencies) at the time the relevant contract is consummated. These
entities include Wall Street firms having primary dealer status. The
IndyMac Operating's exposure to credit risk in the event of default by the
counterparty is the difference between the contract price and the current
market price of the instrument being utilized. Unless noted otherwise,
IndyMac Operating does not require collateral or other security to support
financial instruments with credit risk with approved counterparties.
6. Revenue Recognition
Interest is recognized as revenue when earned according to the terms of the
loans and securities and when, in the opinion of management, it is
collectible. Premiums paid and discounts obtained on loans held for sale
are deferred as an adjustment to the carrying value of the loans until the
loans are sold. Gains on sale of loans and securities are recognized upon
settlement.
7. Income Taxes
For income tax purposes, IndyMac Operating files a separate tax return and
is not consolidated with IndyMac REIT. Taxable earnings of IndyMac
Operating are subject to state and federal income taxes at the applicable
statutory rates. Deferred income taxes in the accompanying financial
statements are computed using the liability method.
F-33
<PAGE>
INDYMAC, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996, and 1995
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
8. Allowance for Loan Losses
IndyMac Operating maintains an allowance for possible credit losses on
loans held for sale. Additions to the reserve are based on an assessment of
certain factors including, but not limited to, estimated future losses on
the loans, general economic conditions, and trends in portfolio volume,
composition, maturity, and delinquency statistics. Additions to the reserve
are provided through a charge to earnings. Actual losses on loans are
recorded as a charge-off or a reduction to the loan loss reserve.
Subsequent recoveries of amounts previously charged off are credited back
to the reserve.
9. Recent Accounting Pronouncement
During 1997, the Financial Accounting Standards Board (FASB) issued SFAS
130, "Reporting Comprehensive Income" which is effective for fiscal years
beginning after December 15, 1997 and requires restatement of earlier
financial statements for comparative purposes. SFAS No. 130 requires that
items meeting the criteria of a component of comprehensive income,
including foreign currency items and unrealized gains and losses on certain
investments in debt and equity securities, including securities classified
as available for sale, be shown in the financial statements as pro forma
adjustments to reported net income to arrive at a disclosure of
"comprehensive income" as defined. SFAS No. 130 does not require a
specific format for disclosure of comprehensive income and its components
in the financial statements. SFAS No. 130 provides informative disclosure
but does not and will not impact previously reported or future net earnings
and earnings per share. Management has not yet determined where in its
financial statements such additional disclosure will be presented when the
effect of SFAS No. 130 becomes effective.
The FASB has also issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information". This standard requires that a public
business enterprise report financial and descriptive information about its
reportable operating segments. Operating segments are components of an
enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker in deciding how
to allocate resources and in assessing performance. SFAS No. 131 also
requires that all public business enterprises report information about the
revenues derived from the enterprise's products or services (or groups of
similar products and services), about the countries in which the enterprise
earns revenues and hold assets, and about major customers regardless of
whether that information is used in making operating decisions. However,
this Statement does not require an enterprise to report information that is
not prepared for internal use if reporting it would be impractical. This
statement is effective for financial statements for periods beginning after
December 15, 1997. In the initial year of application, comparative
information for earlier years is required to be restated. Comparative
information for interim periods is not required until the second year of
application. SFAS No. 131 provides informative disclosure but does not and
will not impact previously reported or future net earnings and earnings per
share. Management is in the process of determining its reportable
operating segments, product, and customer disclosures under SFAS No. 131
for reporting in its 1998 financial statements.
F-34
<PAGE>
INDYMAC, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996, and 1995
NOTE B - LOANS HELD FOR SALE
Substantially all of the loans purchased by IndyMac Operating from IndyMac REIT
are fixed-rate and adjustable-rate jumbo and nonconforming loans secured by
first liens on single-family residential properties. Approximately 38% of the
principal amount of loans held for sale at December 31, 1997 were collateralized
by properties located in California.
In 1997 and 1996, IndyMac Operating purchased loans from IndyMac REIT with an
aggregate principal balance of $4.3 billion and $3.5 billion, respectively, and
sold loans in the form of REMIC securities or bulk whole loan sales with an
aggregate principal balance of $4.2 billion and $3.5 billion, respectively.
IndyMac Operating recognized gains on these securitizations and whole loan
sales, net of related expenses, losses, and hedging costs, totaling $72.5
million, $51.1 million and $22.7 million, respectively, for the years ended
December 31, 1997, 1996 and 1995.
NOTE C - ALLOWANCE FOR LOAN LOSSES
Transactions in IndyMac Operating's allowance for loan losses were as follows:
<TABLE>
<CAPTION>
(Dollar amounts in thousands) 1997 1996 1995
--------------------------------------------------------------
<S> <C> <C> <C>
Balance at January 1 $ 1,173 $1,791 $ 0
Provision for the year 152 - 2,168
Chargeoffs (1,187) (18) (377)
Recoveries - - -
------- ------ ------
Balance at December 31 $ 738 $1,773 $1,791
======= ====== ======
</TABLE>
NOTE D - MORTGAGE SECURITIES
The following is a disclosure of the amortized cost and estimated fair value of
mortgage securities as of December 31,1997 and 1996. Contractual maturities on
the mortgage securities range from 10 to 30 years.
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
-------------------- --------------------
(Dollar amounts in thousands) Available Available
Trading for sale Trading for sale
------- --------- ------- ---------
<S> <C> <C> <C> <C>
Amortized cost $544,743 $56,053 $408,866 $147,482
Gross unrealized gains -- 2,321 -- 2,815
Gross unrealized losses -- (1,448) -- (17,491)
-------- ------- -------- --------
Estimated fair value $544,743 $56,926 $408,866 $132,806
======== ======= ======== ========
</TABLE>
IndyMac Operating reclassified its portfolio of principal-only securities,
totaling $89 million, from available for sale to trading securities during the
quarter ended March 31, 1997. The gross unrealized holding losses associated
with these principal-only securities was $15 million, net of tax, at the time of
transfer, which was recognized in gain on sale of loans and securities.
Additionally, during the year ended December 31, 1997, IndyMac Operating sold
mortgage securities with a net book value of $9.7 million (based on specific
identification) for proceeds of $11.7 million, resulting in gross realized gains
of $2.0 million included in gains on sale of loans and securities. As of
December 31, 1997 and 1996, all of IndyMac Operating's mortgage securities were
pledged as collateral under repurchase agreements.
F-35
<PAGE>
INDYMAC, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996, and 1995
NOTE E - MORTGAGE SERVICING RIGHTS
The changes in mortgage servicing rights during 1997and 1996 are as follows:
<TABLE>
<CAPTION>
(Dollar amounts in thousands) 1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Mortgage servicing rights
Balance at January 1 $56,917 $40,991 $33,474
Additions 33,408 23,275 20,615
Sales (6,677)
Amortization:
Scheduled (9,266) (7,349) (6,421)
Unscheduled (70) -- --
------- ------- -------
Balance before valuation reserve 80,989 56,917 40,991
------- ------- -------
Reserve for impairment of mortgage servicing rights
Balance at January 1 (2,519) (835) --
Additions (5,686) (1,684) (835)
------- ------- -------
Balance at December 31 (8,205) (2,519) (835)
------- ------- -------
Mortgage servicing Right, Net $72,784 $54,398 $40,156
======= ======= =======
</TABLE>
The estimated fair value of mortgage servicing rights aggregated $74.2 million
and $52.8 million at December 31, 1997 and 1996, respectively. Fair value is
determined by discounting estimated net future cash flows from mortgage
servicing activities using discount rates that approximate current market rates
and using current expected future prepayment rates.
NOTE F - REPURCHASE AGREEMENTS AND OTHER CREDIT FACILITIES
IndyMac Operating is a co-borrower under the Company's repurchase agreements and
other credit facilities, subject to IndyMac REIT's continuing to remain jointly
and severally liable for repayment. These facilities are secured by loans which
are ultimately sold in the form of REMIC securities or whole loans, retail sales
installment contracts and mortgage-related securities. During 1997 and 1996,
borrowings under such facilities had original repricings of overnight and less
than 30 days, respectively.
The facilities bear interest at rates indexed to the London Interbank Offered
Rate ("LIBOR") or the federal funds rate, plus an applicable margin. For the
months ending December 31, 1997 and 1996, the weighted average borrowing rates
on these facilities were 6.3% and 5.9%, respectively. None of the lenders is
affiliated with IndyMac REIT or IndyMac Operating.
F-36
<PAGE>
INDYMAC, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996, and 1995
NOTE G - INCOME TAXES
The income tax provision for the years ended December 31, 1997, 1996 and 1995
consist of the following:
<TABLE>
<CAPTION>
(Dollar amounts in thousands) ----------------------------
1997 1996 1995
----------------- -------
<S> <C> <C> <C>
Current expense (benefit)
Federal $ 319 $ (992) $ 164
State 137 365 110
------- ------- -------
Total current expense (benefit) 456 (627) 274
------- ------- -------
Deferred expense
Federal 9,974 9,883 9,025
State 3,468 4,292 3,178
------- ------- -------
Total deferred expense 13,442 14,175 12,203
------- ------- -------
Total income tax expense 13,898 $13,548 $12,477
======= ======= =======
</TABLE>
The tax effect of temporary differences that gave rise to significant portions
of deferred tax assets and liabilities as of December 31, 1997 and 1996 are
presented below:
<TABLE>
<CAPTION>
(Dollar amounts in thousands) 1997 1996
-----------------------
<S> <C> <C>
Deferred tax asset
State tax expense $(3,795) $ (2,791)
Allowance for loan losses (410) (816)
Net operating loss carryforward (5,777) (10,533)
Unrealized losses on securities -- (6,312)
Other (1,084) (518)
-------- --------
(11,066) (20,970)
Deferred tax liability
Mortgage securities and servicing rights 53,632 42,067
Unrealized gains on securities 367 --
Mark-to-market loss 400 2,815
-------- --------
54,399 44,882
Net deferred tax liability $ 43,333 $ 23,912
======== ========
</TABLE>
At December 31, 1997, IndyMac Operating had a net operating loss carryforward
for federal income tax purposes of approximately $16.1 million, which begins to
expire in the year 2009. As of December 31, 1997, IndyMac Operating did not
have a net operating loss carryforward for state income tax purposes.
The effective income tax rate differed from the federal statutory rate as
follows:
<TABLE>
<CAPTION>
(Dollar amounts in thousands) 1997 1996 1995
-----------------------
<S> <C> <C> <C>
Federal statutory rate 35.0% 35.0% 34.0%
State income taxes, net of federal tax effect 7.2% 7.6% 7.0%
Other items, net 0.3% 0.3% 1.7%
-------------- ----
Effective income tax rate 42.5% 42.9% 42.7%
====== ==== ====
</TABLE>
F-37
<PAGE>
INDYMAC, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996, and 1995
NOTE H - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the estimated fair value of the various classes of
financial instruments as of December 31, 1997 and 1996. The estimated fair value
amounts have been determined by IndyMac Operating using available market
information and valuation methodologies which the Company believes are
appropriate under the circumstances. These estimates are inherently subjective
in nature and involve significant judgment to interpret relevant market and
other data. The use of different market assumptions and/or estimation
methodologies may have a material effect on estimated fair value amounts.
Accordingly, the estimates presented herein are not necessarily indicative of
the amounts IndyMac Operating could realize in a current market exchange.
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
--------------------- -----------------------
(Dollar amounts in thousands) Carrying Estimated Carrying Estimated
amount fair value amount fair value
-------- ---------- -------- -----------
<S> <C> <C> <C> <C>
Assets:
Loans held for sale $ 97,965 $ 97,965 $ 99,784 $ 99,784
Commitments to purchase loans 1,971 1,971 (17,142) (17,142)
Commitments to sell loans and securities (102) (102) 281 281
Mortgage securities 601,669 601,669 541,672 541,672
Liabilities:
Repurchase agreements & other borrowings 578,763 578,763 496,052 496,052
Off-balance sheet:
Interest rate floors 324 222 677 66
</TABLE>
The fair value estimates as of December 31, 1997 and 1996 are based on pertinent
information available to management as of those dates. Although management is
not aware of any factors that would significantly affect the estimated fair
value amounts, such amounts have not been comprehensively revalued for purposes
of these financial statements since those dates and, therefore, current
estimates of fair value may differ significantly from the amounts presented
herein.
The following describes the methods and assumptions used by IndyMac Operating in
estimating fair values.
Loans Held for Sale Fair value is estimated using the methodology described in
Note A. 2
Commitments to Purchase Loans Fair value is estimated based upon the
difference between the current value of similar loans and the price at which
IndyMac Operating has committed to purchase the loans.
Commitments to Sell Loans and Securities IndyMac Operating utilizes forward
commitments to sell private-label mortgage-backed securities, Fannie Mae
mortgage-backed securities and two-year, five-year and ten-year U.S. Treasury
futures contracts to hedge interest rate risk associated with loans held for
sale and commitments to purchase loans. Fair value of these commitments is
determined based upon the difference between the settlement values of the
commitments and the quoted market values of the underlying loans and securities.
F-38
<PAGE>
INDYMAC, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996, and 1995
NOTE H - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
Mortgage Securities Fair value is estimated using quoted market prices and by
discounting future cash flows using discount rates that approximate current
market rates and expected future prepayment rates.
Repurchase Agreements and Other Borrowings Fair values approximate the
carrying amounts because of the short term to maturity of the liabilities.
Interest Rate Floors The fair values of IndyMac Operating's interest rate
floors are estimated based upon quoted market prices at year end.
NOTE I - COMMITMENTS AND CONTINGENCIES
Financial Instruments with Off-Balance Sheet Risk IndyMac Operating is a party
to financial instruments with off-balance sheet risk in the normal course of
business through the acquisition and sale of loans and the management of
interest rate risk. These instruments include short-term commitments to purchase
and sell loans and are entered into for purposes other than trading. The
instruments involve, to varying degrees, elements of credit and interest rate
risk. IndyMac Operating is exposed to credit loss in the event of nonperformance
by the counterparties to the various agreements. As discussed below, IndyMac
Operating's exposure to credit risk with respect to the master servicing
portfolio in the event of nonperformance by mortgagors is limited due to the
non-recourse nature of the loans in the servicing portfolio. IndyMac Operating's
exposure to credit risk in the event of default by the counterparty is the
difference between the contract price and the current market price of the
instrument being utilized. Unless noted otherwise, IndyMac Operating does not
require collateral or other security to support financial instruments with
credit risk with approved counterparties.
Master Loan Servicing As of December 31, 1997 and 1996, IndyMac Operating
master serviced loans totaling $12.4 billion and $11.1 billion, respectively,
associated with its issuance of REMIC securities and whole loan sales.
In connection with REMIC issuances, each series of mortgage-backed securities is
typically fully payable from the mortgage assets underlying such series and the
recourse of investors is limited to those assets and any credit enhancement
features, such as insurance. Generally, losses in excess of the credit
enhancement obtained are borne by the security holders. Except in the case of a
breach of the standard representations and warranties made by IndyMac Operating
when loans are securitized or sold, the loans or securities are nonrecourse to
IndyMac Operating. Typically, the Company has recourse to the sellers of such
loans for any breaches of similar representations and warranties made by the
sellers to the Company.
As of December 31, 1997, approximately 47% and 6% of mortgage loans in IndyMac
Operating's master servicing portfolio were secured by properties located in
California and New York, respectively. The remainder are geographically
dispersed throughout the United States, with no more than 5% of the mortgage
loans collateralized by properties in any other state.
Commitments to Purchase Loans As of December 31, 1997 and 1996, IndyMac
Operating had entered into commitments to purchase loans from IndyMac REIT
totaling $2.2 billion and $1.4 billion, respectively, including loans subject to
purchase from sellers by IndyMac REIT. After the purchase and sale of the loans,
IndyMac Operating's exposure to credit loss in the event of nonperformance by
borrowers is limited as described above.
F-39
<PAGE>
INDYMAC, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996, and 1995
NOTE I - COMMITMENTS AND CONTINGENCIES (CONTINUED)
Commitments to Sell Loans and Securities IndyMac Operating hedges its
inventory and committed pipeline of jumbo mortgage loans by using temporary
cross hedges with forward commitments to sell Fannie Mae mortgage-backed
securities and U.S. Treasury futures contracts. IndyMac Operating's commitments
to sell loans approximated $93 million and $200 million, respectively as of
December 31, 1997 and 1996. IndyMac Operating had forward commitments to sell
$1.3 billion and $510 million of Fannie Mae mortgage-backed securities as of
December 31, 1997 and 1996, respectively, and $120 million and $175 million of
two-year, five-year and ten-year U.S. Treasury futures contracts as of December
31, 1997 and 1996, respectively. The commitments to sell securities had a net
unrealized loss of approximately $5.0 million and a net unrealized gain of $6.2
million as of December 31, 1997 and 1996, respectively. The net unrealized
losses and gains were deferred as part of IndyMac Operating's lower of cost or
market analysis on its loans held for sale. Cash requirements related to
forward commitments and futures contracts are limited to the interest rate risk
exposure resulting from having fewer closed loans at the committed price than
anticipated under the forward commitments and futures contracts.
NOTE J - RELATED PARTY TRANSACTIONS
As of December 31, 1997 and 1996, advances due by IndyMac Operating to IndyMac
REIT totaled $118 million and $130 million, respectively. Such funds were
advanced by IndyMac REIT, under a revolving credit facility arrangement and
certain one-year term borrowing arrangements, to finance assets of IndyMac
Operating. Such advances bear interest at rates indexed to LIBOR. The interest
rate charged on such advances was 10.5% and 9.8% at December 31, 1997 and 1996,
respectively.
Prior to July 1, 1997, IndyMac REIT operated under an agreement (the "Management
Agreement") with Countrywide Asset Management Corporation (the "Manager") to
advise the Company on various facets of its business and manage its operations,
subject to review and supervision by IndyMac REIT's Board of Directors. The
Manager had entered into a subcontract with its affiliate, Countrywide Home
Loans, Inc. ("CHL"), to perform such services for the Company as the Manager
deemed necessary. For performing these services, the Manager received, (1) a
base management fee of 0.125% per annum of average-invested mortgage-related
assets not pledged to secure CMOs, and excluding loans held for sale, (2) a
separate management fee equal to 0.2% per annum of the average amounts
outstanding under traditional warehouse lines of credit, and (3) incentive
compensation equal to 25% of the amount by which IndyMac REIT's annualized
return on equity exceeded the ten-year U.S. Treasury Rate plus 2%. IndyMac
Operating paid management fees to CAMC totaling $757,000, $2.0 million and $1.8
million for the years ended December 31, 1997, 1996 and 1995, respectively.
Prior to July 1, 1997, the Manager incurred many of the operating expenses of
the Company, including personnel and related expenses. As part of its
acquisition of CAMC, IndyMac REIT entered into a Cooperation Agreement with
Countrywide Credit Industries, Inc. ("CCR") whereby certain services previously
provided to IndyMac REIT by CCR would be provided during a transition period.
The Cooperation Agreement specifies certain costs for IndyMac REIT to pay CCR
for services during the transition period. The Company's conduit operations are
primarily conducted by IndyMac Operating and all other operations are conducted
by IndyMac REIT. Accordingly, IndyMac Operating is charged with the majority of
the conduit's costs, and IndyMac REIT is charged with the cost of other
operations.
F-40
<PAGE>
INDYMAC, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996, and 1995
NOTE J - RELATED PARTY TRANSACTIONS (CONTINUED)
As of December 31, 1997, CHL was subservicing $2.6 billion in mortgage loans
associated with the Company's mortgage servicing rights. IndyMac Operating paid
CHL $1.9 million, $1.1 million and $461,000 in subservicing fees during 1997,
1996 and 1995, respectively.
All loans purchased by IndyMac REIT for which a REMIC transaction or whole loan
sale is contemplated are committed for sale to IndyMac Operating at the same
price at which the loans were acquired by IndyMac REIT. IndyMac Operating
currently does not purchase any loans from any entities other than IndyMac REIT.
F-41
<PAGE>
EXHIBIT 10.50
-------------
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") has been executed as of January 1,
1997 by and between Countrywide Asset Management Corporation ("Employer") and
Kathleen H. Rezzo ("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 Executive Vice President of CWM
Mortgage Holdings, Inc. ("Holdings") and as Executive Vice President of
Independent National Mortgage Corporation ("Indy Mac") and Independent
Lending Corporation and President and Chief Executive Officer of Construction
Lending Corporation of America, Builder Division. 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 her to discharge her duties in the
offices which she 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. Employer and Officer hereby agree that the portion of Officer's
services which are provided to Indy Mac are to be treated for federal income
tax purposes as services provided by Officer as an employee of Indy Mac.
Officer agrees that Employer and Indy Mac shall make a determination as to
the portion of the total compensation payable to Officer hereunder which
shall be allocated to and deemed paid by Indy Mac for purposes of section
162(m) and related provisions of the Internal Revenue
<PAGE>
Code. If Employer requests Officer to relocate outside of Los Angeles County
in connection with the relocation of Holdings' headquarters, Officer shall
have the option of agreeing to such relocation and the terms of this contract
shall continue in full force and effect. If Officer declines to relocate,
either Officer or Employer shall provide the other party with a Notice of
Termination in accordance with Section 5(f) and the rights and obligations of
both parties shall cease upon such termination and Paragraphs 5(d) and 9(k)
will not be applicable. If Employer requests Officer to relocate outside of
Los Angeles County and the Holdings' headquarters are not also relocating,
Officer shall have the option of agreeing to such relocation and the terms of
this contract shall continue in full force and effect. If Officer declines
to relocate, Employer's request to relocate shall be deemed a termination
other than for Cause pursuant to Section 5(d).
3. SCOPE OF THIS AGREEMENT AND OUTSIDE AFFILIATIONS. During the term of this
Agreement, Officer shall devote her 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 her best
efforts and abilities to promote their respective interests. Officer agrees
that she 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 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 her of her
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 her 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 her 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 $180,000 (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,
2
<PAGE>
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, a good performance review would result in an increase in the
Annual Rate of 5%, but could exceed such percentage if warranted.
Officer's Annual Rate may not be reduced during the term of this
Agreement. If Employer reduces Officer's Annual Rate during the term of
this Agreement, then such reduction may be treated by Officer as a
termination other than for Cause pursuant to Section 5(d) below.
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 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. For the purpose of any allocation of
Officer's incentive compensation pursuant to Section 2 above, it is
understood that the calculation of earnings of Holdings includes Holdings'
equity interest in the earnings of Indy Mac.
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, Employer
may grant to Officer stock options for such number of shares of Employer's
common stock as the Compensation Committee in its sole discretion
determines, taking into account Officer's and Employer's 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 Indy Mac. The
stock options described in this Section 4(c) in respect of a Fiscal Year
shall be granted at the same time as Employer 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 Employer's 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)), 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 she 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 she is eligible to
participate therein, for
3
<PAGE>
senior officers generally or for employees generally, during the term of
this Agreement (collectively, "Additional Benefits"). This Agreement shall
not affect the provision of
4
<PAGE>
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 her
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.
e. DEFERRAL OF AMOUNTS PAYABLE HEREUNDER. In the event Officer should desire
to defer receipt of any cash payments to which she would otherwise be
entitled hereunder, she 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.
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 to her under the terms of Employer's disability
insurance or other disability benefit plans or employer's tax-qualified
Defined Benefit Pension Pan, and any compensation she 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 her 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 her
estate (the "Beneficiary"). Employer shall also (1) pay to such
Beneficiary (x) an amount equal
5
<PAGE>
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 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 5(b) in respect of the
Fiscal Year immediately preceding the Fiscal Year in which her 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 she 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 she 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 her 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 her 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 she has
become vested or which are otherwise payable in respect of periods ending
prior to her termination of employment. Anything herein to the contrary
6
<PAGE>
notwithstanding, termination for Cause shall not include termination by
reason of Officer's job performance or a job performance rating given to
Officer for her job performance or the financial performance of Holdings
or any affiliated company.
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 her 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 she has become vested or
which are otherwise payable in respect of periods ending prior to her
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 her 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.
7
<PAGE>
g. NOTICE OF NON-RENEWAL OF AGREEMENT. Employer shall provide Officer with a
minimum of six (6) months' written notice ("Non-Renewal Notice") if
Employer does not intend to renew the term of this Agreement. Following
such notice, Officer shall be permitted to seek and gain employment
elsewhere and such action shall be deemed to not be a violation of Section
9(k). In the event that Employer provides Officer with a Non-Renewal
Notice, Officer shall be entitled to all incentive compensation earned,
but not paid, during her employment through the date of termination. If
Employer does not provide the Non-Renewal Notice to Officer and Employer
terminates Officer for any reason other than for Cause within six (6)
months from the end of the term of this Agreement, Officer shall be
entitled to severance payment pursuant to Section 5(d). If Employer does
not provide the Non-Renewal Notice to officer and the parties cannot agree
on terms of a new agreement, then upon January 1, 2001, this Agreement
shall terminate and Officer shall not be subject to the restrictions set
forth in Paragraph 9(k), however, Officer shall be entitled to all
incentive compensation earned, but not paid, during her employment through
the date of termination.
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. ARBITRATION. With the exception of disputes arising under or with respect to
Sections 9(h) or 9(k) hereof, any and all disputes arising out of or relating
to this Agreement, between Employer and Officer, shall be resolved by
arbitration. Any party hereto electing to commence an action shall give
written notice to the other parties hereto of such election. The dispute
shall be settled by arbitration in accordance with the then current rules of
the California Employment Dispute Resolution Association; provided, however,
in the event the parties are unable to agree on an arbitrator within twenty
(20) days after receipt of the aforementioned notice of arbitration, a single
arbitrator shall be selected by the Chief Judge of the Superior Court of the
State of California for the County of Los Angeles. The award of such
arbitrator may be confirmed or enforced in any court of competent
jurisdiction. The costs and expenses of the arbitrator, including the
reasonable attorneys' fees and costs of each of the parties, shall be
apportioned between the parties by such arbitrator, based upon such
arbitrator's determination of the merits of their respective positions. Any
party to the arbitration may demand production of documents from any other
party, to be produced no fewer than thirty (30) days prior to the first date
set for arbitration. Any party may notice up to two (2) depositions for
discovery purposes in preparation for arbitration. Other than as expressly
stated, no discovery shall be permitted except in accordance with California
law. The Federal Arbitration Act shall govern the interpretation and
application of this arbitration clause.
8
<PAGE>
8. 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 her harmless for any
acts or decisions made by her in good faith while performing services for
Employer, and shall use reasonable efforts to obtain coverage for her under
liability insurance policies now in force or hereafter obtained during the
term of this Agreement covering the other officers or directors of Employer.
9. 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
she may from time to time in writing designate (or her 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, 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.
9
<PAGE>
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 she 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 she may have learned as a result of her 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 she 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
she 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.
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.
10
<PAGE>
k. COVENANT NOT TO COMPETE
(i) IN GENERAL. Officer agrees that while she 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"), she shall not, 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, unless Officer shall have received the
prior written consent of Employer.
(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).
(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.
11
<PAGE>
(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 her individual capacity
12
<PAGE>
APPENDIX A
ANNUAL INCENTIVE PLAN
. Production/Profitability Bonus:
Year Maximum Amount Minimum Amount
1997 $250,000 $0
1998 $325,000 $0
1999 $400,000 $0
2000 $475,000 $0
2.00% of annual net income of Construction Lending Corporation of America -
- Builder Division, as determined by the Chief Financial Officer and
President of CWM Mortgage Holdings, Inc. in their sole discretion.
. Discretionary Bonus:
*Maximum Amount: 30% of Base Salary Minimum Amount: $0
*Criteria:
(DISCRETIONARY BONUS)
1. POTENTIAL DISCRETIONARY BONUS AMOUNT: From $0 up to 30% of base salary,
------------------------------------
based on your manager's evaluation of your performance.
2. BONUS DISCOUNT FACTOR FOR COMPANY EARNINGS:
------------------------------------------
<TABLE>
<CAPTION>
1997 EARNINGS PER SHARE (FULLY DILUTED)
FOR CWM MORTGAGE HOLDINGS, INC. DISCRETIONARY BONUS AMOUNT
- ------------------------------- --------------------------
<S> <C>
less than $1.31 0%
$1.31 to $1.60 50%
$1.61 to $1.73 75%
greater than $1.74 100%
</TABLE>
13
<PAGE>
Discretionary Bonus con't
Earnings per share for CWM Mortgage Holdings, Inc. shall be determined on the
basis of the annual audit conducted by CWM's independent accountants.
earnings' goals for 1998, 1999 and 2000 shall be set in accordance with CWM'S
goals established immediately prior to such year.
If earnings per share for CWM Mortgage Holdings, Inc. fall between any two
threshold amounts set forth above, the Bonus Discount Factor shall not be
interpolated by the corresponding percentage.
3. Actual Discretionary Bonus Amount.
---------------------------------
The Actual Discretionary Bonus Amount shall be calculated by multiplying (x)
the Potential discretionary Bonus Amount in Part 1 above (from $0 up to 30% of
base salary) times (y) the Bonus Discount Factor determined pursuant to Part 2
-----
above.
Example: $27,000 (Potential Discretionary Bonus Amount) x 50% ($1.50 per
------- share earnings for 1997) = $13,500 (Actual Discretionary Bonus
Amount).
14
<PAGE>
Exhibit 21.1
------------
SUBSIDIARIES OF INMC MORTGAGE HOLDINGS, INC.
--------------------------------------------
<TABLE>
<CAPTION>
SUBSIDIARY STATE OF INCORPORATION OR OWNERSHIP
ORIGINATION
<S> <C> <C>
IndyMac Mortgage Obligations, Inc. Delaware Direct
IndyMac Mortgage Obligations II, Inc. Delaware Direct
</TABLE>
<PAGE>
Exhibit 23.1
------------
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
---------------------------------------------------
We have issued our report dated February 27, 1998, accompanying the consolidated
financial statements and schedule included in the Annual Report of INMC Mortgage
Holdings, Inc. dba, IndyMac Mortgage Holdings, Inc. on Form 10-K for the year
ended December 31, 1997. We hereby consent to the incorporation by reference of
said report in the Registration Statements of INMC Mortgage Holdings, Inc. dba,
IndyMac Mortgage Holdings, Inc. on Form S-8 (File No. 33-8442, effective August
25, 1986, File No. 33-32562, effective December 15, 1989, File No. 33-56267,
effective October 31, 1994, File No. 333-08905, effective July 31, 1996, File
No. 333-36085, effective September 22, 1997) and on Form S-3 (File No. 333-
37149, effective October 24, 1997, File No. 333-41329, effective January 2, 1998
and File No. 333-47297, effective March 18, 1998).
/s/ GRANT THORNTON LLP
Grant Thornton LLP
Los Angeles California
March 31, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 13,676
<SECURITIES> 558,445
<RECEIVABLES> 5,303,672
<ALLOWANCES> (26,683)
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 5,849,110
<CURRENT-LIABILITIES> 37,518
<BONDS> 5,107,698
0
0
<COMMON> 634
<OTHER-SE> 703,260
<TOTAL-LIABILITY-AND-EQUITY> 5,849,110
<SALES> 0
<TOTAL-REVENUES> 145,258<F1>
<CGS> 0
<TOTAL-COSTS> 102,341
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 18,622
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 24,295
<INCOME-TAX> 0
<INCOME-CONTINUING> 24,295
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 24,295
<EPS-PRIMARY> 0.43
<EPS-DILUTED> 0.43
<FN>
<F1>INCLUDES 242,372 OF INTEREST EXPENSE RELATED TO MORTGAGE LOAN ACTIVITIES.
</FN>
</TABLE>
