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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________
FORM 10-K
FOR FISCAL YEAR ENDED DECEMBER 31, 1998
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 1-8972
INDYMAC MORTGAGE HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Delaware 95-3983415
(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification No.)
155 North Lake Avenue, Pasadena, California 91101-7211
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (800) 669-2300
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
----- -----
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 [X].
As of March 12, 1999 there were 79,104,392 shares of IndyMac 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
$855,316,239. 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 1999 Annual Meeting---Part III
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INDYMAC MORTGAGE HOLDINGS, INC.
1998 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
<TABLE>
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Page
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PART I
<S> <C> <C> <C>
ITEM 1. BUSINESS.................................................................. 3
ITEM 2. PROPERTIES................................................................ 17
ITEM 3. LEGAL PROCEEDINGS......................................................... 17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS....................... 17
PART II
ITEM 5. MARKET FOR THE COMPANY'S STOCK
AND RELATED SECURITY HOLDER MATTERS..................................... 17
ITEM 6. SELECTED FINANCIAL DATA................................................... 19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS..................................... 20
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK................. 33
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA............................... 34
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE...................... 34
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT........................ 34
ITEM 11. EXECUTIVE COMPENSATION.................................................... 34
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT................................................. 34
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............................ 34
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K................................................... 35
</TABLE>
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PART I
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ITEM 1. BUSINESS/1/
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General
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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. 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
subsidiaries, 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 conforming, 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 certain consumer lending activities, including its third
party lending activities ("IndyMac TPL"), 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 consumer lending operations also include (1)
IndyMac Construction Lending Division ("IndyMac CLD"), which facilitates the
purchase of a variety of residential construction, land and lot loans through
IndyMac Operating's third party lending customers, (2) IndyMac Manufactured
Housing Division ("IndyMac MHD"), which facilitates the direct origination or
purchase of consumer loans and mortgage loans secured by manufactured housing,
(3) IndyMac Home Improvement Division ("IndyMac HID"), which facilitates the
direct origination or purchase of home improvement loans, (4) LoanWorks, which
facilitates the direct origination of a variety of residential loans, and (5)
LoanWorks Servicing, which performs servicing for mortgage loans acquired by the
Company on a servicing-released basis or originated by the Company through
LoanWorks. The Company also conducts commercial lending activities, which
include (1) Construction Lending Corporation of America ("CLCA"), which offers a
variety of construction, land and lot loan programs for builders and developers,
and (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.
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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 and 7A of this Form 10-K ("MD&A") are forward-
looking statements which reflect the Company's current views with respect to
future events and financial performance. These forward-looking statements are
subject to certain risks and uncertainties, including those identified below,
which could cause future results to differ materially from historical results or
those anticipated. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of their dates, and if no date
is provided, then such statements speak only as of the date of this Form 10-K.
The Company undertakes no obligation to publicly update or revise any forward-
looking statements, whether as a result of new information, future events or
otherwise. The following factors could cause future results to differ
materially from historical results or those anticipated: (1) the level of demand
for consumer loans, mortgage loans, construction loans and commercial term
loans, which is affected by such external factors as the level of interest
rates, the strength of various segments of the economy and demographics of the
Company's lending markets; (2) the availability of funds from the Company's
lenders and other sources of financing to support the Company's lending
activities; (3) the direction of interest rates and the relationship between
interest rates and the cost of funds; (4) federal and state regulation of the
Company's consumer lending and commercial lending operations and federal
regulation of the Company's real estate investment trust status; (5) the actions
undertaken by both current and potential new competitors; and (6) other risks
and uncertainties detailed in this Form 10-K, including the MD&A.
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IndyMac Operating was established in 1993 as a nationwide, third-party lender
and securitizer of residential prime and, to a lesser extent, subprime mortgage
loans. Prior to 1993, 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").
Consumer Lending Operations
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Third Party Lending
Operations. IndyMac TPL is comprised of conforming, non-conforming and jumbo
mortgage and consumer loans. With respect to third party lending operations,
the Company acts as an intermediary between (i) the third party originators of
(x) mortgage loans that 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")) ("conforming mortgage loans") and (y) mortgage loans that do
not qualify for purchase or inclusion in loan guarantee programs sponsored by
the GSEs ("non-conforming mortgage loans"), and (ii) permanent investors in
whole loans or mortgage-backed securities secured by or representing an
ownership interest in such mortgage loans. The Company also originates
conforming and non-conforming mortgage loans through its LoanWorks division. See
"LoanWorks" below. All loans originated or 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 the
Master Forward Commitment and Services Agreement between IndyMac REIT and
IndyMac Operating, which was originally entered into in 1993. The Company's
third party lending operations consist of the purchase and securitization or
whole loan sale of mortgage loans secured by first and subordinate liens on
single (one-to-four units) family residential properties and manufactured homes
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,
through LoanWorks Servicing, services those loans which it has purchased on a
servicing-released basis and which it originates through LoanWorks. See
"LoanWorks Servicing" below. The Company's principal sources of income from its
third party lending operations are gains recognized on the sale of mortgage
loans and securities, master and primary 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. IndyMac TPL operations are designed to attract both large
and small sellers of mortgage and consumer loans by offering a variety of
products, pricing, loan underwriting and funding methods designed to be
responsive to such sellers' needs, although during 1998, the Company continued
to focus on the smaller seller market where the Company believes purchase
margins may be higher. In this regard, the Company continued its extensive
table funding effort during 1998. 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 risk
with respect to the mortgage loans funded in this manner, the Company has
established controls which seek to ensure the loans comply with regulatory
requirements and meet the Company's credit guidelines. During 1998, the Company
also continued its focus on the smaller seller market through the development of
its electronic mortgage information and transaction system. See "Risk-Based
Pricing" below.
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, subprime
credit quality loans and consumer and mortgage loans secured by manufactured
housing and home improvement loans. In response to the perceived needs of
non-conforming 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 IndyMac CLD, the Company offers
combined construction-to-permanent mortgage loans, home improvement loans and
residential lot loans.
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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 effectively to
mortgage bankers, mortgage brokers and other mortgage lenders of all sizes.
However, the Company is continuing its focus on the smaller seller market, and
beginning in the second half of 1998, the Company began to emphasize the
purchase of loans on a servicing-released basis because the secondary market for
these loans became stronger than the secondary market for servicing-retained
loans. 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 mortgage loan sellers. Under the Company's first underwriting
method, which is used by a majority of the Company's customers, sellers submit
mortgage loans that are underwritten by the Company in accordance with its
guidelines prior to purchase. The second 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. 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" below. Because of the Company's increased
focus on smaller net worth sellers, fewer customers are eligible for or
utilizing the delegated underwriting programs.
Risk-Based Pricing. During 1998, the Company continued the development of its
risk-based pricing systems to enable the Company to more accurately estimate
expected credit loss and interest rate (or prepayment) risk so that the Company
can acquire loans at prices that more accurately reflect these risks. Risk-
based pricing is based on a number of borrower and loan characteristics,
including, among other loan variables, credit score, occupancy, documentation
type, purpose and loan-to-value ratio, and prepayment assumptions based on an
analysis of interest rates.
Currently, the Company's primary use of risk-based pricing is through e-MITS/2/
(electronic Mortgage Information and Transaction System). The Company's e-MITS
system is an automated loan submission, underwriting and risk-based pricing
system that allows mortgage loan sellers to conduct business with the Company
electronically via the Internet at the Company's "www.e-MITS.com" website. The
e-MITS system provides sellers with the ability to obtain an underwriting
decision and risk-based pricing, based in part on standard industry loan loss
data, for any borrower or property. The e-MITS system also provides sellers a
streamlined documentation process for certain qualified borrowers. During
1998, the Company funded approximately $600 million of prime and subprime loans
through e-MITS.
The Company intends to continue to refine its risk-based pricing models as it
captures more historical data, and also intends to incorporate risk-based
pricing in all of its various lending operations to better enable the Company to
acquire all loans at prices that more accurately reflect risk. However, because
the Company's risk-based pricing models, including the risk-based pricing models
utilized in e-MITS, are based on standard industry loan loss data supplemented
by the Company's limited historical loan loss data and proprietary logic
developed by the Company, and the models cannot predict the effect of financial
market and other economic performance factors, there are no assurances that the
Company's risk-based pricing models are a complete and accurate reflection of
the risks associated with the Company's loan products.
Mortgage Loans Acquired. Substantially all of the mortgage loans purchased
through the Company's third party lending operations are non-conforming mortgage
loans. Currently, the maximum principal balance for a conforming loan is
$240 thousand. 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 mortgage loans are
originated, including California, Colorado, Connecticut, Florida, Georgia,
Hawaii, Illinois, Nevada, New Jersey, New York, Oregon, Texas, Utah,
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/2/ Registered in U.S. Patent and Trademark office.
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Washington and Washington, D.C. 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 48% of the mortgage
loans purchased by the Company in 1998.
Mortgage loans acquired by the Company are secured by primarily first liens on
single (one-to-four) family residential properties and manufactured homes with
either fixed or adjustable interest rates. Fixed-rate mortgage loans accounted
for approximately 93% of the mortgage loans purchased by the Company in 1998
compared to 81% for 1997. The number of adjustable rate mortgage ("ARM") loans
purchased by the Company has decreased from 19% of all mortgage loans purchased
in 1997 to 7% of 1998 mortgage loan purchases.
Seller Eligibility Requirements. The mortgage loans acquired through 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. Sellers generally enter 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 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, (See "LoanWorks Servicing" below for description of
the Company's servicing operations). 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 unpaid 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, including LoanWorks Servicing.
Under certain circumstances not involving the servicers' default, servicers have
the option to request the Company to purchase such servicing rights at a price
based on a current market valuation. Through LoanWorks Servicing, the Company
services those loans for which it has acquired the servicing rights. See
"LoanWorks Servicing" below.
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 servicers of loans and
remitting loan payments, less master servicing 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 securitizations, the Company master services on a non-
recourse basis. 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
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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. From time to time, the Company may establish 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 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 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 or the e-MITS User 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. See "Loan Sale and Securitization
Process" below. The nature and quantity of hedging transactions will be
determined by management based on various factors, including market conditions,
cash flow considerations, 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 or the e-MITS User 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" above. For loans purchased through e-MITS, the Company
generally relies on e-MITS for all credit related analyses. See discussion of
e-MITS under "Risk-Based Pricing" above.
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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 is based primarily on the risk
characteristics of the loans. Additionally, the Company will review a higher
percentage of loans sold by sellers with higher overall loan delinquency levels.
The Company conducts a full post-purchase underwriting review of the first
twenty-five 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. A higher percentage of mortgage loans with certain
specified characteristics are reviewed by the Company following purchase,
including, among other characteristics, loans in excess of $650 thousand in
principal amount, loans purchased from sellers with comparatively high
delinquency rates, 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, as a part of the standard fraud review conducted by the
Company, the Company reverifies, on a sample basis, the employment, income and
source of funds documentation of the borrower and obtains a new credit report.
Independent appraisals are obtained as a part of the Company's quality control
reviews as deemed appropriate.
Manufactured Housing Division
IndyMac MHD was established in December 1995 and consists of 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 the established manufactured housing retailer network, brokers, IndyMac
MHD's direct-to-consumer LoanTown operations, and the Company's third party
sellers. The Manufactured Housing Division's headquarters are located in San
Diego, CA and it operates three regional offices in Atlanta, GA, Vancouver, WA
and Carmel, IN. The division also operates one LoanTown office in Milwaukie, OR
and plans to open an additional LoanTown office in Spokane, WA in the second
quarter of 1999.
During the fourth quarter of 1998, the Company conducted a strategic review of
its IndyMac MHD operations to determine whether it would continue such
operations given the long-term capital and/or financing requirements for the
business. The Company determined that with increased emphasis on niches such as
land-home products and refinance products, implementation of risk-based pricing
and continued efforts to obtain committed financing and less capital-intensive
outlets for IndyMac MHD's products, the Company would continue such operations.
However, there can be no assurance that cost effective committed financing or
less capital-intensive outlets for these products will be available or that the
other strategies will produce profitable results for the Company. In addition,
while the Company faces competition in every one of its business lines, the
manufactured housing business is particularly prone to competition risk because
this industry is substantially dominated by two firms, which to date, have
funded more than 40% of the production in this market.
Home Improvement Division
IndyMac HID, which began operations in May 1997, provides consumer financing
products to home improvement dealers, specialty brokers, specialty
correspondents and the Company's third party sellers. IndyMac HID offers both
home improvement and home improvement with debt consolidation products that are
secured by liens on improved residential real property. IndyMac HID's primary
facility is located in Atlanta, GA. A second sales and origination location is
maintained in Pasadena, CA.
Due to the nature of the home improvement loan business generally, the Company's
IndyMac HID business involves a number of risks, including credit and regulatory
risk. To mitigate certain of these risks, the Company has adopted a policy to
discontinue the origination and purchase of high-rate, high fee loans/3/.
However, the Company continues to hold previously purchased high-rate, high fee
loans in its
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/3/ In general, a high-rate, high fee loan under The Home Ownership and Equity
Protection Act of 1994 is a loan secured by the borrower's principal dwelling
that is not a purchase loan, a reverse-mortgage loan, or an open-ended line of
credit, where the rate on the loan is at least ten points higher than the yield
on Treasury securities with a comparable maturity or where the total points and
fees paid by the borrower exceed the greater of $441 or eight percent of the
total loan amount.
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portfolio. Additionally, the Company plans to develop a risk-based pricing
system for the IndyMac HID business and is continuing to explore various
financing alternatives for this business.
Construction Lending Division
IndyMac CLD provides financing and administers the related construction draws
for the purchase of combined construction-to-permanent mortgage loans, home
improvement loans, and residential lot loans. These loans are originated by or
sourced through the Company's third party sellers. 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 portion of the construction loans are similar to those applied by
the Company to loans purchased through its third party lending operations. In
general, the maximum construction-to-permanent mortgage loan size is $3 million.
The primary risks associated with IndyMac CLD's business include risks directly
related to the construction effort, such as cost overruns, borrower credit risk
and project completion risk and interest rate increase risk. The Company has
addressed these risks by requiring a fully funded interest reserve, charging
significant fees to extend the construction phase of the loan, and reserving the
right to renegotiate the interest rate for the permanent phase of the loan if
the borrower requests an extension for the construction phase of the loan.
However, there can be no assurance that the foregoing factors will fully
mitigate the risks associated with IndyMac CLD's business.
LoanWorks
LoanWorks, which offers a variety of residential mortgage loans directly to
consumers, including conforming conventional mortgage loans, and prime and
subprime 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
proprietary website "www.Loanworks.com" and relationships with other websites.
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.
During 1998, LoanWorks began originating loans utilizing e-MITS and plans to
continue to implement e-MITS throughout its origination operations. In addition
to expanding its telemarketing and internet marketing efforts, LoanWorks also
plans to expand into direct mail and affinity relationship marketing. The
Company plans to continue its emphasis on LoanWorks' retail origination
business. However, the Company's ability to continue to grow LoanWorks' retail
origination business will depend on its ability to compete with larger, more
well-known retail loan origination operations, the success of its various
marketing efforts, including its internet marketing efforts, and the Company's
ability to sell LoanWorks' originations through whole loan sales or REMIC
securitizations through its third party lending business. See "Third Party
Lending" above and "Loan Sale and Securitization Process" below. There can be no
assurance that the Company's objectives relating to its retail loan origination
efforts will be achieved.
LoanWorks Servicing
In March 1998, the Company acquired certain assets used in the servicing of
residential mortgages from First of America Bank, N.A., a subsidiary of National
City Corporation, for essentially the cost of the fixed assets. The acquisition
added approximately 125 employees to the Company and two office locations,
Kalamazoo, Michigan and Bloomington, Illinois. The latter office was closed in
March 1999. This acquisition permits the Company to engage in the mortgage loan
servicing business. Servicing mortgage loans includes collecting and remitting
loan payments, responding to customers' inquiries, making advances when
required, accounting for principal and interest, holding custodial (impound)
funds for payment of property taxes and hazard insurance, making physical
inspections of the mortgaged property, as necessary, counseling delinquent
mortgagors, supervising foreclosures and property dispositions in the event of
unremedied defaults and generally administering the loans. LoanWorks Servicing
currently services approximately $10.5 billion of prime, subprime and home
improvement mortgage loans.
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Loan Sale and 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 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 purchases a mortgage loan and when
it sells or securitizes such mortgage loan generally ranges from ten to 90 days,
depending on certain factors, 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 committed
for sale. 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 historically had 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 non-conforming 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 (as occurred
during the fourth quarter of 1998) 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 negative or positive effect on the financial performance
of the Company, regardless of the efficiency of the Company's execution of its
hedging strategy. (See "Part II, Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations").
The Company's decision to form REMICs or CMOs or to sell whole loans in bulk is
influenced by a variety of factors, including the price at which such securities
or whole loans can be sold. The market disruptions of the fourth quarter of
1998 had a negative effect on the pricing the Company could obtain through loan
securitizations, so the Company began to emphasize the sale of loans through
whole loan sales. Depending on market conditions, this trend could continue.
The Company has also begun to expand its issuance of Fannie Mae and Freddie Mac
MBS securities that are backed by loans originated or purchased by the Company.
In these transactions, the Company retains the related servicing rights.
REMIC transactions are generally accounted for as sales of the mortgage loans
and may eliminate or minimize any long-term investment by the Company in such
loans, depending on the extent to which the Company decides to retain an
interest. 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 over
the amounts required to be distributed to the regular interests. 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. Since 1993, the Company has
been issuing 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. Beginning in 1998, the
Company began issuing subprime mortgage REMIC securities utilizing a shelf
registration statement established by IndyMac ABS, Inc., a wholly owned limited
purpose finance subsidiary of IndyMac Operating. The Company intends to utilize
the IndyMac ABS, Inc. shelf registration for the issuance of REMIC securities
backed by subprime mortgage, manufactured housing and home improvement loans.
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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
financing the Company's mortgage loans.
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 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 or asset-backed securities in the form of
REMICs, the Company may retain securities on a short-term or long-term basis.
Any such retained interest may include "principal-only" or "interest-only"
securities, residual securities, mortgage servicing rights, or other interest
rate or prepayment-sensitive securities or investments. The Company has assumed
a certain degree of credit risk and interest rate risk in relation to its
portfolio of mortgage securities. See "Credit Risk" and "Part II, Item 7 -
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Effect of Interest Rate Changes" below.
The primary risk associated with interest-only securities and mortgage servicing
rights is 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 interest-only securities or mortgage servicing
rights. Investments in interest-only securities and mortgage servicing rights
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.
See "Part II, Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations - Effect of Interest Rate Changes".
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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.
Commercial Lending Operations
- -----------------------------
Construction Lending
The Company's construction lending group, CLCA, offers residential construction
loan programs for builders and developers, and income property construction and
term loan programs.
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.
Under CLCA's income property loan program, the Company provides financing for
the construction of multi-family, manufactured home community, anchored retail
and light industrial properties, although other types of projects are financed
from time to time. The Company also provides financing for the acquisition or
refinance of multi-family properties. As of December 31, 1998, the average
income property construction loan size was $5.5 million and the average income
property multi-family term loan was $550 thousand. The specific terms of any
income property loan, including the principal amount thereof and the applicable
interest rate and fees, are based upon, among other things, the location of the
project or the property, the value of the land and the financial strength,
historical performance and other qualifications of the borrower.
During the fourth quarter 1998, CLCA's production exceeded the Company's
committed construction lending financing, and, as a result, the Company was
forced to discontinue CLCA's production temporarily during the fourth quarter
1998. The Company has secured additional financing for its subdivision
construction lending business and resumed lending through CLCA in late January
1999. The Company is continuing to explore various financing alternatives for
CLCA's business.
The primary risks associated with CLCA's operations are project risks and market
risks. Project risks include cost overruns, borrower credit risk, project
completion risk, general contractor credit risk, product liability for materials
used in construction and environmental and other hazard risks. Market risks are
risks associated with the sale of the completed residential units. They include
interest rate risk, affordability risk, product design risk and risks posed by
competing projects. CLCA attempts to mitigate some of these risks through the
management and credit committee review process; however, there can be no
assurance that this review process will fully mitigate the foregoing risks. In
the Company's experience, absorption rates of new single family homes has been
good in markets served by CLCA. However, it is unclear whether the economic
cycle in certain geographical markets has peaked, which may have an impact on
new loan generation or timely payoff of existing CLCA loans. The Company has
implemented geographic concentration limits for CLCA, which should serve to
mitigate some of the effects of a slowing in the economic cycles in some areas.
Warehouse Lending
The Company's warehouse lending group, WLCA, engages in secured warehouse
lending operations for small-size and medium-size mortgage originators. WLCA
also offers builder inventory lines of credit. The
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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 Traditional program, WLCA offers credit facilities up to a maximum
amount of $20 million to otherwise qualified mortgage originators with a minimum
audited tangible net worth of $100 thousand and subject to a maximum
debt-to-net-worth ratio of 22 to 1. Under its Advantage Line programs, WLCA
offers credit facilities up to a maximum amount of $2 million to otherwise
qualified mortgage originators with no net worth requirement. Under its Builder
Inventory program, WLCA offers lines of credit up to a maximum amount of $2
million to homebuilders that are current customers of CLCA to temporarily
finance inventories of completed residential homes in subdivisions originally
financed by CLCA. 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
Traditional program and the Builder Inventory program are subject to the prior
approval of a credit committee comprised of senior officers of IndyMac REIT. All
lines of credit under the Advantage Line programs are approved by WLCA's
internal credit group. The Company finances these WLCA programs through a
combination of repurchase agreements, equity and other borrowings.
One of the primary risks associated with WLCA's operations is the risk that a
mortgage company borrower fails to sell a loan that is financed by a WLCA line
of credit and is unable to otherwise remove the loan from the WLCA line of
credit. Under these circumstances, WLCA would have the option to assume the
loan from the mortgage company borrower and subsequently sell the loan; however,
WLCA would also be assuming any credit risk associated with such loan up to its
sale. To mitigate this risk, the contractual terms of all WLCA lines of credit
provide for full recourse to the mortgage company borrowers for the outstanding
balance under the lines of credit. Additionally, under the Traditional program,
WLCA receives personal guarantees from the principals of each mortgage company
borrower, and under the Advantage Line programs, each loan financed by a WLCA
line of credit is prior approved by the ultimate investor before funds are
advanced. Another risk associated with WLCA's operations is fraud risk, which
includes the risk that a loan financed by a WLCA line of credit is fraudulently
originated by the mortgage company borrower or is a sham transaction. To
mitigate fraud risk, the Company requires that mortgage company borrowers carry
fidelity insurance and only transfers funds to approved closing agents who are
required to execute closing protection letters to ensure that the funds are not
misdirected by the mortgage company borrower. However, there can be no
assurances that these mitigating factors will adequately protect the Company
against fraud risk.
In line with the Company's continued focus on the smaller seller market, the
Company plans to expand its Advantage Line programs, which are targeted to
smaller loan originators and do not have minimum net worth requirements. These
smaller loan originators tend to have limited loan funding experience, at least
initially, and require more extensive training and monitoring by WLCA personnel.
Additionally, these smaller loan originators have fewer financial resources to
remove unsalable loans from their WLCA lines of credit; however, as indicated
above, this latter risk is substantially mitigated by the requirement that all
Advantage Line loans be approved by the ultimate investor prior to funding.
Notwithstanding WLCA's focus on smaller loan originator borrowers, there can be
no assurance that WLCA's efforts in this regard will be successful.
Credit Risk
- -----------
The Company has assumed a certain degree of credit risk in connection with its
investments in certain 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 an allowance for anticipated credit losses
based upon estimated inherent 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 non-investment grade
securities. Such securities are recorded net of a discount which represents
primarily the estimated credit losses associated with such securities as
perceived by the market.
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As of December 31, 1998, the Company had accumulated $51.3 million in the
allowance for loan losses associated with the loans owned by both IndyMac REIT
and IndyMac Operating. Net charge-offs on such loans from inception to date
totaled $23.5 million, including $18.7 million on prime and subprime mortgage
loans, $1.2 million on consumer and commercial construction, $1.4 million on
home improvement loans, $2.0 million on manufactured home loans and $0.2 million
on warehouse lines of credit. 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
securities (i.e., rated lower than BBB). As of December 31, 1998, investment
grade securities comprised 92.6% of the Company's mortgage-backed securities
portfolio. In general, non-investment grade securities bear all losses prior to
the related investment grade securities and, therefore, the Company has credit
risk with respect to the non-investment grade securities in its mortgage-backed
securities portfolio. However, the Company's non-investment grade securities
portfolio was recorded at a discount of $36.6 million to such securities' face
value. This discount primarily reflects estimates of future expected credit
losses on approximately $3.0 billion of single-family mortgage loans which
underlie the non-investment grade securities.
In addition to the creation of the allowance for loan losses, the Company has
established risk management and/or credit committees to further manage the
Company's exposure to credit losses in its various business operations. A
central risk management committee reviews the prime, subprime and other products
the Company offers through its IndyMac TPL and LoanWorks divisions, the
authority limits of the Company's third party lending customers and personnel,
and such customers' performance, and implements changes that seek to balance the
Company's credit risk with the Company's production and profitability goals for
its IndyMac TPL and LoanWorks divisions. The Company deploys a risk-based
pricing approach in its IndyMac TPL and LoanWorks divisions in an effort to
price products based in part on the credit risks associated with each product.
Central risk management also oversees the risk management efforts of the
Company's other divisions. Additionally, the Company's CLCA and WLCA divisions
have established credit committees to review the terms of loans made by these
divisions.
While management cannot offer any assurance as to the extent to which the
Company will incur credit losses and any related effects on earnings, controls
are in place in an effort to reduce exposure in this area. In addition, there
is no assurance that discounts applied to non-investment grade securities or
allowances or reserves for credit losses, will accurately reflect the actual
credit losses incurred by the Company related to these investments.
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 "Part II, Item 7. 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.
In 1998, the Clinton Administration announced Fiscal Year 1999 Budget Proposals
that would have affected REIT's non-voting stock subsidiaries, which were never
included in the 1999 budget legislation. On February 1, 1999, the Clinton
Administraion again announced a budget proposal for the Fiscal Year 2000 budget
that addressed REIT's non-voting stock subsidiaries, which the Company believes
is more favorable than the 1999 budget proposal. Because this proposal is
unclear in a few key areas, it could impact the Company's structure positively
or negatively, depending upon the ultimate text of the proposal. No prediction
can be made as to whether such a proposal will be introduced as a bill, or, if
it were so introduced, whether it would be enacted.
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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 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
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<PAGE>
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. Of the 1998 dividends paid by IndyMac REIT, less than one half of 1%
were attributable to excess inclusion income.
Competition
- -----------
In its third party lending operations, the Company competes with established
third party lending 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 third
party lending 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 third party lending 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 $240 thousand.
This dollar limitation has increased twice during the past two years. If this
dollar limitation continues to increase, 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' and LoanWorks Servicing's 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.
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 5.8% 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, two directors and officers
of IndyMac REIT and two directors of 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.
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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."
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, 1998, IndyMac REIT had
206 employees and IndyMac Operating had 866 employees.
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, Vancouver, WA, Milwaukie, OR, and Carmel, IN. These
locations consist of approximately 38,160 square feet, and the primary lease,
located in San Diego, CA, expires in 2001. IndyMac MHD closed its Raleigh, NC
and Houston, TX offices during 1998, consisting of approximately 8,500 square
feet. IndyMac HID occupies space in Atlanta, GA, consisting of approximately
10,340 square feet. IndyMac HID closed its Houston, TX office in February 1999,
consisting of approximately 6,000 square feet. The principal lease relating to
such space expires in 1999. LoanWorks occupies space in Irvine, CA, consisting
of approximately 46,000 square feet. The principal lease related to such space
expires in 2004. LoanWorks Servicing occupies space in Kalamazoo, MI,
consisting of 29,000 square feet. The principal lease related to such space
expires in 2003. LoanWorks Servicing closed its Bloomington, IL office in March
1999, consisting of approximately 4,000 square feet.
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
- ---------------------------------------------------------------------------
IndyMac Mortgage Holdings, Inc.'s ("IndyMac REIT") common stock is traded on the
New York Stock Exchange ("NYSE") under the symbol "NDE."
17
<PAGE>
The following table sets forth the high and low sales prices (as reported by
Bloomberg Financial Service) for common stock for the years ended December 31,
1998 and 1997 and cash dividends declared for earnings of the period as
indicated.
<TABLE>
<CAPTION>
1998 1997 Dividends Declared
High ($) Low ($) High ($) Low ($) 1998 1997
-------- ------- -------- ------- ---- ----
<S> <C> <C> <C> <C> <C> <C>
First Quarter 27 3/16 23 23 5/8 19 3/8 0.50 0.42
Second Quarter 26 1/8 21 1/2 24 19 3/8 0.53 0.43
Third Quarter 24 17 3/8 25 1/2 22 7/16 0.38 0.46
Fourth Quarter 20 1/4 7 3/8 26 1/8 21 0.38 0.48
</TABLE>
As of March 12, 1999, 79,104,392 shares of IndyMac REIT's common stock were held
by 4,545 shareholders of record.
Pursuant to IndyMac REIT's Dividend Reinvestment and Stock Purchase Plan
("DRIP"), 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 DRIP.
Shareholders may also purchase additional shares of IndyMac REIT's common stock
through the cash investment option of the DRIP at the average high and low
market prices for the 12 days preceding the investment date, as defined in the
DRIP.
Investors not yet participating in the DRIP, as well as brokers and custodians
who hold IndyMac REIT common stock for clients, can get a Prospectus relating to
the DRIP by contacting IndyMac REIT's transfer agent as follows: The Bank of
New York, Dividend Reinvestment Department, P.O. Box 1958, Newark, NJ 07101,
telephone (800) 524-4458.
18
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
- --------------------------------
<TABLE>
<CAPTION>
(Dollars in thousands, except per share data)
Years Ended December 31,
-----------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Operating Results for the Year
Interest income $ 528,825 $ 360,901 $ 242,303 $ 180,465 $ 92,119
Interest expense 355,359 242,372 159,365 131,910 66,700
---------- ---------- ---------- ---------- ----------
Net interest income 173,466 118,529 82,938 48,555 25,419
Provision for loan losses 35,892 18,622 12,991 4,037 500
Equity in earnings (loss) of IndyMac
Operating (58,232) 18,414 19,533 13,801 5,624
Net gain (loss) on mortgage loans and securities (19,088) 997 (906) (591) -
Other income 2,822 7,318 3,376 2,018 885
---------- ---------- ---------- ---------- ----------
Net revenues 63,076 126,636 91,950 59,746 31,428
Salaries, general and administrative 29,286 21,935 14,202 4,213 2,402
Management fees to affiliate - 4,406 8,761 5,522 1,195
Non-recurring charges - 76,000 - - -
---------- ---------- ---------- ---------- ----------
Total expenses 29,286 102,341 22,963 9,735 3,597
---------- ---------- ---------- ---------- ----------
Net earnings $ 33,790 $ 24,295 $ 68,987 $ 50,011 $ 27,831
========== ========== ========== ========== ==========
Per Share Data
Basic $ 0.48 $ 0.43 $ 1.51 $ 1.25 $ 0.86
Diluted 0.48 0.43 1.50 1.25 0.86
Dividends declared per share $ 1.79 $ 1.79 $ 1.52 $ 1.25 $ 0.87
Book value per share at December 31 10.85 11.11 9.53 8.55 7.99
Average Common Shares
Basic 69,983 56,125 45,644 39,903 32,184
Diluted 70,093 56,454 45,806 39,941 32,327
Shares Outstanding at December 31 75,794 63,352 50,200 42,414 32,281
Balance Sheet Data at December 31
Loans held for sale, net $1,555,656 $1,458,271 $ 657,208 $ 409,584 $ 608,240
Loans held for investment, net 668,523 1,831,047 1,236,713 1,424,583 899,672
Other loans, net 1,891,149 1,459,264 711,578 320,028 75,961
Mortgage securities 235,032 558,445 231,780 124,975 121,441
Collateral for Collateralized Mortgage Obligations 162,726 245,474 289,054 184,111 233,690
Total assets 4,851,152 5,849,110 3,356,059 2,643,360 1,999,541
Short-term borrowings 3,785,549 4,826,656 2,531,509 2,037,834 1,534,189
Collateralized mortgage obligations 140,810 221,154 264,080 164,760 202,259
Senior unsecured notes 60,031 59,888 59,759 59,649 -
Shareholders' equity 822,103 703,894 478,424 362,731 257,917
</TABLE>
See "Management's Discussion and Analysis of Financial Condition - General" for
a discussion of IndyMac REIT's acquisition of its manager, and see Note A to the
Consolidated Financial Statements of both IndyMac REIT and IndyMac Operating for
a discussion of recent accounting pronouncements.
19
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- ------------------------------------------------------------------------
RESULTS OF OPERATIONS
- ---------------------
GENERAL
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 third party lending 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 "conforming", "jumbo" and other "non-
conforming" 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 third party lending 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 third party lending
operations are gains recognized on the sale or securitization of mortgage and
consumer loans, the net spread between interest earned on mortgage and consumer
loans and the interest costs associated with the borrowings used to finance such
loans pending their sale or securitization, and primary and master servicing fee
income.
In addition to its third party lending operations, the Company earns net
interest income and fee income through its construction, manufactured housing,
home improvement and warehouse lending operations, as well as net interest
income on its investment portfolio of mortgage and manufactured housing loans
and mortgage securities. Construction Lending Corporation of America ("CLCA")
provides builder custom home, model home, construction-to-permanent, lot loan,
income property financing, acquisition, development and construction, on a
nationwide basis to builders and developers, while IndyMac Construction Lending
Division ("IndyMac CLD") facilitates the purchase of a variety of residential
construction, land and lot loans through third party customers. IndyMac
Manufactured Housing Division ("IndyMac MHD") consists of the origination,
purchase, sale and servicing of loans to consumers who are purchasing or
refinancing a new or used manufactured home. IndyMac Home Improvement Division
("IndyMac HID") consists of the origination, purchase, sale and servicing of
consumer home improvement and debt consolidation services by liens on improved
real estate. LoanWorks, the Company's consumer direct lending division,
originates a variety of residential loans, and LoanWorks Servicing performs
servicing for mortgage loans acquired by the Company on a servicing-released
basis or originated by the Company through LoanWorks. Warehouse Lending
Corporation of America ("WLCA"), provides financing to small-to-medium-size
mortgage originators for the origination and sale of mortgage loans and to
small-to-medium-size builders to finance remaining inventory after a
construction loan from CLCA has been repaid.
From its incorporation in 1985 until June 30, 1997, the Company was managed by
Countrywide Asset Management Corporation ("CAMC"), a wholly owned subsidiary of
Countrywide Credit Industries, Inc. ("CCR"). On July 1, 1997, IndyMac REIT and
CCR completed a transaction whereby IndyMac REIT acquired all of the outstanding
stock of 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.
20
<PAGE>
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 $76.0 million during the third quarter of 1997. This charge did not
materially affect total shareholders' equity as $72.0 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.
As a result of implementing Statement of Financial Accounting Standards No. 131,
"Disclosures About Segments of an Enterprise and Related Information", ("SFAS
131"), IndyMac REIT defined three reportable operating segments. The first
segment is the Mortgage Banking segment which includes third party lending
operations, LoanWorks, IndyMac MHD, and IndyMac HID operations. The second
segment is the Investment segment which includes loans held for investment and
mortgage securities. The third segment is the Lending segment which includes
construction lending operations and warehouse lines of credit operations.
FINANCIAL CONDITION
Overview of Third Party Lending Operations: During 1998, IndyMac REIT purchased
$11.8 billion of non-conforming mortgage loans, including $972.0 million of
subprime mortgage loans, an increase of $5.8 billion from the $6.0 billion in
non-conforming mortgage loans purchased during 1997. In addition, the Company
purchased $433.7 million of manufactured housing loans and $220.4 million of
home improvement loans, compared to $320.0 million and $82.0 million,
respectively, during 1997. 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 Collateralized Mortgage Obligations ("CMOs") or repurchase agreements and
other credit facilities. During 1998, IndyMac Operating sold $9.3 billion of
mortgage loans through the issuance of eighteen series of multiple-class MBS in
the form of REMIC securities and sold $2.4 billion of mortgage loans in the form
of whole loan sales transactions. 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 $755.0 million of mortgage
loans in the form of whole loan sales. At December 31, 1998, the Company was
committed to purchase $498.0 million of mortgage loans from various mortgage
originators.
IndyMac Operating's master servicing portfolio at year-end had an aggregate
outstanding principal balance of $17.0 billion with a weighted average coupon of
8.3%, while LoanWorks Servicing's portfolio at year-end was $10.5 billion with
the same weighted average coupon of 8.3%. Non-performing loans held for sale
were 1.6% of principal at December 31, 1998 compared with 1.0% at December 31,
1997. Non-performing loans are defined as loans delinquent ninety days or more.
Loans Held For Investment, Net: The $668.5 million portfolio of loans held for
investment, net at December 31, 1998 consisted of $228.5 million of varying
types of adjustable-rate products which contractually reprice in monthly, semi-
annual or annual periods; $211.9 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 $228.1 million of
fixed-rate loans. The weighted average coupon of the mortgage loans held for
investment, net at December 31, 1998 was 8.4%. The average balance of
residential loans held for investment, net was $1.4 billion for the year ended
December 31, 1998, a decrease of $208.2 million from the average balance of $1.6
billion for the year ended December 31, 1997. The Company finances loans held
for investment with repurchase agreements and other credit facilities which
reprice from overnight to one month. The allowance for loan losses related to
loans held for investment totaled $21.2 million at year-end. Charge-offs related
to loans held for investment totaled $10.5 million for the year ended December
31, 1998. Non-performing loans held for investment were 5.3% of principal at
December 31, 1998 compared with 2.4% at December 31, 1997. The increase in non-
performing loans in 1998 over 1997 is primarily due to the following factors:
21
<PAGE>
. prepayments of higher credit quality loans increased more than
prepayments of lower credit quality loans as a result of the more
favorable interest rate environment during 1998;
. the Company's lower liquidity levels during the fourth quarter of 1998,
see "Liquidity and Capital Resources", and the low demand for adjustable
rate mortgage loans resulted in lower loan purchase and origination
volumes;
. To raise liquidity during the fourth quarter of 1998, the Company sold a
substantial number of the more marketable loans held in this portfolio.
In response to the fourth quarter 1998 market disruption, the Company was
informally advised by its lenders, particularly investment banks and repurchase
lenders, that restrictions would be imposed on the amounts, terms and operating
conditions under which uncommitted advances would be made. In response to these
conditions, the Company reduced its assets and borrowing requirements under
uncommitted lines of credit and sold to third parties through IndyMac Operating
$443.6 million of whole loans from its held for investment portfolio thereby
increasing liquidity. Loans are classified as held for investment based upon
management's intent and ability to hold such loans for the foreseeable future.
Construction Lending Operations: At December 31, 1998, CLCA had commitments to
fund construction loans of $1.9 billion, with outstanding balances of $731.0
million, net of allowance loan for losses compared to commitments to fund
construction loans of $1.3 billion and an outstanding balance of $603.8 million,
net of allowance for loan losses at December 31, 1997. The allowance for loan
losses related to CLCA loans totaled $12.1 million at December 31, 1998, and
charge-offs totaled $887 thousand related to CLCA loans for the year ended
December 31, 1998. Non-performing loans were 1.0% of principal at both December
31, 1998 and 1997, respectively.
At December 31, 1998, IndyMac CLD had commitments to fund construction-to-
permanent, lot loans and home improvement loans of $797.7 million with an
outstanding balance of $508.7 million, net of allowance for loan losses compared
with commitments to fund construction-to-permanent and home improvement loans of
$603.7 million and an outstanding balance of $343.0 million, net of allowance
for loan losses at December 31, 1997. The allowance for loan losses related to
IndyMac CLD loans totaled $2.4 million at December 31, 1998, and there were $253
thousand of charge-offs for the year ended December 31, 1998. Non-performing
loans for IndyMac CLD were 2.7% and 1.0% of principal, at December 31, 1998 and
1997, respectively. The increase in non-performing is primarily due to the
transfer of the servicing for these loans to a new servicing platform during the
fourth quarter 1998.
At December 31, 1998, CLCA's income property division had an outstanding balance
of $53.6 million on commercial term loans, net of allowance for loan losses and
$125.2 million on commercial construction loans, net of allowance for loan
losses. The allowance for loan losses related to CLCA's income property loans
totaled $411 thousand, and there were no charge-offs for the year ended December
31, 1998. Similarly, there were no non-performing loans for CLCA's income
property portfolio for the year ended December 31, 1998.
Warehouse Lending Operations: At December 31, 1998, IndyMac REIT had extended
commitments to make warehouse and related lines of credit in an aggregate amount
of $1.1 billion, of which $443.9 million was outstanding, net of allowance for
loan losses. The average principal balance outstanding of warehouse lines of
credit was $487.0 million during the year ended December 31, 1998, an increase
of $214.7 million from December 31, 1997. The allowance for loan losses related
to warehouse lines of credit totaled $2.9 million at December 31, 1998. There
were $200 thousand of charge-offs against such allowance during the year ended
December 31, 1998. At December 31, 1998, 2.2% of warehouse lines were non-
performing compared to no non-performing warehouse lines of credit at December
31, 1997. This increase in non-performing is primarily due to the effect of the
fourth quarter 1998 market disruptions on WLCA's customers.
22
<PAGE>
RESULTS OF OPERATIONS 1998 COMPARED TO 1997
Net Earnings: IndyMac REIT's net earnings for 1998 were $33.8 million, or
$0.48 basic and diluted earnings per share, based on 69,982,709 and 70,092,019
weighted average shares outstanding for 1998, respectively, compared to $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.
Comparing IndyMac REIT's 1998 net earnings of $33.8 million to 1997 net earnings
of $100.3 million before the non-recurring charge related to IndyMac REIT's
acquisition of CAMC, net earnings declined $66.5 million. The decline in net
earnings is due to the decrease of $76.6 million from equity in the earnings of
IndyMac Operating, an increase of $17.3 million in the provision for loan
losses, an increase of $22.2 million related to net gain (loss) on mortgage
loans and securities and loss on sale of assets, a decrease in other income of
$2.3 million, and an increase of $7.4 million related to salaries and general
and administrative expenses. Offsetting these negative changes were increases
in net interest income of $54.9 million and a reduction in management fees of
$4.4 million as a result of the merger of CAMC into IndyMac REIT.
Interest Income: Total interest income was $528.8 million for 1998 and $360.9
million for 1997. The increase in interest income of $167.9 million was
primarily the result of increases in interest earnings on the following:
mortgage loans held for sale of $97.5 million, construction builder and consumer
loans of $45.8 million, income property loans of $8.8 million, revolving
warehouse lines of credit of $19.7 million, mortgage securities of $17.0
million, advances to IndyMac Operating of $7.3 million and other income of $0.6
million, offset by decreases in loans held for investment of $23.3 million and
collateral for CMOs of $5.5 million.
Interest income on prime and subprime mortgage loans held for sale totaled
$142.8 million and $68.9 million, resulting in effective yields of 8.0% and
8.5%, respectively, for the years ended December 31, 1998 and 1997. The average
principal balance of such loans increased to $1.8 billion for the year ended
December 31, 1998, from $806.9 million for the year ended December 31, 1997.
Interest income on manufactured housing loans held for sale totaled $16.2
million and $9.2 million, with interest earned at effective yields of 9.4% and
9.7%, for the years ended December 31, 1998 and 1997, respectively. The average
principal balance of such loans increased by $77.5 million to $172.0 million
during 1998, from $94.5 million for 1997.
Interest income on home improvement loans held for sale totaled $18.3 million
and $1.7 million, with interest earned at effective yields of 10.9% and 9.3%,
respectively, for the years ended December 31, 1998 and 1997. The average
principal balance increased $150.2 million to $168.9 million for the year ended
December 31, 1998. The increase in 1998 is partly attributable to a full year
of operations, IndyMac HID having commenced operations in the middle of 1997.
Interest income on mortgage loans held for investment totaled $101.9 million
during 1998 compared to $125.2 million during 1997. The decrease from 1997 was
the result of a decrease in the average amount of loans held for investment
during the year of $208.2 million combined with a decrease in the average
effective yield. The average principal balance of mortgage loans held for
investment was $1.4 billion during 1998 with interest earned at an effective
yield of 7.3%, compared to the average principal balance of mortgage loans held
for investment during 1997 of $1.6 billion with interest earned at an effective
yield of 7.6%.
Interest income on manufactured housing loans held for investment totaled $2.2
million and $2.7 million, with interest earned at effective yields of 7.6% and
8.6% for the years ended December 31, 1998 and 1997, respectively. The average
principal balance of such loans increased by $3.4 million to $29.0 million
during 1998, from $25.6 million for 1997.
Interest income on construction loans, including income property, totaled $129.7
million and $75.0 million, with interest earned at an effective yield of 10.5%
and 11.1% for the years ended December 31, 1998 and 1997, respectively. The
average principal balance of construction loans outstanding increased $570.5
million to $1.2 billion during 1998 from $677.6 million during 1997.
23
<PAGE>
Interest income on revolving warehouse lines of credit totaled $44.5 million and
$24.8 million, with interest earned at effective yields of 9.1% for both years
ended December 31, 1998 and 1997, respectively. The average principal balance
outstanding increased to $487.0 million from $272.3 million for the years ended
December 31, 1998 and 1997, respectively.
Interest income on mortgage securities totaled $42.3 million and $25.3 million,
with interest earned at effective yields of 5.5% and 7.3% for the years ended
December 31, 1998 and 1997, respectively. The decline in the effective yield in
1998 was due to impairment losses taken on the portfolio as a result of asset
devaluation, see "Liquidity and Capital Resources". During 1998, the average
principal balance increased to $773.1 million from $348.5 million in 1997.
Mortgage securities consisted of senior securities, adjustable rate agency
securities, subordinated securities, principal-only securities, AAA rated
interest-only securities and inverse-floater securities and residuals. Interest-
only securities and residuals are comprised primarily of securities retained in
connection with the securitization of mortgage loans that were held for sale by
IndyMac Operating, and subsequently transferred to IndyMac REIT. These
securities are now classified as available for sale after implementation of
Statement of Financial Accounting Standards No. 134, "Accounting for Mortgage-
Backed Securities Retained after the Securitization of Mortgage Loans Held for
Sale by a Mortgage Banking Enterprise," ("SFAS 134").
Interest income on collateral for CMOs was $14.7 million and $20.2 million for
the years ended December 31, 1998 and 1997, respectively. This decrease was
primarily attributable to a decrease in the average aggregate principal amount
of collateral for CMOs outstanding to $208.2 million from $267.0 million for the
years ended December 31, 1998 and 1997, respectively. Interest income on
collateral for CMOs includes the impact of amortization of net premiums paid in
connection with acquiring the collateral and the impact of the delay in the
receipt of prepayments and temporary investment in lower yielding short-term
holdings in Guaranteed Investment Contracts ("GICs") until such amounts are
used to repay CMOs.
Interest Expense: For 1998 and 1997, total interest expense was $355.4 million
and $242.4 million, respectively. This increase in interest expense of $113.0
million was primarily due to an increase in interest expense on repurchase
agreements and other credit facilities of $117.2 million, offset in part by a
decline in interest expense on CMOs of $4.2 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 $334.7 million during 1998
compared to $217.5 million during 1997. This increase of $117.2 million was
primarily the result of an increase in the aggregate average balance of
indebtedness outstanding to $5.4 billion in 1998 from $3.5 billion in 1997 to
support the growth in earning assets for the year. The effective cost on such
borrowings was 6.1% and 6.2% for the years ended December 31, 1998 and 1997,
respectively.
Interest expense on CMOs was $15.2 million and $19.4 million for the years ended
December 31, 1998 and 1997, respectively. The decrease was primarily
attributable to a decrease in average aggregate CMOs outstanding to $184.8
million for 1998 from $243.9 million for 1997, offset by an increase in the
effective interest rate of CMOs to 8.2% in 1998 from 7.9% in 1997.
Interest expense on senior unsecured notes totaled $5.5 million for each of the
years ended December 31, 1998 and 1997, respectively. The effective interest
rate of 9.2% was the same for the years ended December 31, 1998 and 1997. The
average outstanding balances were $60.0 million and $59.8 million for the years
ended December 31, 1998 and 1997, respectively.
Equity in Earnings of IndyMac Operating: The 1998 loss for IndyMac Operating of
$58.8 million, in which IndyMac REIT has a 99% economic interest, resulted
principally from the fourth quarter 1998 market disruption. This disruption
caused the Company to react quickly and sell off assets at or below the
Company's investment in the assets to raise liquidity and lower its leverage
ratio. As a result, 1998 revenues declined from 1997 primarily from the
reduction in net gain on sale of loans and securities and service fee income of
$68.5 million and $11.4 million, respectively. Included in the net gain on sale
of loans and securities of $3.2 million is a $98.9 million gain on sale of
loans, a $114.6 million net unrealized loss on mark-to-market valuations on
trading securities and $18.9 million net realized gains on sale of securities,
which is net of losses of $13.6 million realized in the fourth quarter. To
support the overall growth of the Company, 1998 salaries, general and
administrative expenses increased over 1997 by $56.7 million. IndyMac
Operating's pre-tax loss of $102.3 million was offset by a tax benefit of $43.5
million.
24
<PAGE>
Net Gain (Loss) on Mortgage Loans and Securities: The Company incurred a loss on
mortgage loans and securities of $19.1 million in 1998, as compared with a gain
of $1.0 million in 1997. This loss was primarily due to fourth quarter 1998
market disruption resulting in a mark-to-market adjustment on the Company's
trading securities portfolio totaling $14.3 million and a realized net loss on
sale of securities of $2.0 million. At the end of 1998, the Company
reclassified to available for sale its trading portfolio according to the
provisions of SFAS 134.
Salaries, General and Administrative Expenses: The increase of $7.4 million in
these expenses for the year ended December 31, 1998 compared to the year ended
December 31, 1997 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 during the first three quarters of 1998,
as well as the expense of establishing certain administrative and accounting
functions as part of IndyMac REIT becoming self-managed.
Management Fees: There were no management fees for 1998. For 1997, management
fees were $4.4 million. The decrease in the management fee was primarily due to
IndyMac REIT's acquisition of its manager on July 1, 1997 as a result of which
IndyMac REIT became self-managed and the management fee was eliminated.
Non-recurring Charges: The decrease in overall expenses of $73.1 million in
1998 was largely due to the non-recurring charge of $76.0 million related to
IndyMac REIT's acquisition of CAMC discussed below.
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,
$3.0 million and $4.7 million, respectively.
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; manufactured housing loans
held for investment, $1.4 million; and $0.4 million in other income. 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
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<PAGE>
during 1997, from $23.2 million for 1996. This increase is partly attributable
to IndyMac MHD's commencement of operations in March 1996.
Interest income on mortgage loans held for investment totaled $125.2 million
during 1997 compared to $95.5 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 yield 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 8.6% and
9.2% 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.
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 in 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
effective interest rate of CMOs to 7.9% in 1997 from 8.2% in 1996.
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<PAGE>
Interest expense on senior unsecured notes totaled $5.5 million for each of the
years ended December 31, 1997 and 1996, respectively. The effective 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 $0.8
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 gain 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, 1997 as a
result of which IndyMac REIT became self-managed and the management fee was
eliminated.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of funds include monthly principal and interest
payments on its loans held for sale and investment portfolios, committed and
uncommitted borrowings, structured financing, proceeds from the sale of assets
and issuance of REMIC and asset-backed securities, master and primary servicing
fees and other servicing-related revenues and proceeds from the Company's
Dividend Reinvestment and Stock Purchase Plan ("DRIP").
The widely publicized events of the fourth quarter 1998 highlighted the
Company's vulnerability to market disruptions because of the Company's heavy
reliance on repurchase financing. Due in no small part to financial problems in
Asia and the Russian credit crisis in the late summer of 1998, U.S. financial
markets experienced a "flight to quality" (investors' preference for highly
rated and/or low risk investments), which brought unexpected changes in the
debt, equity, credit and securitization markets. These changes adversely
affected the Company's ability to fund its operations. First, the Company's
repurchase lenders, which provided committed and uncommitted repurchase
facilities, advised the Company informally of restrictions on the amounts, terms
and operating conditions under which uncommitted borrowings would be made
available. In addition, the market disruptions caused some repurchase lenders
to change their assessment of their pledged collateral and the terms of certain
of the Company's repurchase credit facilities enabled the Company's lenders to
make margin calls on the Company's credit facilities requiring either a paydown
of the facility or the pledge of additional collateral to support these
facilities. While the Company met the terms of all such margin calls, the
effect was to decrease the amount of indebtedness the Company was authorized to
incur, and thus increase the Company's liquidity. Second, the market
disruptions and the resulting limited availability of financing, caused several
public companies in the financial services industry to file for protection from
their creditors under the U.S. Bankruptcy Code, further eroding investors'
confidence in certain market-funded financial services companies. This lack of
confidence in certain segments of the financial services sector caused IndyMac
REIT's and other's stock prices to fall sharply. As a result of this decline in
stock price, the Company did not utilize the optional cash investment feature of
the DRIP to raise significant amounts of capital in the fourth quarter of 1998.
However, as financial markets have stabilized, the Company has again begun to
raise capital through the optional cash investment feature of the DRIP albeit at
levels lower on average than prior to the fourth quarter of 1998. Lastly,
spreads in the securitization market widened dramatically, making loan sales
through REMIC and other securitization vehicles less profitable and more
capital-intensive.
As a result of these market issues and limitations on available capital, during
1998's fourth quarter, the Company took steps to preserve liquidity and modify
its operations so as to conserve its cash resources. The Company raised pricing
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<PAGE>
and limited premiums in its third party lending and consumer loan businesses to
slow volumes and temporarily halted new commitments for builder single family
construction and income property lending. The Company lowered its expenses by
reducing its workforce by approximately twenty percent in November 1998, to
align expenses more accurately with actual and projected production volumes. The
Company also sold securities, a pool of real estate owned and some bulk
servicing rights to raise cash. In addition, the Company emphasized the sale of
loans on a whole loan basis instead of through securitizations, where financing
of residual securities was not readily available. The decrease in production
volumes and assets reduced the Company's balance sheet from $7.4 billion, as of
September 30, 1998, to $5.7 billion on December 31, 1998 and its leverage ratio
(total liabilities minus borrowings on treasury securities to total equity) from
6.9:1 to 5.5:1, at September 30, 1998 and December 31, 1998, respectively.
The Company reported a loss in the fourth quarter of 1998, but recorded an
overall profit for the full year 1998. The Company suffered realized and
unrealized losses in several areas which, when combined with lower net income
from reduced assets, contributed to the fourth quarter loss. The realized
losses of approximately $15.0 million were the result of securities, bulk
servicing and real estate owned sales into the disrupted markets to raise
liquidity. The Company also sustained unrealized losses of approximately $66.2
million, net of the tax benefit, in its trading and available for sale
securities portfolios as a result of the reduced market value of mortgage-backed
and other securities created by the general market disruption. The Company, at
all times during the fourth quarter, was in compliance with all covenants and
other material terms of its credit and debt agreements and remains in good
standing with all of its creditors and lenders.
Since the end of December 1998, market conditions have improved and stabilized.
The Company has secured $700 million in additional committed financing,
including a $500 million repurchase facility from Morgan Stanley Mortgage
Capital, Inc. and a $200 million commercial paper facility with Bank of America,
both of which are more fully described below. In addition, IndyMac REIT has
resumed raising equity capital through the optional cash investment feature of
the DRIP. From December 1998 through February 1999, the Company has raised
approximately $40 million through the DRIP. The Company currently maintains
liquidity at levels ranging from $175 million to $225 million, somewhat higher
than the levels prior to the fourth quarter of 1998. With its liquidity
returning to more prudent levels, the Company will continue to reassess
reentering the securitization markets in the near term as market conditions
continue to improve. In addition, the Company is pursuing strategic
alternatives to managing its liabilities, with an emphasis on procuring longer
term facilities where collateral values are determined on a less subjective
basis. These options include, but are not limited to, structured financing
vehicles, unsecured debt and the possible acquisition, or de novo charter, of a
depository institution. In general, the Company plans to continue to operate
with a conservative leverage ratio and sufficient liquidity.
The Company believes that its liquidity levels and borrowing capacity are
sufficient to meet its current operating requirements. However, the Company's
liquidity and capital resources will continue to depend on factors such as cash
flow from operations, margins on financial collateral required by lenders,
margin calls and the Company's ability to raise funds in the capital markets.
It is the Company's policy to maintain adequate capital and liquidity and to
comply with all leverage and financial covenants set forth in the Company's
credit agreements.
The table below summarizes the Company's committed sources of financing as of
December 31, 1998/4/:
<TABLE>
<CAPTION>
(Dollars in millions) Committed Maturity
Financing Date
--------- -------------
<S> <C> <C>
Merrill Lynch $2,000 April 2000
First Union Bank Syndicate 900 February 2001
Paine Webber 500 June 2000
Bank of America 200 December 1999
Senior unsecured notes 60 October 2002
------
Total $3,660
======
</TABLE>
- ---------------------------
/4/ Excludes $500 million credit facility with Morgan Stanley Mortgage Capital,
Inc. discussed below.
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<PAGE>
In April 1998, the Company renewed a repurchase facility with Merrill Lynch,
Pierce, Fenner & Smith, Inc. and certain of its affiliates, in an aggregate
committed principal amount of $2.0 billion, and uncommitted amounts to be
determined upon mutual agreement. 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 third party lending operations, mortgage portfolio, warehouse
lending, construction lending and manufactured housing lending assets and
operations. The repurchase facility carries a floating rate of interest based
on the London Interbank Offered Rate ("LIBOR"), plus an applicable margin, which
varies by the type of asset financed, and as of December 31, 1998, the total
balance of outstanding loans from Merrill Lynch was $2.8 billion.
In February 1998, the Company renewed a credit facility with a syndicate of nine
commercial banks led by First Union National Bank increasing the available
committed borrowings from $500 million to $900 million, expanding the types of
collateral which can be financed thereunder and extending the term of the
commitment for an additional three years expiring February 2001. This facility
primarily finances mortgage loans, construction loans, and primary and master
servicing assets. Also during 1998, the syndicate under this credit facility
increased to fifteen commercial banks. As of December 31, 1998, the total
balance of outstanding loans from this syndicate was $748 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.
In June 1998, the Company renewed a repurchase facility with PaineWebber Real
Estate Securities, Inc. in an aggregate principal amount of $500 million. Such
repurchase facility is committed for a two-year period from the date of
execution and currently permits the Company to finance its third party lending
operations, 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. The
Company is permitted to borrow additional uncommitted amounts under this
repurchase facility, and as of December 31, 1998, the total balance of
outstanding loans from PaineWebber Real Estate Securities, Inc. was $488
million.
In January 1999, the Company entered into a one-year committed repurchase
facility with Morgan Stanley Mortgage Capital, Inc. in an aggregate principal
amount of $500 million. This repurchase facility finances the Company's mortgage
portfolio assets and third party lending operations. The repurchase facility
carries a floating rate of interest based on LIBOR, plus an applicable margin,
which varies by type of asset financed. As of January 31, 1999, the total
balance of outstanding loans from this repurchase facility was $285 million.
In December 1998, IndyMac REIT entered into a $200 million commercial paper
conduit facility with Bank of America (formerly NationsBank). This facility
finances residential builder construction loans at a floating interest rate
based on the prevailing rates in the commercial paper market available to
certain Bank of America affiliated entities. As of December 31, 1998, the total
outstanding balance under this credit facility was $184 million.
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.
The Company has from time to time raised additional capital through 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
investment feature of its DRIP. During 1998, the Company raised $234 million in
common equity through the optional cash investment feature of the DRIP. As
previously stated, in light of the market disruptions and related decline in the
Company's stock price during the fourth quarter of 1998, the Company did not
utilize the optional cash investment feature of the DRIP to raise significant
amounts of capital in the fourth quarter of 1998. However, as financial markets
have stabilized, the Company has again begun to raise capital through the
optional cash investment feature of the DRIP albeit at levels lower on average
than prior to the fourth quarter 1998.
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<PAGE>
The Company has filed a shelf registration statement with the Securities and
Exchange Commission, 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 in an aggregate amount of $500 million.
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, third party lending 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 third party lending operations, are
known to require significant and continuing commitments of capital resources in
order to enable their growth.
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.
In March 1999, Standard & Poor's Corporation reaffirmed the Company's senior
unsecured credit rating at "BBB-", but with a negative outlook as a result of
the events of the fourth quarter 1998. Standard & Poor's advised the Company
that its removal from "negative outlook" would depend upon how the Company
successfully implements its business plan for 1999 and beyond. In October
1998, Fitch IBCA Inc., in response to liquidity concerns and credit tightening
for market funded companies, lowered the Company's rating on its senior
unsecured obligations from "BBB" to "BBB-", maintaining the Company's investment
grade rating. In October 1998, these senior unsecured obligations were rated
"BBB" by Duff & Phelps Rating Co. In February 1999, Fitch IBCA Inc. lowered its
rating for the Company's senior secured revolving credit facility to "BBB+", and
at the same time affirmed the Company's investment grade rating at "BBB-" and
removed the ratings from Rating Alert Negative.
EFFECT OF INTEREST RATE CHANGES
Due to the characteristics of certain financial assets and liabilities, and the
nature of 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 movement
in market interest rates. Included in this strategy is the use of a "macro-
hedge" which contemplates increased earnings from production volumes at the same
time as losses are incurred due to rapid prepayments.
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. For example, the Company has been required by market
conditions to raise prices and reduce its purchase and origination volumes of
mortgage loans in its third party lending operations, and as a result, the
macro-hedge strategy of seeking to replace prepayment losses on assets held for
investment with gains on new production volumes may not operate consistent with
prior periods. In addition, cash flow considerations may require the Company to
utilize different strategies with respect to hedging certain assets and/or
production pipelines, including utilizing options as opposed to futures
contracts and principal-only mortgage securities. The decision to sell
principal-only securities was based on the Company's limited ability, during the
fourth quarter 1998 market disruption, to obtain financing for such securities.
Also, see "Item 7A. Quantitative and Qualitative Disclosure About Market Risk".
Financial assets of the Company that tend to increase in value as interest rates
increase, and decline in value as interest rates decrease 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
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<PAGE>
otherwise have been obtained, and therefore, results in higher implicit yields.
As of December 31, 1998, IndyMac REIT and IndyMac Operating on a combined basis
held $335.2 million of interest-only securities. On December 31, 1998, $242.0
million of these assets were reclassified from trading to available for sale in
accordance with the provisions of SFAS 134. The remaining balance of $93.2
million was already classified as available for sale on that date. As a result,
normal fluctuations in fair market value of these securities will be recorded as
adjustments to shareholders' equity in future periods.
Financial instruments of the Company that tend to decrease in value as interest
rates increase, and increase in value as interest rates decline include REMIC
senior securities, fixed rate subordinated securities, adjustable rate agency
securities, principal-only securities, U.S. 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 Company and supported by adjustable rate mortgage loans may decline
in value as interest rates increase, if the timing or absolute level of interest
rate adjustments on the underlying loans do not correspond to applicable
increases in market interest rates.
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 third party lending operations, originated through
LoanWorks 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 adjusted 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, the Company is
required to provide additional funds and/or pledge additional assets to maintain
financing for its holdings that have been financed to maturity through the
issuance of CMOs or other longer-term debt securities. The volatile situation
in the capital markets during the fourth quarter of 1998, particularly with
regard to interest-only securities and servicing assets, resulted in margin
calls based on values taken from disrupted markets, which were offset only
partially by the Company's hedging position and asset/liability management
strategies based on economic models. 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. This phenomenon also occurred during the fourth
quarter of 1998.
SYSTEMS ISSUES ASSOCIATED WITH THE YEAR 2000
Summary
The Company has completed the review of its computer systems to determine the
impact of the Year 2000 issue and is in the process of remediating and replacing
those systems determined to be non-Year 2000 compliant. The Year 2000 issue
relates to the effects of potentially date sensitive calculation errors by
computers whose programs may not properly recognize the year 2000.
The Company's Year 2000 strategy is to identify all systems, which internally
and externally impact its business, and determine Year 2000 compliance.
Internal impact relates to the Company's internally developed programs and
vendor purchased software programs which are operated in-house by the Company.
External impact refers to embedded technology equipment and systems, vendors
that supply the Company with goods and services (including data processing
service bureaus), and business partners. The goals of the Company related to
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<PAGE>
Year 2000 are to determine its state of readiness, identify risks and develop
contingency plans to mitigate those risks and to identify costs associated with
Year 2000 issues. The Company is using external consultants to assist the
Company's Year 2000 staff in identifying Year 2000 risks, addressing these
risks, and developing contingency plans.
State of Readiness and Identification of Risks
The identification and assessment of internal systems has been completed and the
remediation, testing and implementation phases are currently in progress. Most
of the Company's internally developed systems were developed over the past five
years, and were designed to be Year 2000 compliant. The Company currently
expects to substantially complete both remediation and validation of internal
mission-critical systems by April 30, 1999, with formal implementation to occur
by June 30, 1999.
In 1998, the Company began its communication with significant third parties to
determine the extent to which the Company may be affected by those third
parties' failure to remediate their own Year 2000 issues. The Company will
continue to monitor the progress of third party testing and implementation
procedures throughout 1999. Contingency plans for mission-critical third party
systems are in progress. The Company cannot at present determine the financial
effect if significant third party remediation efforts fail.
An inventory of embedded technology equipment and systems has been compiled in
order to ensure that all components are Year 2000 compliant. Embedded
technology equipment and systems include equipment, machinery or building
infrastructure that are controlled, monitored or operated by embedded computer
devices.
Risks and Contingency Plans
The Company has currently identified two material potential risks related to its
Year 2000 issues. The first risk is that the Company's primary lenders,
depository institutions and collateral custodians do not become Year 2000
compliant before year-end 1999, which could materially impact the Company's
ability to access funds and collateral necessary to operate its various
businesses. The Company is currently assessing the risks related to these and
other Year 2000 risks, and has received some assurances that the computer
systems of its lenders, depository institutions, collateral custodians, and
business partners, many of whom are among the largest financial institutions in
the country, will be Year 2000 compliant by year-end 1999.
The second risk is that the external primary servicing system on which the
Company and close to half of its business partners rely to service mortgage
loans does not become Year 2000 compliant before year-end 1999. Failure on the
part of the servicing system could materially impact the Company's servicing
operations and the servicing operations of those business partners that are
servicing mortgage loans held by the Company. As of February 5, 1999, the
Company received confirmation that the servicing system had achieved Year 2000
compliance. In addition to this confirmation, the servicing system vendor is
participating in an industry-sponsored test to further demonstrate its Year 2000
compliance. The completion of this testing is scheduled for April 1999.
In addition to the above noted risks, the Company uses two other servicing
applications for its loan portfolios. The Company has been notified by the
vendor of one of the applications that it is Year 2000 compliant as of February
1999. The other vendor has estimated that its application will be Year 2000
compliant by April 1999.
The Company has developed and is continuing to develop contingency plans for all
non-Year 2000 compliant internal systems. Contingency plans include identifying
alternative processing platforms and alternative sources for services and
businesses provided by critical non-Year 2000 compliant financial depository
institutions, vendors and business partners. The Company believes that its plans
for internal systems and related processing are sufficient to mitigate most of
the major effects of Year 2000 issues. However, there can be no assurance that
the Company's lenders, depository institutions, custodians, vendors and business
partners resolve their own Year 2000 compliance issues in a timely manner.
Neither are there any assurances that any failure by these other parties to
resolve such issues would not have an adverse effect on the Company's operations
and financial condition.
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Costs Related to Year 2000
The costs incurred by the Company through December 31, 1998 related to Year 2000
issues have been immaterial to its earnings. The Company anticipates that Year
2000 expenses through December 31, 1999 will approximate $2.0 million.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
- -------------------------------------------------------------------
The Company's primary market risk affecting market risk sensitive instruments is
interest rate risk. When interest rates fluctuate, the Company can be adversely
impacted because the fair market value of its assets and commitments to purchase
assets changes (See Part II, Item 7. MD&A "Effect of Interest Rate Changes" for
further discussion). Further, in addition to gains on sale, the Company
realizes income from the differential or spread between the interest earned on
loans, investments, and other interest-earning assets and the interest incurred
on borrowings. Any changes in overall interest rates affect both the amount of
interest income received on interest-earning assets and the amount of interest
expense incurred on interest-bearing liabilities. Since the change in amount
received is generally not equal to the change in amount paid, the spread
(defined as the difference between the two) can be adversely affected.
In order to minimize the adverse impact on net interest income and shareholders'
equity due to changes in the fair market value of its assets and commitments to
purchase assets, the Company hedges its loans held for sale, mortgage securities
and mortgage servicing rights.
To hedge changes in the value of its interest-only securities portfolio and
mortgage servicing rights ("MSR"), the Company will generally choose among
several strategies, consisting of either buying mortgage-backed securities or
ten year U.S. Treasuries, futures, or options depending on several factors. The
Company also from time to time purchases other interest rate derivatives such as
floors or swaps; however, the volume and impact of these items as of December
31, 1998 are not considered to be material. The Company uses hedging instruments
to reduce its exposure to interest rate risk, not to speculate on the direction
of market interest rates. Included in this strategy is the use of a "macro-
hedge" which contemplates increased earnings from production volumes at the same
time as losses are incurred due to rapid prepayments. The Company has managed
its interest rate risk in 1998 as described, and does not expect, at this time,
significant changes in future reporting periods.
As part of its interest rate risk management process, the Company performs
various interest rate calculations that quantify the net financial impact of
changes in interest rates on its interest-earning assets, commitments and
interest-bearing liabilities. These analyses incorporate scenarios which assume
hypothetical instantaneous shifts in the yield curve among market sensitive
asset classes. Various modeling techniques are employed to value these assets.
For interest-only securities, MSRs and residuals, the value is determined using
a discounted cash flow model. The primary assumptions used in the model are
prepayment rates, discount rates, and credit losses. For mortgages and other
mortgage securities, a static spread model is used. The primary assumptions
used in this model are prepayment rates and discount rates. For loans, an
option-adjusted spread ("OAS") model is used incorporating assumptions on
prepayment speeds, spreads over the Treasury curve, and the volatility of
interest rates. For options, the primary assumption is the expected volatility
of interest rates. For futures, the underlying security to be delivered under
the contract is valued, a conversion factor is applied, and the percentage
change in the fair value is applied to calculate the fair value of the futures
contract.
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Utilizing this sensitivity analysis, as of December 31, 1998, the Company
estimates that a reduction in interest rates of 50 basis points, or 0.50%, all
else being constant, would result in a combined after tax loss, including
hedges, for IndyMac REIT and IndyMac Operating of $21.5 million. This loss
would occur in 1999 assuming the aforementioned decline in rates occurred in
1999. These sensitivity analyses are limited by the fact that they are performed
at a particular point in time and do not incorporate other factors that would
impact the Company's financial performance in such a scenario, such as the
increase in income associated with the increase in production volume that would
result from the decrease in interest rates. Consequently, the preceding
estimates should not be viewed as a forecast.
FORWARD-LOOKING STATEMENTS
Certain statements contained in this Form 10-K may be deemed to be forward-
looking statements which reflect the Company's current views with respect to
future events and financial performance. These forward-looking statements are
subject to certain risks and uncertainties, including those identified below,
which could cause future results to differ materially from historical results or
those anticipated. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of their dates, and if no date
is provided, then such statements speak only as of the date hereof. The Company
undertakes no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
The following factors could cause future results to differ materially from
historical results or those anticipated: (1) the level of demand for consumer
loans, mortgage loans, construction loans and commercial term loans, which is
affected by such external factors as the level of interest rates, the strength
of various segments of the economy and demographics of the Company's lending
markets; (2) the availability of funds from the Company's lenders and other
sources of financing to support the Company's lending activities; (3) the
direction of interest rates and the relationship between interest rates and the
cost of funds; (4) federal and state regulation of the Company's consumer
lending and commercial lending operations and federal regulation of the
Company's real estate investment trust status; (5) the actions undertaken by
both current and potential new competitors; and (6) other risks and
uncertainties detailed in this Management's Discussion and Analysis of Financial
Condition and Results of Operations.
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.
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 the Company's 1998 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 the Company's 1998 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 the Company's 1998 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 the Company's 1998 fiscal year.
34
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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 IndyMac
Mortgage Holdings, Inc., formerly known as CWM Mortgage Holdings, Inc.
("IndyMac REIT" 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 IndyMac REIT, 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 IndyMac REIT, as amended (incorporated by reference to Exhibit
3.2 to the Company's Form 10-Q for the quarter ended June 30, 1997).
3.3* Certificate of Incorporation of IndyMac REIT, as amended (incorporated
by reference to Exhibit 3.1 of the Company's Form 10-Q for the quarter
ended June 30, 1998).
3.4* Bylaws of IndyMac REIT, as amended (incorporated by reference to Exhibit
3.2 to the Company's Form 10-Q for the quarter ended June 30, 1998).
3.5 Bylaws of IndyMac REIT, as amended.
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).
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).
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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 Exhibit 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).
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).
36
<PAGE>
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).
4.26* 1998 Stock Incentive Plan adopted May 19, 1998, as amended July 21, 1998
(incorporated by reference to Exhibit 4.1 to the Company's Form 10-Q for
the quarter ended June 30, 1998).
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 IndyMac
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).
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).
37
<PAGE>
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).
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).
38
<PAGE>
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).
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).
39
<PAGE>
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).
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 (incorporated by reference to Exhibit 10.50 to the Company's Form
10-K for the year ended December 31, 1998).
10.51* Employment Agreement dated January 1, 1998 between IndyMac REIT and
Carmella Grahn (incorporated by reference to Exhibit 10.1 to the
Company's Form 10-Q for the quarter ended June 30, 1998).
10.52* Amendment to Employment Agreement dated September 1, 1998 between
IndyMac REIT and S. Blair Abernathy (incorporated by reference to 10.1
to the Company's Form 10-Q for the quarter ended September 30, 1998).
10.53* Amendment to Employment Agreement dated September 1, 1998 between
IndyMac REIT and Carmella Grahn (incorporated by reference to 10.2 to
the Company's Form 10-Q for the quarter ended September 30, 1998).
40
<PAGE>
10.54* Second Amendment to Employment Agreement dated September 1, 1998 between
IndyMac REIT and Michael Perry (incorporated by reference to 10.3 to the
Company's Form 10-Q for the quarter ended September 30, 1998).
10.55* Amendment to Employment Agreement dated September 1, 1998 between
IndyMac REIT and Kathleen Rezzo (incorporated by reference to 10.4 to
the Company's Form 10-Q for the quarter ended September 30, 1998).
10.56* Amendment to Employment Agreement dated September 1, 1998 between
IndyMac REIT and Richard H. Wohl (incorporated by reference to 10.5 to
the Company's Form 10-Q for the quarter ended September 30, 1998).
10.57 Employment Agreement dated December 30, 1998 between IndyMac REIT and
David L. Loeb.
10.58 Employment Agreement dated December 23, 1998 between IndyMac REIT and
Angelo R. Mozilo.
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.
41
<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 26, 1999.
INDYMAC MORTGAGE HOLDINGS, INC.
By: /s/ Michael W. Perry
----------------------------
Michael W. Perry
Chief Executive 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 hereto.
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>
Signatures Title Date
<S> <C> <C>
/s/ David S. Loeb Director and Chairman of the Board of March 26, 1999
- ------------------------------------------------ Directors
David S. Loeb
/s/ Angelo R. Mozilo Director, President and March 26, 1999
- ------------------------------------------------ Vice Chairman of the Board of Directors
Angelo R. Mozilo
/s/ Michael W. Perry Director and Chief Executive Officer March 26, 1999
- ------------------------------------------------ (Principal Executive Officer)
Michael W. Perry
/s/ Carmella L. Grahn Executive Vice President and March 26, 1999
- ------------------------------------------------ Chief Financial Officer
Carmella L. Grahn (Principal Financial and
Accounting Officer)
/s/ Lyle E. Gramley Director March 26, 1999
- ------------------------------------------------
Lyle E. Gramley
/s/ Thomas J. Kearns Director March 26, 1999
- ------------------------------------------------
Thomas J. Kearns
/ s/ Frederick J. Napolitano Director March 26, 1999
- ------------------------------------------------
Frederick J. Napolitano
</TABLE>
42
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS AND
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
INDYMAC MORTGAGE HOLDINGS, INC.
AND SUBSIDIARIES
December 31, 1998, 1997, and 1996
F-1
<PAGE>
INDYMAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
December 31, 1998, 1997, 1996
INDYMAC 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 Operations F-5
Consolidated Statements 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-26
</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, INC. AND SUBSIDIARIES
- ------------------------------
<TABLE>
<CAPTION>
<S> <C>
Report of Independent Certified Public Accountants F-27
Financial Statements
Consolidated Balance Sheets F-28
Consolidated Statements of Operations F-29
Consolidated Statements of Shareholders' Equity F-30
Consolidated Statements of Cash Flows F-31
Notes to Financial Statements F-32
</TABLE>
F-2
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
--------------------------------------------------
Board of Directors and Shareholders
IndyMac Mortgage Holdings, Inc.
We have audited the accompanying consolidated balance sheets of IndyMac Mortgage
Holdings, Inc. and Subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended December 31, 1998. 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 Mortgage
Holdings, Inc. and Subsidiaries as of December 31, 1998 and 1997, and the
consolidated results of their operations and their consolidated cash flows for
each of the three years in the period ended December 31, 1998, in conformity
with generally accepted accounting principles.
We have also audited Schedule IV as of December 31, 1998 of IndyMac Mortgage
Holdings, Inc. and Subsidiaries. In our opinion, this schedule presents fairly,
in all material respects, the information required to be set forth therein.
/s/ GRANT THORNTON LLP
Los Angeles, California
February 26, 1999
F-3
<PAGE>
INDYMAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
December 31,
---------------------------------
1998 1997
--------- ---------
ASSETS
Loans held for sale, net
<S> <C> <C>
Mortgages-prime $ 989,052 $1,091,908
Mortgages-subprime 145,793 75,770
Manufactured housing 215,507 208,830
Home improvement 205,304 81,763
---------- ----------
1,555,656 1,458,271
Other loans, net
Loans held for investment 668,523 1,831,047
Construction
Builder 799,712 603,746
Consumer 468,735 326,950
---------- ----------
1,268,447 930,696
Income property 178,756 16,110
Revolving warehouse lines of credit 443,946 512,458
---------- ----------
2,559,672 3,290,311
Mortgage securities 235,032 558,445
Collateral for collateralized mortgage obligations 162,726 245,474
Investment in and advances to IndyMac Operating 279,693 185,715
Other assets 58,373 110,894
---------- ----------
Total assets $4,851,152 $5,849,110
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Repurchase agreements and other credit facilities $3,785,549 $4,826,656
Collateralized mortgage obligations 140,810 221,154
Senior unsecured notes 60,031 59,888
Accounts payable and accrued liabilities 42,659 37,518
---------- ----------
Total liabilities 4,029,049 5,145,216
Shareholders' equity
Preferred stock - authorized, 10,000,000 shares of $.01 par
value; none issued - -
Common stock - authorized, 200,000,000 shares of
$.01 par value; issued and outstanding, 75,794,435 shares at
December 31, 1998 and 63,351,616 at December 31, 1997 758 634
Additional paid-in capital 1,005,797 773,475
Accumulated other comprehensive income (18,776) (1,505)
Cumulative earnings 277,220 243,430
Cumulative distributions to shareholders (442,896) (312,140)
---------- ----------
Total shareholders' equity 822,103 703,894
---------- ----------
Total liabilities and shareholders' equity $4,851,152 $5,849,110
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
INDYMAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Years ended December 31,
-------------------------------------
1998 1997 1996
------------ -------- ---------
<S> <C> <C> <C>
REVENUES
Interest income
Loans held for sale
Mortgages-prime $115,091 $ 56,148 $ 42,436
Mortgages-subprime 27,737 12,752 15,310
Manufactured housing 16,178 9,184 2,259
Home improvement 18,333 1,727 -
-------- -------- --------
177,339 79,811 60,005
Other loans
Loans held for investment 101,893 125,174 95,545
Construction
Builder 77,226 54,498 23,338
Consumer 43,523 20,368 6,820
-------- -------- --------
120,749 74,866 30,158
Income property 8,922 131 -
Revolving warehouse lines of credit 44,452 24,801 15,523
-------- -------- --------
276,016 224,972 141,226
Mortgage securities 42,252 25,250 10,504
Collateral for collateralized mortgage obligations 14,675 20,202 22,648
Advances to IndyMac Operating 17,381 10,075 7,676
Other 1,162 591 244
-------- -------- --------
Total interest income 528,825 360,901 242,303
Interest expense
Repurchase agreements and other credit facilities 334,666 217,492 131,389
Collateralized mortgage obligations 15,163 19,363 22,478
Senior unsecured notes 5,530 5,517 5,498
-------- -------- --------
Total interest expense 355,359 242,372 159,365
Net interest income 173,466 118,529 82,938
Provision for loan losses 35,892 18,622 12,991
-------- -------- --------
Net interest income after provision for loan losses 137,574 99,907 69,947
Equity in earnings (loss) of IndyMac Operating (58,232) 18,414 19,533
Net gain (loss) on mortgage loans and securities (19,088) 997 (906)
Loss on sale of assets (2,178) - -
Other income 5,000 7,318 3,376
-------- -------- --------
Net revenues 63,076 126,636 91,950
EXPENSES
Salaries and related 19,616 12,943 9,940
General and administrative 9,670 8,992 4,262
Management fees to affiliate - 4,406 8,761
Non-recurring charges - 76,000 -
-------- -------- --------
Total expenses 29,286 102,341 22,963
-------- -------- --------
NET EARNINGS $ 33,790 $ 24,295 $ 68,987
======== ======== ========
EARNINGS PER SHARE
Basic EPS $0.48 $0.43 $1.51
Diluted EPS $0.48 $0.43 $1.50
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
INDYMAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Dollars in thousands)
<TABLE>
<CAPTION>
Years ended December 31,
----------------------------------------------------------------------
1998 1997 1996
---------------------- --------------------- ---------------------
<S> <C> <C> <C> <C> <C> <C>
Cumulative earnings
Balance, beginning of year $ 243,430 $ 219,135 $ 150,148
Net earnings 33,790 $ 33,790 24,295 $24,295 68,987 $ 68,987
---------- --------- ---------
Balance, end of year 277,220 243,430 219,135
Cumulative distribution to shareholders
Balance, beginning of year (312,140) (216,315) (149,398)
Dividends paid (130,756) (95,825) (66,917)
---------- --------- ---------
Balance, end of year (442,896) (312,140) (216,315)
Accumulated other comprehensive
income (loss)
Balance, beginning of year
IndyMac REIT (2,006) (7,166) 4,694
IndyMac Operating 501 (8,427) 2,898
Unrealized gain (loss) on securities
IndyMac REIT (16,360) 5,160 (11,860)
IndyMac Operating, net of tax (911) 8,928 (11,325)
-------- ------- --------
Other comprehensive income (17,271) (17,271) 14,088 14,088 (23,185) (23,185)
---------- -------- --------- ------- --------- --------
Comprehensive income $ 16,519 $38,383 $ 45,802
======== ======= ========
Balance, end of year
IndyMac REIT (18,366) (2,006) (7,166)
IndyMac Operating (410) 501 (8,427)
Common stock
Balance, beginning of year 634 502 424
Common stock issued 113 129 74
Common stock options exercised 11 3 4
---------- --------- ---------
Balance, end of year 758 634 502
Additional paid-in capital
Balance, beginning of year 773,475 490,695 353,965
Director's and officer's notes
receivable (9,912) - -
Deferred compensation (6,087) - -
Common stock issued 228,668 278,404 132,982
Common stock options exercised 19,653 4,376 3,748
---------- --------- ---------
Balance, end of year 1,005,797 773,475 490,695
Total shareholders' equity $ 822,103 $ 703,894 $ 478,424
========== ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
INDYMAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Years ended December 31,
----------------------------------------------
1998 1997 1996
---------------- ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings $ 33,790 $ 24,295 $ 68,987
Adjustments to reconcile net earnings
to net cash provided by (used in) operating activities:
Amortization and depreciation 51,969 29,144 24,911
Provision for loan losses 35,892 18,622 12,991
Equity in (earnings) loss of IndyMac Operating 58,232 (18,414) (19,533)
Unrealized (gain) loss on trading securities 19,088 (2,206) -
Issuance of common stock as settlement of management contract - 72,000 -
Purchases of mortgage loans held for sale (11,695,094) (4,912,560) (3,872,783)
Sale of and payments from mortgage loans held for sale 11,443,586 4,210,331 3,646,046
Net purchases of manufactured housing loans held for sale (10,702) (134,510) (74,949)
Purchases of trading securities (152,947) (70,740) (17,369)
Sale of and payments on trading securities 92,257 4,044 -
Net (increase) decrease in other assets 30,784 (54,789) (5,758)
Net increase in other liabilities 5,141 14,790 4,972
------------ ----------- -----------
Net cash (used in) operating activities (88,004) (819,993) (232,485)
Cash flows from investing activities:
Purchases of mortgage loans held for investment (324,184) (1,086,583) (207,825)
Payments and sales from mortgage loans held for investment 1,623,935 601,245 297,709
Net increase in construction loans receivable (494,519) (572,997) (333,011)
Purchases of mortgage securities (634,124) (356,808) (118,783)
Sales and payments of mortgage securities 927,456 80,704 -
Net (increase) decrease in revolving warehouse lines of credit 67,469 (262,026) (60,927)
Investment in IndyMac Operating, net of dividends received - - 24,750
Net (increase) decrease in manufactured housing loans held for investment 4,781 (4,387) (25,822)
(Increase) decrease in advances to IndyMac Operating (153,237) 12,236 (46,561)
Payments from collateral for collateralized mortgage obligations 81,298 43,529 46,204
------------ ----------- -----------
Net cash provided by (used in) investing activities 1,098,875 (1,545,087) (424,266)
Cash flows from financing activities:
Net increase (decrease) in repurchase agreements and other credit
facilities (1,043,442) 2,294,974 493,675
Net proceeds from issuance of common stock 232,446 210,912 136,808
Cash dividends paid (130,756) (95,825) (66,917)
Proceeds from issuance of collateralized mortgage obligations - - 146,152
Principal payments on collateralized mortgage obligations (81,980) (43,755) (48,566)
------------ ----------- -----------
Net cash provided by (used in) financing activities (1,023,732) 2,366,306 661,152
Net increase (decrease) in cash and cash equivalents (12,861) 1,226 4,401
Cash and cash equivalents at beginning of period 13,676 12,450 8,049
------------ ----------- -----------
Cash and cash equivalents at end of period $ 815 $ 13,676 $ 12,450
============ =========== ===========
Supplemental cash flow information:
Cash paid for interest $ 356,174 $ 218,122 $ 156,880
============ =========== ===========
Supplemental disclosure of non-cash activity:
In 1996, $154.6 million of mortgage loans held for investment were transferred
to collateral for CMOs in association with the issuance of a CMO.
</TABLE>
The accompanying notes are an integral part of these statements.
F-7
<PAGE>
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The financial statements of IndyMac Mortgage Holdings, Inc. and Subsidiaries,
("IndyMac REIT") are prepared in conformity with generally accepted accounting
principles ("GAAP"). The following is a summary of the 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 third party lending activities are
primarily conducted through IndyMac, Inc. ("IndyMac Operating"), a taxable
affiliate of IndyMac REIT established in 1993. IndyMac REIT owns all the
preferred non-voting 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 subsidiaries. All significant intercompany balances and
transactions with IndyMac REIT's consolidated subsidiaries have been
eliminated in consolidation of IndyMac REIT.
Certain reclassifications have been made to the financial statements for
the years ended December 31, 1997 and 1996 to conform to the December 31,
1998 presentation.
2. Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect amounts reported in the financial statements.
Changes in these estimates and assumptions are considered reasonably
possible and may have a material impact on the financial statements.
3. 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 by asset
type. 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 Commitment 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.
4. 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.
F-8
<PAGE>
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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 of the loan using a level-yield method. Loans are
classified as held for investment based on management's intent and ability
to hold the loans for the foreseeable future.
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.
5. Construction Loans
Construction loans are carried at amortized cost. Construction loans
include deferred loan fees, premiums and discounts, and commissions paid,
which are amortized over the life of the loans to interest income. Interest
is recognized as revenue when earned according to the terms of the loans
and when, in the opinion of management, it is collectible.
6. Collateral for Collateralized Mortgage Obligations
Collateral for collateralized mortgage obligations ("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.
7. Mortgage Securities
Mortgage securities consist primarily of AAA rated interest-only
securities, subordinated securities, residual securities, adjustable-rate
agency securities and senior securities.
In October 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 134, "Accounting for
Mortgage-Backed Securities Retained after the Securitization of Mortgage
Loans Held for Sale by a Mortgage Banking Enterprise", ("SFAS 134"). This
Statement requires mortgage-banking enterprises to classify as trading
securities any retained mortgage-backed securities that it commits to sell
before or during the securitization process. It also requires mortgage-
banking enterprises to classify mortgage-backed securities of loans
previously held for sale, based on its ability and intent to hold the
securities. IndyMac REIT adopted SFAS 134 on December 31, 1998 and, as a
result, reclassified all of its trading securities to available for sale.
The fair value of the portfolio which was reclassified by IndyMac REIT was
$109.3 million.
Estimated fair value is determined based on market quotes when available or
discounted cash flow techniques using assumptions for prepayment rates,
market yield requirements and credit losses. Such assumptions are
estimates and may change in the near term as interest rates or economic
conditions change.
Unrealized gains and losses resulting from fair value adjustments on
mortgage securities identified as available for sale are excluded from
earnings and reported as a separate component of comprehensive income in
shareholders' equity. IndyMac REIT evaluates the recoverability of
interest-only securities classified as available for sale by computing the
present value of estimated future cash flows, using current estimates for
prepayment rates, discounted at 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. IndyMac
REIT estimates future prepayment rates based upon current interest rate
levels, collateral seasoning, and market forecasts, as well as relevant
characteristics of the collateral underlying the assets, such as loan
types, interest rates and recent prepayment experience. Unrealized gains
and losses from fair value adjustments on mortgage securities identified as
trading are included in earnings.
F-9
<PAGE>
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
8. Allowance for Loan Losses
IndyMac REIT maintains an allowance for possible credit losses on its loan
portfolios. Additions to the allowance are based on an assessment of
certain factors, including but not limited to estimated inherent 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.
9. Collateralized Mortgage Obligations and Deferred Issuance Costs
CMOs are carried at their outstanding principal balances, net of
unamortized original issue costs. 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.
10. 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
either other assets or accrued liabilities.
11. 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>
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
12. Earnings Per Share
The FASB issued Statement of Financial Accounting Standards 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 69,982,709, 56,124,537 and
45,643,885 for 1998, 1997 and 1996, respectively. Diluted earnings per
share takes into consideration common shares outstanding and potentially
dilutive common shares, such as stock options. The weighted average number
of common shares outstanding for diluted earnings per share were
70,092,019, 56,453,634 and 45,805,509 for 1998, 1997 and 1996,
respectively. All earnings per share have been restated, as necessary.
13. Stock-Based Compensation
On January 27, 1998, IndyMac REIT's Board of Directors approved the 1998
Plan (the "Plan") which allows for the grant of various types of awards
(the "Award") including, but not limited to, nonqualified stock options,
incentive stock options, stock appreciation rights, restricted stock
awards, performance share awards, and stock bonuses to employees (including
officers and directors) of IndyMac REIT, IndyMac Operating, and their
respective subsidiaries or affiliates and certain consultants or advisors
to IndyMac REIT, IndyMac Operating, and their respective subsidiaries or
affiliates. Awards are granted based upon the fair market value of IndyMac
REIT's stock on the grant date.
IndyMac REIT accounts for stock awards in accordance with Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation", ("SFAS 123"), which allows companies to continue to
recognize compensation expense pursuant to Accounting Principles Board
Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to Employees"
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 123, are shown
in Note N - Benefit Plans.
14. Recent Accounting Pronouncements
The Company implemented the disclosure provisions of Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an Enterprise
and Related Information", ("SFAS 131"), which was effective for periods
beginning after December 15, 1997. This statement requires disclosure of
financial information about the Company's operating segments. Operating
segments are components of an enterprise about which separate financial
information is available, and is evaluated regularly by the chief operating
decision maker in deciding how to allocate resources and in assessing
performance. Since SFAS 131 provides for informative disclosure,
implementation did not impact 1998 net earnings and earnings per share, and
will not impact previously reported or future net earnings or earnings per
share.
F-11
<PAGE>
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company implemented the disclosure provisions of Statement of Financial
Accounting Standards No. 132, "Employers' Disclosures about Pension and Other
Postretirement Benefits--an amendment of FASB Statements No. 87, 88, and 106"
("SFAS 132"), effective for fiscal years beginning after December 15, 1997. This
Statement revises employers' disclosures about pension plans and other
postretirement benefit plans. SFAS 132 provides informative disclosure but does
not change the measurement or recognition of those plans, and as such, it did
not impact 1998 net earnings or earnings per share and will not impact
previously reported or future net earnings and earnings per share.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). This Statement
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts and
hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. SFAS 133 is required to
be adopted by January 2000, with earlier adoption permitted. The Company is
currently in the process of determining the impact of the adoption of SFAS 133.
The Company implemented SFAS 134 which is effective for fiscal periods beginning
after December 15, 1998. This Statement requires mortgage banking enterprises
to classify as trading securities any retained mortgage-backed securities that
it commits to sell before or during the securitization process. It also requires
mortgage banking enterprises to classify mortgage-backed securities of loans
previously held for sale, based on its ability and intent to hold the
securities. The adoption of SFAS 134 had no impact on 1998 net earnings and
earnings per share as all securities reclassified were trading and required,
under prior accounting pronouncements, mark-to-market adjustments affecting
earnings and earnings per share. The future impact of this pronouncement will be
to record normal fluctuations in the fair market value of these securities as
adjustments to shareholders' equity.
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, NET
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 43% of the principal amount of loans held
for sale at December 31, 1998 were collateralized by properties located in
California. In 1998, IndyMac REIT purchased loans held for sale with an
aggregate principal balance of $12.1 billion and sold loans with an aggregate
principal balance of $11.8 billion to IndyMac Operating.
NOTE D - LOANS HELD FOR INVESTMENT, NET
Loans held for investment, net at December 31, 1998 and 1997 were $668.5
million and $1.8 billion, respectively. As of December 31, 1998, outstanding
principal balances included $427.2 million of adjustable-rate loans, $234.5
million of fixed rate loans and $26.1 million in manufactured housing loans. As
of December 31, 1997, outstanding principal balances included $1.6 billion of
adjustable-rate loans, $180.0 million of fixed-rate loans and $29.1 million in
manufactured housing loans. In response to the unforeseen fourth quarter 1998
market disruption, IndyMac REIT sold $443.6 million of whole loans from its held
for investment portfolio to increase liquidity. The weighted average coupon on
loans held for investment increased to 8.4% in 1998 from 7.9% in 1997. Included
in loans held for investment at December 31, 1998 are $39.3 million of loans on
which interest income was not accruing due to the non-performing status of such
loans. Non-performing loans at December 31, 1997 totaled $47.0 million.
NOTE E - CONSTRUCTION LOANS
IndyMac REIT's construction lending program consists of CLCA which provides
construction, builder custom home, model home, construction-to-permanent,
acquisition and development lot loan financing on a nationwide basis to
builders, and IndyMac CLD which generally provides the same products as CLCA to
IndyMac Operating's third party customers. The carrying amount of builder
construction loans was $799.7 million and $603.8 million at December 31, 1998
and 1997, respectively. The carrying amount of consumer construction loans was
$468.7 million and $327.0 million at December 31, 1998 and 1997, respectively.
F-12
<PAGE>
NOTE F - ALLOWANCE FOR LOAN LOSSES
IndyMac REIT's determination of the level of the allowance for loan losses and
correspondingly, the provision for loan losses rests upon various judgments and
assumptions, including general economic conditions, loan portfolio composition,
prior loan loss experience and IndyMac REIT's ongoing examination process. The
allowance for loan losses of $50.1 million is considered adequate to cover
losses inherent in the loan portfolio at December 31, 1998. However, no
assurance can be given that IndyMac REIT will not, in any particular period,
sustain loan losses that exceed the allowance, or that subsequent evaluation of
the loan portfolio, in light of the factors prevailing, including economic
conditions, the credit quality of the assets comprising the portfolio and the
ongoing examination process, will not require significant increases in the
allowance for loan losses.
The table below summarizes the changes to the allowance for estimated loan
losses:
<TABLE>
<CAPTION>
(Dollars in thousands)
1998 1997 1996
-------- ------- -------
<S> <C> <C> <C>
Balance at January 1 $ 26,682 $15,264 $ 4,331
Provision for the year 35,892 18,622 12,991
Charge-offs, net of recoveries (12,462) (7,204) (2,058)
-------- ------- -------
Balance at December 31 $ 50,112 $26,682 $15,264
======== ======= =======
</TABLE>
NOTE G - MORTGAGE SECURITIES
The following table summarizes the amortized cost and estimated fair value of
mortgage securities classified as available for sale, and the estimated fair
value of mortgage securities classified as trading, as of December 31, 1998 and
1997. Contractual maturities on the mortgage securities range from 10 to 30
years.
<TABLE>
<CAPTION>
(Dollars in thousands) December 31, 1998 December 31, 1997
------------------ --------------------------
Available- Available-
for-sale Trading for-sale
---------- ------- ----------
<S> <C> <C> <C>
Amortized cost $253,398 $93,199 $467,252
Gross unrealized gains 317 - 5,711
Gross unrealized losses (18,683) - (7,717)
-------- ------- --------
Estimated fair value $235,032 $93,199 $465,246
======== ======= ========
</TABLE>
At December 31, 1998, mortgage securities included $132.2 million of AAA rated
interest-only securities, $58.1 million of residual securities, $37.0 million of
agency securities, $1.1 million in subordinated securities and $6.6 million in
other investment grade securities. As of December 31, 1998 and 1997, all of
IndyMac REIT's mortgage securities were pledged as collateral under repurchase
agreements.
Prepayment speed assumptions used to value the Company's AAA interest-only
securities portfolio are based primarily on historical experience, collateral
coupon and seasoning. At December 31, 1998, the average constant prepayment
rate assumption over the next twelve months approximated 33%. In addition,
these valuations incorporated weighted average discount rates ranging from 10%
to 12%.
The fair value for IndyMac REIT's residual securities is determined by
discounting estimated net future cash flows, using discount rates that
approximate current market rates and using current expected prepayment rates.
Estimated net future cash flows include assumptions related to expected credit
losses on these securities. IndyMac REIT maintains a model that evaluates the
default rate on the residual securities' collateral, considering such factors as
loss experience, delinquencies, loan to value ratio, borrower credit scores and
property type. As of December 31, 1998, the weighted average discount rate
ranged from 15% to 20%, and the average constant prepayment rate approximated
25%.
F-13
<PAGE>
NOTE H - 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. The weighted average coupon on collateral for CMOs was 7.6% at
both December 31, 1998 and 1997.
NOTE I - REPURCHASE AGREEMENTS AND OTHER CREDIT FACILITIES
Repurchase agreements and other credit facilities consisted of the following at
December 31, 1998 and 1997:
(Dollars in thousands)
<TABLE>
1998 1997
---------- ----------
<S> <C> <C>
Repurchase agreements $2,942,270 $4,410,798
Revolving credit facility 659,279 415,858
Commercial paper conduit 184,000 -
---------- ----------
$3,785,549 $4,826,656
========== ==========
</TABLE>
Repurchase Agreements
In April 1998, the Company renewed a repurchase facility with Merrill Lynch,
Pierce, Fenner & Smith, Inc. and certain of its affiliates, in an aggregate
committed principal amount of $2.0 billion, and uncommitted amounts to be
determined upon mutual agreement. 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 third party lending operations, mortgage portfolio, warehouse
lending, construction lending and manufactured housing lending assets and
operations. The repurchase facility carries a floating rate of interest based
on the London Interbank Offered Rates ("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, 1998, the total balance of outstanding loans from Merrill Lynch was
$2.8 billion, of which $2.4 billion were outstanding borrowings by IndyMac REIT.
In June 1998, the Company renewed a repurchase facility with PaineWebber Real
Estate Securities, Inc. in an aggregate principal amount of $500 million. Such
repurchase facility is committed for a two-year period from the date of
execution and currently permits the Company to finance its third party lending
operations, 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 repurchase facility. The
Company is permitted to borrow additional uncommitted amounts under this
repurchase facility, and as of December 31, 1998, the total balance of
outstanding loans from PaineWebber Real Estate Securities, Inc. was $488
million, of which $463 million were outstanding borrowings by IndyMac REIT.
At December 31, 1998, substantially all of the Company's mortgage loans,
manufactured housing loans, home improvement loans, and revolving warehouse
lines of credit were pledged to secure the Company's borrowings under repurchase
facilities. The amount outstanding at December 31, 1998 under IndyMac REIT's
repurchase facilities was $3.1 billion. These facilities generally reprice on
an overnight to one month basis.
IndyMac Operating may borrow under each of the Company's agreements as a co-
borrower. As a condition of this co-borrower agreement, IndyMac REIT obtains
from IndyMac Operating a guarantee fee equal to 75 basis points. As of December
31, 1998, IndyMac Operating had $787 million outstanding under repurchase
agreements.
F-14
<PAGE>
NOTE I - REPURCHASE AGREEMENTS AND OTHER CREDIT FACILITIES (CONTINUED)
These repurchase agreements bear interest at rates indexed to LIBOR or the
federal funds rate, plus an applicable margin. For the months ending December
31, 1998 and 1997, the weighted average borrowing rate on these repurchase
agreements was 5.9% and 6.2%, respectively. None of the counterparties is
affiliated with the Company. At December 31, 1998, the Company was in
compliance with all material representations, warranties and covenants under its
repurchase agreements.
Revolving Credit Facility
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. This
facility primarily finances mortgage loans, construction loans, and servicing
and master servicing assets. 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 from $500 million to $900 million, expanding
the types of collateral which can be financed thereunder and extending the term
of the commitment to three years. For the months ending December 31, 1998 and
1997, the weighted average borrowing rate under this facility was 5.3% and 6.5%,
respectively. At December 31, 1998, 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, 1998, IndyMac Operating had $89 million outstanding in
borrowings under this facility.
Commercial Paper Conduit
In December 1998, IndyMac REIT entered into a $200 million commercial paper
conduit facility with Bank of America (formerly NationsBank). This facility
finances residential builder construction loans at a floating interest rate
based on the prevailing commercial paper market.
NOTE J - 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 $2.1 million and $2.4 million on the CMO collateral as of
December 31, 1998 and 1997, 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. Each series is 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, which ranges from the
year 2000 to 2025.
The weighted average coupon on CMOs was 7.2% and 7.3% at December 31, 1998 and
1997, respectively. IndyMac REIT's investment in CMO residuals amounted to $22
million and $24 million at December 31, 1998 and 1997, respectively.
NOTE K - 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 $20.2 million on
October 15 in each of 2000, 2001 and 2002. The notes are carried net of discount
and 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 discount and costs of issuance is 9.2%.
F-15
<PAGE>
NOTE L - 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, 1998 and 1997.
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.
<TABLE>
<CAPTION>
(Dollars in thousands) December 31, 1998 December 31, 1997
------------------------------------------------- -----------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
--------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Assets:
Loans held for sale $1,555,656 $1,555,656 $1,458,271 $1,458,271
Loans held for investment
Mortgage loans 643,551 672,585 1,801,014 1,832,161
Manufactured housing loans 24,972 26,115 30,033 30,169
Construction loans receivable 1,447,203 1,447,203 946,806 946,806
Warehouse lines of credit 443,946 443,946 512,458 512,458
Mortgage securities 235,032 235,032 558,445 558,445
Collateral for CMO's 162,726 166,035 245,474 248,422
Liabilities:
Repurchase agreements and other credit
facilities 3,785,549 3,785,549 4,826,656 4,826,656
Collateralized mortgage obligations 140,810 143,868 221,154 222,269
Senior unsecured notes 60,031 65,094 59,888 63,504
Off-balance sheet gains (losses):
Interest rate swaps - (186) - (284)
</TABLE>
The fair value estimates as of December 31, 1998 and 1997 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. In connection with the Master Forward Commitment and
Services Agreement between IndyMac REIT and IndyMac Operating, whereby mortgage
loans originally purchased by IndyMac REIT are committed for sale to IndyMac
Operating at the same price at which the loans were acquired by IndyMac REIT,
carrying value is equivalent to estimated fair value.
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 and Warehouse Lines of Credit. Fair values approximate the
carrying amounts of each of the aforementioned assets 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 similar
characteristics.
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.
F-16
<PAGE>
NOTE L - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
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.
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 IndyMac REIT 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 M - 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 Company does
not require collateral or other security to support financial instruments with
credit risk with approved counterparties.
The following types of commitments were outstanding at year-end:
Commitments to Purchase and Sell Loans. As of December 31, 1998 and 1997,
IndyMac REIT had entered into commitments to purchase loans totaling $498
million and $743 million, respectively, subject to origination or acquisition of
such loans by various approved originators. In addition, as of December 31, 1998
and 1997, IndyMac REIT had committed to sell $2.1 billion and $2.2 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.
F-17
<PAGE>
NOTE M - COMMITMENTS AND CONTINGENCIES - FINANCIAL INSTRUMENTS WITH OFF -
BALANCE SHEET RISK (CONTINUED)
Construction Lending Credit Commitments. At December 31, 1998 and 1997, IndyMac
REIT had aggregate undisbursed construction loan commitments totaling $1.1
billion and $888 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, 1998 and 1997,
IndyMac REIT had extended lines of credit under this program in the aggregate
amount of $1.1 billion and $768 million, respectively, of which $447 million and
$512 million, respectively, was outstanding.
Interest Rate Swaps. As of December 31, 1998 and 1997, IndyMac REIT has one
interest rate swap agreement with certain securities dealers with a combined
notional amount of $25 million. 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
6.2% and receives a floating interest rate based on the one month LIBOR. The
weighted average floating rate at December 31, 1998 was 5.6%. This contract
expires in October 1999.
NOTE N - BENEFIT PLANS
Stock Option Plans
IndyMac REIT has two stock option plans (the "Plans") that provide for the
granting of non-qualified stock options, incentive stock options, stock
appreciation rights, restricted stock awards, performance stock awards, and
stock bonuses to employees of the Company (including officers and directors).
Options are granted at the average market price of the Company's common stock on
the date of grant, and vest over varying periods beginning at least one year
from the date of grant, and expiring five or ten years from date of grant.
Under IndyMac REIT's 1998 Stock Option Plan ("1998 Plan"), 473,287 restricted
stock awards were granted (of which 161,278 restricted stock awards were granted
to IndyMac Operating employees during 1998), for a fair market value of $7.3
million and a weighted average share price of $15.45. As of December 31, 1998
there were 465,821 awards outstanding. Awards forfeited during 1998 were 7,466.
Paid-in capital in excess of par and unearned compensation was recorded for the
fair market value of the awards issued. Unearned compensation is being
amortized to compensation expense over the vesting period, not exceeding five
years, and is shown as a reduction in shareholders' equity. Total compensation
expense for IndyMac REIT during 1998 related to these awards was $432,000.
On December 14, 1998, the Company repriced 2,895,326 stock options. At the
repricing date, approximately 50% of such stock options were repriced at $9.78
or fair market value, 25% of such stock options were repriced at $12.22 or
125% of fair market value, and the remaining 25% of such stock options were
repriced at $14.67 or 150% of fair market value. Management believes such
repricing was necessary to preserve the incentive originally intended, and was
in response to the decline in the Company's stock price precipitated by the
market disruption in the fourth quarter 1998 which negatively affected
substantially all mortgage companys' stock prices. In accordance with the
provisions of SFAS 123, the fair value compensation cost of the repriced options
was included in the determination of pro forma earnings for 1998 presented
below.
F-18
<PAGE>
NOTE N - BENEFIT PLANS (CONTINUED)
As of December 31, 1998, options to purchase 820,574 shares were exercisable.
Additionally, there were 5,772,431 shares reserved for options outstanding and
future award grants under the plans as of December 31, 1998. Stock option
transactions for the years ended December 31, 1998, 1997 and 1996, respectively,
are summarized as follows:
<TABLE>
<CAPTION>
Number of Shares
----------------------------------------------------
1998 1997 1996
------------ ----------- -----------
<S> <C> <C> <C>
Options outstanding at beginning of year 2,610,791 1,493,839 801,665
Options granted 4,833,200 1,517,969 1,163,247
Options exercised (1,081,225) (312,612) (403,421)
Options canceled (3,202,242) (88,405) (67,652)
---------- --------- ---------
Options outstanding at end of year 3,160,524 2,610,791 1,493,839
========== ========= =========
</TABLE>
<TABLE>
<CAPTION>
Weighted Average Exercise Price
-----------------------------------------------
1998 1997 1996
--------- -------- -------
<S> <C> <C> <C>
Options outstanding at beginning of year $20.03 $16.36 $10.29
Options granted 16.26 22.51 18.04
Options exercised 18.18 14.33 9.30
Options canceled 22.46 20.79 15.36
------ ------ ------
Options outstanding at end of year $12.45 $20.03 $16.36
</TABLE>
The following summarizes information about fixed stock options outstanding at
December 31, 1998:
<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>
$ 8.69 - $ 9.78 1,446,656 6.51 $ 9.78 450,264 $ 9.77
$11.63 - $12.22 724,758 8.24 12.22 49,500 12.22
$14.63 - $14.67 722,871 5.27 14.67 168,512 14.67
$15.50 - $23.94 266,239 5.79 21.62 152,298 20.29
--------- ---- -------- ------- --------
$ 8.69 - $23.94 3,160,524 6.56 $12.45 820,574 $12.88
========= =======
</TABLE>
Had compensation expense been recorded in accordance with SFAS 123, the
Company's net after tax earnings and earnings per share would have been as
follows:
<TABLE>
<CAPTION>
(Dollars in thousands, except per share data)
Year ended December 31,
---------------------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net Earnings
As reported $33,790 $24,295 $68,987
Pro forma 30,041 21,666 67,796
Basic Earnings Per Share
As reported $ 0.48 $ 0.43 $ 1.51
Pro forma $ 0.43 $ 0.39 $ 1.49
Diluted Earnings Per Share
As reported $ 0.48 $ 0.43 $ 1.50
Pro forma $ 0.43 $ 0.38 $ 1.48
</TABLE>
F-19
<PAGE>
NOTE N - BENEFIT PLANS (CONTINUED)
The number of options granted to IndyMac Operating employees and included in the
above calculation were 1,618,291, 438,589, and 224,760 for 1998, 1997, and 1996,
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 1998,
1997, and 1996, respectively: dividend yield of 8%, 8% and 9%; expected
volatility of 21%, 30% and 30%; risk-free interest rates of 4.6%, 6.2% and 6.3%
and expected lives of three years for options granted in all three years. The
average fair value of options granted during 1998, 1997 and 1996 was $1.08,
$3.24 and $2.33, respectively.
Pension Plan
In 1998, the Company adopted a defined benefit pension plan (the "Plan")
covering substantially all of its employees. The Company's policy is to
contribute the amount actuarially determined to be necessary to pay the benefits
under the Plan, and in no event to pay less than the amount necessary to meet
the minimum funding standards of ERISA. The weighted average assumptions used
in calculating the Plan's status as of December 31, 1998 were a discount rate of
6.75%, an expected rate of return on Plan assets of 8.00%, and compensation
increases of 4.00%. Pension expense was $187,000 for 1998, consisting of a
service cost of $157,000, an interest cost of $17,000, and an expected return on
Plan assets of $13,000. The accrued benefit cost at December 31, 1998 was
$187,000, comprised of an unfunded status of $488,000 offset by unrecognized net
actuarial loss of $234,000, and unrecognized prior service cost of $67,000.
NOTE O - 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, 1998
and 1997, advances due to IndyMac REIT from IndyMac Operating totaled $196
million and $118 million, respectively. Such advances bear interest at rates
indexed to LIBOR. Interest charged on advances by IndyMac REIT to IndyMac
Operating was at a rate of 9.3% at December 31, 1998 and 10.5% at December 31,
1997.
Prior to July 1, 1997, IndyMac REIT operated under an agreement (the "Management
Agreement") with CAMC (the "Manager" or "CAMC") to advise 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 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 and $8.8 million for the years ended
December 31, 1997 and 1996, 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 third party lending 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 third party lending operation's costs and IndyMac REIT incurs the other
operations' costs.
F-20
<PAGE>
NOTE O - RELATED PARTY TRANSACTIONS (CONTINUED)
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
year ended December 31, 1996:
(Dollars in thousands)
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Data Processing $1,008 $1,549
Occupancy 936 1,268
Human Resources 50 100
------- -------
$1,994 $2,917
======= =======
</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 third party
lending 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 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. In 1998, total expenses incurred
under the Cooperation Agreement were $421,000. IndyMac REIT incurred certain
other expenses in 1998 related to telephone usage and equipment, and delivery
services of $1.1 million which it paid during the year to CCR.
During 1997, the Company entered into a sublease agreement for its corporate
headquarters with CCR, while at the same time, CCR subleased space from the
Company in the Company's former headquarters. As a result, the Company paid CCR
$2.6 million and $1.1 million in 1998 and 1997, respectively, and received
$189,000 in 1997 for lease and sublease payments from CCR.
During 1998 and 1997, IndyMac REIT purchased approximately $418.4 million and
$2.7 million respectively, in non-conforming mortgage loans from CHL.
In 1987 and 1993, IndyMac REIT entered into servicing agreements appointing CHL
as servicer of pools of mortgage loans collateralizing three series of CMOs with
outstanding balances of approximately $37.7 million at December 31, 1998. 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 $132,000, $186,000 and $200,000 in 1998, 1997
and 1996, respectively.
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 4,420,860 shares, or 5.8%, of IndyMac REIT's common
stock at December 31, 1998. 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, Mr. David S. Loeb,
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.
In connection with two of the real property sales transactions between Loeb
Enterprises, LLC and the builders to which CLCA has made construction loans,
Loeb Enterprises, LLC has accepted a second mortgage from each builder to
partially finance each builder's purchase of real property. As part of CLCA's
credit review of each project with a second mortgage, the amount of the second
mortgage was considered a part of the equity of the builder in the project. In
F-21
<PAGE>
NOTE O - RELATED PARTY TRANSACTIONS (CONTINUED)
each case, the second mortgage is subordinate to CLCA's financing facility,
although both the CLCA financing facility and the second mortgage are paid down
on a unit-by-unit basis.
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, each credit facility has been
approved by the disinterested members of the Board of Directors of IndyMac REIT.
As of December 31, 1998, CLCA had extended nine construction loan facilities to
builders secured by property, originally purchased from Loeb Enterprises, LLC,
with total dollar commitments of $27.9 million, and total loans outstanding of
$12.6 million. 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.
In addition to the foregoing loans, in May 1998, CLCA made a land and water
rights acquisition loan, secured by among other things, approximately 42,000
acres of real property, to Coyote Springs Investment LLC, a Nevada limited
liability company, in which Mr. Loeb and his wife hold a 45% interest and for
which Mr. Loeb acts as a managing member. The remaining 55% interest in the
limited liability company is held by members who are not affiliated with Mr.
Loeb or IndyMac REIT. The loan is personally guaranteed by Mr. Loeb and his
wife. The property is intended to be used by the limited liability company to
develop a master planned community. The general risk characteristics of the
loan are comparable to other loans funded by CLCA, and was negotiated at arms
length. Under the terms of the loan, interest is paid monthly, with annual
scheduled principal reductions. The original principal loan amount was $11.2
million which amount remained outstanding as of December 31, 1998. The primary
source of repayment of the loan is derived from the income generated from the
sale of water rights to a local municipality. The terms of the loan have been
disclosed to and approved by the disinterested members of the Board of Directors
of IndyMac REIT.
NOTE P - SEGMENT REPORTING
On December 31, 1998, the Company adopted SFAS 131. SFAS 131 requires that
selected information about the Company's operating segments be disclosed in
annual and interim reports. SFAS 131 requires that information reported about
each segment be measured on the same basis as the information used internally by
the Company. IndyMac REIT reportable operating segments include Mortgage
Banking, Investments and Lending.
The Mortgage Banking segment purchases jumbo and non-conforming mortgage loans
from third party originators of mortgage loans and also engages in financing
manufactured housing loans and home improvement loans. Mortgage loans purchased
by IndyMac REIT are generally committed for sale and sold to IndyMac Operating
pursuant to the terms of a Master Forward Commitment and Services Agreement.
These loans are then securitized through the issuance of mortgage-backed
securities in the form of REMICs, or resold in bulk whole loan sales to
permanent investors. The Mortgage Banking segment's primary source of income is
the net spread between interest earned on loans and the interest cost associated
with the borrowings used to finance such loans pending their sale to IndyMac
Operating.
The Investment segment invests in residential loans on a long-term basis and
also in securities. The Investment segment's principal source of income is the
net spread between interest earned on residential loans held for investment and
on mortgage securities and the interest cost associated with the borrowings used
to finance such assets.
F-22
<PAGE>
NOTE P - SEGMENT REPORTING (CONTINUED)
The Lending segment offers a variety of construction term loan programs,
residential construction, land and lot loan programs for builders and developers
and third party customers through its CLCA, CLD and Income Property divisions.
This segment also engages in secured warehouse lending operations. The Lending
segment's principal source of income is the net spread between the interest
earned on loans and the interest cost associated with the borrowings used to
finance such loans.
The accounting policies of the operating segments are the same as those
described in the summary of significant accounting policies except that the
segment reporting data includes allocations of certain income and expense
accounts of IndyMac REIT in order to present to the reader the operating
segments as reviewed and managed by the Company's chief operating decision
maker.
IndyMac Operating is accounted for by IndyMac REIT in a method similar to the
equity method. At December 31, 1998, the total investment by IndyMac REIT in
IndyMac Operating was $279.7 million. For the twelve months ended December 31,
1998 IndyMac Operating contributed a loss of $58.2 million to IndyMac REIT.
F-23
<PAGE>
NOTE P - SEGMENT REPORTING (CONTINUED)
Segment information for the years ended Decemer 31, 1998, 1997, and 1996 were as
follows:
<TABLE>
<CAPTION>
Mortgage
(Dollars in thousands) Banking Investments Lending Adjustment Consolidated
---------- ----------- ------- ---------- ------------
<S> <C> <C> <C> <C> <C>
1998
Net interest income $ 56,942 $ 22,619 $ 76,524 $ 17,381 $ 173,466
Net revenues 44,713 (13,719) 72,933 (40,851) 63,076
Net earnings (loss) 41,462 (16,888) 50,067 (40,851) 33,790
Assets as of December 31, 1998 $1,617,588 $1,059,112 $2,091,562 $ 82,890 $4,851,152
1997
Net interest income $ 34,095 $ 29,360 $ 44,999 $ 10,075 $ 118,529
Net revenues 37,040 17,248 43,859 28,489 126,636
Net earnings (loss) 33,466 13,878 24,462 (47,511) 24,295
Assets as of December 31, 1997 $1,514,374 $2,663,093 $1,485,928 $185,715 $5,849,110
1996
Net interest income $ 22,907 $ 31,428 $ 20,927 $ 7,676 $ 82,938
Net revenues 23,296 20,472 20,973 27,209 91,950
Net earnings 18,327 15,569 7,882 27,209 68,987
Assets as of December 31, 1996 $ 710,738 $1,752,251 $ 722,461 $170,609 $3,356,059
</TABLE>
F-24
<PAGE>
NOTE Q - SUBSEQUENT EVENTS
On January 22, 1999, the Board of Directors declared a $0.38 cash dividend per
share payable on March 8, 1999 to shareholders of record on February 1, 1999.
In January 1999, the Company entered into a one-year committed repurchase
facility with Morgan Stanley Mortgage Capital Inc. in an aggregate principal
amount of $500 million. The repurchase facility carries a floating rate of
interest based on LIBOR, plus an applicable margin, which varies by type of
asset financed. As of January 31, 1999, the total balance of outstanding loans
from this repurchase facility was $285 million.
NOTE R - QUARTERLY FINANCIAL DATA - UNAUDITED
Selected quarterly financial data follows for the years 1998 and 1997:
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended
-------------------------------------------------------------------------------
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
<S> <C> <C> <C> <C>
1998
Net revenues $39,037 $42,824 $ 46,140 $(64,925)
Net earnings (loss) 32,564 35,932 39,023 (73,729)
Earnings (loss) per share (2):
Basic $0.50 $0.53 $0.54 $(0.98)
Diluted 0.50 0.53 0.54 (0.98)
Dividends declared 0.50 0.53 0.38 0.38
1997
Net revenues $28,739 $29,659 $ 32,893 $ 35,345
Net earnings (loss) 21,345 22,656 (48,876) 29,170
Earnings (loss) per share (1):
Basic $0.42 $0.43 $(0.83) $0.48
Diluted 0.41 0.42 (0.83) 0.48
Dividends declared 0.42 0.43 0.46 0.48
</TABLE>
(1) Earnings (loss) 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-25
<PAGE>
INDYMAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE
December 31, 1998
(Dollars in thousands)
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E Column F
-------- -------- -------- -------- -------- --------
Principal Amount
of Loans
Subject to Amount of
Range of Number Carrying Delinquent Mortgage Range of
Carrying of Prior Amount of Principal or Being Interest
Amounts of Loans Liens Mortgages Interest Foreclosed Rates
Mortgages (1) (1) (1-5)(7)(9) (1) (1)(8) (1)(6)
--------- -------- ----- --------- -------------- ------- --------------
<S> <C> <C> <C> <C> <C>
$ 0-$50 8,589 $ 253,773 $ 3,584 $ 1,007 6.750 - 18.990
51-100 4,058 295,461 14,479 5,271 5.750 - 14.990
101-150 2,447 303,878 16,560 4,493 5.750 - 14.375
151-200 1,502 260,851 17,298 4,872 5.750 - 13.300
201-250 1,061 237,981 18,147 4,453 5.750 - 13.000
251-300 681 187,040 9,507 1,932 6.250 - 12.750
301-350 351 114,081 7,727 954 5.250 - 12.125
351-400 235 87,904 6,729 358 5.375 - 11.125
401-450 102 43,526 3,837 425 6.375 - 12.750
451-500 116 55,036 3,784 1,478 6.200 - 10.875
501-550 52 27,444 1,096 - 6.250 - 11.125
551-600 61 34,946 1,682 - 6.200 - 10.850
601-650 59 37,169 3,123 1,253 6.350 - 11.125
651-700 17 11,692 - - 5.875 - 8.875
701-750 16 11,759 2,209 - 6.950 - 12.750
751-800 18 14,107 758 - 7.250 - 9.625
801-850 13 10,840 1,671 - 7.250 - 11.625
851-900 18 15,785 2,624 - 7.250 - 10.750
901-950 6 5,576 - - 7.000 - 9.250
951-1,000 42 41,285 4,875 - 6.350 - 9.875
over 1,000 141 - 271,032 23,582 - 6.200 - 10.375
------ -------- ---------- -------- -------
19,585 - $2,321,166 $143,272 $26,496
Net premiums 18,936
----------
$2,340,102
----------
</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 $1,534,392 of mortgage loans held
for sale, $661,769 of mortgage loans held for investment, and $125,005 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, 1998 is as follows:
California 48% with no other state comprising more than 7%.
(5) The aggregate cost for federal income tax purposes is $2,340,102.
(6) Interest earned on mortgages by range of carrying amounts is not reasonably
obtainable.
(7) $418.4 million of mortgage loans purchased during 1998 were acquired from
CHL, an affiliate of the Company.
(8) Of the total amount of mortgages being foreclosed, $15,850 is related to
mortgage loans held for investment,
$10,350 is related to mortgage loans held for sale and $296 is related to
collateral for CMOs.
<TABLE>
<CAPTION>
The Company IndyMac REIT Only
-------------- -----------------
<S> <C> <C> <C> <C>
(9) Balance at beginning of period $ 3,228,901 $ 3,189,386
New mortgage loans 12,019,278 12,019,278
----------- ----------
15,248,179 15,208,664
Deductions during period:
Sales of mortgage loans 11,748,821 11,828,887
Collections of principal 1,178,192 12,927,013 1,249,804 13,078,691
---------- ----------- ---------- -----------
Balance at close of period $ 2,321,166 $ 2,129,973
=========== ===========
</TABLE>
F-26
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
--------------------------------------------------
Board of Directors and Shareholders
IndyMac, Inc.
We have audited the accompanying consolidated balance sheets of IndyMac, Inc.
and Subsidiaries as of December 31, 1998 and 1997, and the related consolidated
statements of operations, shareholders' equity and cash flows for each of the
three years in the period ended December 31, 1998. 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
Subsidiaries as of December 31, 1998 and 1997, and the consolidated results of
their operations and their consolidated cash flows for each of the three years
in the period ended December 31, 1998, in conformity with generally accepted
accounting principles.
/s/ GRANT THORNTON LLP
Los Angeles, California
February 26, 1999
F-27
<PAGE>
INDYMAC, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
December 31,
--------------------------------------------
1998 1997
--------------------- --------------------
<S> <C> <C>
ASSETS
Loans held for sale, net
Mortgages-prime $ 90,855 $ 36,220
Mortgages-subprime 18,539 38,697
Manufactured housing 27,684 23,917
Home improvement 73,008 -
---------- --------
210,086 98,834
Mortgage securities 398,094 524,517
Treasury securities 302,313 77,152
Mortgage servicing rights 127,229 72,784
Other assets 65,074 47,766
---------- --------
Total assets $1,102,796 $821,053
========== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Repurchase agreements and other credit facilities $ 786,545 $578,763
Due to IndyMac REIT 196,154 117,917
Income taxes payable - 41,777
Accounts payable and accrued liabilities 35,714 14,114
---------- --------
Total liabilities 1,018,413 752,571
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 - -
Additional paid in capital 108,116 32,476
Accumulated other comprehensive income (loss) (414) 506
Cumulative earnings 1,681 60,500
Cumulative distributions to shareholders (25,000) (25,000)
---------- --------
Total shareholders' equity 84,383 68,482
---------- --------
Total liabilities and shareholders' equity $1,102,796 $821,053
========== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-28
<PAGE>
INDYMAC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands)
<TABLE>
<CAPTION>
Years ended December 31,
-----------------------------------------------------
1998 1997 1996
------------------ -------------- ---------------
<S> <C> <C> <C>
REVENUES
Interest income
Loans held for sale
Mortgages-prime $ 6,761 $ 7,197 $ 3,725
Mortgages-subprime 3,176 5,354 1,130
Manufactured housing 2,464 1,339 -
Home improvement 1,597 - -
--------- ------- -------
13,998 13,890 4,855
Mortgage securities 29,733 36,822 35,553
Treasury securities 12,193 140 -
--------- ------- -------
Total interest income 55,924 50,852 40,408
Interest expense
Repurchase agreements and other credit facilities 39,830 38,736 30,204
Advances from IndyMac REIT 17,381 10,075 7,676
--------- ------- -------
Total interest expense 57,211 48,811 37,880
--------- ------- -------
Net interest income (expense) (1,287) 2,041 2,528
Provision for loan losses 442 152 -
--------- ------- -------
Net interest income (expense) after provision
for loan losses (1,729) 1,889 2,528
Net gain on mortgage loans and securities 3,238 71,725 51,692
Servicing fee income 1,587 12,940 8,880
Loss on sale of assets (9,316) - -
Other income 17,200 3,422 1,809
--------- ------- -------
Net revenues 10,980 89,976 64,909
EXPENSES
Salaries and related 66,138 32,611 20,562
General and administrative 47,136 23,903 10,656
Management fees to affiliate - 757 2,075
--------- ------- -------
Total expenses 113,274 57,271 33,293
--------- ------- -------
Earnings (loss) before income tax provision (benefit) (102,294) 32,705 31,616
Income tax provision (benefit) (43,475) 13,898 13,548
--------- ------- -------
NET EARNINGS (LOSS) $ (58,819) $18,807 $18,068
========= ======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-29
<PAGE>
INDYMAC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Dollars in thousands)
<TABLE>
<CAPTION>
Years ended December 31,
------------------------------------------------------------------
1998 1997 1996
--------------------- -------------------- ---------------------
<S> <C> <C> <C> <C> <C> <C>
Cumulative earnings
Balance, beginning of year $ 60,500 $ 41,693 $ 23,625
Net earnings (loss) (58,819) $(58,819) 18,807 $18,807 18,068 $ 18,068
-------- -------- --------
Balance, end of year 1,681 60,500 41,693
Cumulative distribution to shareholders
Balance, beginning of year (25,000) (25,000) -
Dividends paid - - (25,000)
-------- -------- --------
Balance, end of year (25,000) (25,000) (25,000)
Accumulated other comprehensive Income (loss)
Balance, beginning of year 506 (8,512) 2,927
Unrealized gain (loss) on securities (920) 9,018 (11,439)
-------- ------- --------
Other comprehensive income (loss) (920) (920) 9,018 9,018 (11,439) (11,439)
-------- -------- -------- ------- -------- --------
Comprehensive income (loss) $(59,739) $ 9,789 $ 6,629
======== ======= ========
Balance, end of year (414) 506 (8,512)
Additional paid-in capital
Balance, beginning of year 32,476 32,476 32,476
Capital contribution 75,000 - -
Deferred compensation 640 - -
Common stock issued - - -
Common stock options exercised - - -
-------- -------- --------
Balance, end of year 108,116 32,476 32,476
-------- -------- --------
--------
Total shareholders' equity $ 84,383 $ 68,482 $ 40,657
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-30
<PAGE>
INDYMAC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Years ended December 31,
------------------------------------------------------------
1998 1997 1996
------------------- ------------------ -----------------
Cash flows from operating activities:
<S> <C> <C> <C>
Net earnings (loss) $ (58,819) $ 18,807 $ 18,068
Adjustments to reconcile net earnings (loss) to net
cash provided by (used in) operating activities:
Amortization and depreciation 108,051 34,692 57,626
Net gain on sale of mortgage loans and securities (3,238) (71,725) (51,692)
Provision for loan losses 442 152 -
Purchases of loans from IndyMac REIT (11,447,302) (4,106,645) (3,523,655)
Principal repayments and sale of loans 11,440,445 4,198,108 3,578,966
Net purchases of manufactured housing loans held
for sale (4,074) (24,573) -
Purchase of mortgage securities classified as trading (1,453,535) (183,391) (276,946)
Principal repayments and sale of mortgage securities
classified as trading 1,347,234 109,731 223,784
Net increase in other assets (19,792) (21,467) (13,331)
Net increase (decrease) in income taxes payable (41,777) 12,117 (5,841)
Net (decrease) increase in other liabilities 21,600 (5,851) 28,964
------------ ----------- -----------
Net cash (used in) provided by operating activities (110,765) (40,045) 35,943
Cash flows from investing activities:
Purchase of mortgage securities available for sale (474,667) (26,840) (134,526)
Principal repayments and sale of mortgage securities
classified as available for sale 328,246 29,818 45,551
Additions to servicing rights (102,265) (33,408) (23,276)
------------ ----------- -----------
Net cash (used in) investing activities (248,686) (30,430) (112,251)
Cash flows from financing activities:
Increase (decrease) in advances from IndyMac REIT 153,237 (12,236) 46,561
Net proceeds of repurchase agreements 207,427 82,711 54,747
Cash dividends paid - - (25,000)
------------ ----------- -----------
Net cash provided by financing activities 360,664 70,475 76,308
Net change in cash 1,213 - -
Cash at beginning of period - - -
------------ ----------- -----------
Cash at end of period $ 1,213 $ - $ -
============ =========== ===========
Supplemental cash flow information:
Cash paid for interest $ 58,761 $ 49,540 $ 30,216
Cash paid for income taxes 9 1,996 259
Supplemental disclosure of non-cash activity:
In 1998, $75 million of capital resulted in the form of
a reduction in amounts due to IndyMac REIT.
</TABLE>
The accompanying notes are an integral part of these statements.
F-31
<PAGE>
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"). 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 wholly owned subsidiaries, IndyMac ABS, Inc. and
IndyMac Agency, Inc. IndyMac ABS was established solely for the purpose
of facilitating the asset-backed securitization of loans purchased by
IndyMac Operating. Loans to be securitized are transferred from IndyMac
Operating to IndyMac ABS, and then simultaneously transferred from
IndyMac ABS to a bank or trust company as custodian for the
securitization entity. IndyMac Agency acts as an insurance agency
primarily selling insurance coverage on manufactured housing loans.
References to the "Company" mean the parent company, its consolidated
subsidiaries, and IndyMac Operating and its consolidated subsidiaries.
All significant intercompany balances and transactions with IndyMac
Operating's consolidated subsidiaries have been eliminated in
consolidation.
All of the preferred non-voting stock and 99% of the economic interest in
IndyMac Operating is owned by IndyMac REIT. 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.
Certain reclassifications have been made to the financial statements for
the periods ended December 31, 1997 and 1996 to conform to the December
31, 1998 presentation.
2. Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect amounts reported in the financial statements.
Changes in these estimates and assumptions are considered reasonably
possible and may have a material impact on the financial statements.
3. Loans Held for Sale
Loans held for sale are carried at the lower of cost or market, which is
computed by the aggregate method by asset type. 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 changes 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.
F-32
<PAGE>
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
4. Mortgage Securities
Mortgage securities consist primarily of AAA rated interest-only
securities, subordinated securities, residual securities, senior
securities, principal-only securities, and inverse-floater securities.
In October 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 134, "Accounting for
Mortgage-Backed Securities Retained after the Securitization of Mortgage
Loans Held for Sale by a Mortgage Banking Enterprise", ("SFAS 134").
This Statement requires mortgage banking enterprises to classify as
trading securities any retained mortgage-backed securities that it
commits to sell before or during the securitization process. It also
requires mortgage banking enterprises to classify mortgage-backed
securities of loans previously held for sale, based on its ability and
intent to hold the securities. IndyMac Operating adopted SFAS 134 on
December 31, 1998, and, as a result reclassified all its trading
securities to available for sale . The fair value of the portfolio which
was reclassified by IndyMac Operating was $369.4 million.
Estimated fair value is determined based on market quotes when available
or discounted cash flow techniques using assumptions for prepayment
rates, market yield requirements and credit losses. Such assumptions are
estimates and may change in the near term as interest rates or economic
conditions change.
Unrealized gains and losses resulting from fair value adjustments on
mortgage securities identified as available for sale are excluded from
earnings and reported net of tax effect as a separate component of
comprehensive income in shareholders' equity.
IndyMac Operating evaluates the recoverability of interest-only
securities classified as available for sale by computing the present
value of estimated future cash flows using current estimates for
prepayment rates, discounted at 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. IndyMac Operating estimates future prepayment rates based
upon current interest rate levels, collateral seasoning, and market
forecasts, as well as relevant characteristics of the collateral
underlying the assets, such as loan types, interest rates and recent
prepayment experience. Unrealized gains and losses from fair value
adjustments on mortgage securities identified as trading are included in
earnings.
F-33
<PAGE>
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
5. Mortgage Servicing Rights
On January 1, 1997, the Company adopted SFAS 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities". SFAS 125 supersedes, but generally retains, the
requirements of SFAS 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 125 eliminates the
distinction between normal and excess servicing. The adoption of SFAS 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
future 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.
The Company assesses impairment of the capitalized servicing rights based
on the fair value of those rights on a stratum-by-stratum basis with any
impairment recognized through a valuation allowance for each impaired
stratum. For purposes of measuring impairment, the servicing rights are
stratified based on the note type and coupon rate of the underlying
mortgage loans in 100 basis point increments.
In order to determine the fair value of the servicing rights, the Company
primarily uses a valuation model that calculates the present value of
future cash flows. Assumptions used in the valuation model include
market discount rates and anticipated prepayment speeds. The prepayment
speeds are determined from market sources for mortgages with similar
coupons, adjusted for differences in collateral type. In addition, the
Company uses market comparables for estimates of the cost of servicing
per loan, an inflation rate, ancillary income per loan, and default
rates.
6. Hedging Instruments
In seeking to protect 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 includes, among other things, balancing
investments in various types of financial instruments whose values could
be expected to move inversely to each other in response to movement in
market interest rates, and using a "macro-hedge" strategy which
contemplates increased earnings from production volumes at the same time
as losses are incurred on interest-only securities and mortgage servicing
rights due to rapid prepayments.
With respect to fixed rate mortgage loans held for sale, the Company
hedges its exposure to interest rate risk with forward commitments to
sell a Fannie Mae or Freddie Mac security of comparable maturity and
weighted average interest rate. With respect to interest-only securities
and mortgage servicing rights, the Company reduces its exposure to
interest rate risk by investing in other mortgage securities and
financial instruments that tend to increase in value as interest rates
decrease including utilizing mortgage-backed securities, ten year U.S.
Treasuries, Treasury futures, or options. The Company uses hedging
instruments to reduce its exposure to interest rate risk.
F-34
<PAGE>
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
IndyMac Operating had $406.9 million notional amount of long ten year
Treasury futures positions outstanding as of December 31, 1998. IndyMac
Operating had no notional amount of interest rate floors outstanding as
of December 31, 1998, as compared to $300 million notional amount for the
year ended December 31, 1997. IndyMac Operating had $620 million notional
amount in U. S. Treasury call options outstanding as of December 31,
1998. 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. 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. As of December 31, 1998, the fair value of the U.S.
Treasury call options was $3.2 million with an unamortized cost of $4.4
million.
For the year ended December 31, 1998, IndyMac Operating recognized net
gains of $36,000 on its long Treasury futures positions. These net gains
offset a small portion of the Company's valuation losses on its trading
portfolio. For the year ended December 31, 1998, IndyMac Operating
recognized $337,000 of additional investment interest income resulting
from interest rate floors that expired at the end of the year. For the
years ended December 31, 1998 and 1997, IndyMac Operating did not have
realized gains or losses on other instruments used to hedge Mortgage
Securities.
Subsequent to the reclassification of all securities from trading to
available for sale as of the end of 1998 and to the extent consistent
with generally accepted accounting principles, IndyMac Operating defers
future gains and losses from hedging activities associated with its
mortgage securities portfolio. Future gains and losses from hedging
activities would be added to or deducted from the carrying value of the
associated assets, which will then be marked-to-market, with net
unrealized gains or losses excluded from earnings and included as a
separate component of comprehensive income in shareholder's equity, net
of related income tax effects.
While IndyMac Operating does not anticipate nonperformance by the
counterparties, 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. 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.
7. 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.
8. 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-35
<PAGE>
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
9. Allowance for Loan Losses
IndyMac Operating maintains an allowance for possible credit losses on
its loan portfolios. Additions to the allowance are based on an
assessment of certain factors, including but not limited to estimated
inherent 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.
10. Stock-Based Compensation
On January 27, 1998, IndyMac REIT's Board of Directors approved the 1998
Plan (the "Plan"), which allows for the grant of various types of awards
(the "Award"), including, but not limited to, nonqualified stock options,
incentive stock options, stock appreciation rights, restricted stock
awards, performance share awards, and stock bonuses to employees
(including officers and directors) of IndyMac REIT, IndyMac Operating and
their respective subsidiaries or affiliates and certain consultants or
advisors to IndyMac REIT, IndyMac Operating, and their respective
subsidiaries or affiliates. Awards are granted based upon the fair
market value of IndyMac REIT's stock on the grant date.
IndyMac Operating accounts for stock awards in accordance with Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation", ("SFAS 123"). Total restricted stock awards for IndyMac
Operating granted in 1998 were 161,278 at a fair market value of $2.7
million and a weighted average share price of $16.67. As of December 31,
1998, there were 160,285 awards outstanding. Awards forfeited during 1998
were 993. Paid in capital in excess of par and unearned compensation was
recorded for the fair market value at the date of grant. Unearned
compensation is being amortized to compensation expense over the vesting
period and is shown as a reduction in stockholders' equity. Total
compensation expense for 1998 was $428,000. Total IndyMac REIT stock
options granted in 1998, 1997, and 1996, respectively, to IndyMac
Operating employees were 1,618,291, 438,589, and 224,760.
11. Recent Accounting Pronouncements
The Company implemented the disclosure provisions of Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information", ("SFAS 131"), which was effective
for periods beginning after December 15, 1997. This statement requires
disclosure of financial information about the Company's operating
segments. Operating segments are components of an enterprise about which
separate financial information is available, and is evaluated regularly
by the chief operating decision maker in deciding how to allocate
resources and in assessing performance. Since SFAS 131 provides for
informative disclosure, implementation did not impact 1998 net earnings
and earnings per share, and will not impact previously reported or future
net earnings or earnings per share.
The Company implemented the disclosure provisions of Statement of
Financial Accounting Standards No. 132, "Employers' Disclosures about
Pension and Other Postretirement Benefits--an amendment of FASB
Statements No. 87, 88, and 106", ("SFAS 132"), effective for fiscal years
beginning after December 15, 1997. This Statement revises employers'
disclosures about pension plans and other postretirement benefit plans.
SFAS 132 provides informative disclosure but does not change the
measurement or recognition of those plans, and as such, it did not impact
1998 net earnings or earnings per share and will not impact previously
reported or future net earnings and earnings per share.
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities", ("SFAS 133"). This Statement
establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts and for hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair
value. SFAS 133 is required to be adopted by January 2000, with earlier
adoption permitted. The Company is currently in the process of
determining the impact of the adoption of SFAS 133.
The Company implemented SFAS 134, which is effective for fiscal periods
beginning after December 15, 1998, with earlier adoption permitted. This
Statement requires mortgage banking enterprises to classify as trading
securities any retained mortgage-backed securities that it commits to
sell before or during the securitization process. It also requires
mortgage banking enterprises to classify mortgage-backed securities of
loans previously held for sale, based on its ability and intent to hold
the securities. The adoption of SFAS 134 had no impact on 1998 net
earnings and earnings per share as all securities reclassified were
trading and required, under prior accounting pronouncements mark-to-
market adjustments affecting earnings and earnings per share. The future
impact of this pronouncement will be to record normal fluctuations in the
fair market value of these securities as adjustments to shareholders'
equity.
F-36
<PAGE>
NOTE B - LOANS HELD FOR SALE
Included in loans held for sale are prime and subprime mortgage loans,
manufactured housing loans and home improvement loans. Substantially all of the
mortgage 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 67% of the principal amount
of mortgage loans held for sale at December 31, 1998 were collateralized by
properties located in California.
In 1998, 1997 and 1996, IndyMac Operating purchased loans from IndyMac REIT with
an aggregate principal balance of $11.8 billion, $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 $11.7 billion, $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 $98.9 million, $72.5 million and $51.1 million,
respectively, for the years ended December 31, 1998, 1997 and 1996.
NOTE C - ALLOWANCE FOR LOAN LOSSES
The table below summarizes the changes to the allowance for estimated loan
losses:
(Dollars in thousands)
<TABLE>
<CAPTION>
1998 1997 1996
----------------- ------------------ -----------------
<S> <C> <C> <C>
Balance at January 1 $ 738 $ 1,773 $1,791
Provision for the year 442 152 -
Charge-offs, net of recoveries (35) (1,187) (18)
------ ------- ------
Balance at December 31 $1,145 $ 738 $1,773
====== ======= ======
</TABLE>
NOTE D - MORTGAGE SECURITIES
The following table summarizes the amortized cost and estimated fair value of
mortgage securities classified as available for sale, and the estimated fair
value of mortgage securities classified as trading, as of December 31, 1998 and
1997. Contractual maturities on the mortgage securities range from 10 to 30
years.
<TABLE>
<CAPTION>
(Dollars in thousands) December 31, 1998 December 31, 1997
----------------- ------------------------------------
Available Available
For sale Trading For sale
----------------- --------------- ------------------
<S> <C> <C> <C>
Amortized cost $397,859 $467,591 $56,035
Gross unrealized gains 408 - 2,021
Gross unrealized losses (173) - (1,130)
-------- -------- -------
Estimated fair value $398,094 $467,591 $56,926
======== ======== =======
</TABLE>
At December 31, 1998, mortgage securities included $203.0 million AAA rated
interest-only securities, $181.1 million in subordinated securities, $7.9
million in residual securities, and $6.1 million in other investment grade
securities. As of December 31, 1998 and 1997, all of IndyMac Operating's
mortgage securities were pledged as collateral under repurchase agreements.
Prepayment speed assumptions used to value the Company's AAA interest-only
securities portfolio are based primarily on historical experience, collateral
coupon and seasoning. At December 31, 1998, the average constant prepayment
rate assumption over the next twelve months approximated 33%. In addition,
these valuations incorporated weighted average discount rates ranging from 10%
to 12%.
F-37
<PAGE>
NOTE E - MORTGAGE SERVICING RIGHTS
The changes in mortgage servicing rights are as follows:
<TABLE>
<CAPTION>
(Dollars in thousands) Year ended December 31,
--------------------------------------------------
1998 1997 1996
---------------- -------------- --------------
<S> <C> <C> <C>
Mortgage servicing rights
Balance at January 1 $ 72,784 $54,398 $40,156
Additions 146,846 33,408 23,275
Sales (46,630) - -
Amortization (16,347) (9,266) (7,349)
Impairment (29,424) (5,756) (1,684)
-------- ------- -------
Balance at December 31 $127,229 $72,784 $54,398
======== ======= =======
</TABLE>
Changes in the valuation for impairment of mortgage servicing rights are as
follows:
<TABLE>
<CAPTION>
(Dollars in thousands) Year ended December 31,
--------------------------------------------------
1998 1997 1996
---------------- -------------- --------------
<S> <C> <C> <C>
Mortgage servicing rights
Balance at January 1 $ (8,275) $(2,519) $ (835)
Impairment (29,424) (5,756) (1,684)
-------- ------- -------
Balance at December 31 $(37,699) $(8,275) $(2,519)
======== ======= =======
</TABLE>
The estimated fair value of mortgage servicing rights aggregated $130.9 million,
$74.2 million, and $54.4 million at December 31, 1998, 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. With
respect to this portfolio, as of December 31, 1998, the average prepayment speed
assumption ("PSA") approximated 382, and the weighted average discount rate
approximated 10%.
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 1998 and 1997,
borrowings under such facilities had original repricings of overnight and less
than 30 days, respectively.
The facilities bear interest at rates indexed to the LIBOR or the federal funds
rate, plus an applicable margin. For the years ending December 31, 1998 and
1997, the weighted average borrowing rates on these facilities were 4.8% and
6.3%, respectively. None of the lenders is affiliated with IndyMac REIT or
IndyMac Operating.
F-38
<PAGE>
NOTE G - INCOME TAXES
The income tax provision for the years ended December 31, 1998, 1997 and 1996
consist of the following:
<TABLE>
<CAPTION>
(Dollars in thousands) 1998 1997 1996
----------------- -------------- --------------
<S> <C> <C> <C>
Current tax expense (benefit)
Federal $ (971) $ 319 $ (992)
State - 137 365
-------- ------- -------
Total current tax expense (benefit) (971) 456 ( 627)
-------- ------- -------
Deferred tax expense (benefit)
Federal (32,344) 9,974 9,883
State (10,160) 3,468 4,292
-------- ------- -------
Total deferred tax expense (benefit) (42,504) 13,442 14,175
-------- ------- -------
Total income tax expense (benefit) $(43,475) $13,898 $13,548
======== ======= =======
</TABLE>
The tax effect of temporary differences that gave rise to significant portions
of deferred tax assets and liabilities as of December 31, 1998 and 1997 are
presented below:
<TABLE>
<CAPTION>
(Dollars in thousands) December 31,
--------------------------
1998 1997
------------ --------
<S> <C> <C>
Deferred tax liability (asset), net
State taxes $ 1,183 $(3,795)
Allowance for loan losses (1,066) (410)
Net operating loss carry forward (4,181) (5,777)
Mortgage securities and servicing rights 247 54,399
Other (743) (1,084)
------- -------
Deferred tax liability (asset), net $(4,560) $43,333
======== =======
</TABLE>
At December 31, 1998, IndyMac Operating had a net operating loss carry forward
for federal income tax purposes of approximately $11.9 million, which begins to
expire in the year 2011. As of December 31, 1998, IndyMac Operating did not
have a net operating loss carry forward for state income tax purposes. The net
deferred tax asset and tax liability are classified in other assets and other
liabilities, respectively, as of December 31, 1998 and 1997.
The effective income tax rate differed from the federal statutory rate as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------------- --------------- -----------------
<S> <C> <C> <C>
Federal statutory rates 35.0% 35.0% 35.0%
State income taxes, net of federal tax effect 6.5% 7.2% 7.6%
Other items, net 1.0% 0.3% 0.3%
---- ---- ----
Effective income tax rate 42.5% 42.5% 42.9%
==== ==== ====
</TABLE>
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, 1998 and 1997. The estimated fair
value amounts have been determined by IndyMac Operating using available market
information and valuation methodologies which IndyMac Operating 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.
F-39
<PAGE>
NOTE H - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
<TABLE>
<CAPTION>
(Dollars in thousands)
December 31, 1998 December 31, 1997
----------------------------- --------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair value
---------- ---------- ------------ ----------
<S> <C> <C> <C> <C>
Assets:
Loans held for sale $ 211,745 $ 211,745 $ 96,965 $ 96,965
Commitments to sell loans and securities (1,841) (1,841) (102) (102)
Commitments to purchase loans 182 182 1,971 1,971
Mortgage securities and Treasury securities 700,407 700,407 601,669 601,669
Treasury call options 3,150 3,150 - -
Liabilities:
Repurchase agreements & other credit facilities 786,545 786,545 578,763 578,763
Off-balance sheet gains (losses):
Interest rate floors - - 324 222
</TABLE>
The fair value estimates as of December 31, 1998 and 1997 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 Operating in
estimating fair values.
Loans Held for Sale. Due to the short-term nature of loans held for sale, the
fair value of this portfolio is assumed to be the carrying value.
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.
Mortgage Securities and U.S. Treasury 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 similar characteristics. U.S. Treasury securities are recorded
at fair market value based upon quoted prices.
Repurchase Agreements and Other Credit Facilities. Due to the short-term nature
of repurchase agreements and other credit facilities, the fair value of these
liabilities is assumed to be the carrying value.
Interest Rate Floors. The fair values of IndyMac Operating's interest rate
floors are estimated based upon quoted market prices at year-end.
F-40
<PAGE>
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.
Primary Loan Servicing
On April 2, 1998, IndyMac Operating acquired certain assets of the mortgage
servicing operation of First of America Loan Services, Inc. The servicing
platform, LoanWorks Servicing, is located in Kalamazoo, Michigan and
Bloomington, Illinois. As of December 31, 1998, the LoanWorks Servicing
portfolio totaled $10.5 billion, with a weighted average coupon of 8.3%.
Master Loan Servicing
As of December 31, 1998 and 1997, IndyMac Operating master serviced loans
totaling $17.0 billion and $12.4 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, IndyMac
Operating has recourse to the sellers of such loans for any breaches of similar
representations and warranties made by the sellers to IndyMac Operating.
As of December 31, 1998, approximately 35%, 7% and 7% of mortgage loans in
IndyMac Operating's master servicing portfolio were secured by properties
located in California, Florida 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, 1998 and 1997, IndyMac Operating had entered into commitments
to purchase loans from IndyMac REIT totaling $2.1 billion and $2.2 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.
Commitments to Sell Loans and Securities
IndyMac Operating hedges its inventory and committed pipeline of 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 $443 million and $93 million,
respectively, as of December 31, 1998 and 1997. IndyMac Operating had forward
commitments to sell $620 million and $1.3 billion of Fannie Mae mortgage-backed
securities as of December 31, 1998 and 1997, respectively, and $407 million and
$120 million of two-year, five-year and ten-year U.S. Treasury futures contracts
as of December 31, 1998 and 1997, respectively. The commitments to sell
securities had a net unrealized loss of approximately $2.0 million and $5.0
million as of December 31, 1998 and 1997, respectively. The net unrealized
losses were deferred as part of
F-41
<PAGE>
NOTE I - COMMITMENTS AND CONTINGENCES (CONTINUED)
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 PENSION PLAN
In 1998, IndyMac Operating adopted a defined benefit pension plan (the "Plan")
covering substantially all of its employees. IndyMac Operating policy is to
contribute the amount actuarially determined to be necessary to pay the benefits
under the Plan, and in no event to pay less than the amount necessary to meet
the minimum funding standards of ERISA. The weighted average assumptions used
in calculating the Plan's status as of December 31, 1998 were a discount rate of
6.75%, an expected rate of return on Plan assets of 8.00% and compensation
increases of 4.00%. Pension expense was $388,000 for 1998, consisting of a
service cost of $298,000, an interest cost of $51,000, and an expected return on
Plan assets of $39,000. The accrued benefit cost at December 31, 1998 was
$388,000, comprised of an unfunded status of $1,237,000 offset by unrecognized
net actuarial loss of $691,000, and unrecognized prior service cost of $158,000.
NOTE - K RELATED PARTY TRANSACTIONS
As of December 31, 1998 and 1997, advances due by IndyMac Operating to IndyMac
REIT totaled $196 million and $118 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 9.3% and 10.5% at December 31, 1998 and 1997,
respectively.
IndyMac Operating received $75 million in capital contribution from IndyMac REIT
in the fourth quarter of 1998 in the form of a reduction in amounts due IndyMac
REIT.
Prior to July 1, 1997, IndyMac REIT operated under an agreement (the "Management
Agreement") with Countrywide Asset Management Corporation (the "Manager" or
"CAMC") 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 and $2.0
million for the years ended December 31, 1997 and 1996, 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 third party lending
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 third party lending's costs, and IndyMac REIT is charged
with the cost of other operations.
IndyMac Operating paid CHL $1.7 million, $1.9 million and $1.1 million in
subservicing fees during 1998, 1997 and 1996, respectively.
F-42
<PAGE>
NOTE K - RELATED PARTY TRANSACTIONS (CONTINUED)
In August 1998, IndyMac Operating acquired from Flagstar Bank, FSB, the
servicing rights of a $2.9 billion loan portfolio for $46.4 million. As a
result of the fourth quarter 1998 market disruptions, the Company sold the
servicing rights acquired from Flagstar Bank, FSB, to CHL on October 31, 1998,
at a price of $36.7 million.
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.
NOTE L - SEGMENT REPORTING
On December 31, 1998, the Company adopted FASB Statement No. 131, "Disclosures
about Segments of an Enterprise and Related Information", ("SFAS 131"). SFAS 131
requires that selected information about the Company's operating segments be
disclosed in annual and interim reports. SFAS 131 requires that information to
be reported about each segment be measured on the same basis as the information
used internally by the Company.
IndyMac Operating reportable operating segments include Mortgage Banking and
Investments.
The Mortgage Banking segment purchases all loans from IndyMac REIT for which a
REMIC transaction or whole loan sale is contemplated are committed for sale to
IndyMac Operating pursuant to the terms of a master forward sales agreement.
These loans are then securitized through the issuance of mortgage-backed
securities in the form of REMICs, or resold in bulk whole loan sales to
permanent investors. The Mortgage Banking segment's principal sources of income
are gains recognized on the sale of mortgage loans and the net spread between
interest earned on loans and the interest cost associated with the borrowings
used to finance such loans.
The Investment segment invests in mortgage servicing rights and mortgage
securities either retained in connection with the issuance of mortgage-backed
securities or purchased from third parties. The investment segment's principal
sources of income are spread income on securities, service fee income and net
gain on sale of mortgage securities.
The accounting policies of the operating segments are the same as those
described in the summary of significant accounting policies except that the
segment reporting data includes allocations of certain income and expense
accounts of IndyMac Operating in order to present to the reader the operating
segments as reviewed and managed by the Company's chief operating decision
maker.
F-43
<PAGE>
NOTE L - SEGMENT REPORTING (CONTINUED)
Segment information for the years ended December 31, 1998, 1997, and 1996 were
as follows:
(Dollars in thousands)
<TABLE>
<CAPTION>
For the Years Ended December 31,
-------------------------------------------------------------
Total
Mortgage IndyMac,
Banking Investments Adjustments Inc.
-------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
1998
Net interest income $ 5,209 $ 10,885 $ (17,381) $ (1,287)
Net revenues 127,107 (98,746) (17,381) 10,980
Net earnings (loss) 11,362 (60,187) (9,994) (58,819)
------------ -------------- --------------- -------------
Assets as of December 31, 1998 $ 236,567 $ 866,229 - $ 1,102,796
1997
Net interest income $ 3,473 $ 8,643 $ (10,075) $ 2,041
Net revenues 80,085 19,966 (10,075) 89,976
Net earnings (loss) 15,765 8,835 (5,793) 18,807
----------- -------------- --------------- -------------
Assets as of December 31, 1997 $ 147,712 $ 673,341 $ - $ 821,053
1996
Net interest income $ 1,214 $ 8,990 $ (7,676) $ 2,528
Net revenues (1) 56,377 16,208 (7,676) 64,909
Net earnings (loss) 14,559 7,923 (4,414) 18,068
----------- --------------- -------- ----------
Assets as of December 31, 1996 $ 111,425 $ 599,680 - $ 711,105
</TABLE>
F-44
<PAGE>
EXHIBIT 3.5
COUNTRYWIDE MORTGAGE INVESTMENTS, INC.
A DELAWARE CORPORATION
___________________
BYLAWS
___________________
ARTICLE I
OFFICES
SECTION 1. Registered Office. The registered office of the Corporation in
the State of Delaware shall be located at the principal place of business in
that state of the entity acting as the corporation's registered agent in the
State of Delaware.
SECTION 2. Principal Executive Office. The principal executive office of
the Corporation shall be in the City of Pasadena, State of California.
SECTION 3. Other Offices. The Corporation may also have offices at such
other places both within and without the State of Delaware as the Board of
Directors may from time to time determine.
ARTICLE II
Meetings of Stockholders
SECTION 1. Place of Meetings. Meetings of stockholders shall be held on
such date, at such time and at such place within the United States as shall be
determined from time to time by the Board of Directors and stated in the notice
of meeting or in a duly executed waiver of notice thereof.
SECTION 2. Annual Meeting. The annual meeting of stockholders of the
Corporation shall be held on such date, at such time and at such place as shall
be designated annually by the Board of Directors and stated in the notice of the
meeting or in a duly executed waiver of notice thereof, at which meeting the
stockholders shall elect a Board of Directors and transact such other business
as may properly be brought before the meeting.
SECTION 3. Special Meetings. At any time in the interval between annual
meetings, special meetings of the stockholders, unless otherwise provided by law
or by the Certificate of Incorporation, may be called by a majority of the Board
of Directors, a majority of the Unaffiliated Directors (as defined in Article
III, Section 3), the President or the Chairman of the Board of Directors. The
date, time and place of a special meeting shall be determined by the Board of
Directors or the officer calling the meeting and shall be stated in the written
notice of the meeting, which notice shall state the purpose or purposes for
which the meeting is called.
<PAGE>
Business of the Corporation transacted at any special meeting of stockholders by
whomever called shall be limited to the purposes stated in the written notice
thereof.
SECTION 4. Notice of Meetings; Waiver of Notice; Adjournment. Not less than
ten nor more than sixty days before the date of every stockholders' meeting, the
Secretary shall give to each stockholder of record entitled to vote at such
meeting, and to each stockholder not entitled to vote who is entitled by statute
to notice, written or printed notice stating the date, time and place of the
meeting and the purpose or purposes for which the meeting is called, either by
mail or by presenting it personally to the stockholder or by leaving it at his
residence or usual place of business. If mailed with postage thereon prepaid,
such notice shall be deemed to be given when deposited in the United States mail
addressed to the stockholder at his address as it appears on the records of the
Corporation.
Notice of any meeting of stockholders shall be deemed waived by any
stockholder who shall attend such meeting in person or by proxy, or who shall,
either before or after the meeting, submit a signed waiver of notice which is
filed with the records of the meeting. When a meeting is adjourned to another
time and place, unless the Board of Directors after the adjournment shall fix a
new record date for an adjourned meeting or the adjournment is for more than
thirty days after the original record date, notice of such adjourned meeting
need not be given if the time and place to which the meeting shall be adjourned
were announced at the meeting at which the adjournment is taken.
SECTION 5. Quorum. At any meeting of stockholders the presence in person or
by proxy of stockholders entitled to cast a majority of the shares of stock
entitled to vote at the meeting shall constitute a quorum, unless otherwise
provided by any statute or by the Certificate of Incorporation. In the absence
of a quorum no business may be transacted, except that the holders of a majority
of the shares of stock present in person or by proxy and entitled to vote may
adjourn the meeting from time to time, without notice other than announcement at
the meeting, except as required by Section 4 above, until a quorum shall be
present or represented. At such adjourned meeting at which a quorum shall be
present or represented any business may be transacted which might have been
transacted at the meeting as originally noticed.
SECTION 6. Voting. The affirmative vote of a majority of the shares of
common stock which are present in person or represented by proxy and entitled to
vote on the matter at a meeting of stockholders, duly called and at which a
quorum is present, shall be sufficient to constitute the act of the stockholders
as to any matter which properly comes before the meeting, unless more than a
majority of the votes shall be required by statute or by the Certificate of
Incorporation. If a vote shall be taken on any question other than the election
of directors (which shall be by written ballot), then unless required by statute
or these bylaws, or determined by the chairman of the meeting to be advisable,
any such vote need not be by ballot. On a vote by ballot, each ballot shall be
signed by the stockholders voting, or by his proxy, and shall state the number
of shares voted.
Unless a statute or the Certificate of Incorporation provides otherwise, each
holder of record of outstanding shares of stock of the Corporation having voting
power shall be entitled to one vote for every share of such stock on each matter
submitted to a vote at a meeting of
<PAGE>
stockholders. A stockholder may vote only the shares owned by him as shown an
the record of stockholders of the Corporation as of the record date determined
pursuant to Section 7 below or pursuant to applicable law and may cast his
shares in person or by proxy executed in writing by the stockholder or by his
duly authorized attorney-in-fact, but no proxy shall be valid after three years
from its date, unless otherwise provided in the proxy. At all meetings of
stockholders, unless the voting is conducted by inspectors, all questions
relating to the qualification of voters and the validity of proxies and the
acceptance or rejection of votes shall be decided by the chairman of the
meeting.
SECTION 7. Fixing of Record Date. The Board of Directors may fix, in
advance, a record date not more than sixty not less than ten days before the
date then fixed for the action requiring determination by the stockholders. All
persons who were holders of record of shares at such time, and no others, shall
be entitled to vote at such meeting and any adjournment thereof.
SECTION 8. Organization and Order of Business. At each meeting of the
stockholders, the Chairman of the Board of Directors, or in his absence or
inability to act, the President, or in the absence or inability to act of the
Chairman of the Board and the President, a Vice President, shall act as chairman
of the meeting. The Secretary, or in his absence or inability to act, any
person appointed by the chairman of the meeting, shall act as secretary of the
meeting and keep the minutes thereof. The order of business at all meetings of
the stockholders shall be as determined by the chairman of the meeting.
SECTION 9. Inspectors. The Board of Directors may, in advance of any
meeting of stockholders, appoint one or more inspectors to act at such meeting
or any adjournment thereof. If the inspectors shall not be so appointed or if
any of them shall fail to appear or act, the chairman of the meeting may, and on
the request of any stockholder entitled to vote thereat shall, appoint
inspectors. Each inspector, before entering upon the discharge of his duties,
shall take and sign an oath to execute faithfully the duties of inspector at
such meeting with strict impartiality and according to the best of his ability.
The inspectors shall determine the number of shares represented at the meeting,
the existence of a quorum, the validity and effect of proxies, and shall receive
votes, ballots or consents, hear and determine all challenges and questions
arising in connection with the right to vote, count and tabulate all votes,
ballots or consents, determine the result, and do such acts as are proper to
conduct the election or vote with fairness to all stockholders. On request of
the chairman of the meeting or any stockholder entitled to vote thereat, the
inspectors shall make a report in writing of any challenge, request or matter
determined by them and shall execute a certificate of any fact found by them.
No director or candidate for the office of director shall act as inspector of an
election of directors. Inspectors need not be stockholders.
ARTICLE III
Board of Directors
SECTION 1. Number of Directors. The number of directors of the Corporation
shall be six. By vote of a majority of the entire Board of Directors, the
number of directors fixed by
<PAGE>
these Bylaws may be increased or decreased by resolution from time to time, but
may not exceed nine nor be less than three. The tenure of office of a director
shall not be affected by any decrease in the number of directors so made by the
Board.
SECTION 2. General Powers. The business and affairs of the Corporation
shall be managed under the direction of its Board of Directors, which may
exercise all of the powers of the Corporation, except such as are by law or by
the Certificate of Incorporation or by these Bylaws conferred upon or reserved
to the stockholders.
SECTION 3. Affiliations of Board Members. A majority of the members of the
Board of Directors shall at all times be persons who are not Affiliates of an
individual or corporate management company to whom the Board has delegated
management duties as permitted in Section 18 of this Article and Article V,
Section 7 of the Certificate of Incorporation (a "Management Company") (such
directors being referred to as "Unaffiliated Directors").
As used in these Bylaws, the term "Affiliate" of another person means any
person directly or indirectly owning, controlling, or holding with power to
vote, five percent (5%) or more of the outstanding voting securities of such
other person or of any person directly or indirectly controlling, controlled by
or under common control with such other person; any person five percent (5%) or
more of whose outstanding voting securities are directly or indirectly owned,
controlled or held with power to vote by such other person; any person directly
or indirectly controlling, controlled by or under common control with, such
other person, and, any officer, director, partner, or employee of such other
person. The term "person" includes a natural person, corporation, partnership,
trust, company or other entity.
SECTION 4. Election and Term. Until the first annual meeting of
stockholders or until successors are duly elected and qualified, the Board shall
consist of the persons named as such in the Certificate of Incorporation. At
the first annual meeting of stockholders and at each annual meeting thereafter,
the stockholders shall elect directors, who need not be stockholders in the
Corporation, to hold office until the next annual meeting and until their
successors are elect and qualified or until their earlier resignation or
removal. Directors are eligible for re-election, and a director may resign at
any time by giving written notice to the Corporation.
SECTION 5. Vacancies. Any vacancy occurring in the Board of Directors for
any cause other than by reason of increase in the number of directors may be
filled by a majority of the remaining members of the Board of Directors,
although such majority is less than a quorum. Any vacancy occurring by reason
of an increase in the number of directors may be filled by action of a majority
of the entire Board of Directors. The vacancy for any reason of any director
who is not an Affiliate of a Management Company shall be filled by a majority
vote of the remaining members of the Board of Directors, including a majority
vote of the remaining Unaffiliated Directors. A director elected by the Board
of Directors to fill a vacancy shall be elected to hold office until the next
annual meeting of stockholders and until his or her successor is elected and
qualifies.
SECTION 6. Removal of Directors. Any director may be removed either with or
without cause, as provided by the General Corporation Law of the State of
Delaware.
<PAGE>
SECTION 7. Place of Meetings. Meetings of the Board of Directors, regular
or special, may be held in or out of the State of Delaware at such place as the
Board of Directors may from time to time determine or as shall be specified in
the notice of such meeting.
SECTION 8. Annual Meeting. The first meeting of each newly elected Board of
Directors shall be held as soon as practicable after the annual meeting of the
stockholders at which the directors were elected. The meeting may be held at
such time and place as shall be specified in a notice given as hereinafter
provided for special meetings of the Board of Directors. or as shall be
specified in a written waiver signed by all of the directors, except that no
notice shall be necessary if such meeting is held immediately after the
adjournment, and at the site, of the annual meeting of stockholders.
SECTION 9. Regular Meetings. Regular meetings of the Board of Directors may
be held without notice at such time and place as shall from time to time be
determined by the Board of Directors.
SECTION 10. Special Meetings. Special meetings of the Board of Directors
may be called by two or more directors of the Corporation or by the Chairman of
the Board of Directors or the President.
SECTION 11. Notice of Special Meetings. Notice of each special meeting of
the Board of Directors shall be given by the Secretary as hereinafter provided.
Such notice shall state the time and place of the meeting. Notice of each such
meeting shall be delivered to each director, either personally or by telephone,
telegraph, cable or wireless, at least twenty-four hours before the time at
which such meeting is to be held, or by first-class mail, postage prepaid, or
established nationwide courier service, delivery cost prepaid, addressed to each
director at his or her post-office address as it appears on the records of the
Corporation, at least four days before the day on which such meeting is to be
held. If mailed, such notice shall be deemed to be given when deposited in the
United States mail addressed to the director at his or her address as it appears
in the records of the Secretary. Special meetings of the Board of Directors may
be held at any time without notice if all directors are present or if those
directors not present waive notice of the meeting in writing either before or
after the date of the meeting.
SECTION 12. Quorum and Voting. At all meetings of the Board of Directors, a
majority of the entire Board of Directors shall constitute a quorum for the
transaction of business, and the action of a majority of the directors present
at any meeting at which a quorum is present shall be the action of the Board of
Directors unless the concurrence of a greater proportion is required for such
action by statute, the Certificate of Incorporation or these Bylaws. If a
quorum shall not be present at any meeting of directors, the directors present
at the meeting may by a majority vote adjourn the meeting from time to time,
without notice other than announcement at the meeting, until a quorum shall be
present.
Notwithstanding the first paragraph of this Section 12, any action pertaining
to a transaction involving the Corporation in which any Management Company, any
director or officer of the Corporation or any Affiliate of any of the foregoing
persons has an interest shall
<PAGE>
be approved in specific as to any isolated transactions or in general as to any
series of similar transactions by a majority of the members of the Board of
Directors who are not Affiliates of such interested party, even if the non-
interested directors constitute less than a quorum. In approving any such
transaction or series of transactions the non-interested directors must
determine that
(a) the transaction as contemplated is fair as to the Corporation and
its stockholders at the time it is authorized, approved or ratified;
(b) if an acquisition of property other than mortgage loans is involved,
the total consideration is not in excess of the appraised value of such
property being acquired; and
(c) if the transaction involves compensation to any Management Company
or its Affiliates for services rendered in a capacity other than that
contemplated by the management arrangements, to the knowledge of the
directors such compensation is not greater than the customary charges for
comparable services generally available from other competent unaffiliated
persons.
SECTION 13. Organization. The Chairman of the Board shall preside at each
meeting of the Board. In the absence or inability of the Chairman of the Board
to preside at a meeting, the President, or, in his absence or inability to act,
another director chosen by a majority of the directors present, shall act as
chairman of the meeting and preside thereat. The Secretary (or, in his absence
or inability to act, any person appointed by the Chairman) shall act as
secretary of the meeting and keep the minutes thereof.
SECTION 14. Meeting by Conference Telephone. Members of the Board of
Directors may participate in a meeting of the Board of Directors or any
committee thereof by means of a conference telephone or similar communications
equipment if all persons participating in the meeting can hear each other at the
same time. Participation in a meeting by these means constitutes presence in
person at a meeting.
SECTION 15. Consent in Lieu of Meeting. Any action required or permitted to
be taken at any meeting of the Board of Directors or of any committee thereof
may be taken without a meeting, if a written consent to such action is signed by
all members of the Board of Directors or of such committee, as the case may be,
and such written consent is filed with the minutes of proceedings of the Board
or committee.
SECTION 16. Compensation. Directors may receive compensation for services
to the Corporation in their capacities as directors in such manner and in such
amounts as may be fixed from time to time by the Board of Directors, and
expenses of attendance at each regular or special meeting of the Board of
Directors, or of any committee thereof.
SECTION 17. Investment Policies and Restrictions. The investment policies
of the Corporation and the restrictions thereon shall be established from time
to time by the Board of Directors, including a majority of the Unaffiliated
Directors; provided, however, that the investment policies of the Corporation
and the limitations thereon shall be at all times in
<PAGE>
compliance with the restrictions applicable to real estate investment trusts
pursuant to the Internal Revenue Code of 1986, as it may be amended from time to
time. The Unaffiliated Directors shall review the investment policies of the
Corporation at least annually to determine that the policies then being followed
by the Corporation are in the best interests of its stockholders. Each such
determination and the basis therefor shall be set forth in the minutes of the
Board of Directors.
SECTION 18. Management Arrangements. The Board may delegate the duty of
management of the assets and the administration of the Corporation's day-to-day
operations to a Management Company pursuant to a written contract or contracts,
or any renewal thereof, which have obtained the requisite approvals of the Board
of Directors, including a majority of the Unaffiliated Directors, or the
stockholders of the Corporation, as provided in the Certificate of
Incorporation.
The Board of Directors shall evaluate the performance of the Management
Company before entering into or renewing any management arrangement. The
minutes of meetings with respect to such evaluation shall reflect the criteria
used by the Board of Directors in making such evaluation. Upon any termination
of the initial management arrangements reflected in the Registration Statement,
the Board of Directors shall determine that any successor Management Company
possess sufficient qualifications (a) to perform the management function for the
Corporation and (b) to justify the compensation provided for in its contract
with the Corporation. Each contract for the services of a Management Company
entered into by the Board of Directors shall have a term of no more than one
year, but may be renewed annually at or prior to the expiration of the contract.
Each contract shall be terminable by a majority of the Unaffiliated Directors,
or the Management Company on sixty (60) days' written notice without cause.
The Unaffiliated Directors shall determine at least annually that the
compensation which the Corporation contracts to pay the Management Company is
reasonable in relation to the nature and quality of services performed and shall
also supervise performance of the Management Company and the compensation paid
to it by the Corporation to determine that the provisions of such contract are
being carried out. Each such determination shall be based upon the following
factors and all other factors the Unaffiliated Directors may deem relevant and
the findings of the Unaffiliated Directors on each of such factors shall be
recorded in the minutes of the Board of Directors:
(a) The size of the management fee in relation to the size, compensation
and profitability of the investment portfolio of the Corporation;
(b) The success of the Management Company in generating opportunities
that meet the investment objectives of the Corporation;
(c) The rates charged to other corporations similar to the Corporation
and to other investors by advisers performing similar services;
<PAGE>
(d) Additional revenues realized by the Management Company and its
Affiliates through their relationship with the Corporation, including loan
administration, underwriting or broker commissions, servicing, engineering,
inspection and other fees, whether paid by the Corporation or by others with
whom the Corporation does business;
(e) The quality and extent of service and advice furnished to the
Corporation;
(f) The performance of the investment portfolio of the Corporation,
including income, conservation or appreciation of capital, frequency of
problem investments and competence in dealing with distress situations; and
(g) The quality of the investment portfolio or the Corporation in
relationship to the investments generated by the Management Company for its
own account.
SECTION 19. Total Expenses. The Unaffiliated Directors shall determine,
from time to time but at least annually, that the total fees and expenses of the
Corporation are reasonable in light of all relevant factors. Within sixty days
after the end of any fiscal quarter of the Corporation for which "Total
Operating Expenses" (for the twelve months then ended) exceed two percent (2%)
of "Average Invested Assets" or twenty-five percent (25%) of the "Net Income",
whichever is greater, there shall be sent to the stockholders of the Corporation
a written disclosure of such fact, together with an explanation of the factors
the Unaffiliated Directors considered in arriving at the conclusion that such
higher operating expenses were justified. The Corporation shall also publish to
the stockholders quarterly (i) the ratio of the cost of raising capital during
the quarter to the capital raised and (ii) the aggregate amount of advisory fees
and the aggregate amount of other fees paid to any Management Company and all
Affiliates of such Management Company by the Corporation and including fees or
charges paid to such Management Company and all of its Affiliates by third
parties doing business with the Corporation.
As used herein, the following terms shall have the following meanings:
(a) "Total Operating Expenses" for any period shall mean the aggregate
expenses of every character which constitute ordinary operating expenses,
including additional expenses paid directly or indirectly by the Corporation
to a Management Company, its Affiliates or third parties based upon their
relationship with the Corporation, including loan administration, servicing,
and all other expenses paid by the Corporation, exclusive of expenses related
to raising capital, for interest, taxes and direct property acquisition,
disposition, operation, maintenance and management costs.
(b) "Average Invested Assets" for any period shall mean the average of
the aggregate book value of the assets of the Corporation, determined on a
consolidated basis, invested, directly or indirectly, in loans secured by
real estate, before deduction of reserves for depreciation and similar non-
cash reserves, computed taking the average of such values at the end of each
calendar month during such period.
<PAGE>
(c) "Net Income" for any period shall mean total revenues applicable to
such period, less the expenses applicable to such period determined in
accordance with generally accepted accounting principles.
ARTICLE IV
Committees of Directors
SECTION 1. Executive and Other Committees. The Board of Directors may, by
resolution adopted by a majority of the Board, appoint from among its members an
Executive Committee, an Audit Committee or other committees each composed of two
or more directors. At least a majority of the members of any such committee
shall be composed of directors who are Unaffiliated Directors. Any such
committee shall have and may exercise all the powers and authority of the Board
of Directors in the management of the business and affairs of the Corporation
and may authorize the seal of the Corporation to be affixed to all papers which
may require it except that no such committee shall have such power or authority
with respect to amending the Bylaws or Certificate of Incorporation, adopting an
agreement of merger or consolidation, recommending to shareholders the sale,
lease or exchange of all or substantially all of the Corporation's property or
assets or the dissolution or the revocation of a dissolution of the Corporation,
and, unless the resolution or the Bylaws or Certificate of Incorporation
specifically so provides, no such committee shall have the power or authority to
declare a dividend, to authorize the issuance of stock or to adopt a certificate
of ownership and merger.
SECTION 2. Minutes and Reports. The committees shall keep minutes of their
proceedings and shall report the same to the Board of Directors when requested
to do so, and any action taken by the committees shall be subject to revision
and alteration by the Board of Directors, provided that no rights of third
persons shall be affected by any such revision or alteration.
SECTION 3. Notice. Notice of committee meetings shall be given in the same
manner as notice for special meetings of the Board, and a waiver thereof in
writing, signed by the directors entitled to such notice and filed with the
records of the meeting, whether before or after the holding thereof, or actual
attendance at the committee meeting in person shall be deemed equivalent to the
giving of such notice to such director.
SECTION 4. Quorum, Voting and General. One-third, but not less than two, of
the members of any committee shall be present in person at any meeting of such
committee in order to constitute a quorum for the transaction of business. The
act of a majority of the committee members present at such meeting shall be an
act of the committee. The Board may designate a chairman of any committee and
such chairman or any two members of any committee may fix the time and place of
its meetings unless the Board shall otherwise provide. In the event of the
absence or disqualification of any member of any committee, the member or
members thereof present at any meeting and not disqualified from voting, whether
or not he, she or they constitute a quorum, may unanimously appoint another
member of the Board of Directors to act at the meeting in the place of any such
absent or disqualified member. The Board shall have the power at any time to
change the membership of any committee, to fill all
<PAGE>
vacancies, to designate alternate members, to replace any absent or disqualified
member or to dissolve any such committee.
ARTICLE V
Officers and Agents
SECTION 1. Number and Qualification. The officers of the Corporation shall
be chosen by the Board of Directors and shall be a Chairman of the Board, a
President, one or more Vice Presidents, a Secretary and a Treasurer. The
Corporation may also have as officers one or more Assistant Secretaries and one
or more Assistant Treasurers. Two or more offices may be held by the same
person but no officer shall execute, acknowledge or verify any instrument in
more than one capacity, if such instrument is required by law, the Certificate
of Incorporation or these Bylaws to be executed, acknowledged or verified by two
or more officers. Such officers shall be elected by the Board of Directors at
its first meeting after each annual meeting of stockholders and shall serve at
the pleasure of the Board of Directors until resignation, removal,
disqualification or until their successors are chosen and qualified. The Board
of Directors may appoint such other officers and agents as it shall deem
necessary, who shall hold their offices for such terms and shall exercise such
powers and perform such duties as shall be determined from time to time by the
Board.
SECTION 2. Compensation. The salaries of all officers and agents of the
Corporation shall be fixed by the Board of Directors.
SECTION 3. Removal and Vacancies. Any officer or agent may be removed by
the Board of Directors whenever in its judgment the best interests of the
Corporation will be served thereby. If the office of any officer becomes vacant
for any reason, the vacancy shall be filled by the Board of Directors for the
unexpired portion of the term of the office which shall be vacant.
SECTION 4. The Chairman of the Board. The Chairman of the Board shall be
the chief executive officer of the Corporation. He shall direct, coordinate and
control the Corporation's business and activities and its operating expenses and
capital expenditures, and shall have general authority to exercise all the
powers necessary for the chief executive officer of the Corporation, all in
accordance with basic policies established by and subject to the control of the
Board of Directors. He may employ and discharge employees and agents of the
Corporation, except such as shall be appointed by the Board, and he may delegate
these powers. He shall have general authority to execute bonds, deeds and
contracts in the name and on behalf of the Corporation. As provided in Section
8 of Article II, he shall act as chairman at all meetings of the stockholders at
which he is present, and, as provided in Section 13 of Article III, he shall
preside at all meetings of the Board of Directors at which he is present. In
the absence of the Chairman of the Board, his duties shall be performed and his
authority may be exercised by the President, and, in the absence of the Chairman
of the Board and the President, such duties shall be performed and such
authority may be exercised by the Vice Presidents in order of their rank as
fixed by the Board of Directors, or if not ranked, the Vice President designated
by the Board of Directors, or in the absence of such Vice President, by such
officer
<PAGE>
as may have been designated by the most senior officer of the Corporation who
has made any such designation, with the right reserved to the Board of Directors
to make the designation or supersede any designation so made.
SECTION 5. The President. The President shall be the chief operating
officer of the Corporation. He shall implement the general directives, plans
and policies formulated by the Chairman of the Board pursuant to the Bylaws, in
general shall have authority to exercise all powers delegated to him by the
Chairman of the Board and shall establish operating and administrative plans and
policies and direct and coordinate the Corporation's organizational components,
within the scope of the authority delegated to him by the Board of Directors or
the Chairman of the Board. He shall have general authority to execute bonds,
deeds and contracts in the name and on behalf of the Corporation and
responsibility for the employment or appointment and discharge of such
employees, agents and officers, except such as shall be appointed by the Board,
as may be required to carry on the operation of the business. As provided in
Section 4 of this Article V, in the absence of the Chairman of the Board, the
President shall perform all the duties and exercise the authority of the
Chairman of the Board. In the absence of the President, his duties shall be
performed and his authority may be exercised by the Vice Presidents in order of
their rank as fixed by the Board of Directors, or if not ranked, the Vice
President designated by the Board of Directors, and, in the absence of the
President and such Vice President, by such officer as may have been designated
by the most senior officer of the Corporation who has made any such designation,
with the right reserved to the Board of Directors to make the designation or
supersede any designation so made.
SECTION 6. Vice Presidents. The Vice Presidents in order of their rank as
fixed by the Board of Directors, or if not ranked, the Vice President designated
by the Board of Directors, shall, in the absence or disability of the President,
perform the duties and exercise the powers of the President, and shall perform
such other duties and have such other powers as the Board of Directors may from
time to time prescribe.
SECTION 7. Secretary. The Secretary shall attend all meetings of the Board
of Directors and all meetings of the stockholders and shall record all the
proceedings of the meetings of the Corporation and of the Board of Directors in
a book to be kept for that purpose and shall perform like duties for the
standing committees when required. He shall give, or cause to be given, notice
of all meetings of the stockholders and special meetings of the Board of
Directors, and shall perform such other duties as may be prescribed by the Board
of Directors, the Chairman of the Board or the President, under whose
supervision he shall act. He shall keep in safe custody the seal of the
Corporation and, when authorized by the Board of Directors, affix the same to
any instrument requiring it and, when so affixed, it shall be attested by his
signature.
SECTION 8. Assistant Secretaries. Each Assistant Secretary shall perform
such duties as may be assigned to him, and shall be under the supervision of
such officer, as the Board of Directors or, in the absence of action by it, as
the Chairman of the Board or the President may from time to time prescribe. In
the event of the absence or disability of the Secretary, the duties of the
Secretary shall be performed by such Assistant Secretary, or if there be more
than one such then by the one designated by the Chairman of the Board or the
President.
<PAGE>
SECTION 9. Treasurer. The Treasurer shall have the custody of the corporate
funds and securities and shall keep full and accurate accounts of receipts and
disbursements in books belonging to the Corporation and shall deposit all moneys
and other valuable effects in the name and to the credit of the Corporation in
such depositories as may be designated by the Board of Directors. He shall
disburse the funds of the Corporation as may be ordered by the Board of
Directors, taking proper vouchers for such disbursements, and shall render to
the President and the Board of Directors at its regular meetings, or when the
Board of Directors so requires, an account of all his transactions as Treasurer
and of the financial condition of the Corporation. If required by the Board of
Directors, he shall give the Corporation a bond in such sum and with such surety
or sureties as shall be satisfactory to the Board for the faithful performance
of the duties of his office and for the restoration to the Corporation, in case
of his death, resignation, retirement or removal from office, of all books,
papers, vouchers, money and other property of whatever kind in his possession or
under his control belonging to the Corporation.
SECTION 10. Assistant Treasurers. Each Assistant Treasurer shall perform
such duties as may be assigned to him, and shall be under the supervision of
such officer, as the Board of Directors or, in the absence of action by it, as
the Chairman of the Board or the President may from time to time prescribe. In
the event of the absence or disability of the Treasurer, the duties of the
Treasurer shall be performed by such Assistant Treasurer, or if there be more
than one such then by the one designated by the Chairman of the Board or the
President.
SECTION 11. Delegation of Duties. In case of the absence of any officer of
the Corporation, or for any other reason that the Board may deem sufficient, the
Board may confer for the time being the powers or duties, or any of them, of
such officer upon any other officer or upon any director.
ARTICLE VI
Certificates of Stock
SECTION 1. Form and Number. Each stockholder shall be entitled upon request
to a certificate or certificates in such form as shall be approved by the Board
which shall represent and certify the number and kind and class of shares owned
by him in the Corporation; provided, however, that certificates for fractional
shares shall not be issued. Each certificate shall be signed by the Chairman of
the Board or the President or a Vice President and countersigned by the
Secretary or an Assistant Secretary or the Treasurer or an Assistant Treasurer
and may be sealed with the corporate seal. The signatures may be either manual
or facsimile signatures and the seal may be either facsimile or any other form
of seal. In case any officer who has signed any certificate ceases to be an
officer of the Corporation before the certificate is issued, the certificate may
nevertheless be issued by the Corporation with the same effect as if the officer
had not ceased to be such officer as of the date of its issue. Each stock
certificate shall include on its face the name of the Corporation, the name of
the stockholder and the class of stock and number of shares represented by the
certificate. A stock certificate
<PAGE>
may not be issued by the Corporation until the stock represented by it is fully
paid by the stockholder.
SECTION 2. Legends. Every stock certificate representing shares of stock
which are restricted as to transferability by the Corporation shall contain a
full statement of the restriction or state that the Corporation will furnish
information about the restriction to the stockholder on request and without
charge.
SECTION 3. Transfers of Shares. No transfers of shares of stock of the
Corporation shall be made if (i) void ab initio pursuant to Article VI of the
Corporation's Certificate of Incorporation, or (ii) the Board of Directors,
pursuant to such Article VI, shall have refused to transfer such shares.
Permitted transfers of shares of stock of the Corporation shall be made on the
stock records of the Corporation only upon the instruction of the registered
holder thereof, or by his attorney thereunto authorized by power of attorney
duly executed and filed with the Secretary or with a transfer agent or transfer
clerk, and on surrender of the certificate or certificates, if issued, for such
shares properly endorsed or accompanied by a duly executed stock transfer power
and the payment of all taxes thereon. Upon Surrender to the Corporation or the
transfer agent of the Corporation of the certificate for shares duly endorsed or
accompanied by proper evidence of succession, assignment or authority to
transfer, as to any transfers not prohibited by such Article VI of the
Certificate of Incorporation or by action of the Board of Directors thereunder,
it shall be the duty of the Corporation to issue a new certificate to the person
entitled thereto, cancel the old certificate and record the transaction upon its
books.
SECTION 4. Regulations. The Board of Directors may make such additional
rules and regulations, not inconsistent with these Bylaws, as it may deem
expedient concerning the issue, transfer and registration of certificates for
shares of stock of the Corporation. It may appoint, or authorize any officer or
officers to appoint, one or more transfer agents or one or more transfer clerks
and one or more registrars and may require all certificates for shares of stock
to bear the signature or signatures of any of them.
SECTION 5. Lost, Destroyed or Mutilated Certificates. The holder of any
certificates representing shares of stock of the Corporation shall immediately
notify the Corporation of any loss, destruction or mutilation of such
certificate, and the Corporation may issue a new certificate of stock in the
place of any certificate theretofore issued by it upon the making of an
affidavit of that fact by the person claiming the certificate of stock to be
stolen, lost or destroyed. When authorizing such issue of a new certificate or
certificates, the Board of Directors may, in its discretion and as a condition
precedent to the issuance thereof, require the owner of such stolen, lost or
destroyed certificate or certificates, or his legal representative, to advertise
the same in such manner as it shall require and to give the Corporation a bond,
with sufficient surety, to indemnify it against any loss or claim which may
arise by reason of the issuance of a new certificate.
ARTICLE VII
Dividends
<PAGE>
Dividends upon the capital stock of the Corporation, subject to the
provisions of the Certificate of Incorporation, if any, may be declared by the
Board of Directors at any regular or special meeting, pursuant to law.
Dividends may be paid in cash, in property, or in the Corporation's own shares,
subject to the provisions of any statute and of the Certificate of
Incorporation. Before payment of any dividend, there may be set aside out of
any funds of the Corporation available for dividends such sum or sums as the
directors from time to time, in their absolute discretion, think proper as a
reserve fund to meet contingencies, or for equalizing dividends, or for
repairing or maintaining any property of the Corporation, or for such other
purpose as the directors shall think conducive to the interests of the
Corporation, and the directors may modify or abolish any such reserve in the
manner in which it was created.
The Board may fix, in advance, a date not more than sixty days preceding the
date fixed for the payment of any dividend or the making of any distribution or
the allotment of rights to subscribe for securities of the Corporation, or for
the delivery of evidences of rights or evidences of interests arising out of any
change, conversion or exchange of stock or other securities, as the record date
for the determination of the stockholders entitled to receive any such dividend,
distribution, allotment, rights or interests, and in such case only the
stockholders of record at the time so fixed shall be entitled to receive such
dividend, distribution, allotment, rights or interests.
ARTICLE VIII
Indemnification
SECTION 1. Right to Indemnification. Each person who was or is made a party
or is threatened to be made a party to or is involved in any action, suit or
proceeding, whether civil, criminal, administrative or investigative
(hereinafter a "proceeding"), by reason of the fact that he or she, or a person
of whom he or she is the legal representative, is or was a director, officer,
employee or agent of the Corporation or is or was serving at the request of the
Corporation as a director, officer, employee or agent of another corporation or
of a partnership, joint venture, trust or other enterprise, including service
with respect to employee benefit plans, whether the basis of such proceeding is
alleged action in an official capacity as a director, officer, employee or agent
or in any other capacity while serving as a director, officer, employee or
agent, shall be indemnified and held harmless by the Corporation to the fullest
extent authorized by the General Corporation Law of the State of Delaware, as
the same exists or may hereafter be amended, (but, in the case of any such
amendment, only to the extent that such amendment permits the Corporation to
provide broader indemnification rights than said law permitted the Corporation
to provide prior to such amendment) against all expense, liability and loss
(including attorneys' fees, judgments, fines, ERISA excise taxes or penalties
and amounts paid or to be paid in settlement) actually and reasonably incurred
or suffered by such person in connection therewith and such indemnification
shall continue as to a person who has ceased to be a director, officer, employee
or agent and shall inure to the benefit of his or her heirs, executors and
administrators. The right to indemnification conferred in this Section shall be
a contract right and shall include the right to be paid by the Corporation the
expenses incurred in defending any such proceeding in advance of its final
disposition; provided, however, that, if
<PAGE>
the General Corporation Law of the State of Delaware requires, the payment of
such expenses incurred by a director or officer in his or her capacity as a
director or officer (and not in any other capacity in which service was or is
rendered by such person while a director or officer, including, without
limitation, service to an employee benefit plan) in advance of the final
disposition of a proceeding, shall be made only upon delivery to the Corporation
of an undertaking, by or on behalf of such director or officer, to repay all
amounts so advanced if it shall ultimately be determined that such director or
officer is not entitled to be indemnified under this Section or otherwise.
SECTION 2. Non-Exclusivity of Rights. The right to indemnification and the
payment of expenses incurred in defending a proceeding in advance of its final
disposition conferred in this Section shall not be exclusive of any other right
which any person may have or hereafter acquire under any statute, provision of
the Certificate of Incorporation, bylaw, agreement, vote of stockholders or
disinterested directors or otherwise.
SECTION 3. Insurance. The Corporation may maintain insurance, at its
expense, to protect itself and any director, officer, employee or agent of the
Corporation or another corporation, partnership, joint venture, trust or other
enterprise against any such expense, liability or loss, whether or not the
Corporation would have the power to indemnify such person against such expense,
liability or loss under the General Corporation Law of the State of Delaware.
ARTICLE IX
Fiscal Year
The fiscal year of the Corporation shall be the same as the calendar year and
shall end on December 31 of each year.
ARTICLE X
Depositories and Custodians
SECTION 1. Depositories. The funds of the Corporation shall be deposited
with such banks or other depositories as the Board of Directors of the
Corporation may from time to time determine.
SECTION 2. Custodians. All securities and other investments shall be
deposited in the safe keeping of such banks or other companies as the Board of
Directors of the Corporation may from time to time determine.
ARTICLE XI
Execution of Instruments
<PAGE>
Checks, notes, drafts, acceptances, bills of exchange and other orders or
obligations for the payment of money shall be signed by such officer or officers
or person or persons as the Board of Directors by resolution shall from time to
time designate.
ARTICLE XII
Independent Public Accountants
A firm of independent public accountants shall sign or certify the annual
financial statements of the Corporation and shall be selected annually by the
Board of Directors.
ARTICLE XIII
Stock Ledger, List of Shareholders, Books and Records
SECTION 1. Stock Ledger. The Corporation shall maintain at its principal
executive office, or at the office of its transfer agent or registrar, an
original stock ledger containing the names and addresses of all stockholders and
the number of shares held by each stockholder. Such stock ledger may be in
written form or any other form capable of being converted into written form
within a reasonable time for visual inspection.
SECTION 2. Stockholder List. The Secretary or other officer in charge of
the stock ledger of the Corporation shall prepare and make, at least ten (10)
days prior to a meeting of stockholders, a complete list of stockholders
entitled to vote at the meeting, arranged in alphabetical order, and showing the
address of each stockholder and the number of shares of stock of the Corporation
registered in the name of each stockholder. Such list shall be open to
examination by any stockholder, for any purpose germane to the meeting, during
ordinary business hours, for a period of at least ten (10) days prior to the
meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The list also shall be
produced and kept at the place and time of the meeting during the whole time
thereof, and may be inspected by any stockholder who is present.
SECTION 3. Inspection of Books and Records. There shall be kept at the
principal executive office of the Corporation correct and complete books and
records of account of all the business and transactions of the Corporation.
In accordance with the General Corporation Laws of Delaware, any stockholder
of the Corporation or his agent may inspect and copy during usual business hours
the Corporation's stock ledger, an existing list of stockholders and other books
and records.
ARTICLE XIV
Amendments
<PAGE>
The Board of Directors shall have the power, at any regular meeting or at any
special meeting if notice thereof be included in the notice of such special
meeting, to alter, modify or repeal any Bylaws of the Corporation and to make
new Bylaws, except that the Board of Directors shall not alter, modify or repeal
any of the following provisions of the Bylaws
(a) Article III, Section 3;
(b) The third sentence of Article III, Section 5;
(c) The second paragraph of Article III, Section 12;
(d) Article III, Section 17-19;
(e) The second sentence of Article IV, Section 1; and
(f) This Article XIV.
The stockholders shall have the power, at any annual meeting or at any
special meeting if notice thereof be included in the notice of such special
meeting, to alter, modify or repeal any Bylaws of the Corporation and to make
new Bylaws.
<PAGE>
AMENDMENT TO BYLAWS OF
----------------------
COUNTRYWIDE MORTGAGE INVESTMENTS, INC.
--------------------------------------
(Adopted by the Board on 7/22/93)
The following resolution was duly adopted by the Board of Directors of
the Company, by unanimous written consent without a meeting, effective as of
July 22, 1993:
NOW, THEREFORE, BE IT RESOLVED, that the Bylaws of the Company be
hereby amended as follows:
Article VI of the Bylaws is hereby amended by deleting the first
sentence of Section 3 of said Article and adding in its place a new sentence to
read in full as set forth below:
"No transfers of shares of stock of the Company shall be made if (i)
void ab initio pursuant to Article VI of the Company's Certificate of
Incorporation, (ii) the Board of Directors, pursuant to such Article VI, shall
have refused to transfer such shares, or (iii) prohibited pursuant to Article XV
of the Bylaws."
The Bylaws of the company are hereby further amended by adding a new
Article XV to read in full as set forth below:
"ARTICLE XV
ACQUISITION OF SHARES BY CERTAIN ORGANIZATIONS
Section 1. Affidavits of Stockholders and Transferees. Whenever it is deemed
by the Board of Directors to be prudent in avoiding
(a) the direct or indirect imposition of a penalty tax on the Company
(including the imposition of an entity-level tax on one or more real estate
mortgage investment conduits ("REMICs") or one or more taxable mortgage
pools in which the Company has acquired or plans to acquire an interest) or
(b) the endangerment of the tax status of one or more REMICs or one or
more taxable mortgage pools in which the Company has acquired or plans to
acquire an interest, the Board of Directors may require to be filed with
the Company a statement or affidavit from any holder or proposed transferee
of capital stock of the Company stating whether the holder or proposed
transferee is
(i) the United States, any state or political subdivision
thereof, any possession of the United States, any foreign government,
any international organization, or any agency or instrumentality of
the foregoing, or any other organization that is exempt from federal
income taxation (including taxation under the unrelated business
taxable income provisions of the Code) (a "Disqualified Organization")
or
(ii) a partnership, trust, real estate investment trust,
regulated investment company, or other pass-through entity in which a
Disqualified Organization holds or is permitted to hold a direct or
indirect beneficial interest (a "Pass-Through Entity").
<PAGE>
Any contract for the sale or other transfer of shares of capital stock of the
Company shall be subject to this provision. Furthermore, the Board of
Directors shall have the right, but shall not be required, to refuse to
transfer any shares of capital stock of the Company purportedly transferred, if
either
(a) a statement or affidavit requested pursuant to this Section 1 has
not been received, or
(b) the proposed transferee is a Disqualified Organization or Pass-
Through Entity.
Section 2. Void Transfers. Any acquisition of shares of capital stock of the
Company that could or would
(a) result in the direct or indirect imposition of a penalty tax on
the Company (including the imposition of an entity-level tax on one or more
REMICs or one or more taxable mortgage pools in which the Company has
acquired or plans to acquire an interest) or
(b) endanger the tax status of one or more REMICs or one or more
taxable mortgage pools in which the company has acquired or plans to
acquire an interest
shall be void ab initio to the fullest extent permitted under applicable law
and the intended transferee of the subject shares shall be deemed never to have
had an interest therein.
If the foregoing provision is determined to be void or invalid by
virtue of any legal decision, statute, rule or regulation, then the transferee
of those shares shall be deemed, at the option of the Company, to have acted as
agent on behalf of the Company in acquiring those shares and to hold those
shares on behalf of the Company.
Section 3. Redemption of Shares. Whenever it is deemed by the Board of
Directors to be prudent in avoiding
(a) the direct or indirect imposition of a penalty tax on the Company
(including the imposition of an entity-level tax on one or more REMICs or
one or more taxable mortgage pools in which the Company has acquired or
plans to acquire an interest) or
(b) the endangerment of the tax status of one or more REMICs or one or
more taxable mortgage pools in which the Company has acquired or plans to
acquire an interest,
the Company may redeem shares of its capital stock.
Any such redemption shall be conducted in accordance with the
procedures set forth in Article VI, Section 6 of the Certificate of
Incorporation of the Company regarding the repurchase of Excess Shares (as
defined therein).
Section 4. Application of Article. Nothing contained in this Article or in
any other provision hereof shall limit the authority of the Board of Directors
to take any and all other action as it in its sole discretion deems necessary or
advisable to protect the Company or the interests of its stockholders by
avoiding
(a) the direct or indirect imposition of a penalty tax on the Company
(including the imposition of an entity-level tax on one or more REMICs or
one or more taxable mortgage pools in which the Company has acquired or
plans to acquire an interest) or
<PAGE>
(b) the endangerment of the tax status of one or more REMICs or one or
more taxable mortgage pools in which the Company has acquired or plans to
acquire an interest.
Section 5. Severability. If any provision of this Article or any application
of any such provision is determined to be invalid by any federal or state court
having jurisdiction over the issue, the validity of the remaining provisions
shall be affected only to the extent necessary to comply with the determination
of that court."
<PAGE>
AMENDMENT TO BYLAWS OF
-----------------------
CWM MORTGAGE HOLDINGS, INC.
---------------------------
(Adopted by the Board on 5/17/95)
The following resolution was duly adopted by the Board of Directors of the
Corporation at a meeting duly called and held on May 17, 1995:
NOW, THEREFORE, BE IT RESOLVED, that the Bylaws of the Corporation be
amended by adding to ARTICLE II a new Section 10 to read as follows:
"SECTION 10. Nominations for Directors. Nominations for the election of
members of the Board of Directors at the annual meeting of stockholders may
be made by the Board of Directors or by any holder of any outstanding class
of voting stock of the Corporation entitled to vote for the election of
directors. Nominations for the election of members of the Board of
Directors shall be stated in writing and filed with the Secretary of the
corporation on or before thirty days prior to the date of the annual
meeting of stockholders, and such nominations so stated, proposed and filed
with the Secretary shall be considered at the annual meeting."
<PAGE>
AMENDMENT TO THE BYLAWS OF
--------------------------
CWM MORTGAGE HOLDINGS, INC.
---------------------------
(Adopted by the Board of Directors on January 20, 1997
and Approved by the Shareholders on June 24, 1997)
Article II, Section 3 of the Bylaws of the Company is hereby amended to delete
the clause, "a majority of the Unaffiliated Directors (as defined in Article
III, Section 3),"
Article III, Section 3 of the Bylaws of the Company is hereby amended to delete
the first sentence thereof, which reads:
"A majority of the members of the Board of Directors shall at all times be
persons who are not Affiliates of an individual or corporate management company
to whom the Board has delegated management duties as permitted in Section 18 of
this Article and Article V, Section 7 of the Certificate of Incorporation (a
'Management Company') (such directors being referred to as 'Unaffiliated
Directors')."
Article III, Section 5 of the Bylaws of the Company is hereby amended to delete
the third sentence thereof, which reads:
"The vacancy for any reason of any director who is not an Affiliate of a
Management Company shall be filled by a majority vote of the remaining members
of the Board of Directors, including a majority vote of the remaining
Unaffiliated Directors."
and replace such sentence with the following new sentence to read in full as set
forth below:
"The vacancy for any reason of any director shall be filled by a majority vote
of the remaining members of the Board of Directors."
Article III, Section 12 of the Bylaws of the Company is hereby amended to make
the following changes to the second paragraph:
(i) delete the clause, "Notwithstanding the first paragraph of this
Section 12, any action pertaining to a transaction involving the Corporation in
which any Management Company, any director or officer of the Corporation or any
Affiliate of any of the foregoing persons has an interest" and replace such
clause with the following new clause, "Notwithstanding the first paragraph of
this Section 12, any action pertaining to a transaction involving the
Corporation in which any director or officer of the Corporation or any Affiliate
of any of the foregoing persons has an interest";
(ii) add the word "and" after the semicolon in subsection (a);
(iii) remove the word "and" from after the semicolon in section (b); and
<PAGE>
(iv) delete subsection (c), which reads: "(c) if the transaction
involves compensation to any Management Company or its affiliates for services
rendered in a capacity other than that contemplated by the management
arrangements, to the knowledge of the directors such compensation is not greater
than the customary charges for comparable services generally available from
other competent unaffiliated persons."
Article III, Section 17 of the Bylaws of the Company is hereby amended:
(i) to delete the clause, ", including a majority of the Unaffiliated
Directors"; and
(ii) to delete the following sentences, "The Unaffiliated Directors
shall review the investment policies of the Corporation at least annually to
determine that the policies then being followed by the Corporation are in the
best interests of its stockholders. Each such determination and the basis
therefor shall be set forth in the minutes of the Board of Directors."
Article III, Section 18 of the Bylaws of the Company is hereby deleted in its
entirety and replaced with the following statement: "Section 18. [RESERVED]".
Article III, Section 19 of the Bylaws of the Company is hereby deleted in its
entirety and replaced with the following statement: "Section 19. [RESERVED]".
Article IV, Section 1 of the Bylaws of the Company is hereby amended to delete
the second sentence, which reads:
"At least a majority of the members of any such committee shall be composed of
directors who are Unaffiliated Directors."
Article XIV of the Bylaws of the Company is hereby amended:
(i) to delete subsection (b);
(ii) to re-letter subsection (c) as subsection (b);
(iii) to replace subsection (d) with the following, "(c) Article III,
Section 17; and";
(iv) to delete subsection (e); and
(v) to re-letter subsection (f) as subsection (d).
<PAGE>
AMENDMENT TO THE BYLAWS OF
INDYMAC MORTGAGE HOLDINGS, INC.
(Adopted by the Board of Directors on 7/21/98)
The Bylaws of IndyMac Mortgage Holdings, Inc. are hereby amended to
revise ARTICLE II so that the current Section 10 shall be deleted and the
following Section 10 and Section 11 shall be added to the end of ARTICLE II:
"Section 10. Nomination of Directors. Only persons who are nominated in
accordance with the following procedures shall be eligible for election as
directors of the Corporation, except as may be otherwise provided in the
Certificate of Incorporation of the Corporation with respect to the right of
holders of preferred stock of the Corporation to nominate and elect a specified
number of directors in certain circumstances. Nominations of persons for
election to the Board of Directors may be made at any annual meeting of
stockholders, or at any special meeting of stockholders called for the purpose
of electing directors, (a) by or at the direction of the Board of Directors (or
any duly authorized committee thereof) or (b) by any stockholder of the
Corporation (i) who is a stockholder of record on the date of the giving of the
notice provided for in this Section 10 and on the record date for the
determination of stockholders entitled to vote at such meeting and (ii) who
complies with the notice procedures set forth in this Section 10.
In addition to any other applicable requirements, for a nomination to be
made by a stockholder, such stockholder must have given timely notice thereof in
proper written form to the Secretary of the Corporation.
To be timely, a stockholder's notice to the Secretary must be delivered to
or mailed and received at the principal executive offices of the Corporation (a)
in the case of an annual meeting, not less than ninety (90) days nor more than
one hundred twenty (120 ) days prior to the anniversary date of the immediately
preceding annual meeting of stockholders; provided, however, that in the event
-------- -------
that the annual meeting is called for a date that is not within thirty (30) days
before or after such anniversary date, notice by the stockholder in order to be
timely must be so received not later than the close of business on the tenth
(10th) day following the day on which such notice of the date of the annual
meeting was mailed or such public disclosure of the date of the annual meeting
was made, whichever first occurs; and (b) in the case of a special meeting of
stockholders called for the purpose of electing directors, not later than the
close of business on the tenth (10th) day following the day on which notice of
the date of the special meeting was mailed or public disclosure of the date of
the special meeting was made, whichever first occurs.
<PAGE>
To be in proper written form, a stockholder's notice to the Secretary must
set forth (a) as to each person whom the stockholder proposes to nominate for
election as a director (i) the name, age, business address and residence address
of the person, (ii) the principal occupation or employment of the person, (iii)
the class or series and number of shares of capital stock of the Corporation
which are owned beneficially or of record by the person and (iv) any other
information relating to the person that would be required to be disclosed in a
proxy statement or other filings required to be made in connection with
solicitations of proxies for election of directors pursuant to Section 14 of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the rules
and regulations promulgated thereunder; and (b) as to the stockholder giving the
notice (i) the name and record address of such stockholder, (ii) the class or
series and number of shares of capital stock of the Corporation which are owned
beneficially or of record by such stockholder, (iii) a description of all
arrangements or understandings between such stockholder and each proposed
nominee and any other person or persons (including their names) pursuant to
which the nomination(s) are to be made by such stockholder, (iv) a
representation that such stockholder intends to appear in person or by proxy at
the meeting to nominate the persons named in its notice and (v) any other
information relating to such stockholder that would be required to be disclosed
in a proxy statement or other filings required to be made in connection with
solicitations of proxies for election of directors pursuant to Section 14 of the
Exchange Act and the rules and regulations promulgated thereunder. Such notice
must be accompanied by a written consent of each proposed nominee to being named
as a nominee and to serve as a director if elected.
No person shall be eligible for election as a director of the Corporation
unless nominated in accordance with the procedures set forth in this Section 10.
If the Chairman of the meeting determines that a nomination was not made in
accordance with the foregoing procedures, the Chairman shall declare to the
meeting that the nomination was defective and such defective nomination shall be
disregarded.
Section 11. Notice of Meetings. No business may be transacted at an
annual meeting of stockholders, other than business that is either (a) specified
in the notice of meeting (or any supplement thereto) given by or at the
direction of the Board of Directors (or any duly authorized committee thereof),
(b) otherwise properly brought before the annual meeting of stockholders by or
at the direction of the Board of Directors (or any duly authorized committee
thereof) or (c) otherwise properly brought before the annual meeting by any
stockholder of the Corporation (i) who is a stockholder of record on the date of
the giving of the notice provided for in this Section and on the record date for
the determination of stockholders entitled to vote at such annual meeting and
(ii) who complies with the notice procedures set forth in this Section.
<PAGE>
In addition to any other applicable requirements, for business to be
properly brought before an annual meeting by a stockholder, such stockholder
must have given timely notice thereof in proper written form to the Secretary of
the Corporation.
To be timely, a stockholder's notice to the Secretary must be delivered to
or mailed and received at the principal executive offices of the Corporation not
less than ninety (90) days nor more than one hundred twenty (120) days prior to
the anniversary date of the immediately preceding annual meeting of
stockholders; provided, however, that in the event that the annual meeting is
-------- -------
called for a date that is not within thirty (30) days before or after such
anniversary date, notice by the stockholder in order to be timely must be so
received not later than the close of business on the tenth (10th) day following
the day on which such notice of the date of the annual meeting was mailed or
such public disclosure of the date of the annual meeting was made, whichever
first occurs.
To be in proper written form, a stockholder's notice to the Secretary must
set forth as to each matter such stockholder proposes to bring before the annual
meeting (i) a brief description of the business desired to be brought before the
annual meeting and the reasons for conducting such business at the annual
meeting, (ii) the name and record address of such stockholder, (iii) the class
or series and number of shares of capital stock of the Corporation which are
owned beneficially or of record by such stockholder, (iv) a description of all
arrangements or understandings between such stockholder and any other person or
persons (including their names) in connection with the proposal of such business
by such stockholder and any material interest of such stockholder in such
business and (v) a representation that such stockholder intends to appear in
person or by proxy at the annual meeting to bring such business before the
meeting.
No business shall be conducted at the annual meeting of stockholders except
business brought before the annual meeting in accordance with the procedures set
forth in this Section 11, provided, however, that, once business has been
-------- -------
properly brought before the annual meeting in accordance with such procedures,
nothing in this Section 11 shall be deemed to preclude discussion by any
stockholder of any such business. If the Chairman of an annual meeting
determines that business was not properly brought before the annual meeting in
accordance with the foregoing procedures, the Chairman shall declare to the
meeting that the business was not properly brought before the meeting and such
business shall not be transacted."
<PAGE>
AMENDMENT TO THE BYLAWS OF
INDYMAC MORTGAGE HOLDINGS, INC.
(Adopted by the Board of Directors on 1/20/99)
The Bylaws of IndyMac Mortgage Holdings, Inc. are hereby amended to revise
ARTICLE V as follows:
1. Section 4 shall be deleted in its entirety and replaced with the
following:
"Section 4. The Chairman of the Board. The Chairman of the Board shall
act as chairman at all meetings of the stockholders at which he is present,
and shall preside at all meetings of the Board of Directors at which he is
present. In the absence of the Chairman of the Board, his duties shall be
performed and his authority may be exercised by the Chief Executive
Officer, and, in the absence of the Chairman of the Board and the Chief
Executive Officer, such duties shall be performed and such authority may be
exercised by the President, and in the absence of the Chairman of the
Board, the Chief Executive Officer and the President, such duties shall be
performed and such authority may be exercised by the Chief Operating
Officer. In the absence of the Chairman of the Board, the Chief Executive
Officer, the President and the Chief Operating Officer, such duties shall
be performed and such authority may be exercised by the Vice Presidents in
order of their rank as fixed by the Board of Directors, or if not ranked,
the Vice President designated by the Board of Directors, or in the absence
of such Vice President, by such officer as may have been designated by the
most senior officer of the Corporation who has made any such designation,
with the right reserved to the Board of Directors to make the designation
or supersede any designation made. The Chairman of the Board shall have
such other powers and duties as may be assigned by the Board of Directors
from time to time. The Board of Directors may in its discretion appoint one
individual to hold the positions of Chairman of the Board and Chief
Executive Officer.
2. A new Section 4A shall be added as follows:
"Section 4A. The Chief Executive Officer. The Chief Executive Officer
shall direct, coordinate and control the Corporation's business and
activities and its operating expenses and capital expenditures, and shall
have general authority to exercise all the powers necessary for the chief
executive officer of the Corporation, all in accordance with basic policies
established by and subject to the control of the Board of Directors. The
Chief Executive Officer may employ and discharge employees and agents of
the Corporation, and he may delegate these powers. He shall have general
authority to execute bonds, deeds and contracts in the name and on behalf
of the Corporation. As provided in Section 4 of this Article V, in the
absence of the Chairman of the Board, the Chief Executive Officer shall
perform all the duties and exercise the authority of the Chairman of the
Board. In the absence of the Chairman of the Board and the Chief Executive
Officer, the duties of the Chairman of the Board shall be performed and his
authority may be exercised by the President, and in
<PAGE>
the absence of the Chairman of the Board, the Chief Executive Officer and
the President, the Vice Presidents in order of their rank as fixed by the
Board of Directors, or if not ranked, the Vice President designated by the
Board of Directors, and, in the absence of such Vice President, by such
officer as may have been designated by the most senior officer of the
Corporation who has made any such designation, with the right reserved to
the Board of Directors to make the designation or supersede any designation
so made. The Board of Directors may in its discretion appoint one
individual to hold the positions of Chairman of the Board and Chief
Executive Officer."
3. Section 5 shall be deleted in its entirety and replaced with the
following:
"Section 5. The President. The President shall implement the general
directives, plans and policies formulated by the Chief Executive Officer
pursuant to the Bylaws and, in general, shall have authority to exercise
all powers delegated to him by the Chief Executive Officer. He shall have
general authority to execute bonds, deeds and contracts in the name and on
behalf of the Corporation and responsibility for the employment or
appointment and discharge of such employees, agents and officers, as may be
required to carry on the operation of the business. As provided in Section
4 of this Article V, in the absence of the Chairman of the Board and the
Chief Executive Officer, the President shall perform all the duties and
exercise the authority of the Chairman of the Board. In the absence of the
Chairman of the Board, the Chief Executive Officer and the President, the
duties of the Chairman of the Board shall be performed and his authority
may be exercised by the Vice Presidents in order of their rank as fixed by
the Board of Directors, or if not ranked, the Vice President designated by
the Board of Directors, and, in the absence of such Vice President, by such
officer as may have been designated by the most senior officer of the
Corporation who has made any such designation, with the right reserved to
the Board of Directors to make the designation or supersede any designation
so made. The Board of Directors may in its discretion appoint one
individual to hold the positions of President and Chief Operating Officer.
4. A new Section 5A shall be added as follows:
"Section 5A. The Chief Operating Officer. The Chief Operating Officer
shall establish operating and administrative plans and policies and direct
and coordinate the Corporation's organizational components, within the
scope of the authority delegated to him by the Board of Directors. He shall
have general authority to execute bonds, deeds and contracts in the name
and on behalf of the Corporation. As provided in Section 4 of this Article
V, in the absence of the Chairman of the Board, the Chief Executive Officer
and the President, the Chief Operating Officer shall perform all the duties
and exercise the authority of the Chairman of the Board. In the absence of
the Chairman of the Board, the Chief Executive Officer, the President and
the Chief Operating Officer, the duties of the Chairman of the Board shall
be performed and his authority may be exercised by the Vice Presidents in
order of their rank as fixed by the Board of Directors, or if not ranked,
the Vice President designated by the Board of Directors, and, in the
absence of such Vice President, by such officer as may
<PAGE>
have been designated by the most senior officer of the Corporation who has
made any such designation, with the right reserved to the Board of
Directors to make the designation or supersede any designation so made. The
Board of Directors may in its discretion appoint one individual to hold the
positions of President and Chief Operating Officer."
<PAGE>
Exhibit 10.57
-------------
EMPLOYMENT AGREEMENT
--------------------
THIS EMPLOYMENT AGREEMENT (the "Agreement") has been executed as of
December 30, 1998 by and between IndyMac Mortgage Holdings, Inc., a Delaware
corporation ("Employer"), and David S. Loeb ("Officer").
W I T N E S S E T H:
--------------------
WHEREAS, Officer currently holds the office of Chairman of the Board of
Directors of Employer (the "Board"); and
WHEREAS, Employer desires to obtain the benefit of continued services of
officer and Officer desires to continue to render services to Employer; and
WHEREAS, the Board has determined that it is in Employer's best interest
and that of its stockholders to recognize the substantial contribution that
Officer has made and is expected to continue to make to the Company's business
and to retain his services in the future; and
WHEREAS, Employer and Officer desire to set forth the continued terms and
conditions of Officer's employment with Employer 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, in accordance with the terms hereof, for a term beginning on January
1, 1999 (the "Effective Date") and ending on December 31, 2003, unless earlier
terminated in accordance with the provisions hereof.
2. Specific 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 and its subsidiaries as Chairman
of the Board. Employer agrees that Officer's duties hereunder shall be the
usual and customary duties of the office of Chairman of the Board and such
further duties consistent therewith as may be designated from time to time by
the Board, and shall not be inconsistent with the provisions of the charter
documents of Employer or applicable law. Officer shall have such executive
power and authority as shall reasonably be required to enable him to discharge
his duties in the offices which he may hold. All compensation paid to Officer
by Employer or any of its subsidiaries shall be aggregated in determining
whether Officer has received the benefits provided for herein.
3. Scope of this Agreement and Outside Affiliations. Except as expressly
------------------------------------------------
provided below, during the term of this Agreement, Officer shall devote such
portion of his business time and energy as the Board may reasonably require to
the business, affairs and interests of Employer and its subsidiaries, and
matters related thereto, and shall use his best efforts and abilities to
<PAGE>
promote its interests. Officer agrees that he will diligently endeavor to
promote the business, affairs and interests of Employer and its subsidiaries 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 in such
senior executive capacity not below the rank of Vice President for one or more
(direct or indirect) subsidiaries of Employer as the Board may from time to time
request, subject to appropriate authorization by the subsidiary or subsidiaries
involved and any limitation under applicable law. Employer and Officer
acknowledge and agree that Officer may perform his duties hereunder outside the
State of California. Officer's failure to discharge an order or perform a
function because Officer reasonably and in good faith believes such would
violate a law or regulation or be dishonest shall not be deemed a breach by him
of his obligations or duties pursuant to any of the provisions of this
Agreement, including without limitation pursuant to Section 5(c) hereof.
Officer may not serve as a director or in any other capacity of any
business enterprise, including an enterprise whose activities may involve or
relate to the business of Employer, unless such service is expressly approved
herein or by the Board. Officer may make and manage personal business
investments of his choice and serve in any capacity with any civic, educational
or charitable organization, or any governmental entity or trade association,
without seeking or obtaining approval by the Board, provided such activities and
services do not materially interfere or conflict with the performance of his
duties hereunder.
Notwithstanding any provisions of this Section 3, Employer and Officer
acknowledge that Officer currently serves as an officer and director of
Countrywide Credit Industries, Inc. and certain of its subsidiaries
("Countrywide") and agree that Officer shall be permitted to perform such
duties, engage in such activities and devote such portion of his business time
and energy as may be required under the terms of his employment with
Countrywide.
4. Compensation and Benefits.
-------------------------
(a) Base Salary. Employer shall pay to Officer a base salary in each
-----------
fiscal year of Employer (a "Fiscal Year") or portion thereof covered by this
Agreement at the annual rate of $550,000. Such base salary shall be subject to
annual review by the Board for increase (but not decrease).
(b) Execution Bonus. Upon the execution of this Agreement by Officer
---------------
and Employer (the "Execution Date"), Employer shall owe to Officer a one time
execution bonus of $1,100,000. Employer shall pay such bonus to Officer as soon
as practicable after the Execution Date.
(c) Restricted Stock and Stock Options. Upon the Execution Date,
----------------------------------
Employer shall grant to Officer 100,000 restricted shares of the Employer's
common stock, such restricted shares to become vested and transferable as to
20,000 shares on each of the first five (5) anniversaries of the date of grant,
provided that Officer remains in continuous service with Employer until such
anniversary. In respect of each of the Fiscal Years during the term of this
Agreement, Employer shall also grant to Officer stock options and/or restricted
shares for such number of shares of Employer's common stock as the Compensation
Committee of the Board in
2
<PAGE>
its sole discretion determines (but not less than stock options for 100,000
shares of such common stock), taking into account Officer's and Employer's
performance in each of such Fiscal Years and the competitive practices then
prevailing regarding the granting of stock options and restricted shares. All
stock options and restricted shares granted in accordance with this Section 4(c)
shall be granted pursuant to the 1998 Stock Incentive Plan, as amended (the
"1998 Plan"), or such other stock option plan or plans as may be or come into
effect during the term of this Agreement and, in the case of stock options,
shall have a per share exercise price equal to the fair market value (as defined
in the 1998 Plan or such other plan or plans) of the common stock at the time of
grant. The stock options granted pursuant to this Section shall consist of
incentive stock options to the extent permitted by law or regulation.
(d) Additional Benefits. Officer shall also be entitled to all
-------------------
rights and benefits for which he is otherwise eligible under any bonus plan,
stock purchase plan, participation or extra compensation plan, executive
compensation plan, pension plan, profit-sharing plan, life and medical insurance
policy, or other plans or benefits, which Employer or its subsidiaries may
provide for him, or provided he is eligible to participate therein, for senior
officers generally or for employees generally, during the term of this Agreement
(collectively, "Additional Benefits"). This Agreement shall not affect the
provision of any other compensation, retirement or other benefit program or plan
of Employer.
(e) Continuation of Benefits. If Officer's employment is terminated
------------------------
hereunder, pursuant to Section 5(a), 5(b) or 5(d) hereof, Employer shall
continue for the period specified in Section 5(a) or 5(b) hereof or three years
in the case of a termination pursuant to Section 5(d) hereof, as the case may
be, to provide benefits substantially equivalent to Additional Benefits (other
than qualified pension or profit-sharing plan benefits and option, equity or
stock appreciation or other incentive plan benefits as distinguished from
health, disability and welfare type benefits) on behalf of Officer and his
dependents and beneficiaries which were being provided to them immediately prior
to Officer's Termination Date, but only to the extent that Officer is not
entitled to comparable benefits from other employment.
(f) Deferral of Amounts Payable Hereunder. In the event Officer
-------------------------------------
should desire to defer receipt of any cash payments to which he would otherwise
be entitled hereunder, he may elect to do so under Employer's nonqualified
deferred compensation program, subject to the terms and conditions of such
program.
(g) Termination Bonus. Upon the termination of Officer's employment
-----------------
hereunder for any reason other than Cause (including, without limitation, death,
Disability, Good Reason, voluntary termination and nonrenewal or expiration of
this Agreement), the Employer shall owe to Officer a one-time termination bonus
of $1,000,000, in addition to any other amounts or benefits payable to Officer
under Section 5. Employer shall pay such bonus to Officer as soon as
practicable after the date of such termination.
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:
3
<PAGE>
(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 the tenth
(10th) anniversary of such notice, 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)
sixty percent (60%) of the then existing base-salary payable immediately prior
to the termination, minus (2) the amount of any cash payments to him under the
terms of Employer's disability insurance or other disability benefit plans or
Employer's tax-qualified defined benefit pension plan, and any compensation he
may receive pursuant to any other employment (other than compensation for
disability), (ii) to provide during the Disability Payment Period the benefits
specified in Section 4(e) hereof, and (iii) to continue during the Disability
Payment Period the vesting of all option, equity and stock appreciation rights
granted to Officer.
The determination of Disability shall be made only after 30 days
notice to Officer and only if Officer has not returned to performance of his
duties during such 30-day period. In order to determine Disability, both
Employer and Officer shall have the right to provide medical evidence to support
their respective positions, with the ultimate decision regarding Disability to
be made by a majority of Employer's disinterested directors.
(b) Death. In the event that Officer shall die during the term of
-----
this Agreement, Employer shall pay Officer's base salary for the remainder of
the term of this Agreement following the date of Officer's death and in the
manner otherwise payable hereunder, to such person or persons as Officer shall
have directed in writing or, in the absence of a designation, to his estate (the
"Beneficiary"). Employer shall also provide during the three (3) year period
following the date of the Officer's death the benefits specified in Section 4(e)
hereof and fully vest all option, equity and stock appreciation rights granted
to Officer. If Officer's death occurs while he is receiving payments for
Disability under Section 5(a)(i) above, such payments shall cease and the
Beneficiary shall be entitled to the payments and benefits under this Subsection
(b). This Agreement in all other respects will terminate upon the death of
Officer; provided, however, that the termination of the Agreement shall not
affect Officer's entitlement to all other benefits in which he has become vested
or which are otherwise payable in respect of periods ending prior to or upon its
termination.
(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, (ii) Officer's conviction
by a court of competent jurisdiction of a felony, or (iii) entry of an order
duly issued by any federal or state regulatory agency having jurisdiction in the
matter removing Officer from office of
4
<PAGE>
Employer or its subsidiaries or permanently prohibiting him from participating
in the conduct of the affairs of Employer or any of its subsidiaries. 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 subsidiaries' affairs by any federal or state regulatory authority having
jurisdiction in the matter, Employer's obligations under Sections 4(a) and 4(c)
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) and 4(c) hereof are suspended, Officer shall continue to be
entitled to receive Additional Benefits under Section 4(d) until the conviction
of the felony or removal from office has become final and non-appealable. When
the conviction of the felony or removal from office has become final and non-
appealable, all of Employer's obligations hereunder shall terminate; provided,
however, that the termination of Officer's employment pursuant to this Section
5(c) shall not affect Officer's entitlement to all benefits in which he has
become vested or which are otherwise payable in respect of periods ending prior
to or upon his termination of employment.
(d) Good Reason. Officer may terminate his employment for Good
-----------
Reason. For purposes of this Agreement, "Good Reason" shall be deemed to occur
if (i) Employer notifies Officer of a termination of his employment other than
for Cause, (ii) Employer breaches this Agreement in any material respect, (iii)
the Board (A) elects a person other than Officer as Employer's Chairman of the
Board without Officer's consent, (B) reorganizes management so as to require him
to report to a person or persons other than the Board, or (C) takes any other
action which, in Officer's sole judgment, results in the diminution in Officer's
status, title, position and responsibilities other than an insubstantial action
not taken in bad faith and which is remedied by Employer promptly after receipt
of notice by Officer, or (iv) Officer is not elected to the Board.
Notwithstanding the foregoing, Officer may terminate his employment for any or
no reason within one year following a "Change in Control" (as defined in
Appendix A to this Agreement) and such termination shall be considered a
termination for Good Reason hereunder. If Officer's employment shall be
terminated by Employer other than for Cause or by Officer for Good Reason, then
Employer shall pay to Officer in a single payment, as severance pay and in lieu
of any further salary and incentive compensation for periods subsequent to the
Termination Date, but in addition to the payment under Section 4(g), an amount
in cash equal to (a) if such termination occurs in 1999, 2.99 times the
Officer's base amount as determined under Section 280G(b)(3) of the Internal
Revenue Code of 1986, as amended (the "Code"), on the Termination Date (the
"Base Amount"), (b) if such termination occurs in 2000, 2.50 times the Base
Amount, (c) if such termination occurs in 2001, 2.00 times the Base Amount, (d)
if such termination occurs in 2002, 1.50 times the Base Amount, and (e) if such
termination occurs in 2003, 1.00 times the Base Amount.
If in the opinion of tax counsel selected by Officer and reasonably
acceptable to Employer, Officer has or will receive any compensation or
recognize any income (whether or not pursuant to this Agreement or any plan or
other arrangement of Employer and whether or not Officer's employment with
Employer has terminated, unless such employment is terminated for
5
<PAGE>
Cause) which will constitute an "excess parachute payment" within the meaning of
Section 280G(b)(1) of the Code (or for which a tax is otherwise payable under
Section 4999 of the Code or any successor provision thereto), then Employer
shall pay Officer an additional amount (the "Additional Amount") equal to the
sum of (i) all taxes payable by Officer under Section 4999 of the Code with
respect to all such excess parachute payments and any such Additional Amount,
plus (ii) all federal, state and local income taxes payable by Officer with
respect to any such Additional Amount. Any amounts payable pursuant to this
paragraph shall be paid by Employer to Officer within 30 days of each written
request therefor made by Officer.
(e) Resignation. Except as provided in Section 5(d) hereof, if
-----------
during the term of this Agreement, Officer shall resign voluntarily, all of his
rights to payment or benefits hereunder shall immediately terminate; provided,
however, that the termination of Officer's employment pursuant to this Section
5(e) shall not affect Officer's entitlement to all benefits in which he has
become vested or which are otherwise payable in respect of periods ending prior
to or upon his termination of employment, including the payment under Section
4(g).
(f) Notice of Termination. Any purported termination by Employer or
---------------------
by Officer shall be communicated by a written Notice of Termination to the other
party hereto which indicates the specific termination provision in this
Agreement, if any, relied upon and which sets forth in reasonable detail the
facts and circumstances, if any, claimed to provide a basis for termination of
Officer's employment under the provision so indicated. For purposes of this
Agreement, no such purported termination shall be effective without such Notice
of Termination. The "Termination Date" shall mean the date specified in the
Notice of Termination, which shall be no less than 30 or more than 60 days from
the date of the Notice of Termination. Notwithstanding any other provision of
this Agreement, in the event of any termination of Officer's employment
hereunder for any reason, Employer shall pay Officer his full base salary
through the Termination Date, plus any Additional Benefits which have been
earned or become payable, but which have not yet been paid as of such
Termination Date.
(g) Payments. All payments required under this Agreement (other than
--------
the Additional Benefits payable pursuant to Section 4(e) hereof) as a result of
the termination of Officer's employment hereunder shall be made within 15 days
of the Termination Date or, if any portion is not then reasonably determinable,
within five (5) days after such portion is so determinable. In the event of a
dispute concerning the validity of a purported termination which is maintained
in good faith, the Termination Date shall mean the date the dispute is finally
resolved and Employer will continue to provide Officer with the compensation and
benefits provided for under this Agreement, until the dispute is finally
resolved without any obligation by Officer to repay any of such amounts to
Employer, notwithstanding the final outcome of the dispute. Payments required
to be made by this Section 5(g) are in addition to all other amounts due under
Section 5 of this Agreement and shall not be offset against or reduce any other
amounts due under Section 5 of this Agreement. Officer shall be required to
render services to Employer during the period following his Termination Date but
before the dispute concerning the termination is finally determined unless
Employer fails to provide Officer with a reasonable opportunity to perform his
duties under this Agreement during such period.
6
<PAGE>
6. Reimbursement of Business Expenses. During the term of this Agreement,
----------------------------------
Employer shall reimburse Officer promptly for all expenditures (including
travel, entertainment, parking, business meetings, and the monthly costs
(including dues) of maintaining memberships at appropriate clubs) to the extent
that such expenditures meet the requirements of the Code for deductibility by
Employer for federal income tax purposes or are otherwise in compliance with the
rules and policies of Employer and are substantiated by Officer as required by
the Internal Revenue Service and rules and policies of Employer.
7. Indemnity. To the extent permitted by applicable law, the Certificate
---------
of Incorporation and the By-Laws of Employer (as from time to time in effect)
and any indemnity agreements entered into from time to time between Employer and
Officer, Employer shall indemnify Officer and hold him harmless for any acts or
decisions made by him in good faith while performing services for Employer, and
shall use reasonable efforts to obtain coverage for him under liability
insurance policies now in force or hereafter obtained during the term of this
Agreement covering the other officers or directors of Employer.
8. Miscellaneous.
-------------
(a) Succession. This Agreement shall inure to the benefit of and
----------
shall be binding upon Employer, its successors and assigns, but without the
prior written consent of Officer, this Agreement may not be assigned other than
in connection with a merger or sale of substantially all the assets of the
Employer or similar transaction. Employer shall not agree to any such
transaction unless the successor to or assignee of Employer's business and/or
assets in such transaction expressly assumes all obligations of the Employer
hereunder. 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 155 North Lake Avenue, Pasadena, California 91101,
Attention: Corporate 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 (or his business address of record in
the absence of such designation). All notices shall be deemed to have been
given two (2) business days after they have been deposited as certified mail,
return receipt requested, 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 (including, but not
limited to the provisions of Section 4 hereof) 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.
7
<PAGE>
(e) California Law. This Agreement shall be construed and
--------------
interpreted in accordance with the laws of California.
(f) Attorneys' Fees in Action on Contract. If any litigation shall
-------------------------------------
occur between the Officer and Employer, which litigation arises out of or as a
result of this Agreement or the acts of the parties hereto pursuant to this
Agreement, or which seeks an interpretation of this Agreement, the prevailing
party in such litigation, in addition to any other judgment or award, shall be
entitled to receive such sums as the court hearing the matter shall find to be
reasonable as and for the attorneys' fees of the prevailing party.
(g) Confidentiality. Officer agrees that he will not divulge or
---------------
otherwise disclose, directly or indirectly, any trade secret or other
confidential information concerning the business or policies of Employer or any
of its subsidiaries which he may have learned as a result of his employment
during the term of this Agreement or prior thereto as an employee, officer or
director of or consultant to Employer or any of its subsidiaries, except to the
extent such use or disclosure is (i) necessary or appropriate to the performance
of this Agreement and in furtherance of Employer's best interests, (ii) required
by applicable law, (iii) lawfully obtainable from other sources, or (iv)
authorized by Employer. The provisions of this subsection shall survive the
expiration, suspension or termination, for any reason, of this Agreement.
(h) Remedies of Employer. Officer acknowledges that the services he
--------------------
is obligated to render under the provisions of this Agreement are of a special,
unique, unusual, extraordinary and intellectual character, which gives this
Agreement peculiar value to Employer. The loss of these services cannot be
reasonably or adequately compensated in damages in an action at law and it would
be difficult (if not impossible) to replace these services. By reason thereof,
Officer agrees and consents that if he violates any of the material provisions
of this Agreement, Employer, in addition to any other rights and remedies
available under this Agreement or under applicable law, shall be entitled during
the remainder of the term to seek injunctive relief, from a tribunal of
competent jurisdiction, restraining Officer from committing or continuing any
violation of this Agreement, or from the performance of services to any other
business entity, or both.
(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.
8
<PAGE>
(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.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
INDYMAC MORTGAGE
HOLDINGS, INC.
ATTEST
s:/ Richard H. Wohl By: s:/Michael W. Perry
- ------------------- -------------------
Richard H. Wohl Michael W. Perry
Title: Secretary Title: Secretary
OFFICER:
s:/ David S. Loeb
-----------------
David S. Loeb, in his individual capacity
9
<PAGE>
APPENDIX A
To David S. Loeb Employment Agreement
A "Change in Control" shall mean the occurrence during the term of the
Agreement, of any one of the following events:
(a) An acquisition (other than directly from Employer) of any common
stock or other "Voting Securities" (as hereinafter defined) of
Employer by any "Person" (as the term person is used for purposes
of Section 13(d) or 14(d) of the Securities Exchange Act of 1934,
as amended (the "Exchange Act")), immediately after which such
Person has "Beneficial Ownership" (within the meaning of Rule
13d-3 promulgated under the Exchange Act) of twenty five percent
(25%) or more of the then outstanding shares of Employers common
stock or the combined voting power of Employer's then outstanding
Voting Securities; provided, however, that in determining whether
-------- -------
a Change in Control has occurred, Voting Securities which are
acquired in a "Non-Control Acquisition" (as hereinafter defined)
shall not constitute an acquisition which would cause a Change in
Control. For purposes of this Agreement, (1) "Voting Securities"
shall mean Employer's outstanding voting securities entitled to
vote generally in the election of directors and (2) a "Non-
Control Acquisition" shall mean an acquisition by (i) an employee
benefit plan (or a trust forming a part thereof) maintained by
(A) Employer or (B) any corporation or other Person of which a
majority of its voting power or its voting equity securities or
equity interest is owned, directly or indirectly, by Employer
(for purposes of this definition, a "Subsidiary"), (ii) Employer
or any of its Subsidiaries, (iii) any Person in connection with a
"Non-Control Transaction" (as hereinafter defined), or (iv)
Countrywide or any of its affiliates (the "Countrywide
Entities");
(b) The individuals who, as of the date of the Agreement are members
of the Board (the "Incumbent Board"), cease for any reason to
constitute at least two-thirds of the members of the Board;
provided, however, that if the election, or nomination for
-------- -------
election by Employer's common stockholders, of any new director
was approved by a vote of at least two-thirds of the Incumbent
Board, such new director shall, for purposes of this Agreement,
be considered as a member of the Incumbent Board; provided
--------
further, however, that no individual shall be considered a member
------- -------
of the Incumbent Board if such individual initially assumed
office as a result of either an actual or threatened "Election
Contest" (as described in Rule 14a-11 promulgated under the
Exchange Act) or other actual or threatened solicitation of
proxies or consents by or on behalf of a Person other than the
Board (a "Proxy Contest") including by reason of any agreement
intended to avoid or settle any Election Contest or Proxy
Contest; or
10
<PAGE>
(c) The consummation of:
(i) A merger, consolidation or reorganization involving
Employer, unless such merger, consolidation or
reorganization is a "Non-Control Transaction." A "Non-
Control Transaction" shall mean a merger, consolidation or
reorganization of Employer into, with or involving any
Countrywide Entity or where:
(A) the stockholders of Employer, immediately before such
merger, consolidation or reorganization, own directly
or indirectly immediately following such merger,
consolidation or reorganization, at least seventy
percent (70%) of the combined voting power of the
outstanding Voting Securities of the corporation
resulting from such merger, consolidation or
reorganization (the "Surviving Corporation") in
substantially the same proportion as their ownership of
the Voting Securities immediately before such merger,
consolidation or reorganization;
(B) the individuals who were members of the Incumbent Board
immediately prior to the execution of the agreement
providing for such merger, consolidation or
reorganization constitute at least two-thirds of the
members of the board of directors of the Surviving
Corporation, or in the event that, immediately
following the consummation of such transaction, a
corporation beneficially owns, directly or indirectly,
a majority of the Voting Securities of the Surviving
Corporation, the board of directors of such
corporation; and
(C) no Person other than (i) Employer, (ii) any Subsidiary,
(iii) any employee benefit plan (or any trust forming a
part thereof) maintained by Employer, the Surviving
Corporation, or any Subsidiary, (iv) any Countrywide
Entity, or (v) any Person who, immediately prior to
such merger, consolidation or reorganization had
Beneficial Ownership of twenty five percent (25%) or
more of the then outstanding Voting Securities or
common stock of Employer, has Beneficial Ownership of
twenty five percent (25%) or more of the combined
voting power of the Surviving Corporation's then
outstanding Voting Securities or its common stock;
(ii) A complete liquidation or dissolution of Employer; or
11
<PAGE>
(iii) The sale or other disposition of all or substantially all
of the assets of Employer to any Person (other than a
transfer to a Subsidiary or to any Countrywide Entity).
Notwithstanding the foregoing, a Change in Control shall not be deemed
to occur solely because any Person (the "Subject Person") acquired Beneficial
Ownership of more than the permitted amount of the then outstanding common stock
or Voting Securities as a result of the acquisition of common stock or Voting
Securities by Employer which, by reducing the number of shares of common stock
or Voting Securities then outstanding, increases the proportional number of
shares Beneficially Owned by the Subject Persons; provided, however, that if a
Change in Control would occur (but for the operation of this sentence) as a
result of the acquisition of common stock or Voting Securities by Employer, and
after such share acquisition by Employer, the Subject Person becomes the
Beneficial Owner of any additional common stock or Voting Securities which
increases the percentage of the then outstanding common stock or Voting
Securities Beneficially Owned by the Subject Person, then a Change in Control
shall occur.
12
<PAGE>
Exhibit 10.58
-------------
EMPLOYMENT AGREEMENT
--------------------
THIS EMPLOYMENT AGREEMENT (the "Agreement") has been executed as of
December 23, 1998 by and between IndyMac Mortgage Holdings, Inc., a Delaware
corporation ("Employer"), and Angelo R. Mozilo ("Officer").
W I T N E S S E T H:
--------------------
WHEREAS, Officer currently holds the offices of Vice Chairman of the Board
of Directors of Employer (the "Board") and Chief Executive Officer of Employer;
and
WHEREAS, Employer desires to obtain the benefit of continued services of
officer and Officer desires to continue to render services to Employer; and
WHEREAS, the Board has determined that it is in Employer's best interest
and that of its stockholders to recognize the substantial contribution that
Officer has made and is expected to continue to make to the Company's business
and to retain his services in the future; and
WHEREAS, Employer and Officer desire to set forth the continued terms and
conditions of Officer's employment with Employer 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, in accordance with the terms hereof, for a term beginning on January
1, 1999 (the "Effective Date") and ending on December 31, 2003, unless earlier
terminated in accordance with the provisions hereof.
2. Specific 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 and its subsidiaries as Vice
Chairman of the Board and Chief Executive Officer of Employer. Employer agrees
that Officer's duties hereunder shall be the usual and customary duties of the
offices of Vice Chairman of the Board and Chief Executive Officer and such
further duties consistent therewith as may be designated from time to time by
the Board, and shall not be inconsistent with the provisions of the charter
documents of Employer or applicable law. Officer shall have such executive
power and authority as shall reasonably be required to enable him to discharge
his duties in the offices which he may hold. All compensation paid to Officer
by Employer or any of its subsidiaries shall be aggregated in determining
whether Officer has received the benefits provided for herein.
3. Scope of this Agreement and Outside Affiliations. Except as expressly
------------------------------------------------
provided below, during the term of this Agreement, Officer shall devote such
portion of his business time and energy as the Board may reasonably require to
the business, affairs and interests of Employer
<PAGE>
and its subsidiaries, and matters related thereto, and shall use his best
efforts and abilities to promote its interests. Officer agrees that he will
diligently endeavor to promote the business, affairs and interests of Employer
and its subsidiaries 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 in
such senior executive capacity not below the rank of Vice President for one or
more (direct or indirect) subsidiaries of Employer as the Board may from time to
time request, subject to appropriate authorization by the subsidiary or
subsidiaries involved and any limitation under applicable law. Employer and
Officer acknowledge and agree that Officer may perform his duties hereunder
outside the State of California. Officer's failure to discharge an order or
perform a function because Officer reasonably and in good faith believes such
would violate a law or regulation or be dishonest shall not be deemed a breach
by him of his obligations or duties pursuant to any of the provisions of this
Agreement, including without limitation pursuant to Section 5(c) hereof.
Officer may not serve as a director or in any other capacity of any
business enterprise, including an enterprise whose activities may involve or
relate to the business of Employer, unless such service is expressly approved
herein or by the Board. Officer may make and manage personal business
investments of his choice and serve in any capacity with any civic, educational
or charitable organization, or any governmental entity or trade association,
without seeking or obtaining approval by the Board, provided such activities and
services do not materially interfere or conflict with the performance of his
duties hereunder.
Notwithstanding any provisions of this Section 3, Employer and Officer
acknowledge that Officer currently serves as an officer and director of
Countrywide Credit Industries, Inc. and certain of its subsidiaries
("Countrywide") and agree that Officer shall be permitted to perform such
duties, engage in such activities and devote such portion of his business time
and energy as may be required under the terms of his employment with
Countrywide.
4. Compensation and Benefits.
(a) Base Salary. Employer shall pay to Officer a base salary in each
-----------
fiscal year of Employer (a "Fiscal Year") or portion thereof covered by this
Agreement at the annual rate of $550,000. Such base salary shall be subject to
annual review by the Board for increase (but not decrease).
(b) Execution Bonus. Upon the execution of this Agreement by Officer
---------------
and Employer (the "Execution Date"), Employer shall owe to Officer a one time
execution bonus of $1,100,000. Employer shall pay such bonus to Officer as soon
as practicable after the Execution Date.
(c) Restricted Stock and Stock Options. Upon the Execution Date,
----------------------------------
Employer shall grant to Officer 100,000 restricted shares of the Employer's
common stock, such restricted shares to become vested and transferable as to
20,000 shares on each of the first five (5) anniversaries of the date of grant,
provided that Officer remains in continuous service with Employer until such
anniversary. In respect of each of the Fiscal Years during the term of this
Agreement, Employer shall also grant to Officer stock options and/or restricted
shares for such
<PAGE>
number of shares of Employer's common stock as the Compensation Committee of the
Board in its sole discretion determines (but not less than stock options for
100,000 shares of such common stock), taking into account Officer's and
Employer's performance in each of such Fiscal Years and the competitive
practices then prevailing regarding the granting of stock options and restricted
shares. All stock options and restricted shares granted in accordance with this
Section 4(c) shall be granted pursuant to the 1998 Stock Incentive Plan, as
amended (the "1998 Plan"), or such other stock option plan or plans as may be or
come into effect during the term of this Agreement and, in the case of stock
options, shall have a per share exercise price equal to the fair market value
(as defined in the 1998 Plan or such other plan or plans) of the common stock at
the time of grant. The stock options granted pursuant to this Section shall
consist of incentive stock options to the extent permitted by law or regulation.
(d) Additional Benefits. Officer shall also be entitled to all
-------------------
rights and benefits for which he is otherwise eligible under any bonus plan,
stock purchase plan, participation or extra compensation plan, executive
compensation plan, pension plan, profit-sharing plan, life and medical insurance
policy, or other plans or benefits, which Employer or its subsidiaries may
provide for him, or provided he is eligible to participate therein, for senior
officers generally or for employees generally, during the term of this Agreement
(collectively, "Additional Benefits"). This Agreement shall not affect the
provision of any other compensation, retirement or other benefit program or plan
of Employer.
(e) Continuation of Benefits. If Officer's employment is terminated
------------------------
hereunder, pursuant to Section 5(a), 5(b) or 5(d) hereof, Employer shall
continue for the period specified in Section 5(a) or 5(b) hereof or three years
in the case of a termination pursuant to Section 5(d) hereof, as the case may
be, to provide benefits substantially equivalent to Additional Benefits (other
than qualified pension or profit-sharing plan benefits and option, equity or
stock appreciation or other incentive plan benefits as distinguished from
health, disability and welfare type benefits) on behalf of Officer and his
dependents and beneficiaries which were being provided to them immediately prior
to Officer's Termination Date, but only to the extent that Officer is not
entitled to comparable benefits from other employment.
(f) Deferral of Amounts Payable Hereunder. In the event Officer
-------------------------------------
should desire to defer receipt of any cash payments to which he would otherwise
be entitled hereunder, he may elect to do so under Employer's nonqualified
deferred compensation program, subject to the terms and conditions of such
program.
(g) Termination Bonus. Upon the termination of Officer's employment
-----------------
hereunder for any reason other than Cause (including, without limitation, death,
Disability, Good Reason, voluntary termination and nonrenewal or expiration of
this Agreement), the Employer shall owe to Officer a one-time termination bonus
of $1,000,000, in addition to any other amounts or benefits payable to Officer
under Section 5. Employer shall pay such bonus to Officer as soon as
practicable after the date of such termination.
<PAGE>
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 the tenth
(10th) anniversary of such notice, 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)
sixty percent (60%) of the then existing base-salary payable immediately prior
to the termination, minus (2) the amount of any cash payments to him under the
terms of Employer's disability insurance or other disability benefit plans or
Employer's tax-qualified defined benefit pension plan, and any compensation he
may receive pursuant to any other employment (other than compensation for
disability), (ii) to provide during the Disability Payment Period the benefits
specified in Section 4(e) hereof, and (iii) to continue during the Disability
Payment Period the vesting of all option, equity and stock appreciation rights
granted to Officer.
The determination of Disability shall be made only after 30 days
notice to Officer and only if Officer has not returned to performance of his
duties during such 30-day period. In order to determine Disability, both
Employer and Officer shall have the right to provide medical evidence to support
their respective positions, with the ultimate decision regarding Disability to
be made by a majority of Employer's disinterested directors.
(b) Death. In the event that Officer shall die during the term of
-----
this Agreement, Employer shall pay Officer's base salary for the remainder of
the term of this Agreement following the date of Officer's death and in the
manner otherwise payable hereunder, to such person or persons as Officer shall
have directed in writing or, in the absence of a designation, to his estate (the
"Beneficiary"). Employer shall also provide during the three (3) year period
following the date of the Officer's death the benefits specified in Section 4(e)
hereof and fully vest all option, equity and stock appreciation rights granted
to Officer. If Officer's death occurs while he is receiving payments for
Disability under Section 5(a)(i) above, such payments shall cease and the
Beneficiary shall be entitled to the payments and benefits under this Subsection
(b). This Agreement in all other respects will terminate upon the death of
Officer; provided, however, that the termination of the Agreement shall not
affect Officer's entitlement to all other benefits in which he has become vested
or which are otherwise payable in respect of periods ending prior to or upon its
termination.
(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
<PAGE>
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, (ii) Officer's conviction by a court of competent jurisdiction of a
felony, or (iii) 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 subsidiaries or permanently prohibiting him from
participating in the conduct of the affairs of Employer or any of its
subsidiaries. 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 subsidiaries' affairs by any federal or state
regulatory authority having jurisdiction in the matter, Employer's obligations
under Sections 4(a) and 4(c) 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) and 4(c) hereof are suspended,
Officer shall continue to be entitled to receive Additional Benefits under
Section 4(d) until the conviction of the felony or removal from office has
become final and non-appealable. When the conviction of the felony or removal
from office has become final and non-appealable, all of Employer's obligations
hereunder shall terminate; provided, however, that the termination of Officer's
employment pursuant to this Section 5(c) shall not affect Officer's entitlement
to all benefits in which he has become vested or which are otherwise payable in
respect of periods ending prior to or upon his termination of employment.
(d) Good Reason. Officer may terminate his employment for Good
-----------
Reason. For purposes of this Agreement, "Good Reason" shall be deemed to occur
if (i) Employer notifies Officer of a termination of his employment other than
for Cause, (ii) Employer breaches this Agreement in any material respect, (iii)
the Board (A) elects a person other than Officer as Employer's Vice Chairman of
the Board or Chief Executive Officer without Officer's consent, (B) reorganizes
management so as to require him to report to a person or persons other than the
Board, or (C) takes any other action which, in Officer's sole judgment, results
in the diminution in Officer's status, title, position and responsibilities
other than an insubstantial action not taken in bad faith and which is remedied
by Employer promptly after receipt of notice by Officer, or (iv) Officer is not
elected to the Board. Notwithstanding the foregoing, Officer may terminate his
employment for any or no reason within one year following a "Change in Control"
(as defined in Appendix A to this Agreement) and such termination shall be
considered a termination for Good Reason hereunder. If Officer's employment
shall be terminated by Employer other than for Cause or by Officer for Good
Reason, then Employer shall pay to Officer in a single payment, as severance pay
and in lieu of any further salary and incentive compensation for periods
subsequent to the Termination Date, but in addition to the payment under Section
4(g), an amount in cash equal to (a) if such termination occurs in 1999, 2.99
times the Officer's base amount as determined under Section 280G(b)(3) of the
Internal Revenue Code of 1986, as amended (the "Code"), on the Termination Date
(the "Base Amount"), (b) if such termination occurs in 2000, 2.50 times the Base
Amount, (c) if such termination occurs in 2001, 2.00 times the Base Amount, (d)
if such termination occurs in 2002, 1.50 times the Base Amount, and (e) if such
termination occurs in 2003, 1.00 times the Base Amount.
<PAGE>
If in the opinion of tax counsel selected by Officer and reasonably
acceptable to Employer, Officer has or will receive any compensation or
recognize any income (whether or not pursuant to this Agreement or any plan or
other arrangement of Employer and whether or not Officer's employment with
Employer has terminated, unless such employment is terminated for Cause) which
will constitute an "excess parachute payment" within the meaning of Section
280G(b)(1) of the Code (or for which a tax is otherwise payable under Section
4999 of the Code or any successor provision thereto), then Employer shall pay
Officer an additional amount (the "Additional Amount") equal to the sum of (i)
all taxes payable by Officer under Section 4999 of the Code with respect to all
such excess parachute payments and any such Additional Amount, plus (ii) all
federal, state and local income taxes payable by Officer with respect to any
such Additional Amount. Any amounts payable pursuant to this paragraph shall be
paid by Employer to Officer within 30 days of each written request therefor made
by Officer.
(e) Resignation. Except as provided in Section 5(d) hereof, if
-----------
during the term of this Agreement, Officer shall resign voluntarily, all of his
rights to payment or benefits hereunder shall immediately terminate; provided,
however, that the termination of Officer's employment pursuant to this Section
5(e) shall not affect Officer's entitlement to all benefits in which he has
become vested or which are otherwise payable in respect of periods ending prior
to or upon his termination of employment, including the payment under Section
4(g).
(f) Notice of Termination. Any purported termination by Employer or
---------------------
by Officer shall be communicated by a written Notice of Termination to the other
party hereto which indicates the specific termination provision in this
Agreement, if any, relied upon and which sets forth in reasonable detail the
facts and circumstances, if any, claimed to provide a basis for termination of
Officer's employment under the provision so indicated. For purposes of this
Agreement, no such purported termination shall be effective without such Notice
of Termination. The "Termination Date" shall mean the date specified in the
Notice of Termination, which shall be no less than 30 or more than 60 days from
the date of the Notice of Termination. Notwithstanding any other provision of
this Agreement, in the event of any termination of Officer's employment
hereunder for any reason, Employer shall pay Officer his full base salary
through the Termination Date, plus any Additional Benefits which have been
earned or become payable, but which have not yet been paid as of such
Termination Date.
(g) Payments. All payments required under this Agreement (other than
--------
the Additional Benefits payable pursuant to Section 4(e) hereof) as a result of
the termination of Officer's employment hereunder shall be made within 15 days
of the Termination Date or, if any portion is not then reasonably determinable,
within five (5) days after such portion is so determinable. In the event of a
dispute concerning the validity of a purported termination which is maintained
in good faith, the Termination Date shall mean the date the dispute is finally
resolved and Employer will continue to provide Officer with the compensation and
benefits provided for under this Agreement, until the dispute is finally
resolved without any obligation by Officer to repay any of such amounts to
Employer, notwithstanding the final outcome of the dispute. Payments required
to be made by this Section 5(g) are in addition to all other amounts due under
Section 5 of this Agreement and shall not be offset against or reduce any other
amounts due under Section 5 of this Agreement. Officer shall be required to
render services to
<PAGE>
Employer during the period following his Termination Date but before the dispute
concerning the termination is finally determined unless Employer fails to
provide Officer with a reasonable opportunity to perform his duties under this
Agreement during such period.
6. Reimbursement of Business Expenses. During the term of this Agreement,
----------------------------------
Employer shall reimburse Officer promptly for all expenditures (including
travel, entertainment, parking, business meetings, and the monthly costs
(including dues) of maintaining memberships at appropriate clubs) to the extent
that such expenditures meet the requirements of the Code for deductibility by
Employer for federal income tax purposes or are otherwise in compliance with the
rules and policies of Employer and are substantiated by Officer as required by
the Internal Revenue Service and rules and policies of Employer.
7. Indemnity. To the extent permitted by applicable law, the Certificate
---------
of Incorporation and the By-Laws of Employer (as from time to time in effect)
and any indemnity agreements entered into from time to time between Employer and
Officer, Employer shall indemnify Officer and hold him harmless for any acts or
decisions made by him in good faith while performing services for Employer, and
shall use reasonable efforts to obtain coverage for him under liability
insurance policies now in force or hereafter obtained during the term of this
Agreement covering the other officers or directors of Employer.
8. Miscellaneous.
-------------
(a) Succession. This Agreement shall inure to the benefit of and
----------
shall be binding upon Employer, its successors and assigns, but without the
prior written consent of Officer, this Agreement may not be assigned other than
in connection with a merger or sale of substantially all the assets of the
Employer or similar transaction. Employer shall not agree to any such
transaction unless the successor to or assignee of Employer's business and/or
assets in such transaction expressly assumes all obligations of the Employer
hereunder. 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 155 North Lake Avenue, Pasadena, California 91101,
Attention: Corporate 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 (or his business address of record in
the absence of such designation). All notices shall be deemed to have been
given two (2) business days after they have been deposited as certified mail,
return receipt requested, 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 (including, but not
limited to the provisions of Section 4 hereof) shall be valid unless made in
writing and signed by the parties hereto.
<PAGE>
(d) Waiver. The waiver of the breach of any term or of any condition
------
of this Agreement shall not be deemed to constitute the waiver of any other
breach of the same or any other term or condition.
(e) California Law. This Agreement shall be construed and
--------------
interpreted in accordance with the laws of California.
(f) Attorneys' Fees in Action on Contract. If any litigation shall
-------------------------------------
occur between the Officer and Employer, which litigation arises out of or as a
result of this Agreement or the acts of the parties hereto pursuant to this
Agreement, or which seeks an interpretation of this Agreement, the prevailing
party in such litigation, in addition to any other judgment or award, shall be
entitled to receive such sums as the court hearing the matter shall find to be
reasonable as and for the attorneys' fees of the prevailing party.
(g) Confidentiality. Officer agrees that he will not divulge or
---------------
otherwise disclose, directly or indirectly, any trade secret or other
confidential information concerning the business or policies of Employer or any
of its subsidiaries which he may have learned as a result of his employment
during the term of this Agreement or prior thereto as an employee, officer or
director of or consultant to Employer or any of its subsidiaries, except to the
extent such use or disclosure is (i) necessary or appropriate to the performance
of this Agreement and in furtherance of Employer's best interests, (ii) required
by applicable law, (iii) lawfully obtainable from other sources, or (iv)
authorized by Employer. The provisions of this subsection shall survive the
expiration, suspension or termination, for any reason, of this Agreement.
(h) Remedies of Employer. Officer acknowledges that the services he
--------------------
is obligated to render under the provisions of this Agreement are of a special,
unique, unusual, extraordinary and intellectual character, which gives this
Agreement peculiar value to Employer. The loss of these services cannot be
reasonably or adequately compensated in damages in an action at law and it would
be difficult (if not impossible) to replace these services. By reason thereof,
Officer agrees and consents that if he violates any of the material provisions
of this Agreement, Employer, in addition to any other rights and remedies
available under this Agreement or under applicable law, shall be entitled during
the remainder of the term to seek injunctive relief, from a tribunal of
competent jurisdiction, restraining Officer from committing or continuing any
violation of this Agreement, or from the performance of services to any other
business entity, or both.
(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.
<PAGE>
(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.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
INDYMAC MORTGAGE
HOLDINGS, INC.
ATTEST
s:/ Richard H. Wohl By: /s/ Michael W. Perry
- ------------------- -------------------
Richard H. Wohl Michael W. Perry
Title: Secretary Title: Secretary
OFFICER:
s:/ Angelo R. Mozilo
--------------------
Angelo R. Mozilo, in his individual capacity
<PAGE>
APPENDIX A
To Angelo R. Mozilo Employment Agreement
A "Change in Control" shall mean the occurrence during the term of the
Agreement, of any one of the following events:
(a) An acquisition (other than directly from Employer) of any common
stock or other "Voting Securities" (as hereinafter defined) of
Employer by any "Person" (as the term person is used for purposes
of Section 13(d) or 14(d) of the Securities Exchange Act of 1934,
as amended (the "Exchange Act")), immediately after which such
Person has "Beneficial Ownership" (within the meaning of Rule
13d-3 promulgated under the Exchange Act) of twenty five percent
(25%) or more of the then outstanding shares of Employers common
stock or the combined voting power of Employer's then outstanding
Voting Securities; provided, however, that in determining whether
-------- -------
a Change in Control has occurred, Voting Securities which are
acquired in a "Non-Control Acquisition" (as hereinafter defined)
shall not constitute an acquisition which would cause a Change in
Control. For purposes of this Agreement, (1) "Voting Securities"
shall mean Employer's outstanding voting securities entitled to
vote generally in the election of directors and (2) a "Non-
Control Acquisition" shall mean an acquisition by (i) an employee
benefit plan (or a trust forming a part thereof) maintained by
(A) Employer or (B) any corporation or other Person of which a
majority of its voting power or its voting equity securities or
equity interest is owned, directly or indirectly, by Employer
(for purposes of this definition, a "Subsidiary"), (ii) Employer
or any of its Subsidiaries, (iii) any Person in connection with a
"Non-Control Transaction" (as hereinafter defined), or (iv)
Countrywide or any of its affiliates (the "Countrywide
Entities");
(b) The individuals who, as of the date of the Agreement are members
of the Board (the "Incumbent Board"), cease for any reason to
constitute at least two-thirds of the members of the Board;
provided, however, that if the election, or nomination for
-------- -------
election by Employer's common stockholders, of any new director
was approved by a vote of at least two-thirds of the Incumbent
Board, such new director shall, for purposes of this Agreement,
be considered as a member of the Incumbent Board; provided
--------
further, however, that no individual shall be considered a member
------- -------
of the Incumbent Board if such individual initially assumed
office as a result of either an actual or threatened "Election
Contest" (as described in Rule 14a-11 promulgated under the
Exchange Act) or other actual or threatened solicitation of
proxies or consents by or on behalf of a Person other than the
Board (a "Proxy Contest") including by reason of any agreement
intended to avoid or settle any Election Contest or Proxy
Contest; or
<PAGE>
(c) The consummation of:
(i) A merger, consolidation or reorganization involving
Employer, unless such merger, consolidation or
reorganization is a "Non-Control Transaction." A "Non-
Control Transaction" shall mean a merger, consolidation or
reorganization of Employer into, with or involving any
Countrywide Entity or where:
(A) the stockholders of Employer, immediately before such
merger, consolidation or reorganization, own directly
or indirectly immediately following such merger,
consolidation or reorganization, at least seventy
percent (70%) of the combined voting power of the
outstanding Voting Securities of the corporation
resulting from such merger, consolidation or
reorganization (the "Surviving Corporation") in
substantially the same proportion as their ownership of
the Voting Securities immediately before such merger,
consolidation or reorganization;
(B) the individuals who were members of the Incumbent Board
immediately prior to the execution of the agreement
providing for such merger, consolidation or
reorganization constitute at least two-thirds of the
members of the board of directors of the Surviving
Corporation, or in the event that, immediately
following the consummation of such transaction, a
corporation beneficially owns, directly or indirectly,
a majority of the Voting Securities of the Surviving
Corporation, the board of directors of such
corporation; and
(C) no Person other than (i) Employer, (ii) any Subsidiary,
(iii) any employee benefit plan (or any trust forming a
part thereof) maintained by Employer, the Surviving
Corporation, or any Subsidiary, (iv) any Countrywide
Entity, or (v) any Person who, immediately prior to
such merger, consolidation or reorganization had
Beneficial Ownership of twenty five percent (25%) or
more of the then outstanding Voting Securities or
common stock of Employer, has Beneficial Ownership of
twenty five percent (25%) or more of the combined
voting power of the Surviving Corporation's then
outstanding Voting Securities or its common stock;
(ii) A complete liquidation or dissolution of Employer; or
<PAGE>
(iii) The sale or other disposition of all or substantially all
of the assets of Employer to any Person (other than a
transfer to a Subsidiary or to any Countrywide Entity).
Notwithstanding the foregoing, a Change in Control shall not be deemed
to occur solely because any Person (the "Subject Person") acquired Beneficial
Ownership of more than the permitted amount of the then outstanding common stock
or Voting Securities as a result of the acquisition of common stock or Voting
Securities by Employer which, by reducing the number of shares of common stock
or Voting Securities then outstanding, increases the proportional number of
shares Beneficially Owned by the Subject Persons; provided, however, that if a
Change in Control would occur (but for the operation of this sentence) as a
result of the acquisition of common stock or Voting Securities by Employer, and
after such share acquisition by Employer, the Subject Person becomes the
Beneficial Owner of any additional common stock or Voting Securities which
increases the percentage of the then outstanding common stock or Voting
Securities Beneficially Owned by the Subject Person, then a Change in Control
shall occur.
<PAGE>
Exhibit 21.1
------------
SUBSIDIARIES OF INDYMAC MORTGAGE HOLDINGS, INC.
-----------------------------------------------
SUBSIDIARY STATE OF INCORPORATION OWNERSHIP
OR ORIGINATION
IndyMac CLCA SPC I, Inc. Delaware Direct
IndyMac Mortgage Obligations, Inc. Delaware Direct
IndyMac Mortgage Obligations II, Inc. Delaware Direct
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
---------------------------------------------------
We have issued our report dated February 26, 1999, accompanying the consolidated
financial statements and schedule included in the Annual Report of IndyMac
Mortgage Holdings, Inc. on Form 10-K for the year ended December 31, 1998. We
hereby consent to the incorporation by reference of said report in the
Registration Statements of 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
File No. 333-55907, effective June 3, 1998) and on Form S-3 (File No. 333-41329,
effective January 2, 1998, File No. 333-47297, effective March 18, 1998, File
No. 333-61625, effective August 17, 1998, File No. 333-51609, effective August
21, 1998 and File No. 333-71329, effective January 28, 1999).
/s/ GRANT THORNTON LLP
Los Angeles, California
February 26, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 815
<SECURITIES> 235,032
<RECEIVABLES> 4,665,417
<ALLOWANCES> (50,112)
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 4,851,152
<CURRENT-LIABILITIES> 42,659
<BONDS> 3,986,390
0
0
<COMMON> 758
<OTHER-SE> 821,345
<TOTAL-LIABILITY-AND-EQUITY> 4,851,152
<SALES> 0
<TOTAL-REVENUES> 98,968<F1>
<CGS> 0
<TOTAL-COSTS> 29,286
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 35,892
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 33,790
<INCOME-TAX> 0
<INCOME-CONTINUING> 33,790
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 33,790
<EPS-PRIMARY> 0.48
<EPS-DILUTED> 0.48
<FN>
<F1>includes 355,359 of interest expense related to mortgage loan activities.
</FN>
</TABLE>
