<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
Form 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the period ended March 31, 1999
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)
<TABLE>
<S> <C>
DELAWARE 95-3983415
(State or other jurisdiction of incorporation or organization) (I. R. S. Employer Identification No.)
155 NORTH LAKE AVENUE, PASADENA, CALIFORNIA 91101-7211
(Address of principal executive offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code (800) 669-2300
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
requirements for the past 90 days. Yes X No
-------- -------
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the close of the period covered by this report.
Common stock outstanding as of March 31, 1999: 80,300,506 shares
1
<PAGE>
INDYMAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
-------------------- --------------------
<S> <C> <C>
ASSETS
Loans held for sale, net
Mortgages-prime $ 612,174 $ 989,052
Mortgages-subprime 30,685 145,793
Manufactured housing 240,365 215,507
Home improvement 184,580 205,304
---------- ----------
1,067,804 1,555,656
Other loans, net
Loans held for investment 582,803 668,523
Construction
Builder 793,437 799,712
Consumer 428,594 468,735
---------- ----------
1,222,031 1,268,447
Income property 185,210 178,756
Revolving warehouse lines of credit 309,305 443,946
---------- ----------
2,299,349 2,559,672
Mortgage securities 221,483 235,032
Collateral for collateralized mortgage obligations 142,783 162,726
Investment in and advances to IndyMac Operating 273,048 279,693
Other assets 67,619 58,373
---------- ----------
Total assets $4,072,086 $4,851,152
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Repurchase agreements and other credit facilities $2,974,820 $3,785,549
Collateralized mortgage obligations 121,147 140,810
Senior unsecured notes 60,069 60,031
Accounts payable and accrued liabilities 33,039 42,659
---------- ----------
Total liabilities 3,189,075 4,029,049
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, 80,300,506 shares at
March 31, 1999 and 75,794,435 at December 31, 1998 803 758
Additional paid-in capital 1,052,596 1,005,797
Accumulated other comprehensive income (loss) 459 (18,776)
Cumulative earnings 300,829 277,220
Cumulative distributions to shareholders (471,676) (442,896)
---------- ----------
Total shareholders' equity 883,011 822,103
---------- ----------
Total liabilities and shareholders' equity $4,072,086 $4,851,152
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
2
<PAGE>
INDYMAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Dollars in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Quarters ended March 31,
-------------------------
1999 1998
----------- -----------
<S> <C> <C>
REVENUES
Interest income
Loans held for sale
Mortgages-prime $15,332 $ 22,944
Mortgages-subprime 3,772 2,488
Manufactured housing 5,557 4,642
Home improvement 5,179 2,770
------- --------
29,840 32,844
Other loans
Loans held for investment 11,719 31,648
Construction
Builder 20,298 17,243
Consumer 9,906 8,103
------- --------
30,204 25,346
Income property 4,224 1,128
Revolving warehouse lines of credit 6,093 10,788
------- --------
52,240 68,910
Mortgage securities 2,428 15,331
Collateral for collateralized mortgage obligations 2,815 4,424
Advances to IndyMac Operating 5,585 2,921
Other 624 105
------- --------
Total interest income 93,532 124,535
Interest expense
Repurchase agreements and other credit facilities 49,074 77,276
Collateralized mortgage obligations 2,976 4,302
Senior unsecured notes 1,384 1,381
------- --------
Total interest expense 53,434 82,959
Net interest income 40,098 41,576
Provision for loan losses 6,681 6,250
------- --------
Net interest income after provision for loan losses 33,417 35,326
Equity in earnings (loss) of IndyMac Operating (2,323) 2,889
Other income 1,686 946
------- --------
Net revenues 32,780 39,161
EXPENSES
Salaries and related 5,914 4,968
General and administrative 3,257 1,628
------- --------
Total expenses 9,171 6,596
______ _______
NET EARNINGS $23,609 $ 32,565
======= ========
EARNINGS PER SHARE
Basic EPS $0.30 $0.50
Diluted EPS 0.30 0.50
WEIGHTED AVERAGE SHARES OUTSTANDING (in thousands)
Basic 77,858 64,613
Diluted 78,027 65,143
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE>
INDYMAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Quarters ended March 31,
----------------------------------
1999 1998
-------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 23,609 $ 32,565
Adjustments to reconcile net earnings
to net cash provided by (used in) operating activities:
Amortization and depreciation 12,257 9,672
Provision for loan losses 6,681 6,250
Equity in (earnings) loss of IndyMac Operating 2,323 (2,889)
Purchases of loans held for sale (1,480,784) (2,281,844)
Sales and payments from loans held for sale 1,974,461 2,187,384
Purchases of trading securities - (41,244)
Sales and payments from trading securities - 4,434
Net increase in other assets (3,254) (26,157)
Net decrease in other liabilities (9,620) (8,750)
----------- -----------
Net cash provided by (used in) operating activities 525,673 (120,579)
Cash flows from investing activities:
Purchases of mortgage loans held for investment - (120,480)
Payments from mortgage loans held for investment 125,974 223,606
Net (increase) decrease in construction loans 4,180 (184,076)
Purchased and retained available for sale securities (6,853) (133,336)
Sales and payments from available for sale securities 14,488 64,980
Net (increase) decrease in revolving warehouse lines of credit 134,487 (159,832)
Net decrease in manufactured housing loans held for investment (13,960) (1,373)
Decrease in advances to IndyMac Operating 16,071 11,262
Payments from collateral for collateralized mortgage obligations 20,045 16,732
----------- -----------
Net cash provided by (used in) investing activities 294,432 (282,517)
Cash flows from financing activities:
Net increase (decrease) in repurchase agreements and other credit
facilities (811,424) 380,221
Net proceeds from issuance of common stock 46,844 69,210
Cash dividends paid (28,780) (30,997)
Principal payments on collateralized mortgage obligations (20,290) (16,822)
----------- -----------
Net cash provided by (used in) financing activities (813,650) 401,612
Net increase (decrease) in cash and cash equivalents 6,455 (1,484)
Cash and cash equivalents at beginning of period 815 13,676
----------- -----------
Cash and cash equivalents at end of period $ 7,270 $ 12,192
=========== ===========
Supplemental cash flow information:
Cash paid for interest $ 55,566 $ 85,828
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE>
INDYMAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Additional Accumulated other comprehensive income (loss)
Common Paid-in ----------------------------------------------
Stock Capital REIT Operating Total
------ ---------- --------------- ---------- --------------
<S> <C> <C> <C> <C> <C>
Balance as of December 31,
1997 $634 $ 773,475 $(2,006) $ 501 $ (1,505)
Common stock options
exercised - 570 - - -
Director's and officer's notes
receivable 1 1,011 - - -
Deferred compensation, restricted
stock - 11 - - -
401(k) contribution - 275 - - -
Net gain (loss) on AFS
securities - - (682) 343 (339)
Dividend reinvestment plan 27 67,315 - - -
Net earnings - - - - -
Dividends paid - - - - -
---- ---------- ------------- --------- -------------
Net change 28 69,182 (682) 343 (339)
---- ----------- --------------- --------- -------------
Balance at March 31, 1998 $662 $ 842,657 $(2,688) $ 844 $ (1,844)
==== =========== =============== ========== =============
Balance at December 31,
1998 $758 $1,005,797 $(18,366) $ (410) $(18,776)
Common stock options exercised 2 263 - - -
Director's and officer's notes
receivable - 469 - - -
Deferred compensation, restricted stock - 212 - - -
401(k) contribution - 178 - - -
Net gain on AFS securities - - 7,694 11,541 19,235
Dividend reinvestment plan 43 45,677 - - -
Net earnings - - - - -
Dividends paid - - - - -
---- ----------- --------------- --------- -------------
Net change 45 46,799 7,694 11,541 19,235
---- ----------- --------------- --------- -------------
Balance at March 31, 1999 $803 $1,052,596 $(10,672) $11,131 $ 459
==== =========== =============== ========== =============
Cumulative
Distributions Total
Cumulative Comprehensive to Shareholders'
Earnings Income Shareholders Equity
-------- ---------- ------------ ---------
<S> <C> <C> <C> <C>
Balance as of December 31,
1997 $243,430 $ 241,925 $(312,140) $703,894
Common stock options
exercised - - - 570
Director's and officer's notes
receivable - - - 1,012
Deferred compensation, restricted
stock - - - 11
401(k) contribution - - - 275
Net gain (loss) on
securities - (339) - (339)
Dividend reinvestment plan - - - 67,342
Net earnings 32,565 32,565 - 32,565
Dividends paid - - (30,997) (30,997)
-------- ----------- ------------ --------
Net change 32,565 32,226 (30,997) 70,439
-------- ----------- ------------ --------
Balance at March 31, 1998 $275,995 $ 274,151 $(343,137) $774,333
======== =========== ============ =========
Balance at December 31,
1998 $277,220 $ 258,444 $(442,896) $822,103
Common stock options exercised - - - 265
Director's and officer's notes
receivable - - - 469
Deferred compensation, restricted stock - - - 212
401(k) contribution - - - 178
Net gain on securities - 19,235 - 19,235
Dividend reinvestment plan - - - 45,720
Net earnings 23,609 23,609 - 23,609
Dividends paid - - (28,780) (28,780)
-------- ----------- ------------ --------
Net change 23,609 42,844 (28,780) 60,908
-------- ----------- ------------ --------
Balance at March 31, 1999 $300,829 $ 301,288 $(471,676) $883,011
======== =========== ============ =========
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE>
INDYMAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999
(Unaudited)
NOTE A - BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles ("GAAP") for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements.
IndyMac Mortgage Holdings, Inc. ("IndyMac REIT"), has elected to be treated as a
real estate investment trust ("REIT") under the Internal Revenue Code of 1986,
as amended. The consolidated financial statements include the accounts of
IndyMac REIT and its qualified REIT subsidiaries. IndyMac, Inc. ("IndyMac
Operating") acts as an intermediary between the originators of mortgage loans
and permanent investors in whole loans and mortgage backed securities ("MBS")
through its third party and direct lending businesses. IndyMac Operating is 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
period ended March 31, 1998 to conform to the March 31, 1999 presentation. In
the opinion of management, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation have been included.
Operating results for the quarter ended March 31, 1999 are not necessarily
indicative of the results that may be expected for the year ending December 31,
1999. For further information, refer to the consolidated financial statements
and footnotes thereto included in IndyMac REIT's annual report on Form 10-K for
the year ended December 31, 1998.
NOTE B - ALLOWANCE FOR LOAN LOSSES
IndyMac REIT's determination of the level of the allowance 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. IndyMac REIT
recognized a $6.7 million provision for loan losses during the first quarter
1999, which was offset by net charge-offs of $3.5 million. The increase in the
allowance for loan losses during the first quarter 1999 was considered necessary
given (a) 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 the first quarter 1999 and (b) the Company sold
a substantial number of the more marketable loans held in this portfolio to
raise liquidity during the fourth quarter 1998. IndyMac REIT considers the
allowance for loan losses of $53.3 million adequate to cover losses inherent in
the loan portfolio at March 31, 1999. However, no assurance can be given that
IndyMac REIT will not, in any particular period, sustain loan losses that exceed
the amount reserved, or that subsequent evaluation of the loan portfolio, in
light of the prevailing factors, including economic conditions, the credit
quality of the assets comprising IndyMac REIT's portfolio and IndyMac REIT's
ongoing examination process, will not require significant increases in the
allowance for loan losses.
6
<PAGE>
NOTE C - MORTGAGE SECURITIES
A summary of IndyMac REIT's mortgage securities as of March 31, 1999 and
December 31, 1998 follows:
<TABLE>
<CAPTION>
(Dollars in thousands) March 31, December 31,
1999 1998
-------------- --------------
<S> <C> <C>
Amortized cost $232,155 $253,398
Gross unrealized gains 5,854 317
Gross unrealized losses (16,526) (18,683)
-------- --------
Estimated fair value $221,483 $235,032
======== ========
</TABLE>
At March 31, 1999, IndyMac REIT's mortgage securities included $128.4 million of
AAA-rated interest-only securities, $60.3 million of residual securities, $30.4
million of adjustable rate agency securities, $1.2 million of non-investment
securities and $1.2 million of senior securities.
The fair value for IndyMac REIT's interest-only and residual securities is
determined by discounting estimated net future cash flows, using discount rates
that approximate current market rates and estimating expected prepayment rates
and credit losses. Prepayment speed assumptions used to value IndyMac REIT's
interest-only securities and residual securities are based primarily on
historical experience, collateral coupon and seasoning. At March 31, 1999, the
interest-only securities reflect an average constant prepayment rate assumption
for the remainder of 1999 of approximately 28%. In addition, these valuations
incorporated weighted average discount rates ranging from 10% to 12%. The
residual securities, comprised primarily of subprime and manufactured housing
collateral, were valued at a weighted average discount rate ranging from 15% to
20% and assumed weighted average annual credit losses on underlying collateral
of 1.03%. The subprime residuals reflect an average annual CPR ranging from 30%
to 35%.
The fair value of the non-investment grade securities is net of a $5 million
reserve for credit losses.
NOTE D-SEGMENT REPORTING
IndyMac REIT's reportable operating segments include Mortgage Banking,
Investments and Lending. The Mortgage Banking segment purchases conforming,
jumbo and non-conforming mortgage loans from third party originators of mortgage
loans as well as direct originated loans from LoanWorks, a division of IndyMac
Operating. The Mortgage Banking segment also engages in financing manufactured
housing loans and home improvement loans. The Investment segment invests in
residential loans and securities on a long-term basis. The Lending segment
offers a variety of commercial term loan programs, residential construction,
land and lot loan programs for builders and developers and third party customers
through its Construction Lending Corporation of America, Construction Lending
Division and Income Property divisions. This segment also engages in secured
warehouse lending operations. In the first quarter 1999, the loan loss reserve
was reclassified between the Investments and Lending segments. This resulted in
a loss for the Lending segment offset by increased earnings in the Investment
segment. These changes had no impact on the Company's overall results of
operations.
7
<PAGE>
Segment information for the quarters ended March 31, 1999 and 1998 were as
follows:
<TABLE>
<CAPTION>
(Dollars in thousands) Mortgage
Banking Investments Lending Adjustment (1) Consolidated
---------- ----------- ----------- -------------- ------------
<S> <C> <C> <C> <C> <C>
Quarter ended March 31, 1999
Net interest income $ 12,000 $ 3,470 $ 19,043 $ 5,585 $ 40,098
Net revenues 11,848 12,677 4,993 3,262 32,780
Net earnings (loss) 11,693 11,697 (3,043) 3,262 23,609
Assets as of March 31, 1999 $1,124,976 $ 926,412 $1,747,650 $273,048 $4,072,086
Quarter ended March 31, 1998
Net interest income $ 11,554 $ 11,942 $ 15,159 $ 2,921 $ 41,576
Net revenues 10,024 8,002 15,325 5,810 39,161
Net earnings 9,485 7,204 10,066 5,810 32,565
Assets as of March 31, 1998 $1,612,160 $2,674,685 $1,809,728 $177,684 $6,274,257
</TABLE>
(1) Represents intercompany interest and earnings from investment in IndyMac
Operating.
NOTE E - INVESTMENT IN INDYMAC OPERATING
Summarized financial information for IndyMac Operating follows:
<TABLE>
<CAPTION>
(Dollars in thousands) March 31, December 31,
1999 1998
------------- -------------
<S> <C> <C>
Loans held for sale, net $177,870 $ 210,086
Mortgage securities 415,693 398,094
Treasury securities 192,712 302,313
Mortgage servicing rights 127,647 127,229
Other assets 76,024 65,074
-------- ----------
Total assets $989,946 $1,102,796
======== ==========
Repurchase agreements and other credit facilities $675,445 $ 786,545
Due to IndyMac REIT 180,083 196,154
Accounts payable and accrued liabilities 40,514 35,714
Shareholders' equity 93,904 84,383
-------- ----------
Total liabilities and shareholders' equity $989,946 $1,102,796
======== ==========
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
(Dollars in thousands) For the Quarters ended March 31,
--------------------------------
1999 1998
-------- --------
<S> <C> <C>
Interest income
Loans held for sale $ 5,388 $ 2,964
Mortgage securities 5,059 9,231
Treasury securities 4,826 3,120
-------- -------
Total interest income 15,273 15,315
Interest expense 15,159 12,902
-------- -------
Net interest income 114 2,413
Provision for loan losses 109 36
Net gain on mortgage loans 27,976 17,972
Net gain (loss) on securities (15,294) 3,618
Servicing fee income (loss) 5,710 (252)
Other income 4,645 1,412
-------- -------
Net revenues 23,042 25,127
Total expenses 27,123 20,052
Earnings (loss) before income tax provision (benefit) (4,081) 5,075
Income tax provision (benefit) (1,734) 2,157
-------- -------
Net earnings (loss) $ (2,347) $ 2,918
======== =======
</TABLE>
Allowance for Loan Losses
IndyMac Operating's allowance for loan losses related to loans held for sale
totaled $1.2 million at March 31, 1999.
Mortgage Securities
A summary of IndyMac Operating's mortgage securities as of March
31, 1999 and December 31, 1998 follows:
<TABLE>
<CAPTION>
(Dollars in thousands) March 31, December 31,
1999 1998
--------- ------------
<S> <C> <C>
Amortized cost $390,789 $397,859
Gross unrealized gains 33,891 408
Gross unrealized losses (8,987) (173)
-------- --------
Estimated fair value $415,693 $398,094
======== ========
</TABLE>
At March 31, 1999, IndyMac Operating's mortgage securities included $235.4
million of AAA-rated interest-only securities, $105.6 million of investment-
grade subordinated securities, $63.9 million of non-investment grade securities,
a $5.5 million residual security, and $5.3 million of principal-only securities.
The fair value for IndyMac Operating's interest-only and residual securities is
determined by discounting estimated net future cash flows, using discount rates
that approximate current market rates and estimating expected prepayment rates
and credit losses. Prepayment speed assumptions used to value IndyMac
Operating's interest-only securities and residual security portfolios are based
primarily on historical experience, collateral coupon and seasoning. At March
31, 1999, the interest-only securities reflected an average constant prepayment
rate assumption for the remainder of 1999 of approximately 28%. In addition,
these valuations incorporated weighted average discount rates ranging from 10%
to 12%.
The $63.9 million fair value of the non-investment grade securities is net of a
$31 million reserve for credit losses.
9
<PAGE>
ITEM 2. 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 ("IndyMac TPL"), the Company acts as an
intermediary between the originators of mortgage loans and permanent investors
in whole loans and mortgage-backed securities ("MBS") secured by or
representing an ownership interest in such mortgage loans. The Company has
realigned IndyMac TPL to concentrate on mortgage originators through the use of
its electronic underwriting and risk-based pricing system, e-MITS/1/
(electronic-Mortgage Information and Transaction System). The Company purchases
conforming, jumbo and other non-conforming mortgage loans, as well as
manufactured housing and home improvement loans, from mortgage originators. The
Company also originates conforming, jumbo and other non-conforming mortgage
loans through its LoanWorks/2/ division via its proprietary website at
www.loanworks.com, other internet relationships, and direct-to-consumer market
methods. The Company and its IndyMac TPL 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 its LoanWorks Servicing division, services those loans that it
has purchased on a servicing-released basis and that it originates through
LoanWorks. All loans purchased or originated 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.
The Company's principal sources of income from its third party and direct
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 other consumer lending operations, as
well as its commercial lending operations, and earns net interest income on its
investment portfolio of mortgage and consumer loans and mortgage securities.
The Company's consumer lending operations include: IndyMac Construction Lending
Division ("IndyMac CLD"), which facilitates the purchase of a variety of
residential construction, land and lot loans through sellers; IndyMac
Manufactured Housing Division ("IndyMac MHD"), which facilitates the direct
origination and purchase of consumer loans and mortgage loans secured by
manufactured housing; LoanWorks, which facilitates the direct origination of a
variety of residential loans; and LoanWorks Servicing, which performs servicing
for mortgage loans acquired by the Company on a servicing-released basis or
originated by the Company through LoanWorks. Through the first quarter 1999,
the Company also operated a Home Improvement Division ("IndyMac HID"), which
focused on the purchase of home improvement loans from specialty loan brokers
and dealers. The Company closed this division during April 1999 and plans to
change the major focus of its home improvement lending business to loans
originated via the internet and through LoanWorks' direct lending channels. See
further discussion in "Subsequent Events." The Company's commercial lending
operations include Construction Lending Corporation of America ("CLCA"), which
provides a variety of commercial, multi-family term, construction, land and lot
loan programs to builders and developers, and Warehouse Lending Corporation of
America
- ------------------------
/1/ Registered in the U.S. Patent and Trademark Office. Patent pending.
/2/ Registered in the U.S. Patent and Trademark Office.
10
<PAGE>
("WLCA"), which provides various types of short-term revolving financing to
small-to-medium-size mortgage originators and offers builder inventory lines of
credit.
FINANCIAL CONDITION
Overview of Third Party Lending Operations: Total loans produced by IndyMac TPL
during the first quarter 1999 were $1.3 billion, compared with fourth quarter
1998 and first quarter 1998 production of $2.2 billion and $2.4 billion,
respectively. These loans were financed on an interim basis using equity and
short-term financing in the form of repurchase agreements and other credit
facilities. The Company sold $2.0 billion of loans during the first quarter
1999, compared with $3.4 billion sold during the fourth quarter 1998. Of the
loans sold, $1.8 billion, $193.5 million and $34.8 million represented sales of
prime, subprime and home improvement loans, respectively. At March 31, 1999,
the Company was committed to purchase $500 million of mortgage loans from
various mortgage originators.
The Company has realigned its third party lending business to concentrate on
mortgage originators where it can add value through the use of e-MITS. Loans
funded through e-MITS in the first quarter 1999 totaled $193.0 million,
representing 15% of the Company's third party prime and subprime mortgage
production during the period, compared with $8.5 million, or less than 1%,
during the first quarter 1998 when the Company began its e-MITS pilot program.
LoanWorks funded $186.7 million of loans during the quarter, up 10% from the
fourth quarter 1998 and up 105% in comparison to the first quarter 1998. In
addition to its proprietary website at www.loanworks.com, LoanWorks initiates
relationships with borrowers via internet channels through its contractual
relationships with other popular consumer websites including America Online,
Inc., QuickenMortgage(TM), Owners.com(TM) and Microsoft HomeAdvisor(TM).
LoanWorks' production obtained via internet channels during the first quarter
1999 totaled $37.6 million or 23% of total LoanWorks' production as measured in
loan count.
At March 31, 1999 IndyMac Operating's master servicing portfolio had an
aggregate outstanding principal balance of $16.2 billion with a weighted average
coupon of 8.2%, while LoanWorks Servicing's portfolio at March 31, 1999 was
$10.4 billion with a weighted average coupon of 8.4%. Non-performing loans held
for sale were 2.2% of principal at March 31, 1999 compared with 1.6% at December
31, 1998. The increase in non-performing loans/3/ as of March 31, 1999 compared
to December 31, 1998 was primarily due to (a) 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 the first quarter
1999 and (b) the Company sold a substantial number of the more marketable loans
held in this portfolio to raise liquidity during the fourth quarter of 1998.
At March 31, 1999, the Company's manufactured housing loans held for sale had an
outstanding balance of $269.0 million (of which $240.4 million was held by
IndyMac REIT) compared with $243.2 million at December 31, 1998 (of which $215.5
million was held by IndyMac REIT). The average balance of manufactured housing
loans held for sale was $255.8 million for the quarter ended March 31, 1999, an
increase of $50.9 million from the average balance of $204.9 million for the
quarter ended December 31, 1998. Non-performing manufactured housing loans held
for sale were 1.1% of principal at March 31, 1999 compared with 0.7% at December
31, 1998.
At March 31, 1999 the Company's home improvement loans held for sale had an
outstanding balance of $243.2 million (of which $184.6 million was held by
IndyMac REIT) compared with $278.3 million at December 31, 1998 (of which $205.3
million was held by IndyMac REIT). The average balance of home improvement loans
held for sale of $266.8 million for the quarter ended March 31, 1999 was
slightly lower than the average balance of $268.1 million for the quarter ended
December 31, 1998. Non-performing home improvement loans held for sale were 1.2%
of principal at March 31, 1999 compared with 0.8% at December 31, 1998.
- ----------------------
/3/ Non-performing loans are generally loans delinquent 90 days or more,
excluding real estate owned. With respect to revolving warehouse lines of
credit, non-performing consists of loans securing the line which, while
performing, are in default with the contractual terms of the line of credit.
11
<PAGE>
Loans Held For Investment: The $582.8 million portfolio of loans held for
investment at March 31, 1999 consisted of $206.6 million of varying types of
adjustable-rate product which contractually reprice in monthly, semi-annual or
annual periods; $196.4 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 $179.8 million of fixed-rate loans.
Included in the loans held for investment portfolio as of March 31, 1999 was
$37.1 million of manufactured housing loans. The weighted average coupon of the
mortgage loans held for investment at March 31, 1999 was 8.4%. The average
balance of residential loans held for investment was $618.5 million for the
quarter ended March 31, 1999, a decrease of $1.1 billion from the average
balance of $1.7 billion for the quarter ended March 31, 1998. The allowance for
loan losses related to loans held for investment totaled $14.8 million at March
31, 1999. Charge-offs related to loans held for investment totaled $720.4
thousand for the quarter ended March 31, 1999. Non-performing loans held for
investment were 6.7% of principal at March 31, 1999 compared with 5.6% at
December 31, 1998. See "Overview of Third Party Lending Operations" above for
explanation for increases in non-performing loans as of March 31, 1999 compared
to December 31, 1998.
Construction Lending Operations: At March 31, 1999, CLCA had commitments to
fund construction loans of $1.5 billion, with outstanding balances of $731.9
million compared to commitments to fund construction loans of $1.6 billion and
an outstanding balance of $731.0 million at December 31, 1998. The allowance
for loan losses related to CLCA loans totaled $19.7 million at March 31, 1999,
and charge-offs related to CLCA loans were $250 thousand for the first quarter
of 1999. Non-performing loans were 1.8% and 1.0% of principal at March 31, 1999
and December 31, 1998, respectively. The increase in non-performing loans is
due to three specific loans which rolled into non-performing status during the
first quarter 1999.
At March 31, 1999, CLCA's income property division had commitments to fund term
and construction loans of $278.6 million with outstanding balances of $87.6
million on commercial term loans and $97.6 million on commercial construction
loans. The allowance for loan losses related to CLCA's income property totaled
$2.9 million and there were no charge-offs as of March 31, 1999. Similarly,
there were no non-performing loans for CLCA's income property portfolio as of
March 31, 1999.
At March 31, 1999, IndyMac CLD had commitments to fund construction-to-
permanent, lot loans and home improvement loans of $662.0 million with an
outstanding balance of $469.8 million compared with commitments of $797.7
million and an outstanding balance of $508.7 million at December 31, 1998.
Included in consumer construction loans were $16.3 million of manufactured
housing and $4.0 million of other construction loans as of March 31, 1999. The
allowance for loan losses related to IndyMac CLD loans totaled $7.7 million at
March 31, 1999, and there were no charge-offs for the quarter ended March 31,
1999. Non-performing loans for IndyMac CLD were 2.2% and 2.7% of principal, at
March 31, 1999 and December 31, 1998, respectively.
Warehouse Lending Operations: At March 31, 1999, IndyMac REIT had extended
commitments to make warehouse and related lines of credit in an aggregate amount
of $1.1 billion, of which $309.3 million was outstanding. The average principal
balance outstanding of warehouse lines of credit was $295.0 million during the
quarter ended March 31, 1999, a decrease of $195.6 million from December 31,
1998. The allowance for loan losses related to warehouse lines of credit
totaled $3.0 million at March 31, 1999 and there were no charge-offs for the
quarter ended March 31, 1999. At March 31, 1999, 3.9% of warehouse lines were
non-performing compared to 2.2% non-performing warehouse lines of credit at
December 31, 1998. The increase in non-performing loans is due primarily to a
$5.5 million line of credit which, while performing at March 31, 1999, was
classified as non-performing because the underlying collateral remained on the
line past the contractual limit. The Company expects that this default will be
cured during the second quarter 1999 with minimal impact on results of
operations.
12
<PAGE>
RESULTS OF OPERATIONS
Quarter Ended March 31, 1999 Compared to Quarter Ended March 31, 1998
Highlights for the Quarters Ended March 31, 1999 and 1998
<TABLE>
<CAPTION>
(Dollars in thousands) For the Quarters ended
-----------------------------------------
March 31, March 31,
1999 1998
------------------- -------------------
<S> <C> <C>
Net interest income $40,098 $41,576
Net earnings 23,609 32,565
Return on average assets (annualized) 2.16% 2.22%
Return on average equity (annualized) 11.14% 17.65%
Interest spread
Yield on interest-earning assets 8.44% 8.56%
Cost of interest-bearing liabilities 5.98% 6.38%
Interest spread 2.46% 2.18%
</TABLE>
Net Earnings
IndyMac REIT's net earnings were $23.6 million, or $0.30 basic and diluted
earnings per share for the quarter ended March 31, 1999, compared to net
earnings of $32.6 million, or $0.50 basic and diluted earnings per share for the
quarter ended March 31, 1998. The decrease in net earnings of $9.0 million was
primarily due to a decrease in the outstanding balances of loans held for sale
and loans held for investment as a result of the Company's response to the
disruption in global financial markets during the fourth quarter 1998. This
decrease in the outstanding loan balances resulted in a decrease in interest
income of $31.0 million from the quarter ended March 31, 1998 to March 31, 1999.
The decrease in interest income was offset by a decrease of $29.5 million in
interest expense as a result of the Company's lower outstanding borrowings
during the same period. IndyMac REIT's equity in earnings (loss) of IndyMac
Operating decreased $5.2 million primarily as a result of IndyMac Operating's
decrease in net interest income of $2.3 million and an increase in loss on sale
of securities of $18.9 million during the first quarter 1999. These losses were
partially offset by a $10.0 million increase in gain on mortgage loans and a
$9.2 million increase in service fee and other income. The remaining decrease
in net earnings was primarily due to an increase in salaries, general and
administrative expenses due to an increase in personnel and expenses required to
support the growth of operations of IndyMac REIT.
Interest Income
Total interest income was $93.5 million for the quarter ended March 31, 1999 and
$124.5 million for the quarter ended March 31, 1998. The decrease in interest
income of $31.0 million was primarily the result of a reduction in interest
income related to mortgage loans held for investment of $19.9 million, loans
held for sale of $3.0 million, mortgage securities of $12.9 million, and
collateral for collateralized mortgage obligations of $1.6 million, offset by an
increase in interest income on other loans of $3.3 million, advances to IndyMac
Operating of $2.6 million and other interest income of $0.5 million.
Loans held for sale
-------------------
Interest income on mortgage loans held for sale totaled $29.8 million and
$32.8 million for the quarters ended March 31, 1999 and March 31, 1998,
respectively. This decrease was primarily the result of a decrease in the
effective yields to 8.3% from 8.4% for the quarters ended March 31, 1999, and
1998, respectively. In addition, the average principal balance of such loans
decreased to $1.5 billion for the quarter ended March 31, 1999, from $1.6
billion for the quarter ended March 31, 1998.
13
<PAGE>
Loans held for investment
-------------------------
Interest income on loans held for investment totaled $11.7 million and $31.6
million for the quarters ended March 31, 1999 and 1998, respectively. This
decrease was the result of a decrease in the average balance of loans held
for investment during the first quarter 1999 by $1.1 billion, in part offset
by an increase in the effective yield to 7.7% from 7.5%, for the quarters
ended March 31, 1999 and 1998, respectively.
Other loans
-----------
Interest income on construction loans totaled $30.2 million and $25.3
million, with interest earned at an effective yield of 9.8% and 10.6%, for
the quarters ended March 31, 1999 and 1998, respectively. The average
principal balance of construction loans outstanding increased $235.2 million
to $1.3 billion during the quarter ended March 31, 1999 compared to the
quarter ended March 31, 1998.
Interest income on revolving warehouse lines of credit totaled $6.1 million
and $10.8 million, with interest earned at effective yields of 8.4% and 9.0%
for the quarters ended March 31, 1999 and March 31, 1998, respectively. The
average principal balance outstanding decreased to $295.0 million from $489.0
million for the quarters ended March 31, 1999 and March 31, 1998,
respectively.
Mortgage securities
-------------------
Interest income on mortgage securities totaled $2.4 million and $15.3
million, with interest earned at effective yields of 4.2% and 8.5% for the
quarters ended March 31, 1999 and 1998, respectively. The $12.9 million
decrease in interest income is primarily due to a decrease in the average
principal balance to $226.3 million from $734.5 million during the quarters
ended March 31, 1999 and 1998, respectively. This decrease in the average
principal balance was primarily a result of the sale of certain of the
Company's mortgage securities in response to the disruption in global
financial markets during the fourth quarter 1998. Impairment losses on
interest-only securities of $3.0 million were recognized during the first
quarter 1999 as a reduction in interest income, whereas no impairment losses
were recognized during the first quarter 1998. Excluding this first quarter
impairment loss of $3.0 million, the effective yield on mortgage securities
would have approximated 9.4%.
Interest Expense
Total interest expense for the quarters ended March 31, 1999 and 1998 was $53.4
million and $83.0 million, respectively. The decrease in interest expense of
$29.6 million was primarily due to the decrease in the average outstanding
balance of repurchase agreements and other credit facilities to $3.4 billion
from $5.0 billion at March 31, 1998, coupled with a decrease in the Company's
cost of funds to 6.0% from 6.4% for the quarters ended March 31, 1999 and 1998,
respectively.
Equity in Earnings (Loss) of IndyMac Operating
For the quarter ended March 31, 1999 the loss for IndyMac Operating of $2.3
million, in which IndyMac REIT has a 99% economic interest, resulted principally
from a decrease in net interest income of $2.3 million, a decrease in gain on
securities of $18.9 million, and an increase in other expense of $7.1 million.
This was offset by an increase in net gain on mortgage loans of $10.0 million
and an increase in service fee income of $6.0 million. The increase in net gain
on mortgage loans was due primarily to the Company's improved profit margins on
loan sales in the first quarter 1999 compared to the first quarter 1998. The
increase in service fee income was due primarily to an increase in the valuation
allowance during the first quarter 1998 of $2.4 million compared to a reduction
in the valuation allowance during the first quarter 1999 of $1.8 million due to
a change in market conditions.
Salaries, General and Administrative Expenses
IndyMac REIT's $2.6 million increase in salaries, general and administrative
expenses for the quarter ended March 31, 1999 compared to the quarter ended
March 31, 1998 is primarily the result of the
14
<PAGE>
increased personnel and expenses required to support the growth in the
operations of IndyMac REIT, CLCA, IndyMac CLD, and WLCA The Company employed
approximately 1,200 employees as of March 31, 1999 compared to 950 employees as
of March 31, 1998.
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 loans
and other 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").
Market conditions improved and stabilized during the first quarter 1999 compared
to the fourth quarter 1998. IndyMac REIT raised approximately $45.8 million
through the DRIP during the first quarter 1999, but does not intend to continue
raising substantial amounts of equity capital through this vehicle during the
second quarter 1999. The Company currently maintains liquidity approximating
$300 million, with a leverage ratio of 4.4:1 at March 31, 1999 compared to 5.9:1
at December 31, 1998 and 8.2:1 at March 31, 1998. The Company is continuing to
pursue strategic alternatives to managing its liabilities, with an emphasis on
procuring longer term facilities where collateral values are not subject to
periodic mark to market valuations. These options include, but are not limited
to structured financing vehicles, and the possible acquisition, or de novo
charter, of a depository institution. In general, the Company plans to continue
to operate with more conservative leverage ratios compared to 1998.
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 sources of financing as of March 31,
1999:
<TABLE>
<CAPTION>
(Dollars in millions) Committed Outstanding Maturity
Financing Balances Date
--------- ----------- --------
<S> <C> <C> <C>
Merrill Lynch $2,000 $1,896 April 2000
First Union Bank Syndicate 900 726 February 2001
Paine Webber 500 334 June 2000
Morgan Stanley 500 241 February 2000
Bank of America 200 198 December 1999
Senior unsecured notes 60 60 October 2002
MBS borrowings - 255
------ ------
Total $4,160 $3,710
====== ======
</TABLE>
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. 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
15
<PAGE>
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.
SUBSEQUENT EVENTS
In April 1999, the Company announced that it was changing its emphasis in the
home improvement lending business from transactions predominantly with specialty
loan brokers and dealers to loans originated via the internet at LoanWorks.com
and through LoanWorks' other direct lending channels. As a result of the above
shift in emphasis, the Atlanta office, which dealt primarily with large
specialty retailers and dealers and employed approximately 40 people, was closed
in April 1999. The Company's home improvement products will continue to be
offered to mortgage bankers and mortgage brokers in IndyMac's third party
lending operation. For 1998, home improvement lending represented approximately
1.5% of IndyMac's total production volume, and the Company's portfolio of home
improvement loans totaled $247.7 million at March 31,1999. The servicing
operations of the portfolio were transferred to the Company's primary servicing
operation in Kalamazoo, Michigan, during the fourth quarter 1998 and collection
activities have been centralized at IndyMac's Pasadena headquarters.
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
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 during the second quarter 1999, with formal
implementation to occur at the beginning of the third quarter 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 completed. 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
16
<PAGE>
equipment, machinery or building infrastructure that are controlled, monitored
or operated by embedded computer devices.
Risks and Contingency Plans
The Company has identified material potential risks related to its Year 2000
issues. These risks are 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 significant assurances that the computer systems of its lenders,
depository institutions, collateral custodians, business partners, and service
bureaus, many of whom are among the largest financial institutions in the
country, will be Year 2000 compliant by year-end 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.
Costs Related to Year 2000
During the first quarter 1999, the Company recognized $1.0 million of expenses
to ensure the readiness of the Company's computer systems for the year 2000. No
additional material expenditures are expected to be recorded for Year 2000
compliance in future periods.
ITEM 3. 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. In addition to gains or losses on sale, the Company realizes
income or losses from the differential or spread between the interest earned on
loans, investments, and other interest-earning assets and the interest incurred
on borrowings. Any changes in overall interest rates effect 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.
Financial instruments of the Company that tend to decrease in value as interest
rates decrease include interest-only securities and servicing assets since
prepayments tend to increase, resulting in lower residual cash flows then would
otherwise have been obtained in a stable or increasing interest rate
environment. Financial instruments of the Company that tend to increase in value
as interest rates decrease include REMIC senior securities, fixed rate
subordinated securities, adjustable rate agency securities, principal-only
securities and U.S. Treasury bonds. In addition, as interest rates decrease the
fair market value of the Company's purchase commitments increase.
In order to minimize the adverse impact on net income and shareholders' equity
due to changes in the fair market value of its assets and commitments to
purchase assets, the Company hedges its loans held for sale, mortgage securities
and mortgage servicing rights. During the first quarter 1999, the Company
expanded its notional balance on hedges to further reduce its exposure to
interest rate risk.
As part of its interest rate risk management process, the Company performs
various interest rate scenarios that quantify the net financial impact of
changes in interest rates on its interest-earning assets, commitments and
interest-bearing liabilities. As of March 31, 1999, the Company estimates that
a parallel downward shift in U.S. Treasury bond rates and short-term indices of
50 basis points, or 0.50%, all
17
<PAGE>
else being constant, would result in a combined after tax loss, including
hedges, to net income for IndyMac REIT and IndyMac Operating of $8.1 million,
and a combined after tax loss on available for sale securities, recorded as a
component of other comprehensive income of $900 thousand. The net result would
be a reduction to comprehensive income in 1999 of $9.0 million. The assumptions
inherent in this model include an instantaneous rate shock and a degree of
correlation between the hedges and hedged assets and as a result is subject to
basis risk (i.e., the spread-widening risk between the change in rates on U.S.
Treasury bonds and mortgage-backed securities). These sensitivity analyses are
limited by the fact that they are performed at a particular point in time and do
not incorporate other factors that would impact the Company's financial
performance in such a scenario, such as the increase in income associated with
the increase in production volume that would result from the decrease in
interest rates. Consequently, the preceding estimates should not be viewed as a
forecast and there can be no assurance that actual results would not vary
significantly from the analysis discussed above.
FORWARD-LOOKING STATEMENTS
Certain statements contained in this Form 10-Q may be deemed to be forward-
looking statements 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.
18
<PAGE>
PART II
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
(a) Exhibits
--------
4.1 1998 Stock Incentive Plan adopted May 19, 1998, as amended July 21,
1998, January 20, 1999 and March 1, 1999.
27 Financial Data Schedule
(b) Reports on Form 8-K.
--------------------
None
19
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Pasadena,
State of California, on May 13, 1999 for the quarter ended March 31, 1999.
INDYMAC MORTGAGE HOLDINGS, INC.
By: /s/ Michael W. Perry
--------------------
Michael W. Perry
Director and Chief Executive Officer
By: /s/ Carmella Grahn
------------------
Carmella Grahn
Executive Vice President and
Chief Financial Officer
20
<PAGE>
INMC MORTGAGE HOLDINGS, INC.
1998 STOCK INCENTIVE PLAN
1. Purpose of Plan. The purpose of this 1998 Stock Incentive Plan
---------------
("Plan") of INMC Mortgage Holdings, Inc. (d.b.a. IndyMac Mortgage Holdings,
Inc.), formerly known as CWM Mortgage Holdings, Inc., a Delaware corporation
(the "Company"), is to enable the Company, IndyMac, Inc. ("IndyMac") and any of
their respective subsidiaries or affiliates to attract, retain and motivate
their employees, consultants, agents, officers and directors by providing
incentives related to equity interests in and the financial performance of the
Company.
2. Persons Eligible Under Plan. Any person, including any director of
---------------------------
the Company or IndyMac, who is an officer or employee of the Company, IndyMac,
or any of their respective subsidiaries or affiliates or an individual who
performs services for the Company, IndyMac, or any of their respective
subsidiaries or affiliates of a nature similar to those performed by officers or
employees, such as consultants and agents, and any non-employee director of
IndyMac who is not also a member of the Board (as hereinafter defined) (any of
the foregoing, an "Employee") shall be eligible to be considered for the grant
of an Award (as defined in Section 5 below) or Awards under Section 5 of this
Plan. No member of the Board of Directors of the Company (the "Board") who is
not an officer or employee of the Company, IndyMac, or any of their respective
subsidiaries or affiliates (a "Non-Employee Director") shall be eligible to
receive any Awards under this Plan, except for nonqualified stock options
granted automatically under the provisions of Section 10 of this Plan ("Director
Options").
3. Stock Subject to Plan.
---------------------
(a) ISO Limit. The maximum number of Common Shares, $0.01 par value
---------
per share, of the Company (the "Common Shares") that may be issued pursuant
to options intended to qualify as incentive stock options ("Incentive Stock
Options") under Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code"), granted under this Plan is 6,000,000, and provided
further that, except as otherwise provided herein, the aggregate Fair
Market Value (as defined in Section 10) of Common Shares with respect to
which options intended to qualify as Incentive Stock Options are
exercisable for the first time by any individual during any calendar year
shall not exceed the limit, if any, set forth in Section 422(d) of the Code
or any successor provision thereto. For purposes of this subsection (a),
the Fair Market Value (as defined in Section 10) of any Common Shares shall
be determined as of the time the Incentive Stock Option with respect to the
Common Shares is granted. Pursuant to Section 422(a)(2) of the Code, only
employees (as that term is used in Section 422(a)(2) of the Code) of the
Company or the Company's wholly-owned subsidiaries may receive options
intended to qualify as Incentive Stock Options under this Plan.
1
<PAGE>
(b) Aggregate/Individual Share Limit.
--------------------------------
(i) The maximum number of Common Shares that may be issued
pursuant to all Awards (including Incentive Stock Options, as set
forth in subsection (a) above) granted under this Plan, other than
Common Shares that are issued pursuant to Awards and subsequently
reacquired by the Company pursuant to the terms and conditions of such
Awards ("Reacquired Common Shares"), is 6,000,000, subject to
adjustment as provided in or pursuant to Section 6 or 10 hereof (such
maximum number, as so adjusted, shall be referred to as the "Share
Limit").
(ii) Notwithstanding anything contained herein to the contrary,
the aggregate number of Common Shares subject to options, stock
appreciation rights, and awards of restricted stock granted during any
calendar year to any individual shall be limited to 500,000.
(c) Share Reservation. No Award may be granted under this Plan
-----------------
unless, on the date of grant, the sum of (i) the maximum number of Common
Shares issuable at any time pursuant to such Award, plus (ii) the number of
Common Shares that have previously been issued pursuant to Awards granted
under this Plan, other than Reacquired Common Shares available for reissue,
plus (iii) the maximum number of Common Shares that may be issued at any
time after such date of grant pursuant to Awards that are outstanding on
such date, does not exceed the Share Limit. Common Shares distributed
under the Plan may be treasury shares, authorized but unissued shares or
shares purchased in the open market for this purpose.
(d) Reissue of Awards and Common Shares. Awards payable in cash or
-----------------------------------
Common Shares that are forfeited or for any reason are not so paid under
this Plan, as well as Common Shares subject to Awards that expire or for
any reason are terminated and are not issued or constitute Reacquired
Common Shares, shall again be available for subsequent Awards under the
Plan.
(e) Fractional Shares/Minimum Issue. Fractional share interests shall
-------------------------------
be disregarded, but may be accumulated. No fewer than 100 Common Shares
may be purchased on exercise of any option granted under this Plan
("Option") at one time unless the number purchased is the total number at
the time available for purchase under the Option.
(f) Privileges of Stock Ownership. Except as otherwise expressly
-----------------------------
authorized by this Plan, an Award recipient shall not be entitled to any
privilege of stock ownership as to any Common Shares subject to an Option
granted under this Plan prior to the satisfaction of all conditions to the
valid exercise of the Option.
2
<PAGE>
4. Administration of Plan.
----------------------
(a) The Committee. Except for the provisions of Section 10 (which to
-------------
the maximum extent feasible shall be self-effectuating), this Plan shall be
administered by a committee of the Board (the "Committee") consisting of
two or more directors, each of whom is a "Non-Employee Director," as such
term is defined in Rule 16b-3 under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), and an "Outside Director," as such term is
defined for purposes of Section 162(m) of the Code.
(b) Powers of the Committee. Subject to the express provisions of
-----------------------
this Plan, the Committee shall be authorized and empowered to do all things
necessary or desirable in connection with the administration of this Plan
including, without limitation, the following:
(i) adopt, amend and rescind rules and regulations relating to
this Plan;
(ii) determine which persons meet the requirements of Section 2
hereof for eligibility under this Plan and to which of such eligible
persons, if any, Awards will be granted hereunder;
(iii) grant Awards to eligible persons and determine the terms
and conditions thereof, including, but not limited to, the number of
Common Shares issuable pursuant thereto, the time not more than ten
(10) years after the date of an Award at which time the Award shall
expire or (if not vested) terminate, and the conditions upon which
Awards become exercisable or vest or shall expire or terminate, and
the consideration, if any, to be paid upon receipt, exercise or
vesting of Awards;
(iv) determine whether, and the extent to which, adjustments are
required pursuant to Section 6 hereof;
(v) interpret and construe this Plan and the terms and
conditions of any Award granted under Section 5, whether before or
after the date set forth in Section 7; and
(vi) determine the circumstances under which, consistent with the
provisions of Section 7, any outstanding Award under Section 5 may be
amended;
which authority (except as to clauses (ii) and (iii) above) shall remain in
effect so long as any Award remains outstanding under this Plan.
(c) Specific Committee Responsibility and Discretion Regarding Awards.
-----------------------------------------------------------------
Subject to the express provisions of this Plan, the Committee, in its sole
and absolute discretion, shall determine all of the terms and conditions of
each Award granted under
3
<PAGE>
Section 5 of this Plan, which terms and conditions may include, subject to such
limitations as the Committee may from time to time impose, among other things,
provisions that:
(i) permit the recipient of such Award, including any recipient
who is a director or officer of the Company, to pay the purchase price
of the Common Shares or other property issuable pursuant to such
Award, or such recipient's tax withholding obligation upon such
issuance or in respect of such Award or Shares, in whole or in part,
by any one or more of the following:
(A) the delivery of previously owned shares of capital
stock of the Company (including shares acquired as or pursuant to
Awards) then having been owned by the recipient for at least six
(6) months (or such other period required under applicable law)
or the delivery of other property, or
(B) the delivery of a promissory note, under any applicable
financing plan or on such other terms and conditions, as in
either case authorized by the Committee, consistent with
applicable law;
(ii) accelerate the receipt of benefits pursuant to such Award
upon the occurrence of specified events, including, without
limitation, a change of control of the Company, an acquisition of a
specified percentage of the voting power of the Company, the
dissolution or liquidation of the Company, a sale of substantially all
of the property and assets of the Company or an event of the type
described in Section 6 hereof, or pursuant to the provisions of an
employment contract not inconsistent with the terms of this Plan, or
in other circumstances or upon the occurrence of other events as
deemed appropriate by the Committee;
(iii) qualify such Award as an Incentive Stock Option;
(iv) extend the exercisability or term of any or all such
outstanding Awards, change the price of any or all such outstanding
Awards or otherwise change previously imposed terms and conditions, in
the specified events described in clause (ii) above or in other
circumstances or upon the occurrence of other events as deemed
appropriate by the Committee, in each case subject to Section 7;
(v) authorize the conversion, succession or substitution of
outstanding Awards under Section 5 upon the occurrence of any event of
the type described in Section 6, or in other circumstances or upon the
occurrence of other events as deemed appropriate by the Committee;
and/or
(vi) provide for automatic grants of Awards or successive
Awards.
4
<PAGE>
(d) Binding Determinations. Any action taken by, or inaction of, the
----------------------
Company, the Board or the Committee relating or pursuant to this Plan shall
be within the absolute discretion of that entity or body and shall be
conclusive and binding upon all persons. No member of the Board or officer
of the Company shall be liable for any such action or inaction of the
entity or body, of another person or, except in circumstances involving bad
faith, of himself or herself.
(e) Reliance on Experts. In making any determination or in taking or
-------------------
not taking any action under this Plan, the Board and the Committee may
obtain and may rely upon the advice of experts, including professional
advisors to the Company. No director, officer or agent of the Company
shall be liable for any such action or determination taken or made or
omitted in good faith.
(f) Delegation. The Committee may delegate ministerial, non-
----------
discretionary functions to individuals who are officers or employees of the
Company. The Committee also may delegate to certain officer(s) of the
Company (i) the authority to grant Awards pursuant to Section 5 of the
Plan, provided that such delegation is set forth in writing and includes
--------
all applicable limitations and parameters to such Awards, and provided
--------
further that such Awards are subsequently ratified by the Committee; and
-------
(ii) with respect to unvested Awards that are Incentive Stock Options that
have been granted to an employee of the Company (other than an employee who
is subject to Section 16 of the Exchange Act), the authority to accelerate
the exercisability of such Incentive Stock Options to allow them to be
exercised within the three-month period commencing upon the date that the
employee's employment by the Company terminates by reason of the transfer
of such employee to employment by IndyMac, provided, however, that to the
-------- -------
extent (A) such accelerated Options are not exercised prior to the
expiration of such three-month period, or (B) the acceleration of the
exercisability of such Options causes such Options to fail to satisfy the
requirements of Section 422(d) of the Code, such Options shall
automatically be converted into non-qualified Options and shall continue to
be exercisable in accordance with their terms (as accelerated Options)
until they expire or otherwise terminate under the terms of the Plan.
5. Awards.
------
(a) Types of Awards. The Committee, on behalf of the Company, is
---------------
authorized under this Plan to enter into any type of arrangement with an
Employee that is not inconsistent with the provisions of this Plan and that
by its terms, involves or might involve the issuance of (i) Common Shares,
(ii) an option, warrant, convertible security, stock appreciation right or
similar right with an exercise or conversion privilege at a fixed or
variable price related to the Common Shares or other equity securities of
the Company and/or the passage of time, the occurrence of one or more
events, or the satisfaction of performance criteria or other conditions, or
any combination of these variables, or any similar security contemplated by
subsection (b) below, or (iii) any similar security with a value derived
from the value of the Common Shares or other equity securities of the
5
<PAGE>
Company, all of which may or may not involve the payment of cash
consideration, subject to subsection (e) below. The authorization of any
such arrangement (including any benefits described in Section 5(e)) is
referred to herein as the grant of an "Award". The date of grant may be at
or after (but not before) the date the Committee authorizes the Award. All
Awards shall be evidenced by a writing with a schedule memorializing the
grant of the Award to the recipient and setting forth certain specifics
with respect to the terms and conditions of the Award ("Award Memorandum").
(b) Form of Awards. Awards are not restricted to any specified form
--------------
or structure and may include, without limitation, sales or bonuses of
stock, restricted stock, performance restricted stock, stock options,
reload stock options, stock purchase warrants, other rights to acquire
stock, securities convertible into or redeemable for stock, stock
appreciation rights, limited stock appreciation rights, phantom stock,
dividend equivalents, performance units or performance shares, and an Award
may consist of one such security or benefit, or two or more of them in any
combination or alternative. In addition, any Award that is intended to
qualify as an Incentive Stock Option will automatically be converted into a
non-qualified stock option to the extent that such Award does not satisfy
any applicable requirement under Section 422 of the Code.
(c) Restricted Stock Awards. If expressly provided by the Committee,
-----------------------
and without limiting subsection (b) above, Awards of restricted Common
Shares ("Restricted Stock") may be made to the holder of any Option, based
upon dividends or distributions that would have been received had the
Common Shares covered by the Option been issued and outstanding on the
applicable dividend record date. The terms and conditions of any such
Awards of Restricted Stock shall be specified in the applicable Award
Memorandum.
(d) Time and Method of Exercise. Awards may be exercised in whole or
---------------------------
in part at such time or times as shall be determined by the Committee and
set forth in the applicable Award Memorandum. Awards shall be exercised in
accordance with procedures established by the Committee, subject to Section
4(c)(i) and any holding periods required under applicable law.
(e) Price; Consideration; Option Pricing Limit. Common Shares may be
------------------------------------------
issued pursuant to an Award for any lawful consideration as determined by
the Committee, including, without limitation, cash, Common Shares (valued
at then Fair Market Value, as defined in Section 10), or services rendered
by the recipient of such Award; provided that no Common Shares shall be
--------
issued for less than the minimum lawful consideration and no Option which
is intended to be an Incentive Stock Option shall be granted with an
exercise price that is less than the Fair Market Value (as defined in
Section 10) of the underlying Common Shares on the date of grant.
(f) Effect of Termination of Service or Death; Change in Subsidiary
---------------------------------------------------------------
Status. Subject to Section 4(c)(ii), each Option and all other rights
------
thereunder, to the extent not
6
<PAGE>
exercised (whether or not presently exercisable), shall terminate and
become null and void at such time as the holder of such Option terminates
service as an Employee, except that
(i) if the holder terminates service as an Employee for a reason
other than cause (as determined by the Committee in its sole
discretion), death or permanent and total disability (as defined in
clause (ii) below), the holder may at any time within a period of
three months after such termination exercise such Option to the extent
such Option was exercisable on the date of such termination;
(ii) if the holder terminates service as an Employee by reason of
permanent and total disability (within the meaning of Section 22(e)(3)
of the Code), or if the holder becomes permanently and totally
disabled within three months after termination described in clause
(i), the holder may at any time within a period of twelve (12) months
after such termination exercise such Option to the extent such Option
was exercisable on the date of such termination; and
(iii) if the holder terminates service as an Employee by reason
of death, or within three months after a termination described in
clauses (i) or (ii), then such Option may be exercised within a period
of twelve (12) months after the holder's termination of service as an
Employee, to the extent such Option was exercisable on the date of
such termination;
provided, however, that in no event may any such Option be exercised by any
-------- -------
holder after its expiration date.
Notwithstanding any of the foregoing provisions of this subsection
(f), if the holder of an Option is an Employee of IndyMac or one of its
subsidiaries or affiliates and IndyMac or the Employee ceases to provide
services to the Company, or if the holder of an Option is an Employee of an
entity which is a subsidiary or affiliate of the Company or IndyMac and
such entity ceases to be such a subsidiary or affiliate, such event shall
be deemed for purposes of this subsection (f) to be a termination of the
holder's service as an Employee described in clause (i) above. Absence
from work caused by military service or authorized sick leave shall not be
considered a termination of service as an Employee for purposes of this
subsection (f).
(g) Cash Awards; Loans. The Committee shall have the express
------------------
authority to create, add or include a cash payment or benefit under this
Plan, whether in lieu of, in addition to or as an Award or as a component
of another type of Award, and to make or authorize loans to finance, or to
otherwise accommodate the financing, acquisition or exercise of an Award or
the satisfaction of any related tax liability.
(h) Transfer Restrictions. Unless otherwise permitted in the
---------------------
applicable Award Memorandum pursuant to the discretion of the Committee, no
Award granted hereunder
7
<PAGE>
shall be transferable other than by will or the laws of descent and
distribution or pursuant to a qualified domestic relations order.
(i) Tax Withholding. Upon the issuance of Common Shares, the payment
---------------
of cash or any other taxable event in respect of an Award under this Plan,
such number of shares or amount of cash or other consideration, as the case
may be, otherwise issuable or payable may be reduced by the amount
necessary to satisfy the minimum applicable tax withholding requirements
imposed on the Company, IndyMac or any of their respective subsidiaries or
affiliates in respect of such Award or event, all to the extent and in such
manner as the Committee may determine.
6. Adjustments and Acceleration.
----------------------------
(a) Adjustments. If (i) the outstanding securities of the class then
-----------
subject to this Plan (the "outstanding shares") (A) are increased,
decreased, exchanged or converted as a result of a stock split
(including a split in the form of a stock dividend), reverse stock
split, recapitalization, or similar event or (B) are exchanged for or
converted into cash, property or a different number or kind of
securities (or if cash, property or securities are distributed in
respect of the outstanding shares), as a result of a reorganization,
merger, consolidation, exchange, recapitalization, restructuring or
reclassification, or (ii) substantially all of the property and assets
of the Company are sold as an entirety, or (iii) the Company is
liquidated and dissolved, then, the Committee (or, in the case of
Director Options, the Board) shall, in such manner and to such extent
(if any) as is equitable and appropriate, make proportionate
adjustments in (x) the number and type of shares or other securities
or cash or other property that may be acquired pursuant to Options and
other Awards previously granted under this Plan (and, where
applicable, the exercise price thereof so as to maintain the same
aggregate exercise price), (y) the maximum number and type of shares
or other securities, cash, or property that may be issued or delivered
pursuant to Options (including Incentive Stock Options and Director
Options) and other Awards thereafter granted under this Plan, and (z)
such other terms as necessarily are affected by such event. In the
case of an extraordinary distribution, merger, reorganization,
consolidation, combination, sale of assets, exchange or spin off, the
Committee (or the Board, in the case of Director Options) may make
provisions for a substitution or exchange of any or all outstanding
Options or other Awards or rights (or for the securities, cash or
property deliverable upon exercise of such outstanding Options or
other Awards or rights), based upon the distribution or consideration
payable to holders of the Common Shares of the Company upon or in
respect of such event.
8
<PAGE>
(b) Acceleration.
------------
(i) A "Change in Control" for purposes of this Plan shall mean
the occurrence of any one of the following events:
(A) An acquisition (other than directly from the Company) of
any common stock or other "Voting Securities" (as hereinafter
defined) of the Company by any "Person" (as the term person is
used for purposes of Sections 13(d) or 14(d) of the Exchange Act,
immediately after which such Person has "Beneficial Ownership"
(within the meaning of Rule 13d-3 under the Exchange Act) of
twenty five percent (25%) or more of the then outstanding shares
of the Company's common stock or the combined voting power of the
Company'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 Plan, (1) "Voting Securities" shall mean the Company's
outstanding voting securities entitled to vote generally in the
election of directors and (2) a "Non-Control Acquisition" shall
mean an acquisition by (a) an employee benefit plan (or a trust
forming a part thereof) maintained by (x) the Company, (y)
IndyMac or, (z) 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 the Company
(for purposes of this definition, a "Subsidiary"), (b) the
Company or any of its Subsidiaries, or (c) any Person in
connection with a "Non-Control Transaction" (as hereinafter
defined);
(B) The individuals who as of January 27, 1998 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 the Company'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
Plan, 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 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
9
<PAGE>
(C) The consummation of: (1) A merger, consolidation or
reorganization involving the Company, unless such
merger, consolidation or reorganization is a "Non-
Control Transaction." A "Non-Control Transaction"
shall mean a merger, consolidation or reorganization of
the Company where: (a) the stockholders of the Company,
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 (w) the
Company, (x) any Subsidiary, (y) any employee benefit
plan (or any trust forming a part thereof) maintained
by the Company, IndyMac, the Surviving Corporation, or
any Subsidiary, or (z) 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 the Company, 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;
(2) A complete liquidation or dissolution of the
Company, or
(3) The sale or other disposition of all or
substantially all of the assets of the Company to any
Person (other than a transfer to a Subsidiary).
10
<PAGE>
Notwithstanding the foregoing provisions of this Section 6(b)(i),
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 the Company 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 the Company, and
after such share acquisition by the Company, 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.
(ii) Except as otherwise provided in Section 10(j), prior to a
Change in Control, the Committee may determine in respect of Awards
held by Employees that upon or in anticipation of the occurrence of
the Change in Control benefits under Awards shall be accelerated only
for a limited period of time, which period of time shall not be less
than a period of time reasonably necessary to realize the benefits of
such acceleration nor more than one year after the Change in Control.
If such a determination is not made, then (subject to the last
sentence of this clause) upon the occurrence of a Change in Control
and without further action by the Board or the Committee, (A) each
Option and stock appreciation right shall become immediately
exercisable, (B) performance Restricted Stock shall immediately vest
free of restrictions, and (C) each performance share Award shall
become payable to the Employee. The Committee may override the
limitations on acceleration in this Section 6(b)(ii) by express
provision in the Award Memorandum or otherwise, and may accord any
holder of an Award a right to refuse any acceleration, whether
pursuant to the Award Memorandum or otherwise, in such circumstances
as the Committee may approve. Any acceleration of Awards shall comply
with any applicable regulatory and financial accounting requirements,
including without limitation Section 422 of the Code.
(iii) Any Awards that are (or but for a holder's rejection of
acceleration would have been) accelerated under this Section 6 and
that are not exercised or vested prior to a dissolution of the Company
or a reorganization event described in Section 6(a) that the Company
does not survive shall terminate, provided that if provision has been
--------
made, consistent with the terms hereof, for the substitution, exchange
or other settlement of Awards, such Awards shall be substituted,
exchanged or otherwise settled in accordance with such provision.
(iv) Any Awards that are (or but for the holder's rejection of
the acceleration would have been) accelerated that are not exercised
or vested prior to
11
<PAGE>
an abandonment or termination of a transaction subject to shareholder
approval that triggered the Change in Control (as evidenced by public
announcement, Board resolution, execution of documents terminating the
transaction, or other action or document objectively confirming such
abandonment or termination), shall be restored to their prior status
(except for the effects of the passage of time) as if no Change in
Control had occurred.
7. Amendment and Termination of Plan.
---------------------------------
(a) No Award shall be granted under this Plan after January 27,
2008. Although Common Shares may be issued after January 27, 2008 pursuant
to Awards granted prior to such date, no Common Shares otherwise shall be
issued under this Plan after such date. Notwithstanding the foregoing, any
Award granted prior to such date may vest or be amended after such date in
any manner that would have been permitted prior to such date, except that
(except as provided herein) no such amendment shall increase the number of
shares subject to or comprising such Award, or extend the final expiration
date of the Award or reduce (below the Fair Market Value (as defined in
Section 10) on the date of the amendment) the exercise price of or under
such Award.
(b) The Board may, without shareholder approval, at any time and
from time to time, suspend, discontinue or amend this Plan in any respect
whatsoever, except that no such amendment shall impair any rights under any
Award theretofore made under the Plan without the consent of the holder of
such Award. Furthermore, and except as and to the extent otherwise
permitted by the provisions hereof, no such amendment shall, without
shareholder approval, cause the Plan to cease to satisfy any applicable
condition of Rule 16b-3 under the Exchange Act or cause any Award under the
Plan to cease to qualify for any applicable exception under Section 162(m)
of the Code.
8. Effective Date of Plan: Shareholder Approval. This Plan shall be
--------------------------------------------
effective as of January 27, 1998, the date upon which it was approved by the
Board; provided, however, that no Common Shares may be issued under this Plan
-------- -------
until it has been approved by the affirmative votes of the holders of a majority
of the Common Shares of the Company present, or represented, and entitled to
vote at a meeting duly held in accordance with applicable law.
12
<PAGE>
9. Legal Issues.
------------
(a) Compliance and Choice of Law: Severability. This Plan, the
------------------------------------------
granting and vesting of Awards under this Plan and the issuance and
delivery of Common Shares and/or the payment of money under this Plan or
under Awards granted hereunder are subject to compliance with all
applicable federal and state laws, rules and regulations (including but not
limited to state and federal securities law and federal margin
requirements) and to such approvals by any listing, regulatory or
governmental authority as may, in the opinion of counsel for the Company,
be necessary or advisable in connection therewith. Any securities
delivered under this Plan shall be subject to such restrictions as the
Company may deem necessary or desirable to assure compliance with all
applicable legal requirements. This Plan, the Awards, all documents
evidencing Awards and all other related documents shall be governed by, and
construed in accordance with, the laws of the State of Delaware. If any
provision shall be held by a court of competent jurisdiction to be invalid
and unenforceable, the remaining provisions of this Plan (subject to
Section 9(b)) shall continue in effect.
(b) Plan Construction. It is the intent of the Company that this Plan
-----------------
and Awards hereunder satisfy and be interpreted in a manner that in the
case of recipients who are or may become persons subject to Section 16 of
the Exchange Act satisfies the applicable requirements of Rule 16b-3 under
the Exchange Act so that such persons will be entitled to the benefits of
Rule 16b-3 or other exemptive rules under Section 16 of the Exchange Act
and will not be subjected to avoidable liability thereunder. If any
provision of this Plan or of any Award would otherwise frustrate or
conflict with the intent expressed above, that provision to the extent
possible shall be interpreted and deemed amended so as to avoid such
conflict, but to the extent of any remaining irreconcilable conflict with
such intent as to such persons in the circumstances, such provision shall
be deemed inoperative.
(c) REIT Qualification.
------------------
(i) It is the intent of the Company that this Plan and Awards
hereunder satisfy and be interpreted in a manner consistent with the
Company's continued status as a "qualified real estate investment
trust" under the Code. If any provision of this Plan or any Award
would otherwise frustrate or conflict with the intent expressed above,
that provision to the extent possible shall be interpreted and deemed
amended so as to avoid such conflict, but to the extent of any
remaining irreconcilable conflict with such intent as to the Company,
such provision shall be deemed inoperative.
(ii) Notwithstanding anything contained herein to the contrary,
no participant may receive any Common Shares upon the grant, exercise
or vesting of an option or right or other Award to the extent it will
cause such person to beneficially or constructively own equity shares
in excess of 9.8% of the equity
13
<PAGE>
shares of the Company. In the event that a participant would be
otherwise entitled to claim or seek to exercise any right which upon
delivery of Common Shares would cause such participant to beneficially
or constructively own equity shares in excess of the ownership limit,
the Company shall have the right, notwithstanding any option or right
previously granted to the participant, to deliver a check or cash to
the participant in lieu thereof.
(d) Non-Exclusivity of Plan. Nothing in this Plan shall limit or be
-----------------------
deemed to limit the authority of the Board or the Committee to grant awards
or authorize any other compensation, with or without reference to the
Common Shares, under any other plan or authority.
10. Non-Employee Director Options
-----------------------------
(a) Participation. Awards relating to the Common Shares authorized
-------------
under this Plan shall be made under this Section 10 only to Non-Employee
Directors.
(b) Certain Definitions. The following definitions shall apply to
-------------------
this Section 10:
(i) "Business Day" shall mean any day, other than Saturday,
Sunday or any statutory holiday in the state of California.
(ii) "Director Option" shall mean an Option granted to a Non-
Employee Director pursuant to this Section 10.
(iii) "Disability" shall mean a "permanent and total disability"
within the meaning of Section 22(e)(3) of the Code.
(iv) "Fair Market Value" on a specified date shall mean (A) if
the Common Shares are listed or admitted to trade on a national
securities exchange, the average of the high and low reported sales
prices of the Common Shares on the Composite Tape on such date, as
published in the Western Edition of The Wall Street Journal, on the
principal national securities exchange on which the Common Shares are
so listed or admitted to trade, or, if there is no trading of the
Shares on such date, then the average of the high and low reported
sales prices of the Common Shares as quoted on such Composite Tape on
the next preceding date on which there was trading in such Shares; (B)
if the Common Shares are not listed or admitted to trade on a national
securities exchange, the average of the high and low reported prices
for the Common Shares on such date, as furnished by the National
Association of Securities Dealers, Inc. ("NASD") through the NASDAQ
National Market Reporting System (or a similar organization, if the
NASD is no longer reporting such information); (C) if the Common
Shares are not listed or admitted to trade on a national securities
exchange and are not
14
<PAGE>
reported on the National Market Reporting System, the arithmetic mean
between the bid and asked prices for the Shares on such date, as
furnished by the NASD or a similar organization; or (D) if the Common
Shares are not listed or admitted to trade on a national securities
exchange nor reported on the National Market Reporting System and if
bid and asked prices for the stock are not furnished by the NASD or a
similar organization, the value as established by the Board at such
time for purposes of this Plan.
(v) "Retirement" shall mean retirement or resignation as a
director after at least five (5) years service as a director.
(c) Annual Awards. On the first Business Day in June in each calendar
-------------
year during the term of the Plan, commencing in June 1998, there shall be
granted automatically (without any action by the Committee or the Board) a
nonqualified stock option (the grant date of which shall be such date in
June) to each Non-Employee Director then in office to purchase the number
of Common Shares equal to 30,000 multiplied by a fraction, the numerator of
which is the earnings per Common Share (on a fully diluted basis, excluding
the one time charge to earnings resulting from the acquisition by the
Company of its manager in June 1997) of the Company for the fiscal year of
the Company ended immediately before the date of grant of the Non-Employee
Director option (as reported in the audited Financial Statements included
in the Company's Annual report on Form 10-K filed with the Securities and
Exchange Commission ("SEC"), but in no event less than zero) (the "EPS
Numerator Amount") and the denominator of which is (i) in 1998, $1.51; and
(ii) in each year after 1998, the greater of (A) $1.79 compounded at a rate
of 15% per year (i.e., in 1999, $2.06; in 2000, $2.37; in 2001, $2.72; in
2002, $3.13), or (B) the EPS Numerator Amount for the fiscal year of the
Company ended immediately before the fiscal year used in determining the
EPS Numerator Amount. The number 30,000 and the specific dollar amounts
herein are subject to adjustment in those events set forth in subsection
(h) below. The formula contained in this Section 10(c) may be amended by
subsequent action of the Board to provide either for an alternative formula
for calculating the number of Common Shares to be awarded annually, or to
provide for the annual award of a fixed number of Common Shares; provided
--------
that, in either case, (i) the number of Common Shares to be awarded
----
annually to Non-Employee Directors under such alternative formula or fixed
number is no greater than that provided for under the formula set forth
herein, and (ii) each Non-Employee Director receives the same number of
Common Shares as every other Non-Employee Director under such alternative
formula or fixed number.
(d) Maximum and Minimum Number of Shares. Notwithstanding anything to
------------------------------------
the contrary contained herein, a Non-Employee Director shall not receive
Options for less than 20,000 nor more than 50,000 Common Shares pursuant to
this Section 10 in any year.
15
<PAGE>
(e) Purchase Price. The exercise price for Shares under each Non-
--------------
Employee Director option shall be equal to 100% of the Fair Market Value of
a Common Share on the date the Director Option is granted. The exercise
price of any option granted under this Section 10 shall be paid in full at
the time of each purchase in cash equivalent or in Common Shares valued at
their Fair Market Value on the date of exercise of such option, or partly
in such shares and partly in cash, provided that any such Common Shares
-------- ----
used in payment shall have been owned by the Non-Employee Director at least
six months prior to the date of exercise.
(f) Option Period and Exercisability. Each Director Option granted
--------------------------------
under this Section 10 shall become fully exercisable, in whole or in part,
on the first anniversary of the grant date. Each option granted under this
Section 10 and all rights or obligations thereunder shall expire on the
earlier of the tenth anniversary of the date of grant or the liquidation or
dissolution of the Company and shall be subject to earlier termination as
provided below.
(g) Termination of Directorship. If a Non-Employee Director's
---------------------------
services as a member of the Board terminate by reason of death, Disability
or Retirement, an option granted pursuant to this Section 10 then held by
such Non-Employee Director shall immediately become and shall remain
exercisable for one year after the date of such termination or until the
expiration of the stated term of such option, whichever first occurs. If a
Non-Employee Director's services as a member of the Board terminate for any
other reason (other than Cause), any option granted pursuant to this
Section 10 which is not then exercisable shall terminate and any such
option which is then exercisable may be exercised for three months after
the date of such termination or until the expiration of the stated term,
which ever first occurs. If a Non-Employee Director is terminated for
Cause, all Director Options granted to such Non-Employee Director shall be
forfeited and shall no longer be exercisable, effective on the date of such
termination for Cause. For purposes of this Section 10, "Cause" shall
mean, with respect to any Non-Employee Director, termination on account of
any act of (i) fraud or intentional misrepresentation, (ii) embezzlement,
misappropriation or conversion of assets or opportunities of the Company or
any affiliate, or (iii) conviction of a felony.
(h) Adjustments. The provisions of this Section 10 and Director
-----------
Options granted hereunder shall be subject to Section 6. If there shall
occur any event described in Section 6(a), then in addition to the matters
contemplated thereby, the Board shall, in such manner and to such extent
(if any) as is appropriate and equitable, proportionately adjust the dollar
amounts set forth elsewhere in this Section 10.
(i) Loans. Subject to the requirements of applicable law, the Board
-----
may authorize loans to Non-Employee Directors to finance the exercise of
Awards; provided, however, that no loan shall be made to any Non-Employee
-------- -------
Director to finance the exercise of an Award made under this Section 10
unless (i) such loan is made pursuant to a full recourse promissory note,
and (ii) such loan, if secured by Common Shares
16
<PAGE>
(whether issuable under the Award in question or otherwise), is made in
compliance with Regulation G of the Federal Reserve Board.
(j) Acceleration Upon a Change in Control. Upon the occurrence of a
-------------------------------------
Change in Control referred to in Section 6(b), each Director Option granted
under this Section 10 shall become immediately exercisable in full subject
to the terms thereof (other than with respect to the Committee's
discretion). To the extent that any Director Option granted under this
Section 10 is not exercised prior to (i) a dissolution of the Company or
(ii) a merger or other corporate event that the Company does not survive,
and no provision is (or consistent with the provisions of Section 9 or 10
can be) made for the assumption, conversion, substitution or exchange of
the option, the Director Option shall terminate upon the occurrence of such
event.
(k) Other Provisions. The provisions of Sections 3(e)-(f), 5(h) and 7
----------------
through 9 are incorporated herein by this reference.
17
<PAGE>
AMENDMENT TO THE 1998 STOCK INCENTIVE PLAN OF
INDYMAC MORTGAGE HOLDINGS, INC.
(Adopted by the Board of Directors on July 21, 1998)
The 1998 Stock Incentive Plan of IndyMac Mortgage Holdings, Inc. is hereby
amended to revise Section 10(b)(iv) so that, as amended, Section 10(b)(iv) shall
read as follows:
"Fair Market Value" on a specified date shall mean (A) if the
Common Shares are listed or admitted to trade on a national securities
exchange, the average of the average of the high and low reported
sales prices of the Common Shares on the Composite Tape, as published
in the Western Edition of The Wall Street Journal, on the ten days
preceding such date on which the Common Shares trade on such principal
national securities exchange; (B) if the Common Shares are not listed
or admitted to trade on a national securities exchange, the average of
the average of the high and low reported prices for the Common Shares
on the ten days preceding such date on which such prices for the
Common Shares are furnished by the National Association of Securities
Dealers, Inc. ("NASD") through the NASDAQ National Market Reporting
System (or a similar organization, if the NASD is no longer reporting
such information); (C) if the Common Shares are not listed or admitted
on a national securities exchange and are not reported on the National
Market Reporting System, the arithmetic mean of the arithmetic mean
between the bid and asked prices for the Common Shares on the ten days
preceding such date on which bid and asked prices for the Common
Shares are furnished by the NASD or a similar organization; or (D) if
the Common Shares are not listed or admitted to trade on a national
securities exchange nor reported on the National Reporting System, and
if bid and asked prices for the Common Shares are not furnished by the
NASD or a similar organization, the value as established by the Board
at such time for purposes of this Plan."
18
<PAGE>
AMENDMENTS TO THE 1998 STOCK INCENTIVE PLAN OF
INDYMAC MORTGAGE HOLDINGS, INC.
(Adopted by the Board of Directors on January 20, 1999)
(1)
The 1998 Stock Incentive Plan of IndyMac Mortgage Holdings, Inc. is
hereby amended to revise Section 10(b)(iv) so that, as amended, Section
10(b)(iv) shall read as follows:
"Fair Market Value" on a specified date shall mean (A) if the
Common Shares are listed or admitted to trade on a national securities
exchange, the average of the high and low reported sales prices of the
Common Shares on the Composite Tape on such date, as published in the
Western Edition of The Wall Street Journal, on the principal national
securities exchange on which the Common Shares are so listed or
admitted to trade, or, if there is no trading of the Shares on such
date, then the average of the high and low reported sales prices of
the Common Shares as quoted on such Composite Tape on the next
preceding date on which there is trading in such Shares; (B) if the
Common Shares are not listed or admitted to trade on a national
securities exchange, the average of the high and low reported prices
for the Common Shares on such date, as furnished by the National
Association of Securities Dealers, Inc. ("NASD") through the NASDAQ
National Market Reporting System (or a similar organization, if the
NASD is no longer reporting such information); (C) if the Common
Shares are not listed or admitted to trade on a national securities
exchange and are not reported on the National Market Reporting System,
the arithmetic mean between the bid and asked prices for the Shares on
such date, as furnished by the NASD or a similar organization; or (D)
if the Common Shares are not listed or admitted to trade on a national
securities exchange nor reported on the National Market Reporting
System and if bid and asked prices for the stock are not furnished by
the NASD or a similar organization, the value as established by the
Board at such time for purposes of this Plan."
19
<PAGE>
AMENDMENTS TO THE 1998 STOCK INCENTIVE PLAN OF
INDYMAC MORTGAGE HOLDINGS, INC.
(Adopted by the Board of Directors on January 20, 1999)
(2)
The 1998 Stock Incentive Plan of IndyMac Mortgage Holdings, Inc. is
hereby amended to revise Section 10(e) so that, as amended, Section 10(e)
shall read as follows:
"The exercise price for Shares under any Director Option shall be
equal to 100% of the Fair Market Value of a Common Share on the date
the Director Option is granted. The exercise price for Shares under
any Director Option may be modified by a separate vote of the members
of the Board who are officers of the Company, as well as the full
Board; provided, that the modified exercise price shall be no less
than 100% of the Fair Market Value of a Common Share on the date the
exercise price of the Director Option is modified. The exercise price
of any option granted under this Section 10 shall be paid in full at
the time of each purchase in cash equivalent or in Common Shares
valued at their Fair Market Value on the date of exercise of such
option, or partly in such shares and partly in cash, provided that any
-------- ----
such Common Shares used in payment shall have been owned by the Non-
Employees Director at least six months prior to the date of exercise."
20
<PAGE>
AMENDMENT TO THE 1998 STOCK INCENTIVE PLAN OF
INDYMAC MORTGAGE HOLDINGS, INC.
(Adopted by the Board of Directors on March 1, 1999)
The 1998 Stock Incentive Plan of IndyMac Mortgage Holdings, Inc. is hereby
amended to add the following sentence to the end of Section 10(c) of the 1998
Plan:
"Notwithstanding the foregoing, beginning with calendar year 1999
and for each calendar year thereafter during the term of the Plan, the
annual award of stock options to Non-Employee Directors shall be on
the same date as the annual grant of Awards to Employees pursuant to
this Plan."
21
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1999
<CASH> 7,270
<SECURITIES> 221,483
<RECEIVABLES> 3,896,869
<ALLOWANCES> (53,536)
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 4,072,086
<CURRENT-LIABILITIES> 33,039
<BONDS> 3,156,036
803
0
<COMMON> 0
<OTHER-SE> 882,208
<TOTAL-LIABILITY-AND-EQUITY> 4,072,086
<SALES> 0
<TOTAL-REVENUES> 39,461<F1>
<CGS> 0
<TOTAL-COSTS> 9,171
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 6,681
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 23,609
<INCOME-TAX> 0
<INCOME-CONTINUING> 23,609
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 23,609
<EPS-PRIMARY> 0.30
<EPS-DILUTED> 0.30
<FN>
<F1>INCLUDES 52,434 OF INTEREST EXPENSE RELATED TO MORTGAGE LOAN ACTIVITIES
</FN>
</TABLE>
