Indymac Bancorp (NYSE:IMB)
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Indymac today issued the following letter to its stakeholders:
Dear Indymac Stakeholders:
In this very difficult and challenging environment, any of the actions
that we take to keep Indymac safe and sound unfortunately have negative
consequences to some important constituency. As we stated in our
financial update on May 12, 2008, we have been working with our
investment bankers to raise additional capital. To-date, we have not
been successful with these efforts, and, while we will continue these
efforts with our bankers and others, we don’t
expect to be able to raise capital until there is more stability and
less uncertainty in the housing and mortgage markets. While some
shareholders may believe it is in their best interests that we not raise
capital right now given the significant dilution that it would cause,
there are consequences of not being able to raise more capital and,
therefore, actions that we now must take.
Given the continued downward trend in home prices and a resulting
increase in our forecasted credit losses and the related downward trend
in the pricing of all mortgage related assets in the capital markets,
especially mortgage-backed securities where we have experienced
significant rating agency downgrades this quarter, we expect our loss
for the second quarter to be larger than Q108, but it is difficult at
this time to be more precise given the significant uncertainty
surrounding accounting estimates, fair value accounting and other
accounting matters.
In light of the current environment and related deterioration of our
financial position since last quarter, we have been working closely with
our federal banking regulators with respect to the actions that they and
we must take to meet our mutual goal of keeping Indymac safe and sound
through this crisis period. In that respect, based on information we
have provided to our regulators, they have advised us that we are no
longer “well capitalized”,
which we stated on May 12 was a possible scenario. Our regulators have
also asked us to submit to them a new business plan for their review and
approval, something on which we have been working with them for some
time. We have agreed on the basic elements of the plan, and the
regulators have directed us to begin executing on it. An important
element of our plan is to improve our capital ratios. Without an
external capital raise, the traditional way to improve safety and
soundness is to sell assets and shrink the balance sheet, which in
normal times generally has the effect of improving capital ratios and
bolstering liquidity. Yet in this environment, where either there are no
bids for most of IMB’s mortgage loans and
securities or the bid/ask spreads are abnormally wide, “fire-selling”
assets would actually deplete capital further. As a result, the most
realistic and cost-effective way to shrink both our balance sheet and
our servicing rights asset (which, as discussed in previous
communications, is up against the regulatory cap limit), is to curtail
most new loan production.
In addition to needing to shrink our assets to improve our capital
ratios, we also need to do so to ensure that we maintain prudent
operating liquidity. A consequence of falling below well-capitalized is
that we are no longer permitted to accept new brokered deposits or renew
or roll over existing ones, unless we get a waiver from the FDIC. While
we have submitted a waiver application, it is uncertain as to whether
such a waiver will be granted.
As a result of the above, we have made the difficult decision, effective
July 7, 2008, that we will no longer accept any new loan submissions or
rate locks in our retail and wholesale forward mortgage lending
channels, except for our servicing retention channel. We plan to honor
all of our existing rate-locked loans and will continue to fund these
loans in the coming weeks. While the managers and employees in these
units have worked incredibly hard, these units are not currently
profitable due to the continuing erosion of the housing and mortgage
markets. At the same time, these operations take up significant balance
sheet capacity and “feed”
growth in the servicing asset, an asset we need to shrink given its size
relative to our existing capital.
In closing our forward mortgage business, we will refocus our lending
efforts on supporting and building within regulatory constraints
Financial Freedom, our reverse mortgage unit (FHA production only), and
on continuing the retention activities associated with our servicing
portfolio. Combined, we currently expect these units to produce roughly
$5 billion to $10 billion per year of new FHA/GSE loans. Thus, our core
business model will include (1) Financial Freedom, one of the largest
reverse mortgage lenders in the Country; (2) a top ten mortgage loan
servicing operation, with a solid retention production unit; and (3) a
Southern California retail bank branch network, including 33 branches
and roughly $18 billion in deposits, of which over 96% is fully covered
by FDIC insurance. In addition, when this housing and mortgage crisis
abates and we return to health, we would also hope to be an investor in
mortgage loans and mortgage-backed securities and might re-enter the
national forward mortgage production business with a low-cost,
non-commissioned-based business model.
Unfortunately, the above actions will necessitate the reduction in our
present workforce from approximately 7,200 to roughly 3,400 or so over
the next couple of months, which should reduce our operating expenses by
roughly 60%. We will retain about 1,100 employees in loan servicing in
Kalamazoo and Austin; 350 in our servicing retention group in Irvine and
Kansas City; 800 at Financial Freedom, primarily in Irvine, Sacramento,
and Atlanta; 400 in our Southern California retail and web bank; 500 in
portfolio management and administration, largely in Pasadena; and 250 in
discontinued businesses. In building Indymac up from 4 employees in 1993
to its present size, we have had to retrench and then rebuild several
times over the past 15 years, but clearly these are the largest and most
difficult staff reductions we have ever had to make. If we had another
alternative, we clearly would have chosen it, as we understand how
painful these workforce reductions can be for the affected employees and
their families. Given Indymac’s current
financial position and these significant layoffs, I strongly believe it
is appropriate that I further materially reduce my own compensation. As
a result, I have requested of Indymac’s Board
of Directors that they reduce my base salary by 50%.
With respect to severance, our policy has always been that the fair and
right thing to do is to provide our departing employees with a generous
severance program to ease their transition to the next stage of their
career. Our severance program, which provided one month of pay and one
month of Indymac-paid COBRA insurance coverage for each year of service,
was clearly the most generous in the mortgage industry, if not among
most of the Fortune 500. I very much regret that the reality today,
however, is that we can no longer afford this program given our need to
preserve capital and return to profitability. Therefore, we will be
providing employees with a minimum 30-day notice of the termination of
their employment (effectively, 30 days severance), with employees
covered under the Federal WARN Act and similar state statutes (“WARN”)
receiving 60 days of advance notice prior to the effective date of the
their termination. Affected employees with five or more years of service
will receive a minimum $20,000 severance, including any compensation
payments made during the notice period.
With all of the above said, in this environment plans can change often
and quickly (e.g. ability to raise capital and/or liquidity, regulatory
actions, etc.). All we can do is continue to work hard and do our very
best to keep Indymac safe and sound, so that we can rebuild our
workforce and shareholder value when the housing and mortgage markets
stabilize. We will be providing more information on our plans and
prospects when we release Q208 earnings.
Very truly yours,
Michael W. Perry
Chairman and Chief Executive Officer
About Indymac Bank
IndyMac Bancorp, Inc. (NYSE:IMB) (Indymac®)
is the holding company for IndyMac Bank, F.S.B. (Indymac Bank®),
the 7th largest savings and loan in the nation.
Indymac Bank provides single-family home mortgage financing,
FDIC-insured banking products and through its Financial Freedom
subsidiary is one of the largest providers of reverse mortgage loans to
seniors.
For more information about Indymac and its affiliates, or to subscribe
to the company's E-mail Alert feature for notification of company news
and events, please visit http://about.indymacbank.com/investors.
To visit Indymac’s corporate blog, please
visit http://www.theimbreport.com.
FORWARD-LOOKING STATEMENTS
Certain statements contained in this press release may be deemed to be
forward-looking statements within the meaning of the federal securities
laws. Examples include our forecasts relating to the second quarter 2008
losses and capital ratio declines, our expectations about the inability
to raise capital in the near term, our ability to take the necessary
actions with our regulators to keep Indymac safe and sound, our ability
to honor and fund existing rate-locked loans, the expected long-term
viability of our revised business model, our projections of a return to
profitability and strong capital levels, and our ability to rebuild our
workforce and shareholder value. Words such as "anticipate," "believe,"
"estimate," "expect," "project," "plan," "forecast," "intend," "goal,"
"target," and similar expressions, as well as future or conditional
verbs, such as "will," "would," "should," "could," or "may," identify
forward-looking statements that are inherently subject to risks and
uncertainties, many of which cannot be predicted or quantified. Actual
results and the timing of certain events could differ materially from
those projected in or contemplated by the forward-looking statements due
to a number of factors, including: the effect of economic and market
conditions including, but not limited to, recent disruptions in the
housing and credit markets, including the level of housing prices,
industry volumes and margins; the level and volatility of interest
rates; Indymac's ability to down-size its business and reduce costs
expeditiously; Indymac's hedging strategies, hedge effectiveness and
overall asset and liability management; the accuracy of subjective
estimates used in determining the fair value of financial assets of
Indymac; the implementation of new accounting pronouncements and
guidance; the various credit risks associated with our loans and other
financial assets, including increased credit losses due to downward
trends in the economy and the real estate market and increased
delinquency rates of borrowers; the adequacy of credit reserves and the
assumptions underlying them; the actions undertaken by both current and
potential new competitors; the availability of funds from Indymac's
lenders (in particular, Federal Home Loan Bank and the Federal Reserve
Bank), loan sales, securitizations, deposits and all other sources used
to fund reverse mortgage loan originations and portfolio investments;
and the execution of Indymac's business and restructuring plans in a
significant and turbulent market transition. Additional risk factors
include the impact of disruptions triggered by natural disasters;
pending or future legislation, regulations and regulatory action, or
litigation, and factors described in the reports that Indymac files with
the Securities and Exchange Commission, including its Annual Report on
Form 10-K, Quarterly Reports on Form 10-Q, and its reports on Form 8-K.
Indymac does not undertake to update or revise forward-looking
statements to reflect the impact of circumstances for events that arise
after the date the forward-looking statements are made.