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By BENJAMIN MARK COLE

Contributing Reporter

Rising interest rates may be causing some skittishness on Wall Street, especially with regard to financial-sector stocks, but the story appears different for IndyMac Mortgage Holdings Inc., a Pasadena-based mortgage lender/broker.

On Aug. 11, Charlotte Chamberlain of brokerage Jefferies & Co. raised an "accumulate" flag on the stock. And of 10 analysts who follow the company, five have "strong buy" ratings, four have "buy" ratings, and only one is "neutral," according to Zacks Investment Service.

That's a far cry from last year about this time, when the financial world was roiled by mounting economic debacles in Asia and the failure of Long Term Capital Inc., the huge East Coast hedge fund. At that time, spooked investors ran to the safety of U.S. Treasuries. This presented problems for IndyMac, which as the nation's largest re-packager of home loans, bundles and resells mortgages to institutional investors in the secondary market.

IndyMac shares, which traded at $28 in June 1998, sank to below $8 by early October. That would have been a great time to buy; IndyMac shares have almost doubled since then, hovering near $14 as of last week. And the upside potential remains considerable, several analysts said.

IndyMac has embarked on a new game plan and the credit markets have returned to relative normalcy.

The "new" IndyMac is moving more heavily into mortgage lending, using its Web site, Loanworks, to lend directly to homebuyers, or indirectly through online mortgage bankers.

And in California, the company has struck a deal to buy West Covina-based San Gabriel Valley Bancorp, with plans to radically hike that thrift's lending activity.

For 1998, IndyMac reported net income of $33.8 million (48 cents a share), compared with $24.3 million (43 cents) in 1997. Its 1998 revenues were $454.3 million, up from $387.6 million.

Two other financial measures of REIT performance earnings before interest and taxes, and net interest revenues also have been strengthening. IndyMac's earnings before interest and taxes, which reflects a REIT's cash flow, improved 45.9 percent in 1998 vs. 1997. And its net interest revenue, which reflects the spread between what a mortgage REIT paid in interest and what it received from borrowers, jumped 46.4 percent.

The second quarter ended June 30 did not quite live up to those upward numbers. Net income was $29.1 million (36 cents), compared with $35.9 million (53 cents) for the like period a year earlier.

But IndyMac Chief Executive Michael Perry said further improvements lie ahead. "San Gabriel Valley has $350 million in assets (primarily outstanding loans) today, but we plan to grow that to $2.5 billion in the next three years," he said.

A broad-based marketing effort including broadcast ads, telemarketing and a Web-driven campaign will funnel borrowers to the thrift. In addition, there are plans to aggressively seek deposits nationwide from people who buy certificates of deposit or similar money market accounts.

A bit fortuitously, the near-complete buyout of Southern California thrifts by out-of-staters has opened a huge hole in the market. "We will be the only major thrift that is run by people who are here, who are intimate with the market, and what borrowers and depositors want here," Perry said.

The other big news is a pending corporate makeover. For years, the company has been structured as a real estate investment trust, but it is in the process of converting to a corporation next year. The switch will enable IndyMac to retain its earnings and use that money to bolster growth. (REITs are required by law to distribute 95 percent of earnings to shareholders in the form of dividends.)

Prior to last summer's credit crunch, many long-term shareholders wanted IndyMac to retain its REIT status. "We had many shareholders who liked the dividend," Perry said, referring to the $1.52-a-share annual payout.

But a growing number of investors came to realize that the REIT status was limiting growth and leaving the company vulnerable in a crunch. "Now more of our investors are asking us to become a growth stock," said Perry. "You can't finance growth if you are spending so much on dividends."

Next year, IndyMac will likely eliminate its dividend and amplify its huge share-buyback program, already underway. By the end of 2002, there are plans to spend $500 million on buying back shares on the open market, Perry said.

Analyst Chamberlain is enthused about the whopping share repurchases, which would reduce the float and hike earnings per share in the long run.

"At current prices, IndyMac could buy back as many as 28 million shares (out of 80.8 million outstanding)," she wrote in her recent report.

With the number of shares contracting, Perry projects that earnings per share will rise 20 percent to 30 percent a year "and more toward the high end of that range" for the next three years.

In the long run, he expects earnings per share to rise at a 15 percent annual rate. Perry also hinted that Loanworks, when it is fleshed out, might be spun off as a separate company.

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