8-K 1 v26603e8vk.htm FORM 8-K e8vk
Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
 
Form 8-K
 
CURRENT REPORT
Pursuant to Section 13 OR 15(d) of The Securities Exchange Act of 1934
 
Date of Report (Date of earliest event reported): January 25, 2007 (January 23, 2007)
 
 
 
 
INDYMAC BANCORP, INC.
(Exact name of registrant as specified in its charter)
 
         
Delaware   1-08972   95-3983415
(State or other jurisdiction
of incorporation)
  (Commission File Number)   (IRS Employer
Identification No.)
 
888 East Walnut Street, Pasadena, California 91101-7211
(Address of Principal Executive Office)
 
Registrant’s telephone number, including area code:
(800) 669-2300
 
 
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):
 
o  Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
 
o  Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
 
o   Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
 
o   Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
 


 

 
TABLE OF CONTENTS
 
             
        Page
 
  Results of Operations and Financial Condition   2
  Regulation FD Disclosure   2
    Forward-looking Statements   2
    Management’s Discussion and Analysis of Financial Condition and Results of Operations   2
    Highlights   2
    Summary of Business Segment Results   6
    Product Profitability Analysis   13
    Loan Production   20
    Loan Sales   25
    Mortgage Servicing and Other Retained Assets   28
    Mortgage-Backed Securities and Loans Held for Investment   36
    Net Interest Margin   44
    Interest Rate Sensitivity   48
    Credit Risk and Reserves   49
    Expenses   53
    Share Repurchase Activities   54
    Future Outlook   54
    Liquidity and Capital Resources   55
  Financial Statements and Exhibits   60
    Consolidated Balance Sheets   60
    Consolidated Statements of Earnings   61
    Consolidated Statements of Stockholders’ Equity and Comprehensive Income   62
    Consolidated Statements of Cash Flows   63
Item 5.02
  Departure of Directors or Principal Officers; Election of Directors; Appointment of Certain Officers; Compensatory Arrangements of Certain Officers   64
Item 5.03(a)
  Amendments to Articles of Incorporation or Bylaws; Change in Fiscal Year   65
Exhibit 3.1
  IndyMac Bancorp, Inc. Amended and Restate Bylaws    
Exhibit 10.1
  Board Compensation Policy and Stock Ownership Requirements, revised January 23, 2007    
Exhibit 99.1
  Press Release regarding IndyMac Bancorp, Inc. Earnings for the Three Months and Year Ended December 31, 2006    
Exhibit 99.2
  Webcast Presentation regarding IndyMac Bancorp, Inc. Earnings Review    
  68
 EXHIBIT 3.1
 EXHIBIT 10.1
 EXHIBIT 99.1
 EXHIBIT 99.2


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ITEM 2.02.  RESULTS OF OPERATIONS AND FINANCIAL CONDITION
 
On January 25, 2007, IndyMac Bancorp, Inc., a Delaware corporation (the “Company” or “Indymac Bancorp”), issued an earnings press release announcing its results of operations and financial condition for the quarter and the year ended December 31, 2006. A copy of the Company’s press release is furnished as Exhibit 99.1 hereto.
 
On January 25, 2007, the Company will host a live webcast presentation in connection with its quarterly release of earnings. A copy of the Company’s webcast presentation is furnished as Exhibit 99.2 hereto.
 
ITEM 7.01.  REGULATION FD DISCLOSURE
 
FORWARD-LOOKING STATEMENTS
 
Certain statements contained in this Form 8-K may be deemed to be forward-looking statements within the meaning of the federal securities laws. The words “anticipate,” “believe,” “estimate,” “expect,” “project,” “plan,” “forecast,” “intend,” “goal,” “target,” and similar expressions 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 industry volumes and margins; the level and volatility of interest rates; the Company’s hedging strategies, hedge effectiveness and asset and liability management; the accuracy of subjective estimates used in determining the fair value of financial assets of Indymac; the credit risks with respect to our loans and other financial assets; the actions undertaken by both current and potential new competitors; the availability of funds from Indymac’s lenders and from loan sales and securitizations to fund mortgage loan originations and portfolio investments; the execution of Indymac’s growth plans and ability to gain market share in a significant market transition; the impact of disruptions triggered by natural disasters; the impact of current, pending or future legislation, regulations or litigation; and other risk 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.
 
While all of the above items are important, the highlighted items represent those that, in management’s view, merit increased focus given current conditions.
 
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
HIGHLIGHTS
 
The following highlights the Company’s consolidated financial condition and results of operations for the quarters and years ended December 31, 2006 and 2005 and the quarter ended September 30, 2006. The 2005 data has been retrospectively adjusted to reflect the stock option expenses under Statement of Financial Accounting Standards (“SFAS”) No. 123(R), Share-Based Payment (“SFAS No. 123(R)”). The 2006 data reflects the Company’s adoption of SFAS No. 158, Employer’s Accounting for Defined Benefit Pension and Other Postretirement Plans (“SFAS No. 158”), on December 31, 2006. SFAS No. 158 requires (a) recognition of the funded status (measured as the difference between the fair value of the plan assets and the benefit obligation) of a benefit plan as an asset or liability in the employer’s statement of financial position, (b) measurement of the funded status as of the employer’s fiscal year-end with limited exceptions, and (c) recognition of changes in the funded status in the year in which the changes occur through comprehensive income. As a result, the Company recorded in its consolidated balance sheet an increase in pension and other postretirement liability of $10.1 million, deferred taxes of $3.9 million and accumulated other comprehensive income (“AOCI”) of $6.2 million.
 
References to “Indymac Bancorp” or the “Parent Company” refer to the parent company, IndyMac Bancorp, Inc., alone, while references to “Indymac,” the “Company,” or “we” refer to the parent company and its consolidated subsidiaries. References to “Indymac Bank” or the “Bank” refer to our subsidiary IndyMac Bank, F.S.B. and its consolidated subsidiaries.
 


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    Three Months Ended     Year Ended  
    December 31,
    December 31,
    September 30,
    December 31,
    December 31,
 
    2006     2005     2006     2006     2005  
    (Dollars in millions, except per share data)  
 
Selected Balance Sheet Information (at period end)(1)
                                       
Cash and cash equivalents
  $ 542     $ 443     $ 521     $ 542     $ 443  
Securities (trading and available for sale)
    5,443       4,102       4,950       5,443       4,102  
Loans held for sale
    9,468       6,024       8,341       9,468       6,024  
Loans held for investment
    10,177       8,278       10,030       10,177       8,278  
Allowance for loan losses
    (62 )     (55 )     (61 )     (62 )     (55 )
Mortgage servicing rights
    1,822       1,094       1,631       1,822       1,094  
Other
    2,105       1,566       1,973       2,105       1,566  
Total Assets
    29,495       21,452       27,385       29,495       21,452  
Deposits
    10,898       7,672       10,111       10,898       7,672  
Advances from Federal Home Loan Bank
    10,413       6,953       9,333       10,413       6,953  
Other borrowings
    4,637       4,367       4,595       4,637       4,367  
Other liabilities
    1,519       917       1,409       1,519       917  
Total Liabilities
    27,467       19,909       25,448       27,467       19,909  
Shareholders’ Equity
    2,028       1,543       1,938       2,028       1,543  
Income Statement(1)
                                       
Net interest income before provision for loan losses
  $ 133     $ 109     $ 137     $ 527     $ 425  
Provision for loan losses
    9       2       5       20       10  
Gain on sale of loans
    165       137       160       668       592  
Service fee income
    22       19       21       101       44  
(Loss) gain on mortgage-backed securities, net
    (4 )     6       19       21       18  
Fee and other income
    13       11       14       50       37  
Net revenues
    320       281       346       1,347       1,106  
Operating expenses
    211       163       203       789       618  
Net earnings
    72       70       86       343       293  
Basic earnings per share(2)
    1.02       1.11       1.25       5.07       4.67  
Diluted earnings per share(3)
    0.97       1.06       1.19       4.82       4.43  
Other Operating Data
                                       
Mortgage production
  $ 25,946     $ 18,025     $ 23,968     $ 89,951     $ 60,774  
Total loan production(4)
    26,328       18,478       24,439       91,698       62,714  
Mortgage industry share(5)
    4.51 %     2.51 %     3.83 %     3.59 %     2.01 %
Pipeline of mortgage loans in process(6)
    11,821       10,488       14,556       11,821       10,488  
Loans sold
    23,417       15,570       19,508       79,049       52,297  
Loans sold/mortgage loans produced
    90 %     86 %     81 %     88 %     86 %
Mortgage loans serviced for others (as of period end)(7)
    139,817       84,495       124,395       139,817       84,495  
Total mortgage loans serviced (as of period end)
    147,994       90,721       130,807       147,994       90,721  
Average full-time equivalent employees
    8,477       6,733       8,186       7,935       6,240  
Other Per Share Data
                                       
Dividends declared per share
  $ 0.50     $ 0.42     $ 0.48     $ 1.88     $ 1.56  
Dividend payout ratio(8)
    52 %     40 %     40 %     39 %     35 %
Book value per share at period end
    27.78       24.02       27.35       27.78       24.02  
Closing price per share at period end
    45.16       39.02       41.16       45.16       39.02  
Average Common Shares (in thousands)
                                       
Basic
    71,059       63,650       68,866       67,701       62,760  
Diluted
    74,443       66,737       72,286       71,118       66,115  
Performance Ratios
                                       
Return on average equity (“ROE”) (annualized)
    14.56 %     18.62 %     18.27 %     19.09 %     21.23 %
Return on average assets (“ROA”) (annualized)
    0.85 %     1.18 %     1.17 %     1.17 %     1.38 %
Net interest income to pretax income after minority interest
    122.52 %     93.44 %     95.97 %     94.82 %     87.55 %
Net interest margin
    1.76 %     2.01 %     2.13 %     2.02 %     2.16 %
Net interest margin, thrift(9)
    1.64 %     2.02 %     2.02 %     1.93 %     2.10 %
Mortgage banking revenue (“MBR”) margin on loans sold(10)
    0.91 %     1.10 %     1.03 %     1.06 %     1.36 %
Efficiency ratio(11)
    64 %     58 %     58 %     58 %     55 %
Operating expenses to loan production
    0.80 %     0.88 %     0.83 %     0.86 %     0.99 %
Balance Sheet and Asset Quality Ratios
                                       
Average interest-earning assets
  $ 29,868     $ 21,614     $ 25,507     $ 26,028     $ 19,645  
Average equity
    1,969       1,501       1,871       1,796       1,381  
Debt to equity ratio(12)
    13.5:1       12.9:1       13.1:1       13.5:1       12.9:1  
Core capital ratio(13)
    7.39 %     8.21 %     7.60 %     7.39 %     8.21 %
Risk-based capital ratio(13)
    11.72 %     12.20 %     11.62 %     11.72 %     12.20 %
Non-performing assets to total assets
    0.63 %     0.34 %     0.51 %     0.63 %     0.34 %
Allowance for loan losses to total loans held for investment
    0.61 %     0.67 %     0.61 %     0.61 %     0.67 %
Allowance for loan losses to non-performing loans held for investment
    57.51 %     127.10 %     77.43 %     57.51 %     127.10 %
Loan Loss Activity
                                       
Allowance for loan losses to annualized net charge-offs
    2.0 x     7.2 x     8.2 x     4.9 x     7.2 x
Provision for loan losses to net charge-offs
    117.77 %     80.97 %     267.45 %     156.50 %     129.57 %
Net charge-offs (annualized) to average non-performing loans held for investment
    32.47 %     17.63 %     10.45 %     16.82 %     16.65 %
Net charge-offs (annualized) to average loans held for investment
    0.31 %     0.10 %     0.08 %     0.14 %     0.10 %

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(1) The items under the balance sheet and income statement sections are rounded individually and therefore may not necessarily add up to the total due to such rounding.
 
(2) Net earnings for the period divided by weighted average basic shares outstanding for the period.
 
(3) Net earnings for the period divided by weighted average dilutive shares outstanding for the period.
 
(4) Includes newly originated commitments on construction loans.
 
(5) Our market share is calculated based on our total loan production, both purchased (correspondent and conduit) and originated (retail and wholesale), in all channels (the numerator) divided by the Mortgage Bankers Association (“MBA”) January 8, 2007 Mortgage Finance Long-Term Forecast estimate of the overall mortgage market (the denominator). As we review industry publications such as National Mortgage News, we have confirmed that our calculation is consistent with its methodologies for reporting market share of Indymac and our mortgage banking peers. It is important to note that these industry calculations cause purchased mortgages to be counted more than once, i.e., first when they are originated and again by the purchasers (through correspondent and conduit channels) of the mortgages. Therefore, our market share calculation may not be mathematically precise, but it is consistent with industry calculations, which provide investors with a good view of our relative standing compared to the other top mortgage lending peers.
 
(6) The amount includes $1.9 billion, $1.3 billion and $2.8 billion of non-specific rate locks on bulk purchases in our conduit channel at December 31, 2006, December 31, 2005 and September 30, 2006, respectively.
 
(7) Represents the unpaid principal balance on loans sold with servicing retained by Indymac.
 
(8) Dividends declared per common share as a percentage of diluted earnings per share.
 
(9) Net interest margin, thrift represents the combined margin from thrift, elimination and other, and corporate overhead.
 
(10) Mortgage banking revenue margin is calculated using the sum of consolidated gain on sale of loans and the net interest income earned on loans held for sale by our mortgage banking production divisions divided by total loans sold.
 
(11) Defined as operating expenses divided by net interest income and other income.
 
(12) Debt includes deposits.
 
(13) Ratio is for Indymac Bank and excludes unencumbered cash at the Parent Company available for investment in Indymac Bank. Risk-based capital ratio is calculated based on the regulatory standard risk weighting adjusted for the additional risk weightings for subprime loans.
 
SUMMARY OF OVERALL RESULTS
 
Three Months ended December 31, 2006
 
The Company recorded net earnings of $72.2 million, or $0.97 per share, for the fourth quarter of 2006. This represented an increase of 3% and a decrease of 8% in net earnings and earnings per share, respectively, compared with net earnings of $70.4 million, or $1.06 per share, for the fourth quarter of 2005. The earnings for the fourth quarter of 2005 were retrospectively adjusted to reflect the stock option expenses due to the adoption of SFAS No. 123(R). Weighted-average diluted shares outstanding increased to $74.4 million shares for the fourth quarter of 2006 from $66.7 million shares a year ago, mainly due to the issuance of common stock through the Direct Stock Purchase Plan and exercise of common stock options and warrants. Return on equity was 15% for the fourth quarter of 2006 compared with 19% for the fourth quarter of 2005.
 
Net revenues in the fourth quarter of 2006 were $319.5 million, reflecting an increase of 14% over the fourth quarter of 2005. Key drivers of this growth included the following:
 
1) Growth in average interest earning assets of 38% from $21.6 billion during the quarter ended December 31, 2005 to $29.9 billion for the quarter ended December 31, 2006, leading to an increase in net interest income of 21% to $132.6 million. However, Indymac’s net interest margin declined to 1.76% in the fourth quarter of 2006 compared to 2.01% in the fourth quarter of 2005 as we continued to experience the negative impact from the yield curve inversion and an increase in our thrift funding cost due to the maturity of


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lower rate fixed-rate liability. The increase in average interest earning assets primarily resulted from growth in production, increased retention of securities and loans in our held for investment portfolio, offset by the sale of loans.
 
2) Growth in our mortgage production of 44% over the fourth quarter of 2005 to an all-time record of $25.9 billion, representing market share of 4.51% based on the industry volume published by the MBA on January 8, 2007. The increase in production led to an increase in loans sold to $23.4 billion, or 90% of mortgage loans produced in the fourth quarter of 2006, and consequently to an increase in gain on sale of loans, a key component of net revenue. This increase in loans sold mitigated the year-over-year decline in the revenue margin on sales. The MBR margin on loans sold was 0.91% in the fourth quarter of 2006, which was down from 1.10% in the fourth quarter of 2005, and 1.03% in the third quarter of 2006. The decline in MBR margin is due to a decline in higher margin pay option ARM volume and due to a higher mix of lower margin conduit and correspondent channel volume.
 
3) An increase in credit costs related to the loan loss provision, secondary market reserve, and marking-to-market delinquent loans held-for-sale and residuals and non-investment grade securities.
 
  •  Provision for loan loss increased from $1.6 million for the fourth quarter of 2005 to $9.0 million for the fourth quarter of 2006. The increase is a direct result of increased delinquencies in our portfolio. Non-performing assets increased during the quarter to 0.63% of total assets at December 31, 2006 compared to 0.34% of total assets at December 31, 2005. The allowance for loan losses currently represents 2.0 times annualized net charge-offs, down from 7.2 times at December 31, 2005, as annualized net charge-offs in the fourth quarter of 2006 increased to 0.31% of average loans held for investment from 0.10% during the fourth quarter of 2005.
 
  •  Net (loss) gain on mortgage-backed securities decreased from a gain of $5.9 million in the fourth quarter of 2005 to a loss of $4.1 million in the fourth quarter of 2006. The decrease was primarily due to higher unrealized losses on AAA-rated and agency interest-only and residual securities of $10.3 million and increased impairment on mainly residual securities of $4.5 million, partially offset by an increase in unrealized gain on prepayment penalty securities of $2.5 million. The unrealized losses and impairment mainly resulted from higher loss assumptions based on our recent credit experience and projected credit performance in certain HELOC residual securities in our thrift segment. In addition, a change in prepayment modeling on certain residual and non-investment grade securities resulted in an impairment of $5.3 million.
 
4) Service fee income of $22.1 million in the fourth quarter of 2006 grew 18% over the fourth quarter of 2005 mainly driven by a 65% increase in the principal amount of mortgage loans serviced for others to $139.8 billion at December 31, 2006.
 
Operating expenses of $210.8 million also reflected a 29% increase from the fourth quarter of 2005, consistent with the growth in our operations and infrastructure investments to execute on our strategy to increase production and revenue. During 2006, we opened three new regional centers, which increased our total regional centers to 16 at December 31, 2006. In addition, average full-time equivalent employees (“FTE”) increased 26% to 8,477 for the fourth quarter of 2006.
 
The effective tax rate on earnings for the quarter ended December 31, 2006 decreased to 39.1% from the 39.5% for the quarter ended December 31, 2005. The decline was due to a lower blended state tax rate as the Company further expanded geographically into states with lower tax rates. The cumulative effect of the decline for the year and the effect of the decline on the net deferred tax liability further reduced the effective tax rate for the fourth quarter of 2006 to 33.3% from the 39.7% for the fourth quarter of 2005.
 
Year ended December 31, 2006
 
For the year ended December 31, 2006, the Company’s net earnings were $342.9 million, or $4.82 per share, an all-time record. This represents an increase of 17% from $293.1 million, or $4.43 per share, for the year ended December 31, 2005, while the industry volumes were down by 17%. The earnings for the year ended December 31,


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2005 were also retrospectively adjusted to reflect stock option expenses resulting from the adoption of SFAS No. 123(R). Return on equity was 19% for the year ended December 31, 2006 compared with 21% for the year ended December 31, 2005.
 
Net revenues of $1.3 billion for 2006 reflect an increase of 22% over 2005. Key drivers of this growth included the following:
 
1) Growth in average interest earning assets of 32% from $19.6 billion in 2005 to $26.0 billion in 2006, leading to an increase in net interest income of 24% to $526.7 million. The increase is primarily driven by the growth in production as mentioned above. Net interest margin declined from 2.16% to 2.02% during a period in which the Federal Reserve increased short-term interest rates by 100 basis points. The yield curve inversion and increase in thrift segment funding costs mentioned above contributed to the decline. This decline somewhat mitigated the positive impact from the growth in average interest earning assets.
 
2) Growth in mortgage production of 48% in 2006 over 2005 to $90.0 billion, led to a 51% increase in loans sold to $79.0 billion. Our market share increased from 2.01% in 2005 to 3.59% in 2006. Leading this growth were our Financial Freedom and conduit channels with increases in production of 71% and 90%, respectively. This volume growth mitigated a decline in the MBR margin on loans sold, resulting from the previously mentioned shift in product and channel mix. Increased credit costs also impacted the MBR margin, albeit to a significantly lesser effect. The MBR margin on loans sold was 1.06% in 2006, down from 1.36% in 2005.
 
3) Provision for loan loss increased from $10.0 million for 2005 to $20.0 million for 2006 due to a considerable increase in our non-performing assets and related charge-offs. The allowance for loan losses currently represents 4.9 times net charge-offs, down from 7.2 times at December 31, 2005 as net charge-offs for 2006 increased 4 basis points to 0.14% of average loans held for investment.
 
4) Service fee income of $101.3 million in 2006 grew 129% over 2005 driven by the increase in the principal balance of loans serviced for others combined with solid hedging performance and slowing prepayments attributable to higher mortgage rates.
 
Operating expenses of $789.0 million reflected an increase of 28%, consistent with our strategy for growth as mentioned above. Accordingly, average FTE increased 27% from 6,240 to 7,935 during the year supporting this growth. The effective tax rate on earnings for the year ended December 31, 2006 decreased to 39.1% from the 39.5% for the year ended December 31, 2005. The decline was due to a lower blended state tax rate as mentioned earlier. The effect of the decline on the net deferred tax liability further reduced the effective tax rate for the year ended December 31, 2006 to 38.2%.
 
SUMMARY OF BUSINESS SEGMENT RESULTS
 
The Company conducts business substantially through IndyMac Bank, F.S.B. via two primary operating segments, the mortgage banking and the thrift segments. These segments provide clear transparency to the two primary activities in our hybrid model: mortgage banking with high asset turn and high returns on equity, and thrift investing characterized by lower but more consistent returns on equity. Please refer to the Company’s annual report on Form 10-K for the year ended December 31, 2005 (“2005 10-K”), page 23, for further discussions of the divisions within the mortgage banking and thrift segments.


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The tables below summarize the quarter-over-quarter performance of Indymac’s divisions. Detailed operating results for each division are provided on pages 9 to 12.
 
                                                                         
    Mortgage Banking                                
          MSRs and
                                           
          Other
    Mortgage
                      Total
             
    Production
    Retained
    Banking
                Elimination
    Operating
    Corporate
    Total
 
    Divisions     Assets     Overhead(1)     Total     Thrift     & Other     Results     Overhead     Company  
    (Dollars in thousands)  
 
Net Income Q406
  $ 70,500     $ 18,117     $ (8,684 )   $ 79,933     $ 24,819     $ (3,900 )   $ 100,852     $ (28,611 )   $ 72,241  
Net Income Q405
    60,115       18,609       (7,368 )     71,356       32,177       (11,126 )     92,407       (21,969 )     70,438  
                                                                         
$ Change
    10,385       (492 )     (1,316 )     8,577       (7,358 )     7,226       8,445       (6,642 )     1,803  
% Change
    17 %     (3 )%     (18 )%     12 %     (23 )%     65 %     9 %     (30 )%     3 %
Average Capital Q406
  $ 668,250     $ 430,267     $ 17,246     $ 1,115,763     $ 706,480     $ 2,541     $ 1,824,784     $ 143,799     $ 1,968,583  
Average Capital Q405
    442,917       225,999       10,273       679,189       583,091       1,696       1,263,976       236,671       1,500,647  
% Change
    51 %     90 %     68 %     64 %     21 %     50 %     44 %     (39 )%     31 %
ROE Q406
    42 %     17 %     N/A       28 %     14 %     N/A       22 %     N/A       15 %
ROE Q405
    54 %     33 %     N/A       42 %     22 %     N/A       29 %     N/A       19 %
% Change
    (22 )%     (49 )%     N/A       (32 )%     (36 )%     N/A       (24 )%     N/A       (22 )%
 
 
(1) Included production division overhead and servicing overhead of $5.9 million and $2.8 million, respectively, for the fourth quarter of 2006. For the fourth quarter of 2005, the production division overhead and servicing overhead were $4.9 million and $2.5 million, respectively.
 
                                                         
    Mortgage Banking Production Divisions  
    Mortgage Professionals Group     Consumer
    Financial
    Production
 
    Wholesale     Correspondent     Conduit     Total     Direct     Freedom     Divisions  
    (Dollars in thousands)  
 
Net Income Q406
  $ 32,658     $ 1,682     $ 16,818     $ 51,158     $ 594     $ 18,748     $ 70,500  
Net Income Q405
    38,283       2,747       10,750       51,780       (61 )     8,396       60,115  
                                                         
$ Change
  $ (5,625 )   $ (1,065 )   $ 6,068     $ (622 )   $ 655     $ 10,352     $ 10,385  
% Change
    (15 )%     (39 )%     56 %     (1 )%     N/M       123 %     17 %
Average Capital Q406
  $ 235,845     $ 64,863     $ 230,960     $ 531,668     $ 9,377     $ 127,205     $ 668,250  
Average Capital Q405
    185,391       37,931       132,836       356,158       16,969       69,790       442,917  
% Change
    27 %     71 %     74 %     49 %     (45 )%     82 %     51 %
ROE Q406
    55 %     10 %     29 %     38 %     25 %     58 %     42 %
ROE Q405
    82 %     29 %     32 %     58 %     (1 )%     48 %     54 %
% Change
    (33 )%     (64 )%     (10 )%     (34 )%     N/M       23 %     (22 )%
 
                                                                 
    Thrift  
                      Consumer
                         
    Mortgage-
    Prime SFR
    Home
    Construction
    Builder
                   
    Backed
    Mortgage
    Equity
    and Lot
    Construction
    Warehouse
    Discontinued
       
    Securities     Loans     Division     Loans     Financing     Lending     Products     Total Thrift  
    (Dollars in thousands)  
 
Net Income Q406
  $ 3,011     $ 6,620     $ 2,851     $ 5,340     $ 6,608     $ 432     $ (43 )   $ 24,819  
Net Income Q405
    4,145       11,382       6,023       4,105       6,743       (220 )     (1 )     32,177  
                                                                 
$ Change
  $ (1,134 )   $ (4,762 )   $ (3,172 )   $ 1,235     $ (135 )   $ 652     $ (42 )   $ (7,358 )
% Change
    (27 )%     (42 )%     (53 )%     30 %     (2 )%     N/M       N/M       (23 )%
Average Capital Q406
  $ 65,217     $ 246,883     $ 140,692     $ 127,789     $ 107,536     $ 14,983     $ 3,380     $ 706,480  
Average Capital Q405
    43,861       216,044       109,808       111,183       94,105       3,986       4,104       583,091  
% Change
    49 %     14 %     28 %     15 %     14 %     276 %     (18 )%     21 %
ROE Q406
    18 %     11 %     8 %     17 %     24 %     11 %     (5 )%     14 %
ROE Q405
    37 %     21 %     22 %     15 %     28 %     (22 )%           22 %
% Change
    (51 )%     (49 )%     (63 )%     13 %     (14 )%     N/M       N/M       (36 )%


7


Table of Contents

Total capital deployed in our operating business segments increased 44% to $1.8 billion in the fourth quarter of 2006 and earned a 22% return on equity before the impact of corporate overhead. Net of corporate overhead and including the excess undeployed capital, Indymac’s average capital of $2.0 billion earned a 15% return on equity for the fourth quarter of 2006.
 
We deployed 34% of our capital, or $668.3 million, into our mortgage production divisions in the fourth quarter of 2006, an increase of 51% over the fourth quarter of 2005. Mortgage production earnings grew 17%; however the return on equity declined from 54% to 42% reflecting the narrower mortgage banking revenue margins. The wholesale and correspondent divisions reflected stronger production year-over-year, but a reduction in net income as margins were lower in these two business lines year-over-year. Our conduit division had a strong quarter with earnings growth of 56% mainly attributable to growth in production of 78%, while return on equity of 29% remained flat. Our reverse mortgage division continued to demonstrate strong returns with earnings and production growth of 123% and 51%, respectively.
 
We deployed 22% of our capital, or $430.3 million, into the MSRs and other retained assets division, up from 15% one year ago. This division’s ROE returned to a more normal level, declining from 33% in the fourth quarter of 2005 to 17% in the fourth quarter of 2006. We target our pricing and hedging strategies to earn expected ROE of 18% to 23% for this segment. Given the volatility in this segment, returns in a quarter may substantially exceed or fall below the targeted level.
 
We deployed 36% of our capital, or $706.5 million, to the thrift segment, a 21% increase over last year. Thrift’s return on equity declined from 22% to 14% over the same period. Net interest margin declined from 1.84% to 1.40%. Factors contributing to the decline included increased non-performing loans, higher cost of funds, higher cost of hedging, and higher premium amortization. As a result, net interest income remained flat in spite of 28% increase in average interest earning assets. Additionally, provision for loan losses and write-downs on HELOC residual securities increased substantially due to worsening credit quality of our portfolio and the collateral supporting the residual securities.


8


Table of Contents

DETAIL CHANNEL SEGMENT RESULTS
 
The following tables summarize the Company’s financial results for the three months ended December 31, 2006 and 2005 by its two primary segments via each of its operating divisions:
 
                                                                         
    Mortgage Banking                                
          MSRs
                                           
          and
                                           
          Other
    Mortgage
                      Total
             
    Production
    Retained
    Banking
                Elimination
    Operating
    Corporate
    Total
 
    Divisions     Assets     Overhead(1)     Total     Thrift     & Other(2)     Results     Overhead     Company  
    (Dollars in thousands)  
 
Three Months Ended December 31, 2006
                                                                       
Operating Results
                                                                       
Net interest income
  $ 48,667     $ 15,758     $ 428     $ 64,853     $ 56,900     $ 13,763     $ 135,516     $ (2,870 )   $ 132,646  
Provision for loan losses
                            (8,953 )           (8,953 )           (8,953 )
Gain (loss) on sale of loans
    155,153       11,788             166,941       17,395       (19,365 )     164,971             164,971  
Service fee income
    6,455       15,016             21,471       (445 )     1,097       22,123             22,123  
Gain (loss) on securities
          863             863       (5,835 )     843       (4,129 )           (4,129 )
Other income
    495       3,273       858       4,626       8,201       (494 )     12,333       513       12,846  
                                                                         
Net revenues (expense)
    210,770       46,698       1,286       258,754       67,263       (4,156 )     321,861       (2,357 )     319,504  
Operating expenses
    157,819       19,875       15,546       193,240       30,417       13,608       237,265       44,623       281,888  
Deferred expense under SFAS 91
    (63,162 )     (2,925 )           (66,087 )     (3,905 )     (655 )     (70,647 )           (70,647 )
                                                                         
Pretax income (loss)
    116,113       29,748       (14,260 )     131,601       40,751       (17,109 )     155,243       (46,980 )     108,263  
                                                                         
Net income (loss)
  $ 70,500     $ 18,117     $ (8,684 )   $ 79,933     $ 24,819     $ (3,900 )   $ 100,852     $ (28,611 )   $ 72,241  
                                                                         
Relevant Financial and Performance Data
                                                                       
Average interest-earning assets
  $ 12,415,322     $ 1,041,331     $ 2,974     $ 13,459,627     $ 16,122,311     $ (90,071 )   $ 29,491,867     $ 376,247     $ 29,868,114  
Allocated capital
    668,250       430,267       17,246       1,115,763       706,480       2,541       1,824,784       143,799       1,968,583  
Loans produced
    24,210,906       1,009,730       N/A       25,220,636       1,107,380       N/A       26,328,016       N/A       26,328,016  
Loans sold
    23,335,591       655,085       N/A       23,990,676       1,476,125       (2,049,366 )     23,417,435       N/A       23,417,435  
MBR margin
    0.87 %     1.80 %     N/A       0.90 %     1.18 %     N/A       N/A       N/A       0.91 %
ROE
    42 %     17 %     N/A       28 %     14 %     N/A       22 %     N/A       15 %
ROA
    2.20 %     2.33 %     N/A       1.99 %     0.61 %     N/A       1.24 %     N/A       0.85 %
Net interest margin, thrift. 
    N/A       N/A       N/A       N/A       1.40 %     N/A       N/A       N/A       1.64 %
Average FTE
    4,807       280       1,139       6,226       648       324       7,198       1,279       8,477  
Three Months Ended December 31, 2005
                                                                       
Operating Results
                                                                       
Net interest income
  $ 33,883     $ 8,898     $ (1,286 )   $ 41,495     $ 58,394     $ 10,977     $ 110,866     $ (1,467 )   $ 109,399  
Provision for loan losses
                            (1,553 )           (1,553 )           (1,553 )
Gain (loss) on sale of loans
    136,416       6,555             142,971       7,726       (13,307 )     137,390             137,390  
Service fee income
    3,767       20,104             23,871       1,662       (6,819 )     18,714             18,714  
Gain (loss) on securities
          4,823             4,823       591       519       5,933             5,933  
Other income
    278       694       502       1,474       9,493       (46 )     10,921       192       11,113  
                                                                         
Net revenues (expense)
    174,344       41,074       (784 )     214,634       76,313       (8,676 )     282,271       (1,275 )     280,996  
Operating expenses
    128,109       10,920       11,394       150,423       27,967       10,360       188,750       34,437       223,187  
Deferred expense under SFAS 91
    (53,186 )     (605 )           (53,791 )     (4,839 )     (645 )     (59,275 )           (59,275 )
                                                                         
Pretax income (loss)
    99,421       30,759       (12,178 )     118,002       53,185       (18,391 )     152,796       (35,712 )     117,084  
                                                                         
Net income (loss)
  $ 60,115     $ 18,609     $ (7,368 )   $ 71,356     $ 32,177     $ (11,126 )   $ 92,407     $ (21,969 )   $ 70,438  
                                                                         
Relevant Financial and Performance Data
                                                                       
Average interest-earning assets
  $ 7,670,179     $ 578,921     $ (546 )   $ 8,248,554     $ 12,571,207     $ (81,156 )   $ 20,738,605     $ 875,121     $ 21,613,726  
Allocated capital
    442,917       225,999       10,273       679,189       583,091       1,696       1,263,976       236,671       1,500,647  
Loans produced
    16,845,128       353,180             17,198,308       1,279,499             18,477,807             18,477,807  
Loans sold
    16,256,493       378,474             16,634,967       814,811       (1,879,599 )     15,570,179             15,570,179  
MBR margin
    1.05 %     1.73 %     N/A       1.06 %     0.95 %     N/A       N/A       N/A       1.10 %
ROE
    54 %     33 %     N/A       42 %     22 %     N/A       29 %     N/A       19 %
ROA
    3.04 %     4.32 %     N/A       2.93 %     1.01 %     N/A       1.65 %     N/A       1.18 %
Net interest margin, thrift. 
    N/A       N/A       N/A       N/A       1.84 %     N/A       N/A       N/A       2.02 %
Average FTE
    3,751       166       877       4,794       639       263       5,696       1,037       6,733  
 
 
(1) Included production division overhead and servicing overhead of $5.9 million and $2.8 million, respectively, for the fourth quarter of 2006. For the fourth quarter of 2005, the production division overhead and servicing overhead were $4.9 million and $2.5 million, respectively.
 
(2) Included are eliminations, deposits, and treasury items, the details of which are provided on page 12.


9


Table of Contents

 
The following tables provide additional detail on the results for the production divisions of our mortgage banking segment for the three months ended December 31, 2006 and 2005:
 
                                                         
    Mortgage Banking Production Divisions  
                                  Financial
       
                                  Freedom
    Total
 
    Mortgage Professionals Group     Consumer
    (Reverse
    Production
 
    Wholesale     Correspondent     Conduit     Total     Direct     Mortgage)     Divisions  
    (Dollars in thousands)  
 
Three Months Ended December 31, 2006
                                                       
Operating Results
                                                       
Net interest income
  $ 17,026     $ 4,576     $ 22,383     $ 43,985     $ 587     $ 4,095     $ 48,667  
Provision for loan losses
                                         
Gain (loss) on sale of loans
    81,936       3,396       13,975       99,307       6,961       48,885       155,153  
Service fee income
                                  6,455       6,455  
Gain (loss) on securities
                                         
Other income
                (136 )     (136 )     443       188       495  
                                                         
Net revenues (expense)
    98,962       7,972       36,222       143,156       7,991       59,623       210,770  
Operating expenses
    87,127       12,621       8,606       108,354       11,690       37,775       157,819  
Deferral of expenses under SFAS 91
    (41,791 )     (7,411 )           (49,202 )     (4,675 )     (9,285 )     (63,162 )
                                                         
Pretax income (loss)
    53,626       2,762       27,616       84,004       976       31,133       116,113  
                                                         
Net income (loss)
  $ 32,658     $ 1,682     $ 16,818     $ 51,158     $ 594     $ 18,748     $ 70,500  
                                                         
Relevant Financial and Performance Data
                                                       
Average interest-earning assets
  $ 4,522,275     $ 1,210,104     $ 5,555,975     $ 11,288,354     $ 186,901     $ 940,067     $ 12,415,322  
Allocated capital
    235,845       64,863       230,960       531,668       9,377       127,205       668,250  
Loans produced
    9,972,068       2,956,718       9,416,480       22,345,266       425,125       1,440,515       24,210,906  
Loans sold
    9,725,597       2,857,739       9,124,889       21,708,225       446,699       1,180,667       23,335,591  
MBR margin
    1.02 %     0.28 %     0.40 %     0.66 %     1.69 %     4.49 %     0.87 %
Pretax income/loan sold
    0.55 %     0.10 %     0.30 %     0.39 %     0.22 %     2.64 %     0.50 %
ROE
    55 %     10 %     29 %     38 %     25 %     58 %     42 %
ROA
    2.86 %     0.55 %     1.19 %     1.79 %     1.23 %     6.41 %     2.20 %
Net interest margin
    1.49 %     1.50 %     1.60 %     1.55 %     1.25 %     1.73 %     1.56 %
Average FTE
    2,616       274       161       3,051       358       1,398       4,807  
Three Months Ended December 31, 2005
                                                       
Operating Results
                                                       
Net interest income
  $ 12,747     $ 3,041     $ 15,871     $ 31,659     $ 1,043     $ 1,181     $ 33,883  
Provision for loan losses
                                         
Gain (loss) on sale of loans
    84,928       6,359       7,635       98,922       12,234       25,260       136,416  
Service fee income
                                  3,767       3,767  
Gain (loss) on securities
                                         
Other income
                1       1       95       182       278  
                                                         
Net revenues (expense)
    97,675       9,400       23,507       130,582       13,372       30,390       174,344  
Operating expenses
    67,949       9,233       5,739       82,921       21,371       23,817       128,109  
Deferral of expenses under SFAS 91
    (33,552 )     (4,373 )           (37,925 )     (7,898 )     (7,363 )     (53,186 )
                                                         
Pretax income (loss)
    63,278       4,540       17,768       85,586       (101 )     13,936       99,421  
                                                         
Net income (loss)
  $ 38,283     $ 2,747     $ 10,750     $ 51,780     $ (61 )   $ 8,396     $ 60,115  
                                                         
Relevant Financial and Performance Data
                                                       
Average interest-earning assets
  $ 3,640,283     $ 757,257     $ 2,721,079     $ 7,118,619     $ 319,622     $ 231,938     $ 7,670,179  
Allocated capital
    185,391       37,931       132,836       356,158       16,969       69,790       442,917  
Loans produced
    8,187,773       1,754,304       5,281,008       15,223,085       667,407       954,636       16,845,128  
Loans sold
    8,107,509       1,771,113       4,752,684       14,631,306       710,596       914,591       16,256,493  
MBR margin
    1.20 %     0.53 %     0.49 %     0.89 %     1.87 %     2.89 %     1.05 %
Pretax income/loan sold
    0.78 %     0.26 %     0.37 %     0.58 %     (0.01 )%     1.52 %     0.61 %
ROE
    82 %     29 %     32 %     58 %     (1 )%     48 %     54 %
ROA
    4.16 %     1.44 %     1.56 %     2.87 %     (0.07 )%     9.02 %     3.04 %
Net interest margin
    1.39 %     1.59 %     2.31 %     1.76 %     1.29 %     2.02 %     1.75 %
Average FTE
    1,991       188       123       2,302       530       919       3,751  


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The following tables provide additional detail on the results for the divisions of our thrift segment for the three months ended December 31, 2006 and 2005:
 
                                                                 
    Thrift  
                      Consumer
                         
    Mortgage-
    Prime SFR
    Home
    Construction
    Builder
                   
    Backed
    Mortgage
    Equity
    and Lot
    Construction
    Warehouse
    Discontinued
       
    Securities     Loans     Division     Loans     Financing     Lending     Products     Total Thrift  
    (Dollars in thousands)  
 
Three Months Ended December 31, 2006
                                                               
Operating Results
                                                               
Net interest income
  $ 4,981     $ 14,555     $ 8,600     $ 11,586     $ 15,460     $ 1,312     $ 406     $ 56,900  
Provision for loan losses
          (4,500 )     (1,800 )     (1,036 )     (1,100 )     (92 )     (425 )     (8,953 )
Gain (loss) on sale of loans
          2,068       6,474       8,853                         17,395  
Service fee income
                (445 )                             (445 )
Gain (loss) on securities
    265             (6,017 )     (83 )                       (5,835 )
Other income
          447       2,078       4,593       552       531             8,201  
                                                                 
Net revenues (expense)
    5,246       12,570       8,890       23,913       14,912       1,751       (19 )     67,263  
Operating expenses
    302       1,700       4,420       17,069       5,832       1,042       52       30,417  
Deferral of expenses under SFAS 91
                (211 )     (1,924 )     (1,770 )                 (3,905 )
                                                                 
Pretax income (loss)
    4,944       10,870       4,681       8,768       10,850       709       (71 )     40,751  
                                                                 
Net income (loss)
  $ 3,011     $ 6,620     $ 2,851     $ 5,340     $ 6,608     $ 432     $ (43 )   $ 24,819  
                                                                 
Relevant Financial and Performance Data
                                                               
Average interest-earning assets
  $ 3,806,347     $ 6,548,868     $ 1,794,929     $ 2,605,291     $ 1,141,871     $ 187,876     $ 37,129     $ 16,122,311  
Allocated capital
    65,217       246,883       140,692       127,789       107,536       14,983       3,380       706,480  
Loans produced
                17,177       708,443       381,760                   1,107,380  
Loans sold
          167,451       767,620       541,054                         1,476,125  
ROE
    18 %     11 %     8 %     17 %     24 %     11 %     (5 )%     14 %
ROA
    0.31 %     0.40 %     0.61 %     0.81 %     2.31 %     0.91 %     (0.52 )%     0.61 %
Net interest margin
    0.52 %     0.88 %     1.90 %     1.76 %     5.37 %     2.77 %     4.34 %     1.40 %
Efficiency ratio
    6 %     10 %     39 %     61 %     25 %     57 %     13 %     35 %
Average FTE
    4       12       80       404       118       30             648  
Three Months Ended December 31, 2005
                                                               
Operating Results
                                                               
Net interest income
  $ 6,989     $ 18,416     $ 8,724     $ 9,354     $ 13,999     $ 328     $ 584     $ 58,394  
Provision for loan losses
          (300 )           (351 )           (2 )     (900 )     (1,553 )
Gain (loss) on sale of loans
    92       1,350       602       5,482                   200       7,726  
Service fee income
          331       1,331                               1,662  
Gain (loss) on securities
                866       (275 )                       591  
Other income
                2,528       6,565       253       147             9,493  
                                                                 
Net revenues (expense)
    7,081       19,797       14,051       20,775       14,252       473       (116 )     76,313  
Operating expenses
    230       984       4,595       16,826       4,609       837       (114 )     27,967  
Deferral of expenses under SFAS 91
                (500 )     (2,836 )     (1,503 )                 (4,839 )
                                                                 
Pretax income (loss)
    6,851       18,813       9,956       6,785       11,146       (364 )     (2 )     53,185  
                                                                 
Net income (loss)
  $ 4,145     $ 11,382     $ 6,023     $ 4,105     $ 6,743     $ (220 )   $ (1 )   $ 32,177  
                                                                 
Relevant Financial and Performance Data
                                                               
Average interest-earning assets
  $ 2,351,249     $ 5,190,691     $ 1,795,142     $ 2,247,464     $ 899,698     $ 40,651     $ 46,312     $ 12,571,207  
Allocated capital
    43,861       216,044       109,808       111,183       94,105       3,986       4,104       583,091  
Loans produced
                52,584       773,782       453,133                   1,279,499  
Loans sold
          74,537       98,867       641,407                         814,811  
ROE
    37 %     21 %     22 %     15 %     28 %     (22 )%           22 %
ROA
    0.69 %     0.87 %     1.30 %     0.73 %     3.00 %     (2.13 )%     (0.01 )%     1.01 %
Net interest margin
    1.18 %     1.41 %     1.93 %     1.65 %     6.17 %     3.20 %     5.00 %     1.84 %
Efficiency ratio
    3 %     5 %     29 %     66 %     22 %     176 %     (15 )%     30 %
Average FTE
    5       12       52       445       98       23       4       639  


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Table of Contents

The following tables provide additional detail on deposits, treasury and eliminations for the three months ended December 31, 2006 and 2005:
 
                                                 
                Eliminations        
                Interdivision
    MSR Economic
             
    Deposits     Treasury     Loan Sales     Value     Other     Total  
    (Dollars in thousands)  
 
Three months ended December 31, 2006
                                               
Operating Results
                                               
Net interest income
  $     $ (55 )   $ 9,619     $     $ 4,199     $ 13,763  
Provision for loan losses
                                   
Gain (loss) on sale of loans
                (19,365 )                 (19,365 )
Service fee income
                1,097                   1,097  
Gain (loss) on securities
                843                   843  
Other income
    907       167                   (1,568 )     (494 )
                                                 
Net revenues (expense)
    907       112       (7,806 )           2,631       (4,156 )
Operating expenses
    7,361       2,465                   3,782       13,608  
Deferral of expenses under SFAS 91
                            (655 )     (655 )
                                                 
Pretax income (loss)
    (6,454 )     (2,353 )     (7,806 )           (496 )     (17,109 )
                                                 
Net income (loss)
  $ (3,930 )   $ (1,433 )   $ (4,754 )   $     $ 6,217     $ (3,900 )
                                                 
Relevant Financial and Performance Data
                                               
Average interest-earning assets
  $ 183     $     $ (90,254 )   $     $     $ (90,071 )
Allocated capital
    2,541                               2,541  
Loans produced
    N/A       N/A       N/A                   N/A  
Loans sold
    N/A       N/A       (2,049,366 )     N/A       N/A       (2,049,366 )
ROE
    N/A       N/A       N/A       N/A       N/A       N/A  
ROA
    N/A       N/A       N/A       N/A       N/A       N/A  
Net interest margin
    N/A       N/A       N/A       N/A       N/A       N/A  
Efficiency ratio
    N/A       N/A       N/A       N/A       N/A       N/A  
Average FTE
    277       47                         324  
Three months ended December 31, 2005
                                               
Operating Results
                                               
Net interest income
  $     $ 448     $ 5,859     $     $ 4,670     $ 10,977  
Provision for loan losses
                                   
Gain (loss) on sale of loans
                (13,307 )                 (13,307 )
Service fee income
                2,901       (9,720 )           (6,819 )
Gain (loss) on securities
                519                   519  
Other income
    685       154                   (885 )     (46 )
                                                 
Net revenues (expense)
    685       602       (4,028 )     (9,720 )     3,785       (8,676 )
Operating expenses
    4,140       1,640                   4,580       10,360  
Deferral of expenses under SFAS 91
                            (645 )     (645 )
                                                 
Pretax income (loss)
    (3,455 )     (1,038 )     (4,028 )     (9,720 )     (150 )     (18,391 )
                                                 
Net income (loss)
  $ (2,090 )   $ (628 )   $ (2,437 )   $ (5,881 )   $ (90 )   $ (11,126 )
                                                 
Relevant Financial and Performance Data
                                               
Average interest-earning assets
  $ 193     $     $ (81,349 )   $     $     $ (81,156 )
Allocated capital
    1,696                               1,696  
Loans produced
                                   
Loans sold
    N/A       N/A       (1,879,599 )     N/A       N/A       (1,879,599 )
ROE
    N/A       N/A       N/A       N/A       N/A       N/A  
ROA
    N/A       N/A       N/A       N/A       N/A       N/A  
Net interest margin
    N/A       N/A       N/A       N/A       N/A       N/A  
Efficiency ratio
    N/A       N/A       N/A       N/A       N/A       N/A  
Average FTE
    230       33                         263  


12


Table of Contents

Accounting Methodology for Reporting Segment Financial Results
 
The profitability of each operating channel is measured on a fully-leveraged basis after allocating capital based on regulatory risk-based capital rules. The Company uses a fund transfer pricing (“FTP”) system to allocate interest expense to the operating channels. Each operating channel is allocated funding with maturities and interest rates matched with the expected lives and repricing frequencies of the channel’s assets. The difference between these allocations and the Company’s actual net interest income and capital levels resulting from centralized management of funding costs is reported in the Treasury unit and Corporate Overhead, respectively. Trust preferred securities are allocated to the operating channels which results in higher interest expense at the operating channel level but reduces their capital charge. This is more reflective of our use of trust preferred securities as a component of capital.
 
The mortgage production divisions are credited with gain on sale of loans based on the actual amount realized for loans sold in the period for the divisions. Loans are occasionally transferred (“sold”) from the production divisions to the thrift divisions at a price based on the estimated fair value, which typically resulted in a premium. The premium for the loans is recorded as a gain in the production divisions and a premium on the asset in the thrift divisions and eliminated in consolidation. In subsequent periods, this premium is amortized as part of the thrift divisions’ net interest margin and the amortization is reversed in Eliminations.
 
Under Statement of Financial Accounting Standards No. 91, “Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases” (“SFAS No. 91”), certain fees and related incremental direct costs associated with originating loans are required to be deferred when incurred. SFAS No. 91 fees and expenses are deferred at production and subsequently recognized at sale. This is reflected as a reclassification reducing operating expenses and loan fees with the net deferral reported as a component of the gain on sale. The deferral of direct origination costs is shown separately as a contra to the gross operating expenses in the detail segment tables on pages 9 to 12 to enable the computation of gross cost per funded loan.
 
The Company hedges the MSRs to protect their economic value. The results in the business segment tables above reflect the economic fair value of MSRs. Prior to the adoption of Statement of Financial Accounting Standards No. 156, “Accounting for Servicing of Financial Assets,” (“SFAS No. 156”) on January 1, 2006, the economic fair value may have varied from the generally accepted accounting principles (“GAAP”) value due to the lower of cost or market limitations of GAAP. Differences between the economic value and the GAAP value were eliminated in consolidation. Also during the second quarter of 2006, the Company revised its capital allocation on MSRs to conform to updated regulatory capital guidelines. Prior period segment data was revised accordingly.
 
The Company’s corporate overhead costs such as corporate salaries and related expenses, and non-recurring corporate items are not allocated to the operating channels. Also, for purposes of calculating average interest-earning assets, the allowance for loan losses is excluded.
 
PRODUCT PROFITABILITY ANALYSIS
 
As part of our process of measuring results and holding managers responsible for specific targets, we evaluate profitability at the product level in addition to our segment results. We currently have four product groups: standard consumer home loans held for sale, specialty consumer home loans held for sale and/or investment, home loans and related investment, and specialty commercial loans held for investment. Please refer to the Company’s 2005 10-K, pages 31 to 37, for further discussion on the products included within each product group.


13


Table of Contents

 
The following tables summarize the profitability for the four product groups for the three months ended December 31, 2006 and 2005:
 
                                                         
                Home
                         
    Standard
    Specialty
    Loans &
    Specialty
                   
    Consumer
    Consumer
    Related
    Commercial
                Total
 
    Home Loans     Home Loans     Investments     Loans     Treasury     Overhead     Company  
    (Dollars in thousands)  
 
Three Months Ended December 31, 2006
                                                       
Operating Results
                                                       
Net interest income
  $ 37,533     $ 39,062     $ 34,190     $ 19,765     $ (55 )   $ 2,151     $ 132,646  
Provision for loan losses
          (3,196 )     (4,500 )     (1,257 )                 (8,953 )
Gain (loss) on sale of loans
    85,957       65,158       13,856                         164,971  
Service fee income
          8,479       13,093                   551       22,123  
Gain (loss) on securities
          (7,331 )     3,202                         (4,129 )
Other income
          7,012       2,299       2,351       167       1,017       12,846  
                                                         
Net revenue (expense)
    123,490       109,184       62,140       20,859       112       3,719       319,504  
Variable expenses
    59,897       43,164       4,635       2,501                   110,197  
Deferral of expenses under SFAS 91
    (47,036 )     (19,447 )     (2,326 )     (1,838 )                 (70,647 )
Fixed expenses
    50,626       26,106       15,603       5,579       2,465       71,312       171,691  
                                                         
Pretax income (loss)
    60,003       59,361       44,228       14,617       (2,353 )     (67,593 )     108,263  
                                                         
Net income (loss)
  $ 36,541     $ 35,939     $ 26,935     $ 8,902     $ (1,433 )   $ (34,643 )   $ 72,241  
                                                         
Balance Sheet Data
                                                       
Average interest-earning assets
  $ 10,881,478     $ 5,800,889     $ 11,264,360     $ 1,564,671     $     $ 356,716     $ 29,868,114  
Allocated capital
  $ 493,217     $ 398,601     $ 687,865     $ 140,025     $     $ 248,875     $ 1,968,583  
Performance Ratios
                                                       
ROE
    29 %     36 %     16 %     25 %     N/A       N/A       15 %
Net interest margin
    1.37 %     2.67 %     1.20 %     5.01 %     N/A       N/A       1.76 %
MBR margin
    0.64 %     2.29 %     1.68 %     N/A       N/A       N/A       0.91 %
Efficiency ratio
    51 %     44 %     27 %     28 %     N/A       N/A       64 %
Operating Data
                                                       
Loan production
  $ 20,506,295     $ 4,499,878     $ 895,800     $ 426,043     $     $     $ 26,328,016  
Loans sold
  $ 19,214,483     $ 3,380,416     $ 822,536     $     $     $     $ 23,417,435  
Three Months Ended December 31, 2005
                                                       
Operating Results
                                                       
Net interest income
  $ 25,115     $ 29,047     $ 35,827     $ 17,850     $ 448     $ 1,112     $ 109,399  
Provision for loan losses
          (1,144 )     (300 )     (109 )                 (1,553 )
Gain (loss) on sale of loans
    95,069       34,324       7,997                         137,390  
Service fee income
          5,098       20,021                   (6,405 )     18,714  
Gain (loss) on securities
          591       5,342                         5,933  
Other income
          8,564       694       1,111       154       590       11,113  
                                                         
Net revenue (expense)
    120,184       76,480       69,581       18,852       602       (4,703 )     280,996  
Variable expenses
    56,084       35,846       704       3,757                   96,391  
Deferral of expenses under SFAS 91
    (40,989 )     (16,027 )     (605 )     (1,654 )                 (59,275 )
Fixed expenses
    40,618       16,183       10,791       3,013       1,640       54,551       126,796  
                                                         
Pretax income (loss)
    64,471       40,478       58,691       13,736       (1,038 )     (59,254 )     117,084  
                                                         
Net income (loss)
  $ 39,005     $ 24,455     $ 35,508     $ 8,310     $ (628 )   $ (36,212 )   $ 70,438  
                                                         
Balance Sheet Data
                                                       
Average interest-earning assets
  $ 6,888,588     $ 4,622,341     $ 8,100,298     $ 1,158,549     $     $ 843,950     $ 21,613,726  
Allocated capital
  $ 326,307     $ 272,609     $ 484,876     $ 115,747     $     $ 301,108     $ 1,500,647  
Performance Ratios
                                                       
ROE
    47 %     36 %     29 %     28 %     N/A       N/A       19 %
Net interest margin
    1.45 %     2.49 %     1.75 %     6.11 %     N/A       N/A       2.01 %
MBR margin
    0.90 %     2.54 %     1.77 %     N/A       N/A       N/A       1.10 %
Efficiency ratio
    46 %     46 %     16 %     27 %     N/A       N/A       58 %
Operating Data
                                                       
Loan production
  $ 14,268,829     $ 3,430,254     $ 254,646     $ 524,078     $     $     $ 18,477,807  
Loans sold
  $ 13,418,141     $ 1,699,027     $ 453,011     $     $     $     $ 15,570,179  


14


Table of Contents

The following tables provide additional detail on the profitability for the standard consumer home loans held for sale group for the three months ended December 31, 2006 and 2005:
 
                                 
    Standard Consumer Home Loans Held for Sale  
    Agency
                   
    Conforming     Alt-A     Subprime     Total  
    (Dollars in thousands)  
 
Three Months Ended December 31, 2006
                               
Operating Results
                               
Net interest income
  $ 476     $ 30,153     $ 6,904     $ 37,533  
Provision for loan losses
                       
Gain (loss) on sale of loans
    402       79,617       5,938       85,957  
Service fee income
                       
Gain (loss) on securities
                       
Other income
                       
                                 
Net revenues (expense)
    878       109,770       12,842       123,490  
Variable expenses
    2,523       49,447       7,927       59,897  
Deferral of expenses under SFAS 91
    (1,983 )     (38,822 )     (6,231 )     (47,036 )
Fixed expenses
    1,740       43,700       5,186       50,626  
                                 
Pretax income (loss)
    (1,402 )     55,445       5,960       60,003  
                                 
Net income (loss)
  $ (854 )   $ 33,766     $ 3,629     $ 36,541  
                                 
Balance Sheet Data
                               
Average interest-earning assets
  $ 174,065     $ 9,266,919     $ 1,440,494     $ 10,881,478  
Allocated capital
  $ 7,058     $ 398,939     $ 87,220     $ 493,217  
Performance Ratios
                               
ROE
    (48 )%     34 %     17 %     29 %
Net interest margin
    1.08 %     1.29 %     1.90 %     1.37 %
MBR margin
    0.26 %     0.61 %     1.57 %     0.64 %
Efficiency ratio
    260 %     49 %     54 %     51 %
Operating Data
                               
Loan production
  $ 337,930     $ 19,314,008     $ 854,357     $ 20,506,295  
Loans sold
  $ 334,845     $ 18,062,672     $ 816,966     $ 19,214,483  
Three Months Ended December 31, 2005
                               
Operating Results
                               
Net interest income
  $ 587     $ 17,690     $ 6,838     $ 25,115  
Provision for loan losses
                       
Gain (loss) on sale of loans
    1,213       88,714       5,142       95,069  
Service fee income
                       
Gain (loss) on securities
                       
Other income
                       
                                 
Net revenues (expense)
    1,800       106,404       11,980       120,184  
Variable expenses
    2,471       46,380       7,233       56,084  
Deferral of expenses under SFAS 91
    (1,810 )     (33,882 )     (5,297 )     (40,989 )
Fixed expenses
    1,418       35,028       4,172       40,618  
                                 
Pretax income (loss)
    (279 )     58,878       5,872       64,471  
                                 
Net income (loss)
  $ (169 )   $ 35,621     $ 3,553     $ 39,005  
                                 
Balance Sheet Data
                               
Average interest-earning assets
  $ 134,268     $ 5,914,502     $ 839,818     $ 6,888,588  
Allocated capital
  $ 5,825     $ 277,028     $ 43,454     $ 326,307  
Performance Ratios
                               
ROE
    (12 )%     51 %     32 %     47 %
Net interest margin
    1.73 %     1.19 %     3.23 %     1.45 %
MBR margin
    0.58 %     0.85 %     1.98 %     0.90 %
Efficiency ratio
    116 %     45 %     51 %     46 %
Operating Data
                               
Loan production
  $ 220,352     $ 13,359,065     $ 689,412     $ 14,268,829  
Loans sold
  $ 312,365     $ 12,500,427     $ 605,349     $ 13,418,141  


15


Table of Contents

The following tables provide additional detail on the profitability for the specialty consumer home loans held for sale and/or investment group for the three months ended December 31, 2006 and 2005:
 
                                         
    Specialty Consumer Home Loans Held for Sale and/or Investment  
    HELOCs/
    Reverse
                   
    Seconds     Mortgages     CTP/Lot     Discontinued     Total  
    (Dollars in thousands)  
 
Three Months Ended December 31, 2006
                                       
Operating Results
                                       
Net interest income
  $ 21,845     $ 4,095     $ 12,716     $ 406     $ 39,062  
Provision for loan losses
    (1,800 )           (971 )     (425 )     (3,196 )
Gain (loss) on sale of loans
    5,800       48,885       10,473             65,158  
Service fee income
    2,024       6,455                   8,479  
Gain (loss) on securities
    (7,248 )           (83 )           (7,331 )
Other income
    3,499       188       3,325             7,012  
                                         
Net revenues (expense)
    24,120       59,623       25,460       (19 )     109,184  
Variable expenses
    12,592       22,424       8,148             43,164  
Deferral of expenses under SFAS 91
    (8,306 )     (9,285 )     (1,856 )           (19,447 )
Fixed expenses
    2,988       15,351       7,715       52       26,106  
                                         
Pretax income (loss)
    16,846       31,133       11,453       (71 )     59,361  
                                         
Net income (loss)
  $ 10,259     $ 18,748     $ 6,975     $ (43 )   $ 35,939  
                                         
Balance Sheet Data
                                       
Average interest-earning assets
  $ 2,462,131     $ 940,067     $ 2,361,562     $ 37,129     $ 5,800,889  
Allocated capital
  $ 239,344     $ 46,298     $ 109,579     $ 3,380     $ 398,601  
Performance Ratios
                                       
ROE
    17 %     161 %     25 %     (5 )%     36 %
Net interest margin
    3.52 %     1.73 %     2.14 %     4.34 %     2.67 %
MBR margin
    0.84 %     4.49 %     1.94 %     N/A       2.29 %
Efficiency ratio
    28 %     48 %     53 %     13 %     44 %
Operating Data
                                       
Loan production
  $ 1,856,621     $ 1,440,515     $ 1,202,742     $     $ 4,499,878  
Loans sold
  $ 1,658,695     $ 1,180,667     $ 541,054     $     $ 3,380,416  
Three Months Ended December 31, 2005
                                       
Operating Results
                                       
Net interest income
  $ 17,833     $ 1,181     $ 9,449     $ 584     $ 29,047  
Provision for loan losses
                (244 )     (900 )     (1,144 )
Gain (loss) on sale of loans
    49       25,260       8,815       200       34,324  
Service fee income
    1,331       3,767                   5,098  
Gain (loss) on securities
    866             (275 )           591  
Other income
    2,528       182       5,854             8,564  
                                         
Net revenues (expense)
    22,607       30,390       23,599       (116 )     76,480  
Variable expenses
    11,133       15,492       9,221             35,846  
Deferral of expenses under SFAS 91
    (5,979 )     (7,363 )     (2,685 )           (16,027 )
Fixed expenses
    1,690       8,325       6,282       (114 )     16,183  
                                         
Pretax income (loss)
    15,763       13,936       10,781       (2 )     40,478  
                                         
Net income (loss)
  $ 9,537     $ 8,396     $ 6,523     $ (1 )   $ 24,455  
                                         
Balance Sheet Data
                                       
Average interest-earning assets
  $ 2,322,757     $ 231,938     $ 2,021,334     $ 46,312     $ 4,622,341  
Allocated capital
  $ 154,424     $ 21,347     $ 92,734     $ 4,104     $ 272,609  
Performance Ratios
                                       
ROE
    25 %     156 %     28 %           36 %
Net interest margin
    3.05 %     2.02 %     1.85 %     5.00 %     2.49 %
MBR margin
    5.33 %     2.89 %     1.37 %     N/A       2.54 %
Efficiency ratio
    30 %     54 %     54 %     (15 )%     46 %
Operating Data
                                       
Loan production
  $ 1,218,301     $ 954,636     $ 1,257,317     $     $ 3,430,254  
Loans sold
  $ 143,241     $ 914,591     $ 641,195     $     $ 1,699,027  


16


Table of Contents

The following tables provide additional detail on the profitability for the home loans and related investments group for the three months ended December 31, 2006 and 2005:
 
                                 
    Home Loans and Related Investments  
    Retained Assets
          SFR Loans
       
    and Retention
          Held for
       
    Activities     MBS     Investment     Total  
    (Dollars in thousands)  
 
Three Months Ended December 31, 2006
                               
Operating Results
                               
Net interest income
  $ 12,519     $ 4,981     $ 16,690     $ 34,190  
Provision for loan losses
                (4,500 )     (4,500 )
Gain (loss) on sale of loans
    11,788             2,068       13,856  
Service fee income
    13,093                   13,093  
Gain (loss) on securities
    2,937       265             3,202  
Other income
    1,852             447       2,299  
                                 
Net revenues (expense)
    42,189       5,246       14,705       62,140  
Variable expenses
    4,635                   4,635  
Deferral of expenses under SFAS 91
    (2,326 )                 (2,326 )
Fixed expenses
    13,601       302       1,700       15,603  
                                 
Pretax income (loss)
    26,279       4,944       13,005       44,228  
                                 
Net income (loss)
  $ 16,004     $ 3,011     $ 7,920     $ 26,935  
                                 
Balance Sheet Data
                               
Average interest-earning assets
  $ 934,701     $ 3,806,347     $ 6,523,312     $ 11,264,360  
Allocated capital
  $ 376,787     $ 65,217     $ 245,861     $ 687,865  
Performance Ratios
                               
ROE
    17 %     18 %     13 %     16 %
Net interest margin
    5.31 %     0.52 %     1.02 %     1.20 %
MBR margin
    1.80 %     N/A       N/A       1.68 %
Efficiency ratio
    38 %     6 %     9 %     27 %
Operating Data
                               
Loan production
  $ 895,800     $     $     $ 895,800  
Loans sold
  $ 655,085     $     $ 167,451     $ 822,536  
Three Months Ended December 31, 2005
                               
Operating Results
                               
Net interest income
  $ 8,898     $ 6,989     $ 19,940     $ 35,827  
Provision for loan losses
                (300 )     (300 )
Gain (loss) on sale of loans
    6,555       92       1,350       7,997  
Service fee income
    19,690             331       20,021  
Gain (loss) on securities
    5,342                   5,342  
Other income
    694                   694  
                                 
Net revenues (expense)
    41,179       7,081       21,321       69,581  
Variable expenses
    704                   704  
Deferral of expenses under SFAS 91
    (605 )                 (605 )
Fixed expenses
    9,577       230       984       10,791  
                                 
Pretax income (loss)
    31,503       6,851       20,337       58,691  
                                 
Net income (loss)
  $ 19,059     $ 4,145     $ 12,304     $ 35,508  
                                 
Balance Sheet Data
                               
Average interest-earning assets
  $ 578,921     $ 2,351,249     $ 5,170,128     $ 8,100,298  
Allocated capital
  $ 225,999     $ 43,861     $ 215,016     $ 484,876  
Performance Ratios
                               
ROE
    33 %     37 %     23 %     29 %
Net interest margin
    6.10 %     1.18 %     1.53 %     1.75 %
MBR margin
    1.73 %     N/A       N/A       1.77 %
Efficiency ratio
    23 %     3 %     5 %     16 %
Operating Data
                               
Loan production
  $ 254,646     $     $     $ 254,646  
Loans sold
  $ 378,474     $     $ 74,537     $ 453,011  


17


Table of Contents

The following tables provide additional detail on the profitability for the specialty commercial loans held for investment group for the three months ended December 31, 2006 and 2005:
 
                                 
    Specialty Commercial Loans Held for Investment  
    Single
          Warehouse
       
    Spec     Subdivision     Lending     Total  
    (Dollars in thousands)  
 
Three Months Ended December 31, 2006
                               
Operating Results
                               
Net interest income
  $ 2,993     $ 15,460     $ 1,312     $ 19,765  
Provision for loan losses
    (65 )     (1,100 )     (92 )     (1,257 )
Gain (loss) on sale of loans
                       
Service fee income
                       
Gain (loss) on securities
                       
Other income
    1,268       552       531       2,351  
                                 
Net revenues (expense)
    4,196       14,912       1,751       20,859  
Variable expenses
    667       1,834             2,501  
Deferral of expenses under SFAS 91
    (68 )     (1,770 )           (1,838 )
Fixed expenses
    539       3,998       1,042       5,579  
                                 
Pretax income (loss)
    3,058       10,850       709       14,617  
                                 
Net income (loss)
  $ 1,862     $ 6,608     $ 432     $ 8,902  
                                 
Balance Sheet Data
                               
Average interest-earning assets
  $ 234,924     $ 1,141,871     $ 187,876     $ 1,564,671  
Allocated capital
  $ 17,506     $ 107,536     $ 14,983     $ 140,025  
Performance Ratios
                               
ROE
    42 %     24 %     N/A       25 %
Net interest margin
    5.05 %     5.37 %     N/A       5.01 %
Efficiency ratio
    27 %     25 %     N/A       28 %
Operating Data
                               
Loan production
  $ 44,283     $ 381,760     $     $ 426,043  
Loans sold
  $     $     $     $  
Three Months Ended December 31, 2005
                               
Operating Results
                               
Net interest income
  $ 3,523     $ 13,999     $ 328     $ 17,850  
Provision for loan losses
    (107 )           (2 )     (109 )
Gain (loss) on sale of loans
                       
Service fee income
                       
Gain (loss) on securities
                       
Other income
    711       253       147       1,111  
                                 
Net revenues (expense)
    4,127       14,252       473       18,852  
Variable expenses
    832       2,925             3,757  
Deferral of expenses under SFAS 91
    (151 )     (1,503 )           (1,654 )
Fixed expenses
    492       1,684       837       3,013  
                                 
Pretax income (loss)
    2,954       11,146       (364 )     13,736  
                                 
Net income (loss)
  $ 1,787     $ 6,743     $ (220 )   $ 8,310  
                                 
Balance Sheet Data
                               
Average interest-earning assets
  $ 218,200     $ 899,698     $ 40,651     $ 1,158,549  
Allocated capital
  $ 17,656     $ 94,105     $ 3,986     $ 115,747  
Performance Ratios
                               
ROE
    40 %     28 %     N/A       28 %
Net interest margin
    6.41 %     6.17 %     N/A       6.11 %
Efficiency ratio
    28 %     22 %     N/A       27 %
Operating Data
                               
Loan production
  $ 70,945     $ 453,133     $     $ 524,078  
Loans sold
  $     $     $     $  


18


Table of Contents

The following tables provide additional detail on the overhead costs for the three months ended December 31, 2006 and 2005:
 
                                         
                            Total
 
    Servicing OH     MB OH     Deposit OH     Corporate OH     Overhead  
          (Dollars in thousands)        
 
Three Months Ended December 31, 2006
                                       
Operating Results
                                       
Net interest income
  $ (60 )   $ 488     $ 4,199     $ (2,476 )   $ 2,151  
Provision for loan losses
                             
Gain (loss) on sale of loans
                             
Service fee income
                      551       551  
Gain (loss) on securities
                             
Other income
    773       85       907       (748 )     1,017  
                                         
Net revenues (expense)
    713       573       5,106       (2,673 )     3,719  
Variable expenses
                             
Deferral of expenses under SFAS 91
                             
Fixed expenses
    5,269       10,277       11,560       44,206       71,312  
                                         
Pretax income (loss)
    (4,556 )     (9,704 )     (6,454 )     (46,879 )     (67,593 )
                                         
Net income (loss)
  $ (2,775 )   $ (5,910 )   $ (3,930 )   $ (22,028 )   $ (34,643 )
                                         
Balance Sheet Data
                                       
Average interest-earning assets
  $ 8     $ 2,966     $ 183     $ 353,559     $ 356,716  
Allocated capital
  $ 359     $ 16,887     $ 2,541     $ 229,088     $ 248,875  
Performance Ratios
                                       
ROE
    N/A       N/A       N/A       N/A       N/A  
Net interest margin
    N/A       N/A       N/A       N/A       N/A  
Efficiency ratio
    N/A       N/A       N/A       N/A       N/A  
Operating Data
                                       
Loan production
  $     $     $     $     $  
Loans sold
  $     $     $     $     $  
Three Months Ended December 31, 2005
                                       
Operating Results
                                       
Net interest income
  $ (44 )   $ (1,242 )   $ 4,346     $ (1,948 )   $ 1,112  
Provision for loan losses
                             
Gain (loss) on sale of loans
                             
Service fee income
                      (6,405 )     (6,405 )
Gain (loss) on securities
                             
Other income
    507       (5 )     685       (597 )     590  
                                         
Net revenues (expense)
    463       (1,247 )     5,031       (8,950 )     (4,703 )
Variable expenses
                             
Deferral of expenses under SFAS 91
                             
Fixed expenses
    4,506       6,888       8,486       34,671       54,551  
                                         
Pretax income (loss)
    (4,043 )     (8,135 )     (3,455 )     (43,621 )     (59,254 )
                                         
Net income (loss)
  $ (2,446 )   $ (4,922 )   $ (2,090 )   $ (26,754 )   $ (36,212 )
                                         
Balance Sheet Data
                                       
Average interest-earning assets
  $     $ (546 )   $ 193     $ 844,303     $ 843,950  
Allocated capital
  $ 728     $ 9,545     $ 1,696     $ 289,139     $ 301,108  
Performance Ratios
                                       
ROE
    N/A       N/A       N/A       N/A       N/A  
Net interest margin
    N/A       N/A       N/A       N/A       N/A  
Efficiency ratio
    N/A       N/A       N/A       N/A       N/A  
Operating Data
                                       
Loan production
  $     $     $     $     $  
Loans sold
  $     $     $     $     $  


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Table of Contents

 
LOAN PRODUCTION
 
The Company’s total mortgage production of $25.9 billion for the fourth quarter of 2006 reflects a record high, up 8% compared to the third quarter of 2006, and up 44% from the fourth quarter of 2005. However, the total pipeline on December 31, 2006, decreased 19% from September 30, 2006, to $11.8 billion, although up 13% from December 31, 2005. The production growth was accomplished through our continued drive to leverage our mortgage banking platform. The mortgage professionals group, including conduit, increased its volume by 47% over the fourth quarter of 2005, contributing 90% of our production growth. Total loan production, including subdivision construction, reached $26.3 billion for the fourth quarter of 2006, also a record for the Company. During 2006, we opened three new operations centers. We expect to continue our growth by expanding into new regions, hiring new salespeople, and rolling out new products.
 
On January 8, 2007, the MBA issued an estimate of the industry volume for 2006 of $2.5 trillion, which represents a 17% decline from 2005. The fourth quarter of 2006 estimate of $575 billion represents an 8% decrease from the third quarter of 2006, and a 20% decline from the fourth quarter of 2005. Based on this forecast, our market share is 4.51% this quarter, up from 3.83% in the third quarter of 2006 and 2.51% in the fourth quarter of 2005 in spite of overall industry volume decline.
 
Total mortgage production for the year ended December 31, 2006 increased 48% to $90.0 billion. Strong production from conduit and Financial Freedom, which increased 90% and 71%, respectively, contributed to this overall growth. The Company has also improved its retention activities with volume from servicing retention increasing 150% during the same period. As a result, Indymac’s market share increased from 2.01% in 2005 to 3.59% in 2006.
 
The following summarizes our loan production and pipeline by purpose, interest rate type, product type, S&P lifetime loss estimate, geographic distribution, and channels as of and for the quarters ended December 31, 2006 and 2005 and September 30, 2006:
 
                                         
    As of and for the Three Months Ended  
    December 31,
    December 31,
    %
    September 30,
    %
 
    2006     2005     Change     2006     Change  
    (Dollars in millions)  
 
Production and Pipeline by Purpose:
                                       
Mortgage loan production:
                                       
Purchase transactions
  $ 9,445     $ 6,917       37 %   $ 9,682       (2 )%
Cash-out refinance transactions
    11,956       8,745       37 %     10,656       12 %
Rate/term refinance transactions
    4,545       2,363       92 %     3,630       25 %
                                         
Total mortgage loan production
  $ 25,946     $ 18,025       44 %   $ 23,968       8 %
                                         
% purchase and cash-out refinance transactions
    82 %     87 %             85 %        
Mortgage industry market share
    4.51 %     2.51 %     80 %     3.83 %     18 %
Mortgage pipeline:
                                       
Purchase transactions
  $ 3,914     $ 3,617       8 %   $ 4,595       (15 )%
Cash-out refinance transactions
    4,193       4,332       (3 )%     5,210       (20 )%
Rate/term refinance transactions
    1,792       1,237       45 %     1,930       (7 )%
                                         
Total specific rate locks
    9,899       9,186       8 %     11,735       (16 )%
Non-specific rate locks on bulk purchases
    1,922       1,302       48 %     2,821       (32 )%
                                         
Total pipeline at period end(1)
  $ 11,821     $ 10,488       13 %   $ 14,556       (19 )%
                                         
 
 
(1) Total pipeline of loans in process includes rate lock commitment the Company has provided on loans that are specifically identified or non-specific bulk packages, and loan applications we have received for which the borrower has not yet locked in the interest rate commitment. Non-specific bulk packages represent pools of loans the Company has committed to purchase, where the pool characteristics are specified but the actual loans are not.
 


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Table of Contents

                         
    Three Months Ended  
    December 31,
    December 31,
    September 30,
 
    2006     2005     2006  
 
Production by Interest Rate Type as a Percentage of Mortgage Production:
                       
Fixed-rate mortgages
    22%       21%       20%  
Intermediate term fixed-rate loans
    7%       8%       7%  
Interest-only loans
    39%       32%       39%  
Pay option ARMs
    21%       26%       23%  
Other ARMs
    11%       13%       11%  
                         
      100%       100%       100%  
                         
 
                                                                 
    Three Months Ended     Year Ended  
    December 31,
    December 31,
    %
    September 30,
    %
    December 31,
    December 31,
    %
 
    2006     2005     Change     2006     Change     2006     2005     Change  
    (Dollars in millions)  
 
Production by Product Type:
                                                               
Standard First Mortgage Products:
                                                               
Alt-A
  $ 20,504     $ 13,947       47 %   $ 19,103       7 %   $ 70,146     $ 47,223       49 %
Agency conforming
    474       249       90 %     260       82 %     1,257       1,092       15 %
Subprime
    886       700       27 %     729       22 %     2,674       2,276       17 %
                                                                 
Total standard first mortgage products (S&P evaluated)(1)
    21,864       14,896       47 %     20,092       9 %     74,077       50,591       46 %
Specialty Consumer Home Mortgage Products:
                                                               
Home equity line of credit(2) /Seconds
    1,856       1,234       50 %     1,840       1 %     7,199       3,653       97 %
Reverse mortgages
    1,441       955       51 %     1,128