10-K 1 v27665e10vk.htm FORM 10-K Indymac Bancorp, Inc.
Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
 
Form 10-K
 
     
(Mark One)    
þ
  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
    For the fiscal year ended December 31, 2006
or
o
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    For the transition period from          to
 
Commission file number: 1-8972
INDYMAC BANCORP, INC.
(Exact name of registrant as specified in its charter)
 
     
Delaware
(State or other jurisdiction of incorporation)
888 East Walnut Street, Pasadena, California
(Address of principal executive offices)
  95-3983415
(I.R.S. Employer Identification No.)
91101-7211
(Zip Code)
 
Registrant’s telephone number, including area code:
(800) 669-2300
 
Securities registered pursuant to Section 12(b) of the Act:
 
     
Title of Each Class
 
Name of Each Exchange on Which Registered
 
Common Stock, $.01 Par Value
(including related preferred stock purchase rights)
  New York Stock Exchange
WIRES Units
(Trust Preferred Securities and Warrants)
  New York Stock Exchange
 
Securities registered pursuant to Section 12(g) of the Act:
[None.]
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes þ     No o
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. Yes o     No þ
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.  Yes þ     No o
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K  þ.
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ     Accelerated filer o     Non-accelerated filer o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o     No þ
 
Based on the closing price for shares of Common Stock as of June 30, 2006, the aggregate market value of Common Stock held by non-affiliates of the registrant was approximately $3,119,794,294. For the purposes of the foregoing calculation only, in addition to affiliated companies, all directors and executive officers of the registrant have been deemed affiliates.
 
As of February 16, 2007, 72,329,748 shares of IndyMac Bancorp, Inc. Common Stock, $.01 par value per share, were outstanding.
 
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement for the 2007 Annual Meeting — Part III
 


 

 
INDYMAC BANCORP, INC.
 
2006 ANNUAL REPORT ON FORM 10-K
 
TABLE OF CONTENTS
 
                 
        Page
 
  BUSINESS     4  
  RISK FACTORS     13  
  UNRESOLVED STAFF COMMENTS     13  
  PROPERTIES     14  
  LEGAL PROCEEDINGS     15  
  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS     15  
 
  MARKET FOR INDYMAC BANCORP, INC.’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES     15  
  SELECTED FINANCIAL DATA     17  
  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS     20  
  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK     86  
  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA     86  
  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE     86  
  CONTROLS AND PROCEDURES     86  
  OTHER INFORMATION     87  
 
  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT     87  
  EXECUTIVE COMPENSATION     87  
  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATERS     87  
  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS     87  
  PRINCIPAL ACCOUNTING FEES AND SERVICES     87  
 
  EXHIBITS, FINANCIAL STATEMENT SCHEDULES     87  
 EXHIBIT 10.25
 EXHIBIT 21.1
 EXHIBIT 23.1
 EXHIBIT 31.1
 EXHIBIT 31.2
 EXHIBIT 32.1
 EXHIBIT 32.2
 EXHIBIT 99.1


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INDYMAC BANCORP, INC.
 
2006 ANNUAL REPORT ON FORM 10-K
 
TABLE OF CONTENTS
 
Items 1. and 7.
 
         
    Page  
 
Forward-Looking Statements
    4  
Item 1. Business
    4  
Business Model
    5  
Segments
    6  
Mortgage Banking
    6  
Production Divisions
    7  
Loan Servicing
    8  
Thrift. 
    9  
Portfolio Divisions
    9  
Regulation and Supervision
    10  
General
    10  
Regulation of Indymac Bank
    10  
General
    10  
Qualified Thrift Lender Test
    10  
Regulatory Capital Requirements
    11  
Insurance of Deposit Accounts
    11  
Capital Distribution Regulations
    12  
Community Reinvestment Act and the Fair Lending Laws
    12  
Privacy Protection
    12  
Income Tax Considerations
    12  
Employees
    12  
Competition
    12  
Website Access to United States Securities and Exchange Commission Filings
    13  
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of
Operations
    20  
Overview
    20  
Summary of Business Segment Results
    21  
Detail Channel Segment Results
    24  
Product Profitability Analysis
    29  
Loan Production
    37  
Loan Sales
    40  
Mortgage Servicing and Other Retained Assets
    43  
Mortgage Servicing and Mortgage Servicing Rights
    43  
Other Retained Assets
    45  
Valuation of MSRs, Interest-Only, Prepayment Penalty, and Residual Securities
    49  
Hedging Interest Rate Risk on Servicing-Related Assets
    50  
Mortgage-Backed Securities and Loans Held for Investment
    50  
SFR Mortgage Loans Held for Investment
    51  
Consumer Construction Division
    53  
Home Equity Division
    54  


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    Page  
 
Homebuilder Division
    55  
Warehouse Lending Division
    56  
Net Interest Margin
    57  
Interest Rate Sensitivity
    59  
Credit Risk and Reserves
    60  
Secondary Market Reserve
    64  
Expenses
    65  
Future Outlook
    65  
Liquidity and Capital Resources
    66  
Overview
    66  
Principal Sources of Cash
    66  
Loan Sales and Securitizations
    66  
Advances from Federal Home Loan Bank
    66  
Deposits/Retail Bank
    67  
Trust Preferred Securities and Warrants
    68  
Other Borrowings, Excluding Subordinated Debentures Underlying Trust Preferred Securities
    68  
Direct Stock Purchase Plan
    70  
Capital Raising and Deployment Strategies
    70  
Principal Uses of Cash
    70  
Regulatory Capital Requirements
    70  
Off-Balance Sheet Arrangements
    70  
Aggregate Contractual Obligations
    71  
Risk Factors That May Affect Future Results
    72  
Risks Related to Our Business Generally
    72  
Risks Related to Our Interest Rate Hedging Strategies
    74  
Risks Related to Our Valuation of Assets
    76  
Risks Related to Our Assumption of Credit Risk
    77  
Risks Related to Our Liquidity
    79  
Critical Accounting Policies and Judgments
    80  
AAA-Rated Interest-Only Securities
    80  
Mortgage Servicing Rights
    81  
Non-Investment Grade Securities and Residuals
    82  
General
    82  
Loss Estimates
    83  
Prepayment Speeds
    83  
Discount Rates
    83  
Derivatives and Other Hedging Instruments
    83  
Allowance for Loan Losses
    84  
Secondary Market Reserve
    85  
Sensitivity Analysis
    85  

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PART I
 
FORWARD-LOOKING STATEMENTS
 
Certain statements contained in this Form 10-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 this Annual Report on Form 10-K, its 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.
 
ITEM 1.   BUSINESS
 
IndyMac Bancorp, Inc. is the holding company for IndyMac Bank, F.S.B., a $29 billion hybrid thrift/mortgage bank, headquartered in Pasadena, California (“Indymac Bank” or “Bank”). Indymac Bank originates mortgages in all 50 states of the U.S. and is the largest savings and loan headquartered in Los Angeles County, California, the seventh largest nationwide, based on assets according to American Banker, the ninth largest residential mortgage originator according to the National Mortgage News based on third quarter 2006 mortgage origination volume, and the eleventh largest mortgage servicer according to National Mortgage News as of September 30, 2006. Indymac Bank, operating as a hybrid thrift/mortgage banker, provides cost-efficient financing for the acquisition, development, and improvement of single-family homes. Indymac also provides financing secured by single-family homes and other banking products to facilitate consumers’ personal financial goals. We facilitate the acquisition, development, and improvement of single-family homes through our e-MITS(R) (Electronic Mortgage Information and Transaction System) platform that automates underwriting, risk-based pricing and rate locking on a nationwide basis via the Internet at the point of sale. Indymac Bank offers highly competitive mortgage products and services that are tailored to meet the needs of both consumers and mortgage professionals.
 
Indymac (then known as Countrywide Mortgage Investments, Inc.) was founded as a passive mortgage real estate investment trust (“REIT”) in 1985 and transitioned its business model to become an active, operating mortgage lender in 1993. In response to the global liquidity crisis in the fourth quarter of 1998 in which many non-regulated financial institutions, mortgage lenders and mortgage REITs were adversely impacted or did not survive, we determined that it would be advantageous to become a depository institution. The depository structure provides significant advantages in the form of diversified financing sources, the retention of capital to support growth, and a strong platform for the origination of mortgages. Effective January 1, 2000, we terminated our status as a REIT and converted to a fully taxable entity, and, on July 1, 2000, we acquired SGV Bancorp, Inc. (“SGVB”), which then was the parent of First Federal Savings and Loan Association of San Gabriel Valley, a federal savings association. We contributed substantially all of our assets and operations to the subsidiary savings association, which we renamed Indymac Bank.
 
We entered the reverse mortgage industry through the acquisition of 93.75% of the outstanding shares of common stock of Financial Freedom Holdings, Inc. (“Financial Freedom”), the leading provider of reverse mortgages in the United States of America, and the related assets from Lehman Brothers Bank, F.S.B. and its affiliates on July 16, 2004. The remaining shares of the common stock of Financial Freedom, constituting 6.25% of the outstanding shares of common stock, were held by its chief executive officer, James Mahoney, after the


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acquisition. The acquisition was consummated as part of our strategy to increase market share by offering niche mortgage products and servicing a broad customer base. On July 3, 2006, the Company purchased from James Mahoney the remaining 6.25% interest in Financial Freedom for $40 million. Financial Freedom now operates as a wholly-owned subsidiary of Indymac Bank.
 
References to “Indymac Bancorp” or the “Parent Company” refer to the parent company 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.
 
BUSINESS MODEL
 
Indymac’s hybrid thrift/mortgage banking business model is the basis for our corporate structure. Our model provides a strong framework for growth over the long-term and the flexibility to operate efficiently in varying interest-rate environments. Our businesses are aligned into two primary operating segments, the mortgage banking and the thrift segments. Mortgage banking involves the originating and trading of mortgage loans and related assets, and the servicing of these loans. The revenues from mortgage banking consist primarily of gains on sale of the loans; interest income earned while the loans are held for sale; and the servicing fees. The thrift side of our business invests in single-family residential mortgage assets including mortgage-backed securities (“MBSs”) which we hold on our balance sheet. Revenues consist primarily of spread income, which represents the difference between the interest earned on the loans and the cost of funds.
 
As a result of the quick asset turn times associated with mortgage banking, it is less capital-intensive than thrift investing and offers higher returns on invested capital. However, mortgage banking is cyclical: origination volumes are closely correlated to interest rates, rising when rates fall and falling when rates rise.
 
Thrift investing requires more capital than mortgage banking, resulting in lower returns on invested capital. However, the returns tend to be more stable and less cyclical than those from mortgage banking, and they generally improve as returns on mortgage banking decline. As interest rates rise, there is little incentive for borrowers to refinance, so portfolio runoff (i.e., reduction) is reduced.
 
Our hybrid business model allows us to take advantage of both the higher returns on invested equity offered by mortgage banking, and the earnings stability offered by a traditional savings and loan institution. The common denominator of the Company’s business is providing consumers with single-family residential mortgages through relationships with each segment’s core customers via the channels in which we operate. Prudent allocation of capital between our mortgage banking and thrift segments, depending on the interest rate environment, market conditions and expected return on equity, serves to stabilize earnings through the mortgage cycles. With our hybrid model, we can take advantage of opportunities to fund and sell loans, but we also prudently build a portfolio of high-quality investment loans and mortgage-backed securities, as well as a substantial servicing portfolio to provide more consistent income throughout the interest rate cycle. By deploying capital in the area that offers the best returns, we are able to stabilize earnings through a variety of economic and interest rate cycles.
 
Indymac’s long-term strategy focuses on gaining a larger share of the mortgage origination market without compromising profitability goals. During 2006, we successfully executed our strategy and reached a record level of mortgage production of $90.0 billion and increased our market share by 78% to 3.58% while the market volume declined. According to the National Mortgage News, by the third quarter of 2006, we were the ninth largest originator of mortgage loans in the United States of America. We will continue to leverage our mortgage-banking infrastructure, increase our marketing and sales efforts, and expand our geographic presence in an effort to gain additional market share in the future.
 
In the fourth quarter of 2006, we saw a fairly dramatic decrease in the return on equity (“ROE”) in our thrift segment, mostly caused by net interest margin erosion in our whole loan and MBS portfolios. As such, it does not make economic sense for us to grow these portfolios to the extent that we had previously planned. While we will continue to maintain some level of investments in our whole loan and MBS portfolios, going forward the growth of these portfolios will be based on the extent to which (1) their ROEs exceed our cost of both core and risk-based capital or (2) they are needed to support our core mortgage banking investments in mortgage servicing rights and residual and non-investment grade securities, if their ROEs are below our cost of capital. These changes in our business model and strategy represent fine-tuning more than a major strategic shift.


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SEGMENTS
 
Indymac is structured to achieve synergies among its operations and to enhance customer service, operating through its two main segments, the mortgage banking and the thrift segments. The common denominator of the Company’s business is providing consumers with single-family residential mortgages through relationships with each segment’s core customers via the channel in which each operates.
 
For further information on the revenues earned and expenses incurred by each of our segments, refer to “Note 3 — Segment Reporting” included in the Company’s consolidated financial statements incorporated herein.
 
MORTGAGE BANKING
 
The mortgage banking segment’s core activities are loan production, loan sales, and the performance of our servicing functions. Loan production is achieved by delivering a suite of mortgage products, predominantly prime credit quality, to our customers using a technology-based approach across multiple channels on a nationwide basis supported by 16 strategically distributed regional mortgage centers. Our broad product line includes adjustable-rate mortgages (“ARMs”), intermediate term fixed-rate loans, pay option ARMs offering borrowers multiple payment options, fixed-rate mortgages, both conforming and non-conforming, construction-to-permanent loans, subprime mortgages, home equity lines of credits (“HELOCs”) and reverse mortgages.
 
Our largest production channel, mortgage professionals group, originates or purchases mortgage loans through its relationships with mortgage brokers, mortgage bankers, and financial institutions. We also offer mortgages and reverse mortgages to consumers through channels such as direct mail, Internet leads, online advertising, affinity relationships, real estate professionals, including realtors, and through our Southern California retail banking branches.
 
When we have accumulated a sufficient volume of loans with similar characteristics, generally $100 million to $1.5 billion in principal amount, we sell the loans in the secondary market. The length of time between when we originate or purchase a mortgage loan and when we sell or securitize the mortgage loan generally ranges from 10 to 90 days, depending on factors such as loan volume by product type and market fluctuations in the prices of MBS. On average during 2006, we sold loans within 50 days of purchase or origination, down from 52 days in 2005.
 
We sell the majority of the mortgage loans that we originate or purchase (88% in 2006). The loans are usually sold on a non-recourse basis, but we do make certain representations and warranties concerning the loans. We generally retain the servicing rights with respect to loans sold to the government sponsored enterprises (“GSEs”), primarily Federal National Mortgage Association (“Fannie Mae”) and Federal Home Loan Mortgage Company (“Freddie Mac”). The credit losses on these loans are absorbed by the GSEs. We pay guarantee fees to the GSEs to compensate them for their assumption of credit risk.
 
We also sell loans through private-label securitizations. Loans sold through private-label securitizations consist primarily of non-conforming loans and subprime loans. The securitization process involves the sale of the loans to one of our wholly-owned bankruptcy remote special purpose entities, which then sells the loans to a separate, transaction-specific securitization trust in exchange for cash and certain trust interests that we retain. The securitization trust issues and sells undivided interests to third-party investors that entitle the investors to specified cash flows generated from the securitized loans. These undivided interests are usually represented by certificates with varying interest rates and are secured by the payments on the loans acquired by the trust, and commonly include senior and subordinated classes. The senior class securities are usually rated “AAA” by at least two of the major independent rating agencies and have priority over the subordinated classes in the receipt of payments. We have no obligation to provide funding support (other than temporary servicing advances) to either the third-party investors or securitization trusts. Neither the third-party investors nor the securitization trusts have recourse to our assets or us, and neither have the ability to require us to repurchase their securities. We do make certain representations and warranties concerning the loans, such as lien status or mortgage insurance coverage, and if we are found to have breached a representation or warranty, we could be required to repurchase the loan from the securitization trust. We do not guarantee any securities issued by the securitization trusts. The securitization trusts represent “qualified special purpose entities,” which meet the legal isolation criteria of Statement of Financial Accounting Standards No. 140, “Accounting for Transfer and Servicing of Financial Assets and Extinguishments of Liabilities” (“SFAS 140”), and are therefore not consolidated for financial reporting purposes. We also sell loans on


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a whole-loan basis to institutional investors with servicing on such loans either retained by us or released to the institutional investors.
 
In addition to the cash we receive from the sale of MBS, we typically retain certain interests in the securitization trust as payment for the loans. These retained interests may include mortgage servicing rights (“MSRs”), AAA-rated interest-only securities, AAA-rated senior securities, AAA-rated principal-only securities, subordinated classes of securities, residual securities, securities associated with prepayment charges on the underlying mortgage loans, cash reserve funds, or an overcollateralization account. Other than AAA-rated interest-only and principal-only securities, the AAA-rated senior securities, the securities associated with prepayment charges on the underlying mortgage loans, and the MSRs, these retained interests are subordinated and serve as credit enhancement for the more senior securities issued by the securitization trust. We are entitled to receive payment on most of these retained interests only after the third party investors are repaid their investment plus interest and there is excess cash in the securitization trust. Our ability to obtain repayment of our residual interests depends solely on the performance of the underlying mortgage loans. Material adverse changes in performance of the loans, including actual credit losses and prepayment speeds differing from our assumptions, may have a significant adverse effect on the value of these retained interests.
 
We usually retain the servicing rights for the securitized mortgage loans, as discussed in the description of servicing operations below under the caption “Loan Servicing.” As a servicer, we are entitled to receive a servicing fee equal to a specified percentage of the outstanding principal balance of each loan. This servicing fee is calculated and payable on a monthly basis. We may also be entitled to receive additional servicing compensation, such as late payment fees or prepayment charges. Our servicing fees have priority in payment over each class of securities issued by the securitization trusts.
 
Refer to “Note 14 — Transfers and Servicing of Financial Assets” in the accompanying notes to consolidated financial statements for additional information.
 
Production Divisions
 
Mortgage Professionals Group
 
Our largest production channel, mortgage professionals group, was responsible for 86% of our total mortgage production during 2006. This group is responsible for the production of mortgage loans through relationships with mortgage brokers, mortgage bankers, financial institutions, capital market participants across the country, and homebuilders via three channels: wholesale, correspondent, and conduit. Mortgage loans could be either funded by us (wholesale) or obtained as closed loans on a flow basis (correspondent) or in bulk purchases (conduit). When originating or purchasing mortgage loans, we generally acquire the rights to “service” the mortgage loans (as described below). When we sell the loans, we may either retain the related servicing rights and service the loans through our Home Loan Servicing division or sell those rights. See “Loan Servicing” below.
 
This division targets customers based on their loan production volume, product mix and projected revenue to us. The sales force is responsible for maintaining and increasing loan production from these customers by marketing our strengths, which include a “one stop shop” for all products, competitive pricing and response time efficiencies in the loan purchase process through our e-MITS underwriting process and high customer service standards.
 
During 2006, to continue our emphasis on increasing production capacity and geographic penetration to build market share, the division opened three new regional centers. With these three new centers, the division currently has 16 regional centers. Looking ahead, we plan to add several new regional offices in the coming years as a way of increasing geographic penetration to gain market share in target markets, improving customer service, and improving operational efficiencies.
 
The retail lending group, a division of the mortgage professionals group, will open storefront mortgage offices in areas supported by regional operating centers. These offices will offer mortgage services through the retail channel, anchored by a proven local producing leader. The choice of areas in which to open retail mortgage offices will be determined based upon several factors, such as the availability of local talent and the demographic characteristics of the area. We plan to open 15 to 20 retail mortgage offices in 2007.
 
In February 2007, the Company entered into a definitive agreement to purchase assets of the retail mortgage banking platform of New York Mortgage Company, LLC (“NYMC”), a wholly owned taxable REIT subsidiary of


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New York Mortgage Trust, Inc. As part of the transaction, the Company will hire a majority of NYMC’s employees, including approximately 200 retail loan officers and a strong retail branch management team. This acquisition is part of our strategy to build our retail platform. See “Note 27 — Subsequent Events” in the accompanying notes to consolidated financial statements for further discussion on the acquisition.
 
Consumer Direct
 
This channel markets mortgage products directly to existing and new consumers nationwide through direct mail, Internet lead aggregator, outbound telesales, online advertising, and referral programs, as well as our Southern California retail banking branches.
 
Through our call center operations and our Southern California retail banking branch network, loan consultants counsel consumers on the loan application process and make lending decisions using our e-MITS technology. Loans are processed and funded by our operations group within our regional call centers.
 
Financial Freedom
 
Through the acquisition of Financial Freedom, we have become the leading provider of reverse mortgages in the United States. This group is responsible for the generation and servicing of predominantly reverse mortgage products with senior customers via the affinity business unit to institutional relationships, traditional wholesale mortgage relationship sales force and a retail loan officer sales force. Reverse mortgages allow homeowners age 62 and older to convert home equity into cash to supplement their retirement income. The equity may be withdrawn in a lump sum, as annuity-style monthly payments, as a credit line, or any combination thereof. Reverse mortgages offered by us feature: no recourse to the borrower, no repayment during the borrower’s occupancy of the home, and a repayment amount that cannot exceed the value of the home (after costs of sale). With the increased familiarity that senior homeowners and their financial advisors have with this product, the reverse mortgage market is expected to continue to grow. Comparing 2006 to 2005, our reverse mortgage volume increased 71% to $5.0 billion in 2006 from $2.9 billion in 2005. However, the competition is expected to intensify in this market. As a result, margin for this product will be negatively impacted.
 
Loan Servicing
 
MSRs and Other Retained Assets
 
This division manages the assets the Company retains in conjunction with its mortgage loan sales. The assets held include the following asset classes: (i) mortgage servicing rights (“MSRs”), interest-only strips, prepayment penalty securities and residual securities; (ii) derivatives and securities held as hedges of such assets, including forward rate agreements swaps, options, futures, principal-only securities, agency debentures and U.S. Treasury bonds; (iii) loans acquired through clean-up calls or originated through the Company’s customer retention programs; and (iv) investment and non-investment grade securities. The Company hedges the MSRs to protect the economic value of the MSRs.
 
At December 31, 2006, primarily through our Home Loan Servicing operation in Kalamazoo, Michigan, we serviced $148.0 billion of mortgage loans, of which $139.8 billion was serviced for others, an increase of 65% from $84.5 billion serviced for others in 2005. The growth in our portfolio of loans serviced for others was attributable to our record production and sale volumes in 2006. The servicing portfolio includes servicing for prime and subprime loans, HELOCs, reverse mortgages, manufactured housing loans and home improvement loans.
 
Servicing of mortgage loans includes: collecting loan payments; responding to customers’ inquiries; accounting for principal and interest; holding custodial (impound) funds for payment of property taxes and insurance; counseling delinquent mortgagors; modifying and refinancing loans; supervising foreclosures and liquidation of foreclosed property; performing required tax reporting; and performing other loan administration functions necessary to protect investors’ interests and comply with applicable laws and regulations. Servicing operations also include remitting loan payments, less servicing fees, to trustees and, in some cases, advancing delinquent borrower payments to investors, subject to a right of reimbursement.


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THRIFT
 
The strategy of our thrift segment has been to leverage and scale infrastructure with prudent mortgage related asset growth to stabilize and diversify company-wide earnings, targeting a return on equity ranging from 15% to 20%. Through leveraging our capital and our FDIC-insured financial institution, the thrift segment principally invests in single-family residential (“SFR”) mortgage loans (predominantly prime ARMs, including intermediate term fixed-rate loans), construction financing for single-family residences or lots provided directly to individual consumers, builder construction financing facilities for larger residential subdivision loans, HELOCs, mortgage-backed securities, and warehouse lines of credit, which provides short- term revolving warehouse lending facilities to small-to-medium size mortgage bankers and brokers to finance mortgage loans from the closing of the loans until they are sold. The thrift segment also occasionally engages in loan sales with servicing retained, principally of HELOCs and lot loans, as part of our balance sheet management efforts and our efforts to optimize returns on equity. The primary sources of revenue for the thrift segment are net interest income on loans and securities, and to a lesser extent, the gain on sale of HELOCs and lot loans.
 
In the fourth quarter of 2006, we saw a fairly dramatic decrease in the ROE in our thrift segment, mostly caused by net interest margin erosion in our whole loan and MBS portfolios. As such, it does not make economic sense for us to grow these portfolios to the extent that we had previously planned. While we will continue to maintain some level of investments in our whole loan and MBS portfolios, going forward the growth of these portfolios will be based on the extent to which (1) their ROEs exceed our cost of both core and risk-based capital or (2) they are needed to support our core mortgage banking investments in mortgage servicing rights and residual and non-investment grade securities, if their ROEs are below our cost of capital. These changes in our business model and strategy represent fine-tuning more than a major strategic shift. The new reality of narrowing net interest margins actually favors Indymac from a competitive standpoint in that, unlike many other depository institutions, we already have a relatively high, market-based cost of funds and have learned, through trading assets and loans in the secondary market, how to earn strong overall ROEs despite that fact.
 
Portfolio Divisions
 
Mortgage Backed Securities (“MBS”)
 
MBS includes predominantly AAA-rated agency and private label MBS.
 
Prime SFR Mortgage Loans
 
Single-family residential mortgage loans held for investment are generally originated or acquired through our mortgage banking production divisions and transferred to the thrift divisions. Held for investment loans may also be acquired from third party sellers. Such loans are typically prime loans as the majority of the subprime loans originated are securitized in private transactions or sold to GSEs. The thrift divisions invest in loans for which they can earn an acceptable return on equity. We are currently investing primarily in ARMs in order to minimize interest rate risk, and to a lesser extent, loan products which we believe the market does not properly price. We may also retain a portion of the loans acquired through our exercise of clean-up calls as these loans are generally high quality, seasoned loans that generate an above-market yield.
 
Home Equity Division
 
Our home equity division specializes in providing HELOC and closed-end second mortgages nationwide through Indymac’s wholesale and retail channels. With a state-of-the-art web-based decision engine, utilizing a streamlined application process and competitive pricing, this division provides homeowners the ability to easily tap the excess equity in their homes for a variety of uses. With the HELOC product, homeowners have convenient access to their funds using the Indymac Visa Equity Card or equity checks.
 
Consumer Construction and Lot Loans
 
Our consumer construction and lot loans division provides construction financing for individual consumers who want to build a new primary residence or second home. Through our streamlined e-MITS online application process, the division offers a single-close construction-to-permanent loan that provides borrowers with the funds to build a primary residence or vacation home. This product typically provides financing for a construction term of 6 to 12 months and automatically converts to a permanent mortgage loan at the end of construction. The end result is a


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product that represents a hybrid activity between our portfolio lending and mortgage banking activities. The Company earns net interest income on these loans during the construction phase. When the home is completed, the loan automatically converts to a permanent mortgage loan without any additional cost or closing documents, which is typically sold in the secondary market or acquired by the SFR mortgage loan portfolio. This division also provides financing to builders who are building single-family residences without a guaranteed sale at inception of project, or on a speculative basis. Approximately 68% of new commitments are generated through mortgage broker customers of the Mortgage Bank and the remaining 32% of new commitments are retail originations.
 
Builder Financing
 
Our homebuilder division provides land acquisition, development and construction financing to homebuilders for residential construction. Builder construction loans are typically adjustable-rate loans, indexed to the prime interest rate with terms ranging from 12 to 24 months. The Company earns net interest income on these loans. The homebuilder division has central operations in Pasadena, California with 17 satellite sales offices in Arizona, California, Colorado, Florida, Illinois, Massachusetts, North Carolina, Oregon, Tennessee, Texas, and Washington, D.C. Our typical customer is a middle size, professional homebuilder who builds between 200 and 2,000 homes per year. We do a limited amount of business with large private and public homebuilders, and have a small homebuilder program dedicated to homebuilders building five to 25 unit projects, and who typically build five to 100 homes per year.
 
Warehouse Lending
 
Our warehouse lending group offers short-term lines of credit to approved correspondent sellers nationwide. The group functions as a financial intermediary for lenders, providing them with the financial capacity to fund loans and hold them on the balance sheet until they are sold to approved investors.
 
REGULATION AND SUPERVISION
 
GENERAL
 
As a savings and loan holding company, Indymac Bancorp is subject to regulation by the Office of Thrift Supervision (“OTS”) under the savings and loan holding company provisions of the Federal Home Owners’ Loan Act (“HOLA”). As a federally chartered and insured savings and loan association, Indymac Bank is subject to regulation, supervision and periodic examination by the OTS, which is the primary federal regulator of savings associations, and the Federal Deposit Insurance Corporation (“FDIC”), in its role as federal deposit insurer. The primary purpose of regulatory examination and supervision is to protect depositors, financial institutions and the financial system as a whole rather than the shareholders of financial institutions or their holding companies. The following summary is not intended to be a complete description of the applicable laws and regulations or their effects on us, and it is qualified in its entirety by reference to the particular statutory and regulatory provisions described.
 
REGULATION OF INDYMAC BANK
 
General
 
Both Indymac Bank and the Company are required to file periodic reports with the OTS concerning our activities and financial condition. The OTS has substantial enforcement authority with respect to savings associations, including authority to bring enforcement actions against a savings association and any of its “institution-affiliated parties,” which term includes directors, officers, employees, controlling shareholders, agents and other persons who participate in the conduct of the affairs of the institution. The FDIC has “backup” enforcement authority over us and has the power to terminate a savings association’s FDIC deposit insurance. In addition, we are subject to regulations of the Federal Reserve Board relating to equal credit opportunity, electronic fund transfers, collection of checks, truth in lending, truth in savings, and availability of funds for deposit customers.
 
Qualified Thrift Lender Test
 
Like all savings and loan holding company subsidiaries, Indymac Bank is required to meet a qualified thrift lender (“QTL”) test to avoid certain restrictions on our operations, including the activities restrictions applicable to


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multiple savings and loan holding companies, restrictions on our ability to branch interstate and Indymac Bancorp’s mandatory registration as a bank holding company under the Bank Holding Company Act of 1956. A savings association satisfies the QTL test if: (i) on a monthly average basis, for at least nine months out of each twelve month period, at least 65% of a specified asset base of the savings association consists of loans to small businesses, credit card loans, educational loans, or certain assets related to domestic residential real estate, including residential mortgage loans and mortgage securities; or (ii) at least 60% of the savings association’s total assets consist of cash, U.S. government or government agency debt or equity securities, fixed assets, or loans secured by deposits, real property used for residential, educational, church, welfare, or health purposes, or real property in certain urban renewal areas. Indymac Bank is currently, and expects to remain, in compliance with QTL standards.
 
Regulatory Capital Requirements
 
OTS capital regulations require savings associations to satisfy three sets of capital requirements: tangible capital, Tier 1 (leverage) capital, and risk-based capital. In general, an association’s tangible capital, which must be at least 1.5% of adjusted total assets, is the sum of common shareholders’ equity adjusted for the effects of other comprehensive income (“OCI”), less goodwill and other disallowed assets. An association’s ratio of Tier 1 capital to adjusted total assets (the “core capital” or “leverage” ratio) must be at least 3% for strong associations that are not anticipating or experiencing significant growth and have well-diversified risks, including no undue interest rate risk exposure, excellent asset quality, high liquidity, and good earnings, and 4% for others. Higher capital ratios may be required if warranted by the particular circumstances, risk profile, or growth rate of a given association. Under the risk-based capital requirement, a savings association must have Tier 1 (core) capital equal to at least 4% of adjusted total assets and total capital (core capital plus supplementary capital) equal to at least 8% of risk-weighted assets. Tier 1 capital must represent at least 50% of total capital and consists of core capital elements, which include common shareholders’ equity, qualifying noncumulative, nonredeemable perpetual preferred stock, and minority interests in the equity accounts of consolidated subsidiaries, but exclude goodwill and certain other intangible assets. Supplementary capital mainly consists of qualifying subordinated debt, preferred stock that does not meet Tier 1 capital requirements, and portions of allowance for loan losses.
 
The above capital requirements are viewed as minimum standards by the OTS. The OTS regulations also specify minimum requirements for a savings association to be considered a “well-capitalized institution” as defined in the “prompt corrective action” regulation described below. A “well-capitalized” savings association must have a total risk-based capital ratio of 10% or greater, a Tier 1 risk-based capital ratio of 6% or greater and a leverage ratio of 5% or greater. Indymac Bank currently meets, and expects to continue to meet, all of the requirements of a “well-capitalized institution.”
 
The OTS regulations include prompt corrective action provisions that require certain remedial actions and authorize certain other discretionary actions to be taken by the OTS against a savings association that falls within specified categories of capital deficiency. The relevant regulations establish five categories of capital classification for this purpose, ranging from “well-capitalized” or “adequately capitalized” through “undercapitalized,” “significantly undercapitalized” and “critically undercapitalized.” In general, the prompt corrective action regulations prohibit an OTS-regulated institution from declaring any dividends, making any other capital distributions, or paying a management fee to a controlling person, such as its parent holding company, if, following the distribution or payment, the institution would be within any of the three undercapitalized categories.
 
Insurance of Deposit Accounts
 
Deposits of the Bank are presently insured by the Savings Association Insurance Fund (“SAIF”), which is administered by the FDIC, up to $100,000 per depositor. The FDIC has established a risk-based system for setting deposit insurance assessments. Under the risk-based assessment system, a savings association’s insurance assessments vary according to the level of capital the institution holds and the degree to which it is the subject of supervisory concern. Assessment rates currently range between five and 43 cents per $100 in deposits. Insurance of deposits may be terminated by the FDIC upon a finding that the savings association has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC or the OTS. All insured depository institutions, including the Bank, are required to pay an additional assessment, currently 1.22 cents per $100 in deposits, in order to retire Financial Corporation bonds that were issued between 1987 and 1989.


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Capital Distribution Regulations
 
OTS regulations limit “capital distributions” by savings associations, which include, among other things, dividends and payments for stock repurchases. Refer to “Note 23 — Regulatory Requirements” in the accompanying notes to consolidated financial statements for further discussion.
 
Community Reinvestment Act and the Fair Lending Laws
 
Savings associations are examined under the Community Reinvestment Act (“CRA”) and related regulations of the OTS on the extent of their efforts to help meet the credit needs of their communities, including low and moderate-income neighborhoods. In addition, the Equal Credit Opportunity Act and the Fair Housing Act, together known as the “Fair Lending Laws,” prohibit lenders from discriminating in their lending practices on the basis of characteristics specified in those statutes. Enforcement of these regulations has been an important focus of federal regulatory authorities and of community groups in recent years. A failure by Indymac Bank to comply with the provisions of the CRA could, at a minimum, result in adverse action on branch and certain other corporate applications, and regulatory restrictions on our activities, and failure to comply with the Fair Lending Laws could result in enforcement actions by the OTS, as well as other federal regulatory agencies and the Department of Justice. Indymac Bank received an overall “Satisfactory” rating during our most recent CRA evaluation.
 
Privacy Protection
 
The OTS has adopted privacy protection regulations which require each savings association to adopt procedures to protect consumers’ and customers’ “nonpublic personal information.” It is Indymac Bank’s policy not to share customers’ information with any unaffiliated third parties, except as expressly permitted by law, or to allow third party companies to provide marketing services on our behalf, or under joint marketing agreements between us and other unaffiliated financial institutions. In addition to federal laws and regulations, we are required to comply with any privacy requirements prescribed by California and other states in which we do business that afford consumers with protections greater than those provided under federal law.
 
INCOME TAX CONSIDERATIONS
 
We report our income on a calendar year basis using the liability method of accounting. We are subject to federal income taxation under existing provisions of the Internal Revenue Code of 1986, as amended, in generally the same manner as other corporations. We are also subject to state taxes in the areas in which we conduct business.
 
EMPLOYEES
 
As of December 31, 2006, we had 8,630 full-time equivalent employees (“FTE”), including 633 FTE off-shore as part of our Global Resources program. We believe that we have generally good relations with our employees.
 
COMPETITION
 
We face significant competition in acquiring and selling loans. In our mortgage banking operations, we compete with other mortgage bankers, GSEs, established third party lending programs, investment banking firms, banks, savings and loan associations, and other lenders and entities purchasing mortgage assets. With regard to MBS issued through our mortgage banking operations, we face competition from other investment opportunities available to prospective investors. We estimate our market share of the U.S. mortgage market to be approximately 3.58% based on the full year 2006 mortgage production. A number of our competitors have significantly larger market share and financial resources. We seek to compete with financial institutions and mortgage companies through an emphasis on quality of service, diversified products and maximum use of technology.
 
The GSEs have made and we believe will continue to make significant technological and economic advances to broaden their customer bases. When the GSEs contract or expand, there are both positive and negative impacts on our mortgage banking lending operations. As GSEs expand, additional liquidity is brought to the market, and loan products can be resold more quickly. Conversely, expanding GSEs increase competition for loans, which may reduce profit margins on loan sales. We seek to address these competitive pressures by making a strong effort to maximize our use of technology, by diversifying into other residential mortgage products that are less affected by GSEs, and by operating in a more cost-effective manner than our competitors.


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WEBSITE ACCESS TO UNITED STATES SECURITIES AND EXCHANGE COMMISSION
FILINGS
 
All reports filed electronically by us with the Securities and Exchange Commission (“SEC”), including Annual Reports on Form 10-K, quarterly reports on Form 10-Q, and current event reports on Form 8-K, as well as any amendments to those reports, are made accessible as soon as reasonably practicable after filing with the SEC at no cost on our website at www.IndymacBank.com. These filings are also accessible on the SEC’s website at www.sec.gov.
 
We have a Code of Business Conduct and Ethics that is applicable to all of our employees and officers, including the principal executive officer, the principal financial officer and the principal accounting officer. In addition, Indymac has a Director Code of Ethics that sets forth the policy and standards concerning ethical conduct for directors of Indymac. We also adopted formal corporate governance standards in January 2002, which the Corporate Governance Committee of the Board of Directors reviews annually to ensure they incorporate recent corporate governance developments and generally meet the corporate governance needs of Indymac. You may obtain copies of each of the Code of Business Conduct and Ethics, the Director Code of Ethics, and the Board of Directors’ Guidelines for Corporate Governance Issues by accessing the “Corporate Governance” subsection of the “Investors” section of www.IndymacBank.com, or free of charge by writing to our Corporate Secretary at IndyMac Bancorp, Inc., 888 East Walnut Street, Pasadena, California 91101. Indymac intends to post amendments to or waivers of the Code of Business Conduct and Ethics (to the extent applicable to Indymac’s principal executive officer, principal financial officer or principal accounting officer) and of the Director Code of Ethics at the website location referenced above.
 
ITEM 1A.   RISK FACTORS
 
KEY OPERATING RISKS
 
Like all businesses, we assume a certain amount of risk in order to earn returns on our capital. For further information on these and other key operating risks, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Risk Factors.”
 
ITEM 1B.   UNRESOLVED STAFF COMMENTS
 
None.


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ITEM 2.   PROPERTIES
 
Our significant leased properties are as follows:
 
                     
        Approximate
    Principal Lease
 
Purpose
  Location   Square Feet     Expiration  
 
Corporate Headquarters/Administration
  Pasadena, California     173,000       2010  
Corporate Headquarters/ Administration*
  Pasadena, California     179,000       2016  
Corporate IT
  Tempe, Arizona     28,500       2015  
Home Loan Servicing — Customer Service and Loan Administration
  Kalamazoo, Michigan     38,000       2008  
Home Loan Servicing — Master Servicing and Investor Reporting
  Pasadena, California     36,000       2007  
Web & Direct Mail Headquarters; Mortgage Bank Operations; Financial Freedom Headquarters, Legal/Administration
  Irvine, California     138,000       2012  
Regional Mortgage Banking Center, Consumer Direct Operations and Sales
  Kansas City, Missouri     53,000       2009  
    Overland Park, Kansas**     21,000       2007  
Regional Mortgage Banking Center
  Ontario, California     41,500       2012  
Regional Mortgage Banking Center
  San Ramon, California     46,500       2010  
Regional Mortgage Banking Center
  Atlanta (Norcross), Georgia     67,500       2009  
Regional Mortgage Banking Center
  Scottsdale, Arizona     46,000       2009-2011  
Regional Mortgage Banking Center
  Marlton, New Jersey     62,000       2012  
Regional Mortgage Banking Center
  East Norriton, Pennsylvania     39,000       2011  
Regional Mortgage Banking Center
  Columbia, South Carolina     29,000       2009  
Regional Mortgage Banking Center
  Dallas (Irving), Texas     41,000       2008  
Regional Mortgage Banking Center
  Seattle (Bellevue), Washington     31,000       2008  
    Sacramento (Rancho Cordova),                
Regional Mortgage Banking Center
  California     34,000       2012  
Regional Mortgage Banking Center
  Tampa, Florida     46,000       2007-2013  
Regional Mortgage Banking Center
  Chicago (Schaumburg), Illinois     62,000       2013  
Regional Mortgage Banking Center
  Boston (Braintree), Massachusetts     12,000       2007  
Eastern Operations Center — Financial Freedom
  Atlanta, Georgia     44,000       2012  
Western Operations Center — Financial Freedom
  Sacramento (Roseville), California     39,000       2008  
Loan Servicing, Accounting and Finance — Financial Freedom
  San Francisco, California     23,000       2008  
Consumer Bank Retail Operations
  24 locations in Southern California     86,000       2008-2013  
Other Sales Offices and Locations
  58 locations in various states     45,000       2007-2010  
 
 
5,203 square feet relates to a Consumer Bank Retail Operation
 
** to be extended to 2009
 
In addition to the above leased office space, we own the property (consisting of four buildings) that houses our mortgage banking headquarters, located in Pasadena, California, totaling approximately 265,000 square feet. We also own a building in La Mirada, California of approximately 16,500 square feet, which houses our information technology data center. We own an additional four retail banking properties, containing an aggregate of approximately 56,000 square feet, located in Southern California.


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ITEM 3.   LEGAL PROCEEDINGS
 
In the ordinary course of business, the Company and its subsidiaries are defendants in or parties to a number of legal actions. Certain of such actions involve alleged violations of employment laws, unfair trade practices, consumer protection laws, including claims relating to the Company’s sales, loan origination and collection efforts, and other federal and state banking laws. Management believes, based on current knowledge and after consultation with counsel, that these legal actions, individually and in the aggregate, and the losses, if any, resulting from the likely final outcome thereof, will not have a material adverse effect on the Company and its subsidiaries’ financial position, but may have a material impact on the results of operations of particular periods. Refer to “Note 21 — Commitments and Contingencies” in the accompanying notes to consolidated financial statements for further discussion.
 
ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
No matters were submitted to a vote of shareholders during the quarter ended December 31, 2006.
 
PART II
 
ITEM 5.   MARKET FOR INDYMAC BANCORP, INC.’S COMMON EQUITY, RELATED STOCK HOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
 
STOCK INFORMATION
 
IndyMac Bancorp, Inc.’s common stock is traded on the New York Stock Exchange (“NYSE”) under the symbol “NDE.” The following table sets forth the high and low sales prices (as reported by Bloomberg Financial Service) for shares of IndyMac Bancorp, Inc.’s common stock for the years ended December 31, 2006 and 2005:
 
                                 
    2006     2005  
    High
    Low
    High
    Low
 
    ($)     ($)     ($)     ($)  
 
First Quarter
    43.24       37.71       39.15       32.83  
Second Quarter
    50.50       40.44       43.44       33.04  
Third Quarter
    47.24       37.15       46.25       37.40  
Fourth Quarter
    48.14       40.35       40.50       34.40  
 
ISSUANCE OF COMMON STOCK
 
On June 8, 2004, we issued 3,200,000 shares of common stock at a market price of $31.75 through a public offering. On July 12, 2004, we issued an additional 130,000 shares of common stock at a market price of $31.75 upon the exercise of the underwriters’ over-allotment option. The cash proceeds of $96.25 million from the initial closing, net of expenses, were recorded as equity during the second quarter of 2004. The cash proceeds from the exercise of the over-allotment option, net of expenses, of $3.9 million were recorded as equity during the third quarter of 2004. Certain of the proceeds were used to finance the acquisition of Financial Freedom and the remaining proceeds have been used for general corporate purposes, including, but not limited to, continued asset growth for Indymac Bank.
 
The Company has a direct stock purchase plan which offers investors the ability to purchase shares of our common stock directly over the Internet. Investors interested in investing over $10,000 can also participate in the waiver program administered by Mellon Investor Services LLC. For the year ended December 31, 2006, we issued 3,532,360 shares of common stock at an average market price of $42.04 through this plan.
 
SHARE REPURCHASE ACTIVITIES
 
There was no share repurchase activity during the three months ended December 31, 2006. Our Board of Directors previously approved a $500 million share repurchase program. Since its inception in 1999, we have repurchased a total of 28.0 million shares through this program. As of December 31, 2006 the maximum approximate dollar value of shares that may be purchased under the program was $63.6 million. In January 2007, we obtained an authorization from the Board of Directors to repurchase an additional $236.4 million of common stock for a total current authorization of up to $300 million.


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As of February 16, 2007, 72,329,748 shares of IndyMac Bancorp, Inc.’s common stock were held by approximately 1,797 shareholders of record.
 
DIVIDEND POLICY
 
Indymac’s goal is to maintain a dividend payout ratio in line with other financial institution payout ratios, which range from 30% to 50% of earnings per share. For 2006, Indymac’s dividend payout ratio was 39%.
 
Cash dividends declared were as follows during 2006 and 2005:
 
                 
    Dividend
    Dividend
 
    per
    Payout
 
    Share     Ratio(1)  
 
2006:
               
First Quarter 2006
  $ 0.44       37 %
Second Quarter 2006
  $ 0.46       31 %
Third Quarter 2006
  $ 0.48       40 %
Fourth Quarter 2006
  $ 0.50       52 %
2005:
               
First Quarter 2005
  $ 0.36       37 %
Second Quarter 2005
  $ 0.38       31 %
Third Quarter 2005
  $ 0.40       34 %
Fourth Quarter 2005
  $ 0.42       40 %
 
 
(1) Dividend payout ratio for the first, second, third, and fourth quarters of 2005 was calculated using the dividend declared divided by retrospectively adjusted diluted earnings per share of $0.98, $1.24, $1.16, and $1.06, respectively.
 
In 2006 and 2005, we funded the payment of dividends primarily from the dividend from Indymac Bank and cash on hand at the Company. The future principal source of funds for the dividend payments is anticipated to be the dividends we will receive from Indymac Bank. The payment of dividends by Indymac Bank is subject to regulatory requirements and review. See the “Capital Distribution Regulations” section on page 12 for further information. There is no assurance that the Bank will be able to pay dividends to the holding company in the future.
 
EQUITY COMPENSATION PLANS INFORMATION
 
The equity compensation plans information required by this Item 5 is hereby incorporated by reference to Indymac Bancorp’s definitive proxy statement, to be filed pursuant to Regulation 14A within 120 days after the end of our 2006 fiscal year.


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ITEM 6.   SELECTED FINANCIAL DATA
 
                                         
    Year Ended December 31,  
    2006     2005(2)     2004(2, 3, 4)     2003(2, 4)     2002(2, 4)  
    (Dollars in millions, except per share data)  
 
Selected Balance Sheet Information (at December 31)(1)
                                       
Cash and cash equivalents
  $ 542     $ 443     $ 356     $ 115     $ 197  
Securities (trading and available for sale)
    5,443       4,102       3,689       1,838       2,339  
Loans held for sale
    9,468       6,024       4,446       2,573       2,228  
Loans held for investment
    10,177       8,278       6,750       7,449       3,962  
Allowance for loan losses
    (62 )     (55 )     (53 )     (53 )     (51 )
Mortgage servicing rights
    1,822       1,094       641       444       301  
Other
    2,105       1,566       997       874       600  
Total assets
    29,495       21,452       16,826       13,240       9,574  
Deposits
    10,898       7,672       5,743       4,351       3,141  
Advances from Federal Home Loan Bank
    10,413       6,953       6,162       4,935       2,722  
Other borrowings
    4,637       4,367       3,162       2,622       2,609  
Other liabilities
    1,519       917       478       301       242  
Total liabilities
    27,467       19,909       15,545       12,209       8,713  
Shareholders’ equity
    2,028       1,543       1,280       1,032       862  
Income Statement(1)
                                       
Net interest income before provision for loan losses
    527       425       405       311       209  
Provision for loan losses
    20       10       8       20       16  
Gain on sale of loans
    668       592       431       387       301  
Service fee income (expense)
    101       44       (12 )     (16 )     19  
Gain (loss) on mortgage-backed securities, net
    21       18       (24 )     (31 )     4  
Fee and other income
    50       37       27       19       19  
Net revenues
    1,347       1,106       819       650       537  
Operating expenses
    789       618       483       382       321  
Net earnings
    343       293       202       161       132  
Basic earnings per share(5)
    5.07       4.67       3.41       2.92       2.28  
Diluted earnings per share(6)
    4.82       4.43       3.27       2.88       2.27  
Other Operating Data
                                       
Mortgage production
  $ 89,951     $ 60,774     $ 37,902     $ 29,236     $ 20,276  
Total loan production(7)
    91,698       62,714       39,048       30,036       20,882  
Mortgage industry share(8)
    3.58 %     2.01 %     1.37 %     0.77 %     0.71 %
Pipeline of mortgage loans in process(9)
    11,821       10,488       6,689       4,116       4,723  
Loans sold
    79,049       52,297       31,036       23,176       16,825  
Loans sold/mortgage loans produced
    88 %     86 %     82 %     79 %     83 %
Mortgage loans serviced for others (as of year end)(10)
    139,817       84,495       50,219       30,774       28,376  
Total mortgage loans serviced (as of year end)
    147,994       90,721       56,038       37,066       29,138  
Average full-time equivalent employees
    7,935       6,240       4,715       3,882       2,938  
Other Per Share Data
                                       
Dividends declared per share
  $ 1.88     $ 1.56     $ 1.21     $ 0.55     $  
Dividends payout ratio(11)
    39 %     35 %     37 %     19 %      
Book value per share at December 31
    27.78       24.02       20.65       18.17       15.72  
Closing price per share at December 31
    45.16       39.02       34.45       29.79       18.49  
Average Common Shares (in thousands)
                                       
Basic
    67,701       62,760       59,513       55,247       58,028  
Diluted
    71,118       66,115       62,010       55,989       58,302  
 


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    Year Ended December 31,  
    2006     2005(2)     2004(2, 3, 4)     2003(2, 4)     2002(2, 4)  
    (Dollars in millions, except per share data)  
 
Performance Ratios
                                       
Return on average equity (“ROE”)
    19.09 %     21.23 %     17.38 %     17.02 %     15.17 %
Return on average assets (“ROA”)
    1.17 %     1.38 %     1.20 %     1.38 %     1.66 %
Net interest income to pretax income after minority interest
    94.82 %     87.55 %     120.65 %     116.10 %     97.41 %
Net interest margin
    2.02 %     2.16 %     2.61 %     2.91 %     2.89 %
Net interest margin, thrift(12)
    1.93 %     2.10 %     2.05 %     1.78 %     2.00 %
Mortgage banking revenue (“MBR”) margin on loans sold(13)
    1.06 %     1.36 %     1.80 %     2.21 %     2.30 %
Efficiency ratio(14)
    58 %     55 %     58 %     57 %     58 %
Operating expenses to loan production
    0.86 %     0.99 %     1.24 %     1.27 %     1.54 %
Balance Sheet and Asset Quality Ratios
                                       
Average interest-earning assets
  $ 26,028     $ 19,645     $ 15,521     $ 10,675     $ 7,230  
Average equity
    1,796       1,381       1,167       949       870  
Debt to equity ratio(15)
    13.5:1       12.9:1       12.1:1       11.8:1       10.1:1  
Core capital ratio(16)
    7.39 %     8.21 %     7.66 %     7.56 %     8.70 %
Risk-based capital ratio(16)
    11.72 %     12.20 %     12.02 %     12.29 %     14.03 %
Non-performing assets to total assets
    0.63 %     0.34 %     0.73 %     0.76 %     1.05 %
Allowance for loan losses to total loans held for investment
    0.61 %     0.67 %     0.78 %     0.71 %     1.28 %
Allowance for loan losses to non-performing loans held for investment
    57.51 %     127.10 %     107.67 %     140.04 %     95.76 %
Loan Loss Activity
                                       
Allowance for loan losses to net charge-offs
    4.9 x     7.2 x     6.7 x     3.0 x     2.2x  
Provision for loan losses to net charge-offs
    156.50 %     129.57 %     103.10 %     110.57 %     69.95 %
Net charge-offs to average non-performing loans held for investment
    16.82 %     16.65 %     18.28 %     39.33 %     36.70 %
Net charge-offs to average loans held for investment
    0.14 %     0.10 %     0.11 %     0.34 %     0.76 %
 
 
(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) 2002-2005 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 123(R)”). Refer to “Note 1 — Summary of Significant Accounting Policies” in the accompanying notes to consolidated financial statements for further discussion.
 
(3) For the year ended December 31, 2004, the data is presented on a pro forma basis excluding the effect of change in accounting principle for rate lock commitments under Staff Accounting Bulletin No. 105, “Application of Accounting Principles to Loan Commitments” (“SAB 105”), effective April 1, 2004, and for the impact of the purchase accounting adjustments for Financial Freedom. The SAB 105 impact for the year ended December 31, 2004 was $59.5 million. Additionally, the impact of the purchase accounting adjustment for Financial Freedom totaled $7.9 million before-tax. The pro forma results are provided so that investors can evaluate our results on a

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comparable basis. A full reconciliation between the pro forma and GAAP amounts, with the relevant performance ratios, is as follows:
 
                         
    Year Ended December 31, 2004  
    GAAP     Adjustments     Pro Forma  
    (Dollars in millions, except per share data)  
 
Gain on sale of loans
  $ 364     $ 67     $ 431  
Net revenues
    751       67       818  
Other expense
    483             483  
Income taxes
    106       27       133  
                         
Net earnings
  $ 162     $ 40     $ 202  
                         
Diluted earnings per share
  $ 2.61     $ 0.66     $ 3.27  
ROE
    13.89 %             17.38 %
ROA
    0.96 %             1.20 %
 
(4) The Company previously classified the initial deferral of the incremental direct origination costs net of the fees collected on the loans as a net reduction in operating expenses. However, during 2005, we revised the presentation to reflect the deferral of the total fees collected as a reduction of fee and other income and the deferral of the incremental direct origination costs as a reduction of operating expenses. All prior periods were revised to conform to the current presentation. This revision had no impact on reported earnings or the balance sheet in 2005 or in any prior period. Certain performance ratios based on net revenues or operating expenses were revised accordingly.
 
(5) Net earnings divided by weighted average basic shares outstanding for the year.
 
(6) Net earnings divided by weighted average dilutive shares outstanding for the year.
 
(7) Includes newly originated commitments on construction loans.
 
(8) 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”) February 12, 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.
 
(9) The amount includes $1.9 billion, $1.3 billion and $0.4 billion of non-specific rate locks on bulk purchases in our conduit channel at December 31, 2006, 2005 and 2004, respectively.
 
(10) Represents the unpaid principal balance on loans sold with servicing retained by Indymac.
 
(11) Dividends declared per common share as a percentage of diluted earnings per share.
 
(12) Net interest margin, thrift represents the combined margin from thrift, elimination and other, and corporate overhead.
 
(13) 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.
 
(14) Defined as operating expenses divided by net interest income and other income.
 
(15) Debt includes deposits.
 
(16) 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.


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ITEM 7.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
The following discussion and analysis should be read in conjunction with our consolidated financial statements, and the notes thereto and the other information incorporated by reference herein.
 
OVERVIEW
 
Indymac is a leading hybrid thrift/mortgage banking company. We offer a wide range of home mortgage products to a broad customer base using a technology-based approach. Indymac is structured to achieve synergies among its operations and to enhance customer service. The Company conducts business substantially through IndyMac Bank, F.S.B. via two primary operating segments, the mortgage banking and the thrift segments. On the mortgage banking side, we generate earnings largely by originating, securitizing and selling loans and securities at a profit and by servicing loans for others. On the thrift side, we generate core spread income from our investment portfolio of prime SFR mortgages, home equity loans, consumer and builder construction loans and mortgage-backed securities. The combination of mortgage banking and thrift investing has proven to be a powerful business model for Indymac, and, given our strong execution in the past, we have been able to outperform our peers and produce both strong and relatively stable returns on our shareholders’ equity.
 
2006 was a challenging year in the mortgage banking industry. This was the third year since the industry peaked, and industry loan volumes of $2.5 trillion were 34% below 2003’s historic high level and 17% lower than in 2005. Mortgage banking revenue margins declined further after sharp declines in 2005, and net interest margins continued to compress, as the yield curve inverted with the average spread between the 10-year Treasury yield and the 1-month LIBOR declining from 89 basis points in 2005 to negative 31 basis points in 2006. To cap it off, the housing industry slowed down significantly, increasing loan delinquencies and non-performing assets and driving up credit costs for all mortgage lenders.
 
Yet, despite these challenges, Indymac again reached new performance heights in 2006, achieving:
 
  •  Record mortgage loan production of $90 billion, a 48% increase over 2005;
 
  •  Record mortgage market share of 3.58%, a 78% gain over the 2.01% share we had in 2005;
 
  •  Record net revenues of $1.3 billion, a 22% increase over 2005;
 
  •  Record earnings-per-share of $4.82, a 9% gain;
 
  •  Record growth in total assets, which increased by $8 billion, or 37%, to $29.5 billion;
 
  •  Record growth in our portfolio of loans served for others, which increased by $55 billion, or 65%, to 140 billion;
 
  •  Strong return on equity of 19%, slightly lower than last year’s 21% level.
 
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, increased retention of securities and loans in our held for investment portfolio, offset by the sale of loans. Net interest margin declined from 2.16% to 2.02% during a period of inverted yield curve. Factors contributing to this decline included higher cost of funds and hedging cost, higher premium amortization and increased non-performing loans. 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 a record high of $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 3.58% 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 a decline in higher margin pay option ARM volume and a higher mix of lower margin conduit and correspondent channel volume. The MBR margin on loans sold was 1.06% in 2006, down from 1.36% in 2005.


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3) Provision for loan loss increased from $10.0 million for 2005 to $20.0 million for 2006 mainly due to an increase in our non-performing assets as delinquencies worsened. 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 the growth in our operations and infrastructure investments in order 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 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 the Company further expanded geographically into states with lower tax rates. 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 38.3%.
 
SUMMARY OF BUSINESS SEGMENT RESULTS
 
Our mortgage banking segment consists of the following divisions:
 
     
Mortgage Professionals Group
  This group is responsible for the production of mortgage loans through relationships with mortgage brokers, mortgage bankers, financial institutions and homebuilders. Mortgage loans are either funded by us (wholesale division) or obtained as closed loans on a flow basis (wholesale and correspondent divisions) or through bulk purchases (conduit division).
Consumer Direct
  This division offers consumers mortgage lending through our Southern California retail banking branches, direct mail, internet lead aggregators, outbound telesales, online advertising, and referral programs.
Financial Freedom
  This group is responsible for the generation of predominantly reverse mortgage products with senior customers (age 62 or older). This group also services all reverse mortgage loans originated.
MSRs and Other Retained Assets
  This division manages the assets the Company retains in conjunction with its mortgage loan sales. The assets held include the following asset classes:(i) mortgage servicing rights (“MSRs”), interest-only strips, prepayment penalty securities and residual securities; (ii) derivatives and securities held as hedges of such assets, including forward rate agreements, swaps, options, futures, principal-only securities, agency debentures and U.S. Treasury bonds; (iii) loans acquired through clean-up calls or originated through the Company’s customer retention programs; and (iv) investment and non-investment grade securities. Further, the division continues to service all loans sold with servicing retained, loans held on the balance sheet pending sale and mortgage loans held for investment and undertakes solicitation and loan production activities related to retention of customers in the servicing portfolio unless prohibited by the servicing agreement.


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The thrift segment includes the following divisions:
 
     
Mortgage-backed Securities (“MBS”)
  Assets include predominantly AAA-rated agency and private label MBS.
Prime SFR Mortgage Loans
  Assets include all single-family residential mortgage loans held for investment other than discontinued products.
Home Equity Division
  This division specializes in providing HELOC and closed-end second mortgages nationwide through Indymac’s wholesale and retail channels.
Consumer Construction Division
  This division provides construction-to-permanent and lot loan financing to individuals who are in the process of building their own homes. This channel leverages our relationship sales force in the mortgage professional channel to produce these products in addition to programs offered directly to consumers.
Homebuilder Division
  This division offers land acquisition, development and construction financing to homebuilders for residential construction.
Warehouse Lending Division
  This division offers short-term lines of credit to approved correspondent sellers nationwide. The group functions as a financial intermediary for lenders, providing them with the financial capacity to fund loans and hold them on balance sheet until they are sold to approved investors.
Discontinued Products
  Home improvement and manufactured housing loans.
 
The tables below summarize the year-over-year performance of Indymac’s divisions. Detailed operating results for each division are provided on pages 24 to 27:
 
                                                                         
    Mortgage Banking                                
          MSRs and
                                           
          Other
    Mortgage
                      Total
             
    Production
    Retained
    Banking
                Elimination
    Operating
    Corporate
    Company
 
    Divisions     Assets     Overhead(1)     Total     Thrift     & Other     Results     Overhead     Total  
    (Dollars in thousands)  
 
Net Income 2006
  $ 289,675     $ 91,246     $ (34,189 )   $ 346,732     $ 137,721     $ (34,346 )   $ 450,107     $ (107,178 )   $ 342,929  
Net Income 2005
    268,085       43,913       (28,061 )     283,937       134,938       (32,214 )     386,661       (93,533 )     293,128  
                                                                         
$ Change
    21,590       47,333       (6,128 )     62,795       2,783       (2,132 )     63,446       (13,645 )     49,801  
% Change
    8 %     108 %     (22 )%     22 %     2 %     (7 )%     16 %     (15 )%     17 %
Average Capital 2006
  $ 552,835     $ 370,451     $ 12,848     $ 936,134     $ 675,467     $ 2,108     $ 1,613,709     $ 182,551     $ 1,796,260  
Average Capital 2005
    364,125       193,959       10,291       568,375       524,791       1,464       1,094,630       286,237       1,380,867  
% Change
    52 %     91 %     25 %     65 %     29 %     44 %     47 %     (36 )%     30 %
ROE 2006
    52 %     25 %     N/A       37 %     20 %     N/A       28 %     N/A       19 %
ROE 2005
    74 %     23 %     N/A       50 %     26 %     N/A       35 %     N/A       21 %
% Change
    (29 )%     9 %     N/A       (26 )%     (21 )%     N/A       (21 )%     N/A       (10 )%
 
 
(1) Included production division overhead and servicing overhead of $24.1 million and $10.1 million, respectively, for the year ended December 31, 2006. For the year ended December 31, 2005, the production division overhead and servicing overhead were $18.5 million and $9.6 million, respectively.
 


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    Mortgage Banking Production Divisions  
    Mortgage Professionals Group     Consumer
    Financial
    Production
 
    Wholesale     Correspondent     Conduit     Total     Direct     Freedom     Divisions  
    (Dollars in thousands)  
 
Net Income 2006
  $ 154,087     $ 18,773     $ 61,935     $ 234,795     $ 682     $ 54,198     $ 289,675  
Net Income 2005
    191,576       27,111       25,090       243,777       (525 )     24,833       268,085  
                                                         
$ Change
    (37,489 )     (8,338 )     36,845       (8,982 )     1,207       29,365       21,590  
% Change
    (20 )%     (31 )%     147 %     (4 )%     230 %     118 %     8 %
Average Capital 2006
  $ 211,459     $ 51,870     $ 182,133     $ 445,462     $ 10,943     $ 96,430     $ 552,835  
Average Capital 2005
    153,298       27,551       103,534       284,383       15,981       63,761       364,125  
% Change
    38 %     88 %     76 %     57 %     (32 )%     51 %     52 %
ROE 2006
    73 %     36 %     34 %     53 %     6 %     56 %     52 %
ROE 2005
    125 %     98 %     24 %     86 %     (3 )%     39 %     74 %
% Change
    (42 )%     (63 )%     40 %     (39 )%     290 %     44 %     (29 )%
 
                                                                 
    Thrift  
    Mortgage-
    Prime SFR
    Home
    Consumer
                         
    Backed
    Mortgage
    Equity
    Construction
    Homebuilder
    Warehouse
    Discontinued
       
    Securities     Loans     Division     Division     Division     Lending     Products     Total Thrift  
    (Dollars in thousands)  
 
Net Income 2006
  $ 18,099     $ 41,170     $ 23,521     $ 27,467     $ 26,775     $ 556     $ 133     $ 137,721  
Net Income 2005
    18,122       46,124       22,454       29,452       20,133       (1,138 )     (209 )     134,938  
                                                                 
$ Change
    (23 )     (4,954 )     1,067       (1,985 )     6,642       1,694       342       2,783  
% Change
          (11 )%     5 %     (7 )%     33 %     149 %     164 %     2 %
Average Capital 2006
  $ 58,135     $ 227,937     $ 148,033     $ 123,273     $ 104,123     $ 10,382     $ 3,584     $ 675,467  
Average Capital 2005
    40,342       202,883       95,907       101,060       78,051       2,172       4,376       524,791  
% Change
    44 %     12 %     54 %     22 %     33 %     N/M       (18 )%     29 %
ROE 2006
    31 %     18 %     16 %     22 %     26 %     5 %     4 %     20 %
ROE 2005
    45 %     23 %     23 %     29 %     26 %     (52 )%     (5 )%     26 %
% Change
    (31 )%     (21 )%     (32 )%     (24 )%           N/M       178 %     (21 )%
 
Total capital deployed in our operating business segments increased 47% to $1.6 billion in 2006 and earned a 28% return on equity before the impact of corporate overhead. Net of corporate overhead and including the excess undeployed capital, Indymac’s average capital of $1.8 billion earned a 19% return on equity for 2006.
 
We deployed 31% of our capital, or $552.8 million, into our Mortgage Production Divisions in 2006, an increase of 52% over 2005. Mortgage production earnings grew 8%; however the return on equity declined from 74% to 52% reflecting the narrower mortgage banking revenue margins. The wholesale and correspondent divisions reported 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 year with earnings growth of 147% mainly attributable to growth in production of 90%, while return on equity increased to 34% from 24%. Our reverse mortgage division continued to demonstrate strong returns with earnings and production growth of 118% and 71%, respectively. In addition, return on equity increased from 39% in 2005 to 56% in 2006. The strong returns in this business are reflective of the strong growth in demographics for the seniors market and the growing popularity of the reverse mortgage product. In light of the intensifying competition in the reverse mortgage market, the division will focus on improving its efficiency and thus improving its costs to originate. We expect the division to continue to grow in the future and expect it to maintain its industry leadership position in the reverse mortgage market.
 
We deployed 21% of our capital, or $370.5 million, into the MSRs and Other Retained Assets division, up from 14% one year ago, while return on equity at 25% remained flat. 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 38% of our capital, or $675.5 million, to the Thrift segment, a 29% increase over last year. Thrift’s return on equity declined from 26% to 20% over the same period. Net interest margin declined from 1.95% to 1.75% during a period of inverted yield curve. Factors contributing to the decline included higher cost of funds and hedging cost, higher premium amortization and increased non-performing loans. As a result, net interest income increased by only 12% in spite of the 25% increase in average interest earning assets. Additionally, provision for loan losses and write-downs on residual securities increased substantially due to worsening credit quality of our portfolio and the collateral supporting the residual securities.

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DETAIL CHANNEL SEGMENT RESULTS
 
The following tables summarize the Company’s financial results for the years ended December 31, 2006 and 2005 by its two primary segments via each of its operating divisions:
 
                                                                         
    Mortgage Banking                                      
          MSRs and
    Mortgage
                      Total
             
    Production
    Other Retained
    Banking
                Elimination
    Operating
    Corporate
    Total
 
Year Ended December 31, 2006
  Divisions     Assets     Overhead(1)     Total     Thrift     & Other(2)     Results     Overhead     Company  
    (Dollars in thousands)  
 
Operating Results
                                                                       
Net interest income
  $ 170,786     $ 60,497     $ 562     $ 231,845     $ 259,052     $ 44,561     $ 535,458     $ (8,737 )   $ 526,721  
Provision for loan losses
                            (19,993 )           (19,993 )           (19,993 )
Gain (loss) on sale of loans
    637,966       31,477             669,443       66,634       (68,023 )     668,054             668,054  
Service fee income
    21,141       84,071             105,212       466       (4,361 )     101,317             101,317  
Gain (loss) on securities
          22,014             22,014       (12,725 )     11,193       20,482             20,482  
Other income
    1,895       7,015       3,295       12,205       37,361       (1,664 )     47,902       2,220       50,122  
                                                                         
Net revenues (expense)
    831,788       205,074       3,857       1,040,719       330,795       (18,294 )     1,353,220       (6,517 )     1,346,703  
Operating expenses
    594,041       63,312       59,997       717,350       121,621       49,009       887,980       169,473       1,057,453  
Deferred expense under FAS 91
    (238,979 )     (8,068 )           (247,047 )     (16,970 )     (2,229 )     (266,246 )           (266,246 )
                                                                         
Pretax income (loss)
    476,726       149,830       (56,140 )     570,416       226,144       (65,074 )     731,486       (175,990 )     555,496  
                                                                         
Net income (loss)
  $ 289,675     $ 91,246     $ (34,189 )   $ 346,732     $ 137,721     $ (34,346 )   $ 450,107     $ (107,178 )   $ 342,929  
                                                                         
Relevant Financial and Performance Data
                                                                       
Average interest-earning assets
  $ 9,856,626     $ 862,271     $ 2,472     $ 10,721,369     $ 14,808,096     $ (89,838 )   $ 25,439,627     $ 588,649     $ 26,028,276  
Allocated capital
    552,835       370,451       12,848       936,134       675,467       2,108       1,613,709       182,551       1,796,260  
Loans produced
    84,205,831       2,698,332       N/A       86,904,163       4,793,661       N/A       91,697,824       N/A       91,697,824  
Loans sold
    80,906,387       2,055,905       N/A       82,962,292       5,271,485       (9,184,815 )     79,048,962       N/A       79,048,962  
MBR margin
    1.00 %     1.53 %     N/A       1.01 %     1.26 %     N/A       N/A       N/A       1.06 %
ROE
    52 %     25 %     N/A       37 %     20 %     N/A       28 %     N/A       19 %
ROA
    2.87 %     3.49 %     N/A       2.70 %     0.92 %     N/A       1.62 %     N/A       1.17 %
Net interest margin, thrift. 
    N/A       N/A       N/A       N/A       1.75 %     N/A       N/A       N/A       1.93 %
Average FTE
    4,471       207       1,060       5,738       649       314       6,701       1,234       7,935  
Year Ended December 31, 2005
                                                                       
Operating Results
                                                                       
Net interest income
  $ 117,693     $ 45,160     $ (1,290 )   $ 161,563     $ 230,394     $ 43,430     $ 435,387     $ (10,676 )   $ 424,711  
Provision for loan losses
                            (9,978 )           (9,978 )           (9,978 )
Gain (loss) on sale of loans
    592,229       14,985             607,214       45,365       (60,404 )     592,175             592,175  
Service fee income
    12,650       31,594             44,244       6,154       (6,163 )     44,235             44,235  
Gain (loss) on securities
          12,810             12,810       2,866       2,190       17,866             17,866  
Other income
    1,668       2,697       1,989       6,354       31,958       (4,040 )     34,272       2,429       36,701  
                                                                         
Net revenues (expense)
    724,240       107,246       699       832,185       306,759       (24,987 )     1,113,957       (8,247 )     1,105,710  
Operating expenses
    477,154       36,624       47,080       560,858       102,861       35,319       699,038       145,954       844,992  
Deferred expense under FAS 91
    (196,233 )     (1,963 )           (198,196 )     (19,143 )     (7,060 )     (224,399 )           (224,399 )
                                                                         
Pretax income (loss)
    443,319       72,585       (46,381 )     469,523       223,041       (53,246 )     639,318       (154,201 )     485,117  
                                                                         
Net income (loss)
  $ 268,085     $ 43,913     $ (28,061 )   $ 283,937     $ 134,938     $ (32,214 )   $ 386,661     $ (93,533 )   $ 293,128  
                                                                         
Relevant Financial and Performance Data
                                                                       
Average interest-earning assets
  $ 6,489,208     $ 629,027     $ (106 )   $ 7,118,129     $ 11,825,555     $ (66,938 )   $ 18,876,746     $ 768,266     $ 19,645,012  
Allocated capital
    364,125       193,959       10,291       568,375       524,791       1,464       1,094,630       286,237       1,380,867  
Loans produced
    56,493,453       1,079,142       N/A       57,572,595       5,141,689             62,714,284       N/A       62,714,284  
Loans sold
    54,284,169       1,315,673       N/A       55,599,842       3,357,700       (6,660,302 )     52,297,240       N/A       52,297,240  
MBR margin
    1.31 %     1.14 %     N/A       1.30 %     1.35 %     N/A       N/A       N/A       1.36 %
ROE
    74 %     23 %     N/A       50 %     26 %     N/A       35 %     N/A       21 %
ROA
    4.04 %     2.87 %     N/A       3.42 %     1.14 %     N/A       1.92 %     N/A       1.38 %
Net interest margin, thrift. 
    N/A       N/A       N/A       N/A       1.95 %     N/A       N/A       N/A       2.10 %
Average FTE
    3,511       140       781       4,432       570       238       5,240       1,000       6,240  
 
 
(1) Included in the mortgage banking overhead was $24.1 million and $10.1 million production division overhead and servicing overhead, respectively, for the year ended December 31, 2006. For the year ended December 31, 2005, the production division overhead and servicing overhead were $18.5 million and $9.6 million servicing overhead.
 
(2) Included are eliminations, deposits, and treasury items, the details of which are provided on page 27.


24


Table of Contents

The following tables provide additional detail on the results for the production divisions of our mortgage banking segment for the years ended December 31, 2006 and 2005:
 
                                                         
    Mortgage Banking Production Divisions  
                                  Financial
       
                                  Freedom
    Total
 
    Mortgage Professionals Group     Consumer
    (Reverse
    Production
 
Year Ended December 31, 2006
  Wholesale     Correspondent     Conduit     Total     Direct     Mortgage)     Divisions  
    (Dollars in thousands)  
 
Operating Results
                                                       
Net interest income
  $ 64,218     $ 15,005     $ 79,138     $ 158,361     $ 2,507     $ 9,918     $ 170,786  
Provision for loan losses
                                         
Gain (loss) on sale of loans
    353,955       38,229       52,465       444,649       32,473       160,844       637,966  
Service fee income
                                  21,141       21,141  
Gain (loss) on securities
                                         
Other income
                (63 )     (63 )     806       1,152       1,895  
                                                         
Net revenues (expense)
    418,173       53,234       131,540       602,947       35,786       193,055       831,788  
Operating expenses
    324,503       47,359       29,841       401,703       57,092       135,246       594,041  
Deferral of expenses under FAS 91
    (159,346 )     (24,951 )           (184,297 )     (22,426 )     (32,256 )     (238,979 )
                                                         
Pretax income (loss)
    253,016       30,826       101,699       385,541       1,120       90,065       476,726  
                                                         
Net income (loss)
  $ 154,087     $ 18,773     $ 61,935     $ 234,795     $ 682     $ 54,198     $ 289,675  
                                                         
Relevant Financial and Performance Data
                                                       
Average interest-earning assets
  $ 3,930,599     $ 954,680     $ 4,149,226     $ 9,034,505     $ 204,641     $ 617,480     $ 9,856,626  
Allocated capital
    211,459       51,870       182,133       445,462       10,943       96,430       552,835  
Loans produced
    36,859,055       10,263,616       30,102,134       77,224,805       1,957,493       5,023,533       84,205,831  
Loans sold
    36,041,893       9,940,275       28,425,553       74,407,721       2,000,314       4,498,352       80,906,387  
MBR margin
    1.16 %     0.54 %     0.46 %     0.81 %     1.75 %     3.80 %     1.00 %
Pretax income/loan sold
    0.70 %     0.31 %     0.36 %     0.52 %     0.06 %     2.00 %     0.59 %
ROE
    73 %     36 %     34 %     53 %     6 %     56 %     52 %
ROA
    3.91 %     1.96 %     1.48 %     2.58 %     0.32 %     6.77 %     2.87 %
Net interest margin
    1.63 %     1.57 %     1.91 %     1.75 %     1.23 %     1.61 %     1.73 %
Average FTE
    2,418       240       147       2,805       394       1,272       4,471  
Year Ended December 31, 2005
                                                       
Operating Results
                                                       
Net interest income
  $ 48,763     $ 10,829     $ 49,762     $ 109,354     $ 5,459     $ 2,880     $ 117,693  
Provision for loan losses
                                         
Gain (loss) on sale of loans
    394,498       48,235       9,974       452,707       59,260       80,262       592,229  
Service fee income
                (276 )     (276 )           12,926       12,650  
Gain (loss) on securities
                                         
Other income
    156             144       300       316       1,052       1,668  
                                                         
Net revenues (expense)
    443,417       59,064       59,604       562,085       65,035       97,120       724,240  
Operating expenses
    255,147       30,764       18,133       304,044       94,942       78,168       477,154  
Deferral of expenses under FAS 91
    (128,385 )     (16,511 )           (144,896 )     (29,038 )     (22,299 )     (196,233 )
                                                         
Pretax income (loss)
    316,655       44,811       41,471       402,937       (869 )     41,251       443,319  
                                                         
Net income (loss)
  $ 191,576     $ 27,111     $ 25,090     $ 243,777     $ (525 )   $ 24,833     $ 268,085  
                                                         
Relevant Financial and Performance Data
                                                       
Average interest-earning assets
  $ 3,192,851     $ 590,614     $ 2,236,944     $ 6,020,409     $ 319,106     $ 149,693     $ 6,489,208  
Allocated capital
    153,298       27,551       103,534       284,383       15,981       63,761       364,125  
Loans produced
    29,145,082       5,718,598       15,810,873       50,674,553       2,883,559       2,935,341       56,493,453  
Loans sold
    28,358,598       5,424,613       14,819,081       48,602,292       2,852,465       2,829,412       54,284,169  
MBR margin
    1.56 %     1.09 %     0.40 %     1.16 %     2.27 %     2.94 %     1.31 %
Pretax income/loan sold
    1.12 %     0.83 %     0.28 %     0.83 %     (0.03 )%     1.46 %     0.82 %
ROE
    125 %     98 %     24 %     86 %     (3 )%     39 %     74 %
ROA
    5.99 %     4.58 %     1.12 %     4.04 %     (0.16 )%     9.12 %     4.04 %
Net interest margin
    1.53 %     1.83 %     2.22 %     1.82 %     1.71 %     1.92 %     1.81 %
Average FTE
    1,860       181       107       2,148       589       774       3,511  


25


Table of Contents

The following tables provide additional detail on the results for divisions of our thrift segment for the years ended December 31, 2006 and 2005:
 
                                                                 
    Thrift  
    Mortgage-
    Prime SFR
    Home
    Consumer
                         
    Backed
    Mortgage
    Equity
    Construction
    Homebuilder
    Warehouse
    Discontinued
       
Year Ended December 31, 2006
  Securities     Loans     Division     Division     Division     Lending     Products     Total Thrift  
    (Dollars in thousands)  
 
Operating Results
                                                               
Net interest income
  $ 31,809     $ 76,081     $ 39,503     $ 45,546     $ 60,422     $ 3,489     $ 2,202     $ 259,052  
Provision for loan losses
          (9,225 )     (1,800 )     (3,322 )     (3,800 )     (181 )     (1,665 )     (19,993 )
Gain (loss) on sale of loans
    (122 )     3,703       23,996       39,068                   (11 )     66,634  
Service fee income
                466                               466  
Gain (loss) on securities
    (834 )     384       (12,934 )     659                         (12,725 )
Other income
    (3 )     1,637       8,723       23,412       1,867       1,725             37,361  
                                                                 
Net revenues (expense)
    30,850       72,580       57,954       105,363       58,489       5,033       526       330,795  
Operating expenses
    1,131       4,978       20,496       69,073       21,516       4,120       307       121,621  
Deferral of expenses under FAS 91
                (1,165 )     (8,812 )     (6,993 )                 (16,970 )
                                                                 
Pretax income (loss)
    29,719       67,602       38,623       45,102       43,966       913       219       226,144  
                                                                 
Net income (loss)
  $ 18,099     $ 41,170     $ 23,521     $ 27,467     $ 26,775     $ 556     $ 133     $ 137,721  
                                                                 
Relevant Financial and Performance Data
                                                               
Average interest-earning assets
  $ 3,258,988     $ 5,876,399     $ 1,934,429     $ 2,502,397     $ 1,076,213     $ 119,043     $ 40,627     $ 14,808,096  
Allocated capital
    58,135       227,937       148,033       123,273       104,123       10,382       3,584       675,467  
Loans produced
                109,375       2,937,596       1,746,690                   4,793,661  
Loans sold
          170,296       2,604,875       2,496,314                         5,271,485  
ROE
    31 %     18 %     16 %     22 %     26 %     5 %     4 %     20 %
ROA
    0.55 %     0.70 %     1.18 %     1.10 %     2.51 %     0.47 %     0.37 %     0.92 %
Net interest margin
    0.98 %     1.29 %     2.04 %     1.82 %     5.61 %     2.93 %     5.42 %     1.75 %
Efficiency ratio
    4 %     6 %     32 %     55 %     23 %     79 %     14 %     30 %
Average FTE
    5       13       75       422       108       26             649  
Year Ended December 31, 2005
                                                               
Operating Results
                                                               
Net interest income
  $ 30,086     $ 73,231     $ 32,840     $ 46,122     $ 44,458     $ 632     $ 3,025     $ 230,394  
Provision for loan losses
          (3,750 )           (2,596 )     (900 )     (117 )     (2,615 )     (9,978 )
Gain (loss) on sale of loans
    92       8,806       3,098       33,169                   200       45,365  
Service fee income
          953       5,200             1                   6,154  
Gain (loss) on securities
    776             1,221       869                         2,866  
Other income
    (1 )     (1 )     8,268       21,905       1,409       374       4       31,958  
                                                                 
Net revenues (expense)
    30,953       79,239       50,627       99,469       44,968       889       614       306,759  
Operating expenses
    999       3,000       15,558       61,526       18,049       2,770       959       102,861  
Deferral of expenses under FAS 91
                (2,046 )     (10,738 )     (6,359 )                 (19,143 )
                                                                 
Pretax income (loss)
    29,954       76,239       37,115       48,681       33,278       (1,881 )     (345 )     223,041  
                                                                 
Net income (loss)
  $ 18,122     $ 46,124     $ 22,454     $ 29,452     $ 20,133     $ (1,138 )   $ (209 )   $ 134,938  
                                                                 
Relevant Financial and Performance Data
                                                               
Average interest-earning assets
  $ 2,212,816     $ 4,993,311     $ 1,648,086     $ 2,106,111     $ 794,166     $ 21,831     $ 49,234     $ 11,825,555  
Allocated capital
    40,342       202,883       95,907       101,060       78,051       2,172       4,376       524,791  
Loans produced
                207,968       2,993,962       1,939,759                   5,141,689  
Loans sold
          543,542       560,881       2,253,277                         3,357,700  
ROE
    45 %     23 %     23 %     29 %     26 %     (52 )%     (5 )%     26 %
ROA
    0.81 %     0.92 %     1.34 %     1.40 %     2.56 %     (5.08 )%     (0.49 )%     1.14 %
Net interest margin
    1.36 %     1.47 %     1.99 %     2.19 %     5.60 %     2.89 %     6.14 %     1.95 %
Efficiency ratio
    3 %     4 %     27 %     50 %     25 %     275 %     30 %     26 %
Average FTE
    5       11       36       395       93       20       10       570  


26


Table of Contents

The following tables provide additional detail on deposits, treasury and eliminations for the year ended December 31, 2006 and 2005:
 
                                                 
                Eliminations        
                      MSR
             
                Interdivision
    Economic
             
Year Ended December 31, 2006
  Deposits     Treasury     Loan Sales     Value     Other     Total  
    (Dollars in thousands)  
 
Operating Results
                                               
Net interest income
  $     $ (3,343 )   $ 32,275     $     $ 15,629     $ 44,561  
Provision for loan losses
                                   
Gain (loss) on sale of loans
                (68,023 )                 (68,023 )
Service fee income
                (4,361 )                 (4,361 )
Gain (loss) on securities
                11,193                   11,193  
Other income
    3,476       677                   (5,817 )     (1,664 )
                                                 
Net revenues (expense)
    3,476       (2,666 )     (28,916 )           9,812       (18,294 )
Operating expenses
    26,764       8,529                   13,716       49,009  
Deferral of expenses under FAS 91
                            (2,229 )     (2,229 )
                                                 
Pretax income (loss)
    (23,288 )     (11,195 )     (28,916 )           (1,675 )     (65,074 )
                                                 
Net income (loss)
  $ (14,182 )   $ (6,818 )   $ (17,610 )   $     $ 4,264     $ (34,346 )
                                                 
Relevant Financial and Performance Data
                                               
Average interest-earning assets
  $ 181     $     $ (90,019 )   $     $     $ (89,838 )
Allocated capital
    2,108           $     $     $     $ 2,108  
Loans produced
    N/A       N/A     $ N/A     $     $       N/A  
Loans sold
    N/A       N/A     $ (9,184,815 )     N/A       N/A     $ (9,184,815 )
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
    270       44                         314  
Year ended December 31, 2005
                                               
Operating Results
                                               
Net interest income
  $     $ 9,405     $ 19,877     $     $ 14,148     $ 43,430  
Provision for loan losses
                                   
Gain (loss) on sale of loans
                (62,204 )           1,800       (60,404 )
Service fee income
                4,970       (11,133 )           (6,163 )
Gain (loss) on securities
                2,190                   2,190  
Other income
    2,486       566                   (7,092 )     (4,040 )
                                                 
Net revenues (expense)
    2,486       9,971       (35,167 )     (11,133 )     8,856       (24,987 )
Operating expenses
    16,045       5,003                   14,271       35,319  
Deferral of expenses under FAS 91
                            (7,060 )     (7,060 )
                                                 
Pretax income (loss)
    (13,559 )     4,968       (35,167 )     (11,133 )     1,645       (53,246 )
                                                 
Net income (loss)
  $ (8,203 )   $ 3,006     $ (21,276 )   $ (6,736 )   $ 995     $ (32,214 )
                                                 
Relevant Financial and Performance Data
                                               
Average interest-earning assets
  $ 180     $     $ (67,118 )   $     $     $ (66,938 )
Allocated capital
    1,464           $     $     $     $ 1,464  
Loans produced
              $     $     $     $  
Loans sold
    N/A       N/A     $ (6,660,302 )     N/A       N/A     $ (6,660,302 )
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
    206       32                         238  


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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 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 is allocated to the operating channels, which results in higher interest expense at the operating channel level but reduces the capital charge to each operating channel. This is more reflective of our use of trust preferred 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 that division. Loans are occasionally transferred (“sold”) from the production divisions to the thrift divisions at a premium based on the estimated fair value. The premium paid 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 91”), certain fees and related incremental direct costs associated with originating loans are required to be deferred when incurred. SFAS 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 24 to 27 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, an amendment of FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities” (“SFAS 156”) on January 1, 2006, the economic fair value may vary 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 in 2006, the Company has 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.


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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 Includes first mortgage products originated for sale through the various Indymac channels (excluding servicing retained and consumer construction channels). These products include agency conforming, Alt-A and subprime loans.
 
Agency Conforming
 
First mortgage loans for sale that meet the underwriting guidelines of Fannie Mae and Freddie Mac.
 
Alt-A
 
First mortgage loans for sale that have prime credit characteristics, but do not meet the GSE underwriting guidelines. We sell Alt-A loans to the GSEs on a negotiated basis even though the loans do not meet the GSE underwriting guidelines.
 
Subprime
 
Includes first mortgage loans that are extended to borrowers with impaired credit with one or more of the following characteristics: 1) FICO score of less than 620; 2) late mortgage payment in the last 12 months; and 3) bankruptcy in the last 2 years.
 
Specialty Consumer Home Loans Held for Sale and/or Investment Includes specialty mortgage products originated through the various Indymac channels and adjusted for intercompany activity. These products include, HELOCs/seconds, reverse mortgages, CTP/Lot and discontinued products.
 
HELOCs/Seconds
 
Home equity lines of credit and closed-end second mortgages.
 
Reverse Mortgages
 
Reverse mortgage loans extended to borrowers age 62 and older secured by equity in a primary residence.
 
CTP/Lot
 
Loans made to homeowners for the construction of new custom homes and the subsequent permanent mortgage, and lot loans.
 
Discontinued
 
Dealer originated manufactured housing and home improvement loans.
 
Home Loans and Related Investments Includes all investment related activity including home loans held for investment, variable cash flow instruments, mortgage-backed securities and other related investments.
 
Retained Assets and Retention Activities
 
Mortgage banking, trading and hedging activity associated with the purchase, management and sale of mortgage banking assets and variable cash flow instruments retained in connection with the Company’s loan sales. Activity also includes loans acquired through clean-up calls and originated through customer retention programs.


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Table of Contents

 
MBS
 
Trading and investment activity related to the purchase, management and sale of investment grade mortgage-backed securities.
 
SFR Loans Held for Investment
 
Company-wide loan investment activity related to the purchase, management and sale of single family residential mortgage loans held for investment.
 
Specialty Commercial Loans Held for Investment Includes the consolidated loan activity associated with loans that are made to commercial customers such as homebuilders, commercial builders and mortgage brokers and bankers for the purposes of either building residential homes or financing the purchase of these homes.
 
Single Spec
 
Loans that are made to homebuilders to build individual custom homes for resale to consumers.
 
Builder Financing
 
Subdivision lending for commercial acquisition, development and construction loans to commercial builders.
 
Warehouse Lending
 
Warehouse lines of credit to mortgage brokers to finance their inventory of loans prior to sale.
 
Overhead Includes all fixed operating costs associated with production divisions and servicing loans that are not allocated to the respective products for which these services are provided. In addition, it includes all corporate fixed costs that do not vary in the short term with changes in business activity. These fixed costs include corporate administration, financial management, enterprise risk management, centralized information technology and other unallocated fixed costs.


30


Table of Contents

The following tables summarize the profitability for each of the four product groups and the loan servicing operations for the years ended December 31, 2006 and 2005:
 
                                                         
                Home
                         
    Standard
    Specialty
    Loans &
    Specialty
                   
Year Ended
  Consumer
    Consumer
    Related
    Commercial
                Total
 
December 31, 2006
  Home Loans     Home Loans     Investments     Loans     Treasury     Overhead     Company  
    (Dollars in thousands)  
 
Operating Results
                                                       
Net interest income
  $ 126,582     $ 151,281     $ 168,025     $ 77,184     $ (3,343 )   $ 6,992     $ 526,721  
Provision for loan losses
          (6,371 )     (9,225 )     (4,397 )                 (19,993 )
Gain (loss) on sale of loans
    432,508       200,488       35,058                         668,054  
Service fee income
          27,139       72,227                   1,951       101,317  
Gain (loss) on securities
          (16,849 )     37,331                         20,482  
Other income
          30,964       6,920       7,644       677       3,917       50,122  
                                                         
Net revenue (expense)
    559,090       386,652       310,336       80,431       (2,666 )     12,860       1,346,703  
Variable expenses
    233,344       169,448       10,988       11,376                   425,156  
Deferral of expenses under FAS 91
    (178,637 )     (74,536 )     (5,772 )     (7,301 )                 (266,246 )
Fixed expenses
    186,182       94,937       53,824       18,875       8,529       269,950       632,297  
                                                         
Pretax income (loss)
    318,201       196,803       251,296       57,481       (11,195 )     (257,090 )     555,496  
                                                         
Net income (loss)
  $ 193,784     $ 119,201     $ 153,039     $ 35,006     $ (6,818 )   $ (151,283 )   $ 342,929  
                                                         
Balance Sheet Data
                                                       
Average interest-earning assets
  $ 8,536,706     $ 5,574,028     $ 9,915,749     $ 1,439,550     $     $ 562,243     $ 26,028,276  
Allocated capital
  $ 398,215     $ 373,204     $ 625,455     $ 133,069     $     $ 266,317     $ 1,796,260  
Performance Ratios
                                                       
ROE
    49 %     32 %     24 %     26 %     N/A       N/A       19 %
Net interest margin
    1.48 %     2.71 %     1.69 %     5.36 %     N/A       N/A       2.02 %
MBR margin
    0.88 %     1.88 %     1.57 %     N/A       N/A       N/A       1.06 %
Efficiency ratio
    43 %     48 %     18 %     27 %     N/A       N/A       58 %
Operating Data
                                                       
Loan production
  $ 70,043,484     $ 17,484,288     $ 2,232,454     $ 1,937,598     $     $     $ 91,697,824  
Loans sold
  $ 63,635,182     $ 13,187,579     $ 2,226,201     $     $     $     $ 79,048,962  
Year Ended December 31, 2005
                                                       
Operating Results
                                                       
Net interest income
  $ 98,061     $ 107,441     $ 154,099     $ 56,087     $ 9,153     $ (130 )   $ 424,711  
Provision for loan losses
          (4,699 )     (3,750 )     (1,529 )                 (9,978 )
Gain (loss) on sale of loans
    438,995       126,842       26,338                         592,175  
Service fee income
          18,126       36,043       1             (9,935 )     44,235  
Gain (loss) on securities
          2,090       15,776                         17,866  
Other income
          29,242       2,695       3,770       566       428       36,701  
                                                         
Net revenue (expense)
    537,056       279,042       231,201       58,329       9,719       (9,637 )     1,105,710  
Variable expenses
    218,381       126,077       3,734       16,874                   365,066  
Deferral of expenses under FAS 91
    (160,543 )     (54,845 )     (1,963 )     (7,048 )                 (224,399 )
Fixed expenses
    150,815       56,092       35,251       9,418       5,003       223,347       479,926  
                                                         
Pretax income (loss)
    328,403       151,718       194,179       39,085       4,716       (232,984 )     485,117  
                                                         
Net income (loss)
  $ 198,684     $ 91,666     $ 117,478     $ 23,647     $ 2,854     $ (141,201 )   $ 293,128  
                                                         
Balance Sheet Data
                                                       
Average interest-earning assets
  $ 6,037,836     $ 4,050,747     $ 7,813,287     $ 996,350     $     $ 746,792     $ 19,645,012  
Allocated capital
  $ 274,935     $ 225,414     $ 436,090     $ 94,528     $     $ 349,900     $ 1,380,867  
Performance Ratios
                                                       
ROE
    72 %     41 %     27 %     25 %     N/A       N/A       21 %
Net interest margin
    1.62 %     2.65 %     1.97 %     5.63 %     N/A       N/A       2.16 %
MBR margin
    1.22 %     2.33 %     1.42 %     N/A       N/A       N/A       1.36 %
Efficiency ratio
    39 %     45 %     16 %     32 %     N/A       N/A       56 %
Operating Data
                                                       
Loan production
  $ 48,151,564     $ 11,389,658     $ 901,365     $ 2,271,697     $     $     $ 62,714,284  
Loans sold
  $ 44,146,314     $ 6,291,711     $ 1,859,215     $     $     $     $ 52,297,240  


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Table of Contents

The following tables provide details on the profitability for the standard consumer home loans held for sale for the years ended December 31, 2006 and 2005:
 
                                 
    Standard Consumer Home Loans Held for Sale  
Year Ended
  Agency
                   
December 31, 2006
  Conforming     Alt-A     Subprime     Total  
    (Dollars in thousands)  
 
Operating Results
                               
Net interest income
  $ 1,757     $ 94,707     $ 30,118     $ 126,582  
Provision for loan losses
                       
Gain (loss) on sale of loans
    1,868       407,635       23,005       432,508  
Service fee income
                       
Gain (loss) on securities
                       
Other income
                       
                                 
Net revenues (expense)
    3,625       502,342       53,123       559,090  
Variable expenses
    7,420       196,971       28,953       233,344  
Deferral of expenses under FAS 91
    (6,030 )     (150,322 )     (22,285 )     (178,637 )
Fixed expenses
    5,271       163,240       17,671       186,182  
                                 
Pretax income (loss)
    (3,036 )     292,453       28,784       318,201  
                                 
Net income (loss)
  $ (1,849 )   $ 178,104     $ 17,529     $ 193,784  
                                 
Balance Sheet Data
                               
Average interest-earning assets
  $ 129,275     $ 7,128,473     $ 1,278,958     $ 8,536,706  
Allocated capital
  $ 5,324     $ 314,394     $ 78,497     $ 398,215  
Performance Ratios
                               
ROE
    (35 )%     57 %     22 %     49 %
Net interest margin
    1.36 %     1.33 %     2.35 %     1.48 %
MBR margin
    0.41 %     0.84 %     2.03 %     0.88 %
Efficiency ratio
    184 %     42 %     46 %     43 %
Operating Data
                               
Loan production
  $ 877,309     $ 66,580,898     $ 2,585,277     $ 70,043,484  
Loans sold
  $ 883,719     $ 60,129,551     $ 2,621,912     $ 63,635,182  
Year Ended December 31, 2005
                               
Operating Results
                               
Net interest income
  $ 2,484     $ 70,612     $ 24,965     $ 98,061  
Provision for loan losses
                       
Gain (loss) on sale of loans
    5,806       404,911       28,278       438,995  
Service fee income
                       
Gain (loss) on securities
                       
Other income
                       
                                 
Net revenues (expense)
    8,290       475,523       53,243       537,056  
Variable expenses
    7,380       178,305       32,696       218,381  
Deferral of expenses under FAS 91
    (5,424 )     (131,196 )     (23,923 )     (160,543 )
Fixed expenses
    4,394       128,194       18,227       150,815  
                                 
Pretax income (loss)
    1,940       300,220       26,243       328,403  
                                 
Net income (loss)
  $ 1,174     $ 181,633     $ 15,877     $ 198,684  
                                 
Balance Sheet Data
                               
Average interest-earning assets
  $ 116,723     $ 5,168,483     $ 752,630     $ 6,037,836  
Allocated capital
  $ 4,978     $ 229,650     $ 40,307     $ 274,935  
Performance Ratios
                               
ROE
    24 %     79 %     39 %     72 %
Net interest margin
    2.13 %     1.37 %     3.32 %     1.62 %
MBR margin
    0.84 %     1.17 %     1.98 %     1.22 %
Efficiency ratio
    77 %     37 %     51 %     39 %
Operating Data
                               
Loan production
  $ 905,481     $ 44,899,737     $ 2,346,346     $ 48,151,564  
Loans sold
  $ 981,249     $ 40,481,759     $ 2,683,306     $ 44,146,314  


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The following tables provide details on the profitability for the specialty consumer home loans held for sale and/or investment for the years ended December 31, 2006 and 2005:
 
                                         
    Specialty Consumer Home Loans Held for Sale and/or Investment  
Year Ended
  HELOCs/
    Reverse
                   
December 31, 2006
  Seconds     Mortgages     CTP/Lot     Discontinued     Total  
    (Dollars in thousands)  
 
Operating Results
                                       
Net interest income
  $ 90,832     $ 9,918     $ 48,329     $ 2,202     $ 151,281  
Provision for loan losses
    (1,800 )           (2,906 )     (1,665 )     (6,371 )
Gain (loss) on sale of loans
    (1,106 )     160,844       40,761       (11 )     200,488  
Service fee income
    5,998       21,141                   27,139  
Gain (loss) on securities
    (17,508 )           659             (16,849 )
Other income
    10,452       1,152       19,360             30,964  
                                         
Net revenues (expense)
    86,868       193,055       106,203       526       386,652  
Variable expenses
    52,746       79,858       36,844             169,448  
Deferral of expenses under FAS 91
    (33,776 )     (32,256 )     (8,504 )           (74,536 )
Fixed expenses
    11,628       55,388       27,614       307       94,937  
                                         
Pretax income (loss)
    56,270       90,065       50,249       219       196,803  
                                         
Net income (loss)
  $ 34,268     $ 54,198     $ 30,602     $ 133     $ 119,201  
                                         
Balance Sheet Data
                                       
Average interest-earning assets
  $ 2,666,823     $ 617,480     $ 2,249,098     $ 40,627     $ 5,574,028  
Allocated capital
  $ 233,930     $ 31,712     $ 103,978     $ 3,584     $ 373,204  
Performance Ratios
                                       
ROE
    15 %     171 %     29 %     4 %     32 %
Net interest margin
    3.41 %     1.61 %     2.15 %     5.42 %     2.71 %
MBR margin
    0.58 %     3.80 %     1.63 %     N/A       1.88 %
Efficiency ratio
    35 %     53 %     51 %     14 %     48 %
Operating Data
                                       
Loan production
  $ 7,199,309     $ 5,023,533     $ 5,261,446     $     $ 17,484,288  
Loans sold
  $ 6,192,913     $ 4,498,352     $ 2,496,314     $     $ 13,187,579  
Year Ended December 31, 2005
                                       
Operating Results
                                       
Net interest income
  $ 54,784     $ 2,880     $ 46,752     $ 3,025     $ 107,441  
Provision for loan losses
                (2,084 )     (2,615 )     (4,699 )
Gain (loss) on sale of loans
    8,385       80,262       37,995       200       126,842  
Service fee income
    5,200       12,926                   18,126  
Gain (loss) on securities
    1,221             869             2,090  
Other income
    8,268       1,052       19,918       4       29,242  
                                         
Net revenues (expense)
    77,858       97,120       103,450       614       279,042  
Variable expenses
    42,370       50,574       33,133             126,077  
Deferral of expenses under FAS 91
    (22,497 )     (22,299 )     (10,049 )           (54,845 )
Fixed expenses
    4,618       27,594       22,921       959       56,092  
                                         
Pretax income (loss)
    53,367       41,251       57,445       (345 )     151,718  
                                         
Net income (loss)
  $ 32,287     $ 24,833     $ 34,755     $ (209 )   $ 91,666  
                                         
Balance Sheet Data
                                       
Average interest-earning assets
  $ 1,931,463     $ 149,693     $ 1,920,357     $ 49,234     $ 4,050,747  
Allocated capital
  $ 119,506     $ 15,317     $ 86,215     $ 4,376     $ 225,414  
Performance Ratios
                                       
ROE
    27 %     162 %     40 %     (5 )%     41 %
Net interest margin
    2.84 %     1.92 %     2.43 %     6.14 %     2.65 %
MBR margin
    2.08 %     2.94 %     1.68 %     N/A       2.33 %
Efficiency ratio
    31 %     58 %     44 %     30 %     45 %
Operating Data
                                       
Loan production
  $ 3,626,310     $ 2,935,341     $ 4,828,007     $     $ 11,389,658  
Loans sold
  $ 1,207,261     $ 2,829,412     $ 2,255,038     $     $ 6,291,711  


33


Table of Contents

The following tables provide details on the profitability for the home loans and related investments and the loan servicing operations for the years ended December 31, 2006 and 2005:
 
                                 
    Home Loans and Related Investments  
    Retained Assets
          SFR Loans
       
Year Ended
  and Retention
          Held for
       
December 31, 2006
  Activities     MBS     Investment     Total  
    (Dollars in thousands)  
 
Operating Results
                               
Net interest income
  $ 53,160     $ 31,809     $ 83,056     $ 168,025  
Provision for loan losses
                (9,225 )     (9,225 )
Gain (loss) on sale of loans
    31,477       (122 )     3,703       35,058  
Service fee income
    72,227                   72,227  
Gain (loss) on securities
    37,781       (834 )     384       37,331  
Other income
    5,286       (3 )     1,637       6,920  
                                 
Net revenues (expense)
    199,931       30,850       79,555       310,336  
Variable expenses
    10,988                   10,988  
Deferral of expenses under FAS 91
    (5,772 )                 (5,772 )
Fixed expenses
    47,715       1,131       4,978       53,824  
                                 
Pretax income (loss)
    147,000       29,719       74,577       251,296  
                                 
Net income (loss)
  $ 89,523     $ 18,099     $ 45,417     $ 153,039  
                                 
Balance Sheet Data
                               
Average interest-earning assets
  $ 801,446     $ 3,258,988     $ 5,855,315     $ 9,915,749  
Allocated capital
  $ 340,239     $ 58,135     $ 227,081     $ 625,455  
Performance Ratios
                               
ROE
    26 %     31 %     20 %     24 %
Net interest margin
    6.63 %     0.98 %     1.42 %     1.69 %
MBR margin
    1.53 %     N/A       N/A       1.57 %
Efficiency ratio
    26 %     4 %     6 %     18 %
Operating Data
                               
Loan production
  $ 2,232,454     $     $     $ 2,232,454  
Loans sold
  $ 2,055,905     $     $ 170,296     $ 2,226,201  
Year Ended December 31, 2005
                               
Operating Results
                               
Net interest income
  $ 45,160     $ 30,086     $ 78,853     $ 154,099  
Provision for loan losses
                (3,750 )     (3,750 )
Gain (loss) on sale of loans
    17,414       92       8,832       26,338  
Service fee income
    35,090             953       36,043  
Gain (loss) on securities
    15,000       776             15,776  
Other income
    2,697       (1 )     (1 )     2,695  
                                 
Net revenues (expense)
    115,361       30,953       84,887       231,201  
Variable expenses
    3,734                   3,734  
Deferral of expenses under FAS 91
    (1,963 )                 (1,963 )
Fixed expenses
    31,252       999       3,000       35,251  
                                 
Pretax income (loss)
    82,338       29,954       81,887       194,179  
                                 
Net income (loss)
  $ 49,814     $ 18,122     $ 49,542     $ 117,478  
                                 
Balance Sheet Data
                               
Average interest-earning assets
  $ 629,027     $ 2,212,816     $ 4,971,444     $ 7,813,287  
Allocated capital
  $ 193,959     $ 40,342     $ 201,789     $ 436,090  
Performance Ratios
                               
ROE