10-Q 1 v34346e10vq.htm FORM 10-Q e10vq
Table of Contents

 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
 
Form 10-Q
 
 
     
þ
  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
    For the quarterly period ended September 30, 2007
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 or organization)
  95-3983415
(I.R.S. Employer
Identification No.)
     
888 East Walnut Street,
Pasadena, California
(Address of principal executive offices)
  91101-7211
(Zip Code)
 
(Registrant’s telephone number, including area code)
(800) 669-2300
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ     No o
 
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
 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
 
Common stock outstanding as of October 31, 2007: 80,488,799 shares
 


 

 
FORM 10-Q QUARTERLY REPORT
For the Quarter Ended September 30, 2007

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 EXHIBIT 4.1
 EXHIBIT 4.2
 EXHIBIT 10.1
 EXHIBIT 10.2
 EXHIBIT 10.3
 EXHIBIT 31.1
 EXHIBIT 31.2
 EXHIBIT 32.1
 EXHIBIT 32.2


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PART I. FINANCIAL INFORMATION
 
FORWARD-LOOKING STATEMENTS
 
Certain statements contained in this Form 10-Q 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, as well as future or conditional verbs, such as “will,” “would,” “should,” “could,” or “may,” are generally intended to identify forward-looking statements that are inherently subject to risks and uncertainties, many of which are beyond Indymac’s control or 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 or from historical results 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; Indymac’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 its loans and other financial assets including increased credit losses due to demand trends in the economy and in the real estate market and increased delinquency rates of borrowers; 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 including a reduction in secondary mortgage market investor demand; the execution of Indymac’s growth plans in a significant market transition; the impact of disruptions triggered by natural disasters; the impact of current, pending or future legislation, regulations or litigation; and other risk factors described in the reports that Indymac files with the Securities and Exchange Commission, including its Annual Report on Form 10-K, its Quarterly Reports on Form 10-Q, and its reports on Form 8-K. For further information on our risk factors, please refer to “Risk Factors” on pages 72 to 80 in Indymac’s annual report on Form 10-K for the year ended December 31, 2006 (“2006 10-K”) and Part II Item 1A “Risk Factors” on page 82. Accordingly, readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date they are made. Indymac does not undertake to update or revise forward-looking statements to reflect the impact of circumstances or events that arise after the date the forward-looking statements are made.
 
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. The following discussion addresses the Company’s financial condition and results of operations for the three and nine months ended September 30, 2007.


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ITEM 2.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
OVERVIEW
 
The third quarter of 2007 was marked by an unprecedented disruption in the U.S. mortgage market. The private mortgage-backed securities market, as well as markets for asset-backed commercial paper and other financing markets came to a virtual halt during the quarter. This disruption had severe consequences for many mortgage originators. Many lenders that were not depository institutions failed or were severely disrupted. The impact of the market disruption appears to have significantly impacted the U.S. housing market as both sales of homes and prices are expected to decline in the future. Indymac’s results of operations were significantly impacted by the disruptions resulting in material reductions to revenue for both credit and market risks.
 
For the three months ended September 30, 2007, Indymac had a consolidated net loss of $202.7 million, representing a negative 39% return on average equity (“ROE”). Regarding business segment performance1, the mortgage production divisions had a net loss of $123.6 million and a negative ROE of 67% in the third quarter while the mortgage servicing division had earnings of $85.3 million and a 85% ROE. Combining production and servicing, mortgage banking recorded a net loss of $50.5 million and a negative ROE of 17%. The thrift segment also recorded a net loss $104.4 million, representing a negative ROE of 45% for the third quarter. As a result of our thrift structure and strong capital and liquidity position, we were not forced to sell assets at liquidation prices and our funding capacity was not materially impacted.
 
 
1 Net income for the mortgage production divisions, mortgage servicing and the thrift portfolio is before divisional and corporate overhead. Net income for total mortgage banking segment is after divisional overhead but before corporate overhead.


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SELECTED CONSOLIDATED FINANCIAL HIGHLIGHTS
 
The following highlights the Company’s consolidated financial condition and results of operations for the periods indicated (dollars in millions, except per share data):
 
                                         
    Three Months Ended  
    September 30,
    June 30,
    March 31,
    December 31,
    September 30,
 
    2007     2007     2007     2006     2006  
 
Balance Sheet Information (at period end)(1)
                                       
Cash and cash equivalents
  $ 785     $ 618     $ 577     $ 542     $ 521  
Securities (trading and available for sale)
    5,732       5,608       5,253       5,443       4,950  
Loans held for sale
    14,022       11,762       10,511       9,468       8,341  
Loans held for investment
    8,553       8,648       8,988       10,177       10,030  
Allowance for loan losses
    (162 )     (77 )     (68 )     (62 )     (61 )
Mortgage servicing rights
    2,490       2,387       2,053       1,822       1,631  
Other assets
    2,313       2,713       2,380       2,105       1,973  
                                         
Total Assets
  $ 33,733     $ 31,659     $ 29,694     $ 29,495     $ 27,385  
                                         
Deposits
  $ 16,775     $ 11,747     $ 11,452     $ 10,898     $ 10,111  
Advances from Federal Home Loan Bank
    11,095       10,873       10,350       10,413       9,333  
Other borrowings
    2,189       4,527       4,313       4,637       4,595  
Other liabilities and preferred stock in subsidiary
    1,803       2,462       1,525       1,519       1,409  
                                         
Total Liabilities and Preferred Stock in Subsidiary
  $ 31,862     $ 29,609     $ 27,639     $ 27,467     $ 25,447  
                                         
Shareholders’ Equity
    1,871       2,050       2,055       2,028       1,938  
Income Statement Information(1)
                                       
Net interest income
  $ 142     $ 149     $ 135     $ 133     $ 137  
Provision for loan losses
    (98 )     (17 )     (11 )     (9 )     (5 )
Gain (loss) on sale of loans
    (251 )     101       118       165       160  
Service fee income
    213       86       49       22       21  
Gain (loss) on MBS
    (94 )     (46 )     (5 )     (4 )     19  
Fee and other income
    46       25       16       13       14  
                                         
Net revenues
    (42 )     298       302       320       346  
Total expenses
    (283 )     (224 )     (216 )     (211 )     (203 )
(Provision) benefit for income taxes
    122       (29 )     (34 )     (36 )     (56 )
                                         
Net earnings (loss)
  $ (203 )   $ 45     $ 52     $ 72     $ 86  
                                         
Operating Data
                                       
SFR mortgage loan production
  $ 16,816     $ 22,505     $ 25,569     $ 25,946     $ 23,968  
Total loan production(2)
    17,062       23,023       25,930       26,328       24,439  
Mortgage industry market share(3)
    3.06 %     3.24 %     4.05 %     3.76 %     3.44 %
Pipeline of SFR mortgage loans in process (at period end)
  $ 7,421     $ 13,376     $ 16,112     $ 11,821     $ 14,556  
Loans sold
    13,009       20,194       24,537       23,417       19,508  
Loans sold/SFR mortgage loan production
    77 %     90 %     96 %     90 %     81 %
SFR mortgage loans serviced for others (at period end)(4)
  $ 173,915     $ 167,710     $ 156,144     $ 139,817     $ 124,395  
Total SFR mortgage loans serviced (at period end)
    192,629       183,574       171,955       155,656       139,022  
Average number of full-time equivalent employees (“FTEs”)
    9,890       9,431       8,755       8,477       8,186  
Per Common Share Data
                                       
Basic earnings (loss) per share(5)
  $ (2.77 )   $ 0.62     $ 0.72     $ 1.02     $ 1.25  
Diluted earnings (loss) per share(6)
    (2.77 )     0.60       0.70       0.97       1.19  
Dividends declared per share
    0.50       0.50       0.50       0.50       0.48  
Dividend payout ratio(7)
    (18 )%     83 %     71 %     52 %     40 %
Book value per share (at period end)
  $ 24.31     $ 27.83     $ 27.93     $ 27.78     $ 27.35  
Closing price per share (at period end)
    23.61       29.17       32.05       45.16       41.16  
Average Shares (in thousands):
                                       
Basic
    73,134       72,412       72,297       71,059       68,866  
Diluted
    73,134       73,976       74,305       74,443       72,286  
Performance Ratios
                                       
Return on average equity (annualized)
    (39.15 )%     8.62 %     10.45 %     14.56 %     18.27 %
Return on average assets (annualized)
    (2.18 )%     0.50 %     0.60 %     0.85 %     1.17 %
Net interest margin, consolidated
    1.78 %     1.92 %     1.77 %     1.76 %     2.13 %
Net interest margin, thrift(8)
    2.37 %     2.29 %     2.11 %     2.09 %     2.50 %
Mortgage banking revenue (“MBR”) margin on loans sold(9)
    (1.54 )%     0.80 %     0.68 %     0.91 %     1.03 %
Efficiency ratio(10)
    483 %     71 %     69 %     64 %     58 %
Operating expenses to total loan production
    1.58 %     0.97 %     0.83 %     0.80 %     0.83 %
Balance Sheet and Asset Quality Ratios
                                       
Average interest-earning assets
  $ 31,695     $ 31,255     $ 31,030     $ 29,868     $ 25,507  
Average assets
    36,833       35,837       35,341       33,765       29,140  
Average equity
    2,054       2,078       2,033       1,969       1,871  
Debt to equity ratio (at period end)(11)
    16.1:1       13.2:1       12.7:1       12.8:1       12.4:1  
Tier 1 core capital ratio (at period end)(12)
    7.48 %     8.10 %     7.41 %     7.39 %     7.60 %
Risk-based capital ratio (at period end)(12)
    11.79 %     12.09 %     11.28 %     11.72 %     11.62 %
Non-performing assets to total assets (at period end)(13)
    2.46 %     1.63 %     1.09 %     0.63 %     0.51 %
Allowance for loan losses to total loans held for investment (at period end)
    1.89 %     0.89 %     0.75 %     0.61 %     0.61 %
Allowance for loan losses to non-performing loans held for investment (at period end)
    47.64 %     36.07 %     44.11 %     57.51 %     77.43 %


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(1) The items under the balance sheet and income statement sections are rounded individually and therefore may not necessarily add to the total.
 
(2) Total loan production includes newly originated commitments on builder construction loans as well as commercial real estate loan production, which started in March 2007.
 
(3) Mortgage industry market share is calculated based on our total SFR mortgage loan production, both purchased (correspondent and conduit) and originated (retail and wholesale), in all channels (the numerator) divided by the Mortgage Bankers Association (“MBA”) October 17, 2007 Mortgage Finance Long-Term Forecast estimate of the overall mortgage market (the denominator). Our market share calculation is consistent with that of 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.
 
(4) SFR mortgage loans serviced for others represent the unpaid principal balance on loans sold with servicing retained by Indymac. Total SFR mortgage loans serviced include mortgage loans serviced for others and mortgage loans owned by and serviced for Indymac.
 
(5) Net earnings (loss) for the period divided by weighted average basic shares outstanding for the period.
 
(6) Net earnings (loss) for the period divided by weighted average dilutive shares outstanding for the period.
 
(7) Dividend payout ratio represents dividends declared per share as a percentage of diluted earnings (loss) per share.
 
(8) Net interest margin, thrift, represents the combined margin for thrift, elimination and other, and corporate overhead.
 
(9) Mortgage banking revenue margin is calculated using the sum of consolidated gain (loss) 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.
 
(10) Efficiency ratio is defined as operating expenses divided by net revenues, excluding provision for loan losses.
 
(11) In the debt to equity calculation, debt includes deposits. Preferred stock in subsidiary is excluded from the calculation.
 
(12) The tier 1 core capital ratio and risk-based capital ratio are for Indymac Bank and exclude unencumbered cash at the Parent Company available for investment in Indymac Bank. The risk-based capital ratio is calculated based on the regulatory standard risk weightings adjusted for the additional risk weightings for subprime loans.
 
(13) Non-performing assets are non-performing loans plus foreclosed assets. Loans are generally placed on non-accrual status when they are 90 days past due.


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NARRATIVE SUMMARY OF CONSOLIDATED FINANCIAL RESULTS
 
Three Months ended September 30, 2007 Compared to Three Months ended September 30, 2006
 
The Company recorded a net loss of $202.7 million, or $2.77 loss per diluted share, for the third quarter of 2007. This represents decreases of 335% and 333% in net earnings and earnings per diluted share, respectively, compared with the net earnings of $86.2 million, or $1.19 per diluted share, for the third quarter of 2006. The decline in profitability is mainly attributable to credit costs of $408 million versus $15 million in the third quarter of 2006, or a negative impact on earnings per share (“EPS”) of $3.40; unprecedented disruption in the private-label mortgage-backed securities (spread widening) which resulted in a reduction of expected gain on sale revenue estimated at $167 million for the third quarter, or a negative EPS impact of $1.39; and staff reductions that took place in the third quarter (over 1,500 positions) which resulted in a one-time, pre-tax charge to earnings of roughly $28 million, or a negative $0.23 EPS impact. These items were partially offset by strong hedging performance with respect to the mortgage servicing rights (“MSR”) asset which resulted in an additional $149 million in pre-tax servicing profits in the third quarter, or a positive EPS impact of $1.24; and the sale and leaseback of a commercial property which houses our mortgage banking headquarters which resulted in a $24 million pre-tax gain recorded in the third quarter of 2007, having a $0.20 positive EPS impact.
 
SFR Mortgage Loan Production
 
Our total SFR mortgage loan production for the third quarter of 2007 dropped 30% to $16.8 billion as compared to $24.0 billion for the third quarter of 2006, and 25% from $22.5 billion for the second quarter of 2007. This decline in volume is mainly reflected in the 74%, or $6.7 billion, drop in production from our conduit channel from the third quarter of 2006 as we scaled back production from this channel due to its inherently lower profit margins and the current uncertainty with respect to secondary market spreads and execution. Compared to the second quarter of 2007, volume from the conduit channel also declined 55%, or $2.9 billion. Our core mortgage professionals group (excluding the conduit channel) produced $11.3 billion in the third quarter of 2007, reflecting a reduction of 4% and 15% from the third quarter of 2006 and second quarter of 2007, respectively. Our retail channel, now part of the core mortgage professionals group, continues to grow with production reaching $546 million this quarter, up 45% from the second quarter of 2007. While the servicing retention channel saw a decline of 29% from the second quarter of 2007, production increased 46% from the third quarter of 2006 to $1.1 billion. The pipeline of SFR mortgage loans in process ended at $7.4 billion, down 49% from $14.6 billion at September 30, 2006, and 45% from $13.4 billion at June 30, 2007.
 
Mortgage Banking Revenue Margin
 
Our MBR margin declined to a negative 1.54% for the quarter ended September 30, 2007 from 1.03% for the quarter ended September 30, 2006, and 0.80% for the quarter ended June 30, 2007. This year over year MBR margin decline was primarily due to higher credit costs and spread widening caused by the secondary market disruption. Notwithstanding the disruption, we sold $13.0 billion and recorded a net loss on sale of $251.1 million in the third quarter of 2007 (including the credit losses discussed below). By comparison, we sold $19.5 billion, which generated $160.2 million in gain on sale during the same period last year. Substantially all of the credit and spread widening costs were unrealized as we were not forced to liquidate any assets due to liquidity concerns.
 
Delinquencies and foreclosures significantly worsened in the third quarter of 2007 in our total servicing portfolio. As a result, a total of $408 million in credit related charges was recorded during the third quarter of 2007. The lower of cost or market (“LOCOM”) mark-to-market valuation reserve on loans held for sale (“HFS”) increased from June 30, 2007 by $225.9 million to $338.9 million at September 30, 2007. Due to the disruption in the secondary mortgage market, our HFS loans increased to $14.0 billion as the market for certain products stopped functioning. As a result of our thrift structure, our capital and liquidity position allowed us to retain loans held for sale in the third quarter when many of our peers were forced to sell assets to meet margin calls. We expect to transfer a portion of these loans to be held for investment (“HFI”) in the next two quarters.


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Other Credit Costs
 
For the HFI portfolio, provision for loan losses increased to $98.3 million for the third quarter of 2007 from $5.0 million for the third quarter of 2006, with the most significant increase in our homebuilder division’s portfolio. We recorded $72.8 million in credit related valuation adjustments to our residual and non-investment grade MBS portfolio. We also recorded a $32.0 million reduction in gain on sale revenue to increase our secondary market reserve.
 
Mortgage Servicing Performance
 
We had a strong performance from our Mortgage Servicing Division in the third quarter of 2007. This division benefited from the financial instruments we used to hedge against decline in market interest rates. Moreover, the value of our mortgage servicing rights did not experience a decline in value as the impact of lower swap and government-sponsored enterprise (“GSE”) rates were offset by significant spread widening in our predominantly non-GSE servicing portfolio. As a result, our mortgage servicing division recorded net earnings of $85.3 million, or an 85% ROE, despite a $2.3 million net loss from its servicing retention channel.
 
Operating Expenses
 
Total operating expenses of $269.7 million for the third quarter of 2007 were up 20% over the second quarter of 2007 and 33% from the same quarter a year ago. Operating expense growth in the third quarter of 2007 from the same period a year ago was driven mainly by the approximately $28 million in severance-related charges that were recorded this quarter as a result of the right-sizing of our workforce. We have executed on plans to reduce our workforce by roughly 1,500 positions, or 15%, through both the voluntary resignation with severance program and targeted involuntary layoffs for regular employees and reductions in our offshore and temporary workforce. In addition, we continued our investments in two of our new business activities, our retail channel and commercial mortgage division, with the bulk of the increase coming from the April 1, 2007 acquisition of the retail lending platform of the New York Mortgage Company (“NYMC”), including roughly 400 employees, and the hiring of over 1,400 retail lending professionals who were former employees of failed mortgage companies such as American Home Mortgage Investment Corp. (“AHM”). As a result, expenses increased by $20.7 million and $5.3 million from the third quarter of 2006 and second quarter of 2007, respectively. In addition, real estate owned (“REO”) related expenses significantly increased to $10.6 million in the third quarter of 2007 from $0.6 million in the same period last year. This is primarily driven by $7.9 million of further write-downs on REOs resulting from a further decline in their values.
 
Other Items
 
We also recognized a one-time gain of $24.0 million on the sale and leaseback of one of our properties in Pasadena, California. This gain is reflected in fee and other income in the consolidated statements of operations. Our total gain was $60 million with the remaining $36 million to be recognized over the lease term.
 
Nine Months ended September 30, 2007 Compared to Nine Months ended September 30, 2006
 
The Company recorded a net loss of $105.7 million, or $1.46 loss per diluted share, for the nine months ended September 30, 2007. These represent decreases of 139% and 138% in net earnings and earnings per diluted share, respectively, compared with net earnings of $270.7 million, or $3.87 per diluted share, for the nine months ended September 30, 2006. The decline in profitability is mainly attributable to higher credit costs and significant reduction in gain on sale of loans due to spread widening and illiquidity in the secondary mortgage market.
 
While total SFR mortgage loan production remained relatively flat at $64.9 billion and loan sales grew 4% to $57.7 billion during the first nine months of 2007 compared to the first nine months of 2006, net revenues declined 46% to $557.5 million during the same period. This is primarily due to the decline in MBR margin caused by the secondary market disruption discussed earlier and higher credit costs due to worsening delinquencies in our HFS, HFI and credit risk securities portfolios. The change in product mix of loans sold also contributed to the decline in MBR margin.


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As discussed earlier, credit costs during the first nine months of 2007 increased significantly due primarily to worsened delinquency and foreclosure rates in both our HFS and HFI portfolios. For the HFI portfolio, we increased the provision for loan losses to $126.2 million for the nine months ended September 30, 2007 compared to $11.0 million in the nine months ended September 30, 2006. We repurchased $562 million of loans in the first nine months of 2007, mainly due to early payment defaults, compared to $119 million in the first nine months of 2006. Accordingly, we recorded a provision for the secondary market reserve of $87.9 million for the nine months ended September 30, 2007, compared to $24.1 million for the same period last year.
 
Total non-interest income, excluding gain on sale of loans, increased 105% from $141.1 million for the first nine months of 2006 to $289.7 million for the first nine months of 2007. This increase is largely due to the strong performance from our mortgage servicing division. Service fee income increased $268.5 million, as a direct result of out performance in hedging, as well as, the growth in our servicing portfolio and slower prepayment rates. Revenue from our MBS portfolio declined from $24.6 million for the first nine months of 2006 to a loss of $145.4 million for the first nine months of 2007, primarily due to valuation adjustments on non-investment grade and residual securities, which reflected expected credit losses. Lastly, we recorded a one-time gain of $24.0 million on the sale and leaseback of one of our properties as discussed earlier.
 
Operating expenses increased 23% from $578.1 million for the first nine months of 2006 to $709.5 million for the first nine months of 2007. The increase is primarily reflected in the 21% growth of our average FTEs from 7,755 for the first nine months of 2006 to 9,359 for the first nine months of 2007, which was necessary to support the expansion of our retail lending group and growth in loan servicing and default management functions. We recorded severance charges of approximately $28 million in the third quarter related to the right-sizing of our workforce. This was partially offset by a one-time expense reduction of $10.3 million related to the curtailment of our pension plan in the second quarter of 2007. Without the two unusual items, the expense growth year over year was 20%. While year-over-year servicing portfolio and total assets have grown by 40% and 24%, respectively, we have been able to hold the growth in ongoing operating expenses to 20% through our previously disclosed cost saving initiatives. We expect to continue to see the benefit of these initiatives, including the right-sizing of our workforce, in the future.
 
SUMMARY OF BUSINESS SEGMENT RESULTS
 
Indymac’s hybrid business model combines elements of mortgage banking and thrift investing. Mortgage banking involves the origination, securitization and sale of mortgage loans and related assets, and the servicing of those loans. The revenues from mortgage banking consist primarily of gains on the sale of loans, fees earned from origination, interest income earned while the loans are held for sale and servicing fees. On the thrift side, we generate core spread income from our investment portfolio of prime single-family residential (“SFR”) mortgage loans, home equity loans, consumer and builder construction loans and mortgage-backed securities (“MBS”).
 
As a result of the asset turn times associated with mortgage banking, it is less capital intensive than thrift investing and generally offers higher returns on invested capital. When demand for mortgages and related secondary products is high, more capital can be deployed in this segment. Thrift investing requires more capital than mortgage banking and generates correspondingly lower returns on invested capital. However, the returns generally tend to be more stable and less cyclical than those from mortgage banking. We allocate more capital to the thrift segment when we believe the secondary market is under-valuing returns on mortgage-related assets. The ability to deploy capital into the segment with the best opportunities at any given time allows us to focus on strong shareholder returns throughout the interest rate cycle.
 
We have developed a detailed reporting process that computes net earnings and ROE for our key business segments each reporting period and uses the results to evaluate our managers’ performance and determine their incentive compensation. In addition, we use the results to evaluate the performance and prospects of our divisions and adjust our capital allocations to those divisions that earn the best returns for our shareholders.


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We predominantly use Generally Accepted Accounting Principles (“GAAP”) to compute each division’s financial results as if it were a stand-alone entity. Consistent with this approach, borrowed funds and their interest cost are allocated based on the funds actually used by the Company to fund the division’s assets and capital is allocated based on regulatory capital rules for the specific assets of each segment. Additionally, transactions between divisions are reflected at arms-length in these financial results and intercompany profits are eliminated in consolidation. We do not allocate fixed corporate and business unit overhead costs to our profit center divisions, because the methodologies to do so are arbitrary and distort each division’s marginal contribution to our profits. However, the cost of these overhead activities is included in the following tables to reconcile to our consolidated results, and is tracked closely, so the responsible managers can be held accountable for the level of these costs and their efficient use.
 
Our segment reporting is organized consistent with our hybrid business model that combines mortgage banking and thrift investing. The activities of the mortgage banking segment involve the origination, securitization and sale of mortgage loans and related assets, and the servicing of those loans. The revenues from mortgage banking consist primarily of gains on the sale of the loans, fees earned from origination, net interest income earned while the loans are held pending sale, and servicing fees. In the thrift segment, we primarily generate core spread income from our investment portfolio of mortgage-backed securities, prime SFR mortgages, home equity loans, and consumer and builder construction loans.


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The following tables and discussion explain the recent results of our two major operating segments, mortgage banking and thrift. These activities, combined with the eliminations and other category, which includes supporting deposit and treasury costs as well as eliminating entries, form our total operating results. Our unallocated corporate overhead costs are also presented and discussed. We have also included supplemental tables showing detailed division level financial results for each of our segments.
 
The following tables summarize the Company’s financial results by segment for the periods indicated (dollars in thousands):
 
                                                 
    Mortgage
                Total
             
    Banking
    Thrift
    Eliminations
    Operating
    Corporate
    Total
 
    Segment     Segment     & Other(1)     Results     Overhead     Company  
 
Three Months Ended September 30, 2007
                                       
Operating Results
                                               
Net interest income
  $ 39,226     $ 73,829     $ 29,900     $ 142,955     $ (777 )   $ 142,178  
Provision for loan losses
          (98,279 )           (98,279 )           (98,279 )
Gain (loss) on sale of loans
    (157,670 )     (35,783 )     (57,666 )     (251,119 )           (251,119 )
Service fee income (expense)
    183,273       1,571       28,085       212,929             212,929  
Gain on sale and leaseback of building
                            23,982       23,982  
Gain (loss) on MBS
    (3,321 )     (91,617 )     1,269       (93,669 )           (93,669 )
Other income (expense)
    11,737       8,735       898       21,370       222       21,592  
                                                 
Net revenues (expense)
    73,245       (141,544 )     2,486       (65,813 )     23,427       (42,386 )
Operating expenses
    214,516       34,250       17,345       266,111       39,111       305,222  
Severance charges
                            27,634       27,634  
Deferral of expenses under SFAS 91
    (58,379 )     (4,349 )           (62,728 )           (62,728 )
                                                 
Pre-tax earnings (loss)
    (82,892 )     (171,445 )     (14,859 )     (269,196 )     (43,318 )     (312,514 )
Minority interests
                            12,396       12,396  
                                                 
Net earnings (loss)
  $ (50,512 )   $ (104,411 )   $ (9,017 )   $ (163,940 )   $ (38,777 )   $ (202,717 )
                                                 
Performance Data
                                               
Average interest-earning assets
  $ 14,591,406     $ 16,618,394     $ (94,598 )   $ 31,115,202     $ 579,356     $ 31,694,558  
Allocated capital
    1,157,664       914,473       11,335       2,083,472       (29,091 )     2,054,381  
Loans produced
    16,176,966       884,732       N/A       17,061,698             17,061,698  
Loans sold
    13,827,123       826,566       (1,645,142 )     13,008,547             13,008,547  
MBR margin
    (0.77 )%     (4.33 )%     N/A       N/A       N/A       (1.54 )%
ROE
    (17 )%     (45 )%     N/A       (31 )%     N/A       (39 )%
Net interest margin
    N/A       1.76 %     N/A       1.82 %     N/A       1.78 %
Net interest margin, thrift
    N/A       1.76 %     N/A       N/A       N/A       2.37 %
Average FTE
    7,734       660       339       8,733       1,157       9,890  
Three Months Ended September 30, 2006
                                       
Operating Results
                                               
Net interest income
  $ 37,707     $ 79,043     $ 22,034     $ 138,784     $ (2,073 )   $ 136,711  
Provision for loan losses
          (4,988 )           (4,988 )           (4,988 )
Gain (loss) on sale of loans
    166,663       16,558       (22,996 )     160,225             160,225  
Service fee income (expense)
    29,927       (397 )     (8,472 )     21,058             21,058  
Gain (loss) on MBS
    15,622       1,976       1,370       18,968             18,968  
Other income (expense)
    2,802       10,631       (610 )     12,823       777       13,600  
                                                 
Net revenues (expense)
    252,721       102,823       (8,674 )     346,870       (1,296 )     345,574  
Operating expenses
    182,026       31,757       12,937       226,720       42,606       269,326  
Deferral of expenses under SFAS 91
    (60,988 )     (4,492 )     (718 )     (66,198 )           (66,198 )
                                                 
Pre-tax earnings (loss)
    131,683       75,558       (20,893 )     186,348       (43,902 )     142,446  
                                                 
Net earnings (loss)
  $ 80,041     $ 46,016     $ (13,141 )   $ 112,916     $ (26,736 )   $ 86,180  
                                                 
Performance Data
                                               
Average interest-earning assets
  $ 9,798,354     $ 15,500,071     $ (93,621 )   $ 25,204,804     $ 302,213     $ 25,507,017  
Allocated capital
    789,277       820,043       1,939       1,611,259       260,120       1,871,379  
Loans produced
    23,167,283       1,271,893             24,439,176             24,439,176  
Loans sold
    21,216,331       1,281,971       (2,990,126 )     19,508,176             19,508,176  
MBR margin
    0.98 %     1.29 %     N/A       N/A       N/A       1.03 %
ROE
    40 %     22 %     N/A       28       N/A       18 %
Net interest margin
    N/A       2.02 %     N/A       2.18       N/A       2.13 %
Net interest margin, thrift
    N/A       2.02 %     N/A       N/A       N/A       2.50 %
Average FTE
    5,902       657       324       6,883       1,303       8,186  
Quarter to Quarter Comparison
                                               
% change in net earnings
    (163 )%     (327 )%     31 %     (245 )%     (45 )%     (335 )%
% change in capital
    47 %     12 %     485 %     29 %     (111 )%     10 %
 
(1) Included are eliminations, deposits, and treasury items, the details of which are provided on page 31.


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MORTGAGE BANKING SEGMENT
 
Our mortgage banking segment primarily consists of the mortgage production divisions and the mortgage servicing division, which services the loans that Indymac originates, whether they have been sold into the secondary market or are held for investment on our balance sheet.
 
The mortgage banking segment reported an after-tax loss of $50.5 million in the third quarter of 2007 compared with net earnings of $80.0 million in the same period last year. These lower results were caused by a large decline in earnings from our production divisions, which reported a $123.6 million after-tax loss this quarter, partially offset by very strong returns and growth in the mortgage servicing area.
 
The primary driver of the loss in the mortgage production divisions this quarter was the decline in the MBR margin from a positive 0.97% of loans sold in last year’s third quarter to a negative 0.83% of loans sold in this year’s third quarter. A large increase in production credit costs was the primary cause of this decline. Mortgage banking revenue was reduced by $226.0 million in pre-tax credit related costs this quarter representing a $209.8 million increase from $16.2 million in the third quarter of 2006. As credit conditions in the U.S. mortgage market have deteriorated, our loan production credit costs have increased. However, we have identified the products where these losses were concentrated and stopped offering them. As a result, substantially all of the production credit losses we incurred this quarter resulted from products we no longer offer.
 
In addition to the increased credit losses, a severe disruption in the secondary market for loans and securities not sold to the GSEs reduced the value of our loans held for sale. As a result, we recognized $167.2 million less in gain on sale and MBS securities revenue than we expected.
 
The mortgage banking segment was also negatively impacted this quarter by the fact that it includes two start-up businesses; the retail lending channel and commercial mortgage banking that are currently unprofitable. These two businesses reported a combined after-tax loss of $11.5 million this quarter. We expect these businesses to contribute to mortgage banking profits next year.
 
Although worsening credit conditions and disrupted secondary markets were significant negatives for our production results this quarter, they improved the performance of our mortgage servicing division. These trends resulted in higher non-GSE mortgage rates, significantly more restrictive underwriting guidelines and declining home prices, all of which worked to slow prepayments in our servicing portfolio. The loans in our servicing portfolio prepaid at an annual rate of 12% in the third quarter of this year compared with 18% in last year’s third quarter. The expectation of slower non-GSE prepayments offset the impact of lower market interest rates and resulted in strong hedging results. As a result, the net income from our mortgage servicing division increased 325% from $20.1 million in the third quarter of 2006 to $85.3 million in this year’s quarter and resulted in an 85% return on the almost $400 million of capital we have invested in this division.


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The following tables provide additional detail on total mortgage banking segment for the periods indicated (dollars in thousands):
 
                                         
                Consumer
    Commercial
    Total
 
    Mortgage
    Mortgage
    Mortgage
    Mortgage
    Mortgage
 
    Production
    Servicing
    Banking
    Banking
    Banking
 
    Divisions     Division     O/H(1)     Division     Segment  
 
Three Months Ended September 30, 2007
                                       
Operating Results
                                       
Net interest income
  $ 50,572     $ (12,080 )   $ 632     $ 102     $ 39,124  
Provision for loan losses
                             
Gain (loss) on sale of loans
    (159,817 )     2,543       (193 )     (203 )     (157,467 )
Service fee income (expense)
    11,753       171,508       9       3       183,273  
Gain (loss) on MBS
          (3,321 )                 (3,321 )
Other income (expense)
    7,014       3,778       755       190       11,737  
                                         
Net revenues (expense)
    (90,478 )     162,428       1,203       92       73,245  
Operating expenses
    167,064       25,824       18,954       2,674       214,516  
Deferral of expenses under SFAS 91
    (54,672 )     (3,421 )           (286 )     (58,379 )
                                         
Pre-tax earnings (loss)
    (202,870 )     140,025       (17,751 )     (2,296 )     (82,892 )
                                         
Net earnings (loss)
  $ (123,579 )   $ 85,275     $ (10,810 )   $ (1,398 )   $ (50,512 )
                                         
Performance Data
                                       
Average interest-earning assets
  $ 13,040,013     $ 1,484,197     $ 2,109     $ 65,087     $ 14,591,406  
Allocated capital
    735,561       399,237       17,315       5,551       1,157,664  
Loans produced
    15,000,286       1,051,464       N/A       125,216       16,176,966  
Loans sold
    13,112,054       674,074       N/A       40,995       13,827,123  
MBR margin
    (0.83 )%     0.38 %     N/A       N/A       (0.77 )%
ROE
    (67 )%     85 %     N/A       (100 )%     (17 )%
Net interest margin
    1.54 %     N/A       N/A       0.62 %     N/A  
Average FTE
    5,839       296       1,549       50       7,734  
Three Months Ended September 30, 2006
                                       
Operating Results
                                       
Net interest income
  $ 41,218     $ (3,323 )   $ (188 )   $     $ 37,707  
Provision for loan losses
                             
Gain (loss) on sale of loans
    157,271       9,392                   166,663  
Service fee income (expense)
    5,599       24,328                   29,927  
Gain (loss) on MBS
          15,622                   15,622  
Other income (expense)
    303       1,653       846             2,802  
                                         
Net revenues (expense)
    204,391       47,672       658             252,721  
Operating expenses
    149,728       16,868       15,367       63       182,026  
Deferral of expenses under SFAS 91
    (58,860 )     (2,128 )                 (60,988 )
                                         
Pre-tax earnings (loss)
    113,523       32,932       (14,709 )     (63 )     131,683  
                                         
Net earnings (loss)
  $ 68,981     $ 20,056     $ (8,958 )   $ (38 )   $ 80,041  
                                         
Performance Data
                                       
Average interest-earning assets
  $ 9,152,748     $ 645,565     $ 41     $     $ 9,798,354  
Allocated capital
    509,136       269,464       10,677             789,277  
Loans produced
    22,446,264       721,019                   23,167,283  
Loans sold
    20,562,308       654,023                   21,216,331  
MBR margin
    0.97 %     1.44 %     N/A       N/A       0.98 %
ROE
    54 %     30 %     N/A       N/A       40 %
Net interest margin
    1.79 %     N/A       N/A       N/A       N/A  
Average FTE
    4,652       175       1,074       1       5,902  
Quarter to Quarter Comparison
                                       
% change in net earnings
    (279 )%     325 %     (21 )%     N/A       (163 )%
% change in equity
    44 %     48 %     62 %     N/A       47 %
 
(1) Included production division overhead, servicing overhead and secondary marketing overhead of $4.2 million, $3.7 million and $2.9 million, respectively, for the third quarter of 2007. For the third quarter of 2006, the production division overhead, servicing overhead and secondary marketing overhead were $3.8 million, $2.7 million and $2.5 million, respectively.


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MORTGAGE PRODUCTION DIVISIONS
 
The mortgage production divisions originate loans through three divisions: consumer direct, mortgage professionals group (“MPG”) and Financial Freedom. The MPG sources loans through relationships with mortgage brokers, financial institutions, realtors, and homebuilders and is composed of four business unit channels: retail, wholesale, correspondent and conduit.
 
The consumer direct division offers mortgage loans directly to consumers via our southern California retail branch network and our centralized call center, sourcing leads through direct mail, internet lead aggregators, online advertising and referral programs.
 
Within the MPG, the retail channel provides mortgage financing directly to home purchase oriented consumers by targeting Realtors®, homebuilders and financial professionals via storefront mortgage loan offices. With the goal of becoming a top 15 retail lender over the next five years, our recent acquisition of the retail platform of NYMC and the hiring of retail lending professionals from failed mortgage companies provide a model for this channel. As of September 30, 2007, we have 170 retail storefront mortgage offices/branches. This increase was mostly facilitated through a licensing agreement with AHM. Wholesale is the largest channel in our MPG, funding loans originated through mortgage brokers and emerging mortgage bankers nationwide. The correspondent channel purchases closed loans — those already funded — on a flow basis from mortgage brokers, realtors, homebuilders, mortgage bankers and financial institutions. The conduit channel opportunistically purchases pools of closed loans for portfolio, resale, or securitization and this channel is characterized by its low cost operations and quick asset turn times. Currently, we have elected not to use our conduit channel to source loans as a response to the present market condition.
 
The Financial Freedom division provides reverse mortgage products directly to seniors (age 62 and older) and through mortgage brokers and bankers. Financial Freedom also retains MSRs and receives fees an ancillary revenues for servicing loans sold into the secondary market.


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The following tables provide details on the results for the mortgage production divisions of our mortgage banking segment for the periods indicated (dollars in thousands):
 
                                                                 
          Mortgage Professionals Group Division              
                                  Total Mortgage
          Total
 
    Consumer
                            Professionals
    Financial
    Mortgage
 
    Direct
    Retail
    Wholesale
    Correspondent
    Conduit
    Group
    Freedom
    Production
 
    Division     Channel     Channel     Channel     Channel     Division     Division     Divisions  
 
Three Months Ended September 30, 2007
                                                               
Operating Results
                                                               
Net interest income
  $ 291     $ 1,508     $ 26,008     $ 5,666     $ 12,455     $ 45,637     $ 4,644     $ 50,572  
Provision for loan losses
                                               
Gain (loss) on sale of loans
    2,125       (568 )     (53,466 )     (23,261 )     (98,961 )     (176,256 )     14,314       (159,817 )
Service fee income (expense)
                                        11,753       11,753  
Gain (loss) on MBS
                                               
Other income (expense)
    173       1,654       5,240             (64 )     6,830       11       7,014  
                                                                 
Net revenues (expense)
    2,589       2,594       (22,218 )     (17,595 )     (86,570 )     (123,789 )     30,722       (90,478 )
Operating expenses
    5,369       31,448       78,111       9,672       10,235       129,466       32,229       167,064  
Deferral of expenses under SFAS 91
    (2,514 )     (12,223 )     (29,689 )     (4,032 )           (45,944 )     (6,214 )     (54,672 )
                                                                 
Pre-tax earnings (loss)
    (266 )     (16,631 )     (70,640 )     (23,235 )     (96,805 )     (207,311 )     4,707       (202,870 )
                                                                 
Net earnings (loss)
  $ (163 )   $ (10,128 )   $ (43,020 )   $ (14,150 )   $ (58,954 )   $ (126,252 )   $ 2,836     $ (123,579 )
                                                                 
Performance Data
                                                               
Average interest-earning assets
  $ 118,896     $ 205,379     $ 5,601,759     $ 1,257,571     $ 4,893,561     $ 11,958,270     $ 962,847     $ 13,040,013  
Allocated capital
    6,053       17,939       275,232       64,199       236,397       593,767       135,741       735,561  
Loans produced
    263,259       546,260       8,828,707       1,891,435       2,391,033       13,657,435       1,079,592       15,000,286  
Loans sold
    238,189       400,705       7,770,432       1,722,851       2,862,416       12,756,404       117,461       13,112,054  
MBR margin
    1.01 %     0.23 %     (0.35 )%     (1.02 )%     (3.02 )%     (1.02 )%     16.14 %     (0.83 )%
ROE
    (11 )%     (224 )%     (62 )%     (87 )%     (99 )%     (84 )%     8 %     (67 )%
Net interest margin
    0.97 %     2.91 %     1.84 %     1.79 %     1.01 %     1.51 %     1.91 %     1.54 %
Average FTE
    280       1,282       2,571       232       132       4,217       1,342       5,839  
Three Months Ended September 30, 2006
                                                               
Operating Results
                                                               
Net interest income
  $ 504     $ 3     $ 15,939     $ 3,577     $ 18,327     $ 37,846     $ 2,868     $ 41,218  
Provision for loan losses
                                               
Gain (loss) on sale of loans
    5,957       48       79,916       7,897       17,905       105,766       45,548       157,271  
Service fee income (expense)
                                        5,599       5,599  
Gain (loss) on MBS
                                               
Other income (expense)
    240       29                   (153 )     (124 )     187       303  
                                                                 
Net revenues (expense)
    6,701       80       95,855       11,474       36,079       143,488       54,202       204,391  
Operating expenses
    10,961       868       83,575       11,962       7,557       103,962       34,805       149,728  
Deferral of expenses under SFAS 91
    (5,197 )     (22 )     (40,282 )     (5,767 )           (46,071 )     (7,592 )     (58,860 )
                                                                 
Pre-tax earnings (loss)
    937       (766 )     52,562       5,279       28,522       85,597       26,989       113,523  
                                                                 
Net earnings (loss)
  $ 570     $ (466 )   $ 32,010     $ 3,215     $ 17,370     $ 52,129     $ 16,282     $ 68,981  
                                                                 
Performance Data
                                                               
Average interest-earning assets
  $ 174,893     $ 1,339     $ 3,734,539     $ 830,710     $ 3,609,638     $ 8,176,226     $ 801,629     $ 9,152,748  
Allocated capital
    8,755       67       192,689       42,780       149,894       385,430       114,951       509,136  
Loans produced
    447,753       7,890       9,280,817       2,503,012       9,078,589       20,870,308       1,128,203       22,446,264  
Loans sold
    448,113       5,947       9,050,759       2,385,091       7,600,746       19,042,543       1,071,652       20,562,308  
MBR margin
    1.44 %     0.86 %     1.06 %     0.48 %     0.48 %     0.75 %     4.52 %     0.97 %
ROE
    26 %     N/M       66 %     30 %     46 %     54 %     56 %     54 %
Net interest margin
    1.14 %     0.89 %     1.69 %     1.71 %     2.01 %     1.84 %     1.42 %     1.79 %
Average FTE
    362       25       2,507       246       147       2,925       1,365       4,652  
Quarter to Quarter Comparison
                                                               
% change in net earnings
    (129 )%     N/M       (234 )%     N/M       (439 )%     (342 )%     (83 )%     (279 )%
% change in capital
    (31 )%     N/M       43 %     50 %     58 %     54 %     18 %     44 %
 
(1) MBR margin is calculated using the sum of consolidated gain (loss) on sale of loans and the net interest income earned on HFS loans by our mortgage banking production divisions divided to total loans sold. The gain (loss) on sale of loans includes fair value adjustments on HFS loans in our portfolio at the end of the period that are not included in the amount of total loans sold.


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The following table summarizes the key production drivers for the wholesale and correspondent channels for the periods indicated:
 
                                                 
    Three Months Ended        
    September 30,
    September 30,
    Percent
    June 30,
    Percent
       
    2007     2006     Change     2007     Change        
 
Key Production Drivers:
                                               
Active customers(1)
    9,223       7,686       20 %     9,187                
Sales personnel
    1,235       992       24 %     1,241                
Number of regional offices
    16       16             16                
 
(1) Active customers are defined as customers who funded at least one loan during the most recent 90-day period.
 
Loan Production
 
Loan production and sales are the profitability drivers of our mortgage banking segment. While the table on page 15 presents only the results of the mortgage production divisions of our mortgage banking segment, which contribute 95% to our total loan originations, the following discussion refers to total Company production, through both the mortgage banking and thrift segments.
 
We generated SFR mortgage loan production of $16.8 billion for the third quarter of 2007, down 30% and 25% from the third quarter of 2006 and second quarter of 2007, respectively. Total loan production, including commercial real estate loans and builder financings, reached $17.1 billion for the third quarter of 2007, compared to $24.4 billion a year ago. At September 30, 2007, our total pipeline of SFR mortgage loans in process was $7.4 billion, down 49% and 45% from September 30, 2006 and June 30, 2007, respectively. On October 17, 2007, the MBA issued an estimate of the industry volume for the third quarter of 2007 of $550 billion, which represents a 21% drop from both the second quarter of 2007 and third quarter of 2006. Based on this estimate, our market share is 3.06% for the quarter ended September 30, 2007, down from 3.44% and 3.24% in the quarters ended September 30, 2006 and June 30, 2007, respectively.
 
The decline in our SFR mortgage production in the third quarter of 2007 was mainly attributable to a significant decline in our conduit business as we elected not to use this channel to source loans at this time. Excluding production from the conduit channel, total SFR production declined 3% for the third quarter year over year. MPG’s retail channel generated $546 million in production for the third quarter of 2007. The Financial Freedom division saw a 4% decline in its reverse mortgage production from the third quarter of 2006, and was down 14% from the second quarter of 2007 as competition intensified in the reverse mortgage market. Our commercial mortgage banking division, which began operations in March 2007, generated $125 million of commercial real estate loans, while our homebuilder division saw a 74% decline in volume to $121 million for the third quarter of 2007.


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The following summarizes our loan production by division and channel for the periods indicated (dollars in millions):
 
                                                                 
    Three Months Ended     Nine Months Ended  
    September 30,
    September 30,
    Percent
    June 30,
    Percent
    September 30,
    September 30,
    Percent
 
    2007     2006     Change     2007     Change     2007     2006     Change  
 
Production by Division and Channel:
                                                               
SFR mortgage loan production:
                                                               
Mortgage professionals group division:
                                                               
Wholesale channel(1)
  $ 8,829     $ 9,281       (5 )%   $ 10,238       (14 )%   $ 29,699     $ 26,887       10 %
Correspondent channel
    1,891       2,503       (24 )%     2,649       (29 )%     7,564       7,307       4 %
Conduit channel
    2,391       9,078       (74 )%     5,281       (55 )%     16,040       20,685       (22 )%
Retail channel
    546             N/A       376       45 %     971             N/A  
Consumer direct division
    263       456       (42 )%     289       (9 )%     872       1,533       (43 )%
Financial Freedom division
    1,080       1,128       (4 )%     1,258       (14 )%     3,559       3,583       (1 )%
Servicing retention channel
    1,052       721       46 %     1,490       (29 )%     3,660       1,688       117 %
Home equity division(2)
    4       30       (87 )%     7       (43 )%     36       93       (61 )%
Consumer construction division(2)
    760       771       (1 )%     917       (17 )%     2,489       2,229       12 %
                                                                 
Total SFR mortgage loan production
    16,816       23,968       (30 )%     22,505       (25 )%     64,890       64,005       1 %
Commercial loan production:
                                                               
Commercial mortgage banking division
    125             N/A       45       178 %     171             N/A  
Homebuilder division(2)
    121       471       (74 )%     473       (74 )%     954       1,365       (30 )%
                                                                 
Total loan production
  $ 17,062     $ 24,439       (30 )%   $ 23,023       (26 )%   $ 66,015     $ 65,370       1 %
                                                                 
Total pipeline of SFR mortgage loans in process at period end
  $ 7,421     $ 14,556       (49 )%   $ 13,376       (45 )%                        
                                                                 
 
 
(1) Wholesale channel includes $1.4 billion, $898 million, and $1.4 billion of production from wholesale inside sales for the quarters ended September 30, 2007 and 2006 and June 30, 2007, respectively, and $4.1 billion, and $2.2 billion of production from wholesale inside sales for the nine months ended September 30, 2007 and 2006, respectively. The wholesale inside sales force focuses on small and geographically remote mortgage brokers through centralized in-house sales personnel instead of field sales personnel.
 
(2) The amounts of home equity lines of credit (“HELOCs”), consumer construction loans and builder construction loans originated by these channels represent commitments.


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The following summarizes our loan production by product type for the periods indicated (dollars in millions):
 
                                                                 
    Three Months Ended     Nine Months Ended  
    September 30,
    September 30,
    Percent
    June 30,
    Percent
    September 30,
    September 30,
    Percent
 
    2007     2006     Change     2007     Change     2007     2006     Change  
 
Production by Product Type:
                                                               
Standard first mortgage products:
                                                               
Prime
  $ 13,632     $ 19,363       (30 )%   $ 18,536       (26 )%   $ 52,887     $ 50,425       5 %
Subprime
    596       729       (18 )%     751       (21 )%     2,431       1,788       36 %
                                                                 
Total standard first mortgage products (S&P evaluated)
    14,228       20,092       (29 )%     19,287       (26 )%     55,318       52,213       6 %
Specialty consumer home mortgage products:
                                                               
HELOCs(1)/Seconds
    637       1,840       (65 )%     876       (27 )%     3,216       5,343       (40 )%
Reverse mortgages
    1,080       1,128       (4 )%     1,258       (14 )%     3,559       3,583       (1 )%
Consumer construction(1)
    871       908       (4 )%     1,084       (20 )%     2,797       2,866       (2 )%
                                                                 
Subtotal SFR mortgage production
    16,816       23,968       (30 )%     22,505       (25 )%     64,890       64,005       1 %
Commercial loan products:
                                                               
Commercial real estate
    125             N/A       45       178 %     171             N/A  
Builder construction commitments(1)
    121       471       (74 )%     473       (74 )%     954       1,365       (30 )%
                                                                 
Total production
  $ 17,062     $ 24,439       (30 )%   $ 23,023       (26 )%   $ 66,015     $ 65,370       1 %
                                                                 
Total S&P lifetime loss estimate(2)
    0.49 %     0.87 %             0.63 %             0.68 %     0.81 %        
 
 
(1) Amounts represent total commitments.
 
(2) While our production is evaluated using the Standard & Poor’s (“S&P”) Levels model, the data are not audited or endorsed by S&P. S&P evaluated production excludes second liens, HELOCs, reverse mortgages, and construction loans.
 
The above loan production by product type provides a breakdown of standard first mortgage products by prime and subprime only. As the definition of various product types tends to vary widely in the mortgage industry, we believe that further classification may not accurately reflect the credit quality of loans produced implied through such classification.


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Table of Contents

Loan Sale and Distribution
 
The following table shows the various channels through which loans were distributed for the Company during the periods indicated (dollars in millions):
 
                                         
    Three Months Ended     Nine Months Ended  
    September 30,
    September 30,
    June 30,
    September 30,
    September 30,
 
    2007     2006     2007     2007     2006  
 
Distribution of Loans by Channel:
                                       
Sales of GSE equivalent loans
    64 %     16 %     40 %     41 %     18 %
Private-label securitizations
    31 %     38 %     46 %     36 %     40 %
Whole loan sales, servicing retained
          38 %     13 %     20 %     36 %
Whole loan sales, servicing released
    1 %     1 %           1 %     2 %
                                         
Subtotal sales
    96 %     93 %     99 %     98 %     96 %
Investment portfolio acquisitions
    4 %     7 %     1 %     2 %     4 %
                                         
Total loan distribution percentage
    100 %     100 %     100 %     100 %     100 %
                                         
Total loan distribution
  $ 13,478     $ 20,914     $ 20,378     $ 58,789     $ 57,870  
                                         
 
Due to the disruptions in the secondary mortgage market, we have tightened our guidelines and focused on GSE eligible mortgage products. As a result, sales to GSEs increased to 64% of total loan distribution for the third quarter of 2007, up significantly from 16% and 40% for the third quarter of 2006 and second quarter of 2007, respectively. We expect that a very high percentage of our loan sales will be to the GSEs until the private MBS market recovers.
 
In conjunction with the sale of mortgage loans, we generally retain certain assets. The primary assets retained include MSRs and, to a lesser degree, AAA-rated and agency interest-only securities, AAA-rated principal-only securities, prepayment penalty securities, late fee securities, investment and non-investment grade securities, and residual securities. The allocated cost of the retained assets at the time of sale is recorded as an asset with an offsetting increase to the gain on sale of loans (or a reduction in the cost basis of the loans sold). The calculation of gain (loss) on sales of loans included the retention of $194.0 million of MSRs and $174.1 million of other retained assets, consisting of investment-grade securities of $151.0 million and non-investment grade and residual securities of $23.1 million during the three months ended September 30, 2007. During the three months ended September 30, 2007, assets previously retained generated cash flows of $217.9 million. More information on the valuation assumptions related to our retained assets can be found in table 14 “Valuation of MSRs, Interest-Only, Prepayment Penalty, and Residual Securities” on page 70.
 
The profitability of our loans is measured by the MBR margin, which is calculated using mortgage banking revenue divided by total loans sold. MBR includes total consolidated gain (loss) on sale of loans and the net interest income earned on mortgage loans held for sale by mortgage banking production divisions. Most of the gain (loss) on sale of loans resulted from the loan sale activities in our mortgage banking segment. The gain (loss) on sale recognized in the thrift segment, primarily lot loans and home equity products, is included in the MBR margin calculation.


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Table of Contents

The following table summarizes the amount of loans sold and the MBR margin during the periods indicated (dollars in millions):
 
                                                                 
    Three Months Ended     Nine Months Ended  
    September 30,
    September 30,
    Percent
    June 30,
    Percent
    September 30,
    September 30,
    Percent
 
    2007     2006     Change     2007     Change     2007     2006     Change  
 
Total loans sold
  $ 13,009     $ 19,508       (33 )%   $ 20,194       (36 )%   $ 57,739     $ 55,632       4 %
MBR margin after production hedging
    0.48 %     1.32 %     (64 )%     1.31 %     (63 )%     1.04 %     1.47 %     (29 )%
MBR margin after credit costs
    (1.26 )%     1.24 %     (202 )%     1.01 %     (225 )%     0.44 %     1.35 %     (67 )%
Net MBR margin
    (1.54 )%     1.03 %     (250 )%     0.80 %     (293 )%     0.22 %     1.12 %     (80 )%
 
For more details on our MBR margin see Table 7 on page 64 of our Appendix A.
 
MORTGAGE SERVICING DIVISION
 
Servicing is a key component of our business model, as it is a natural complement to our mortgage production operations and its financial performance tends to run countercyclical to the mortgage production business. Through MSRs retained from our mortgage banking activities, we collect fees and ancillary revenues for servicing loans sold into the secondary market. As interest rates rise, the expected life of the underlying loans is generally extended, which extends the life of the income stream flowing from those loans. This in turn increases the capitalized value of the associated MSRs. Conversely, as interest rates decline, the value of the MSRs may also decline. To mitigate the potential volatility in the MSRs, we hedge this asset to earn a stable return throughout the interest rate cycle. For more information on servicing hedges, see the “Consolidated Risk Management Discussion” section on page 33.
 
During the third quarter of 2007, the overall swap and GSE market rates declined, which resulted in gains in value in our hedging instruments. The decline in value of the MSR asset that would be attributed to swap and GSE market rates was entirely offset by reduced expectation of future prepayments from housing turnover and higher non-GSE market rates.
 
Our servicing portfolio provides opportunities to cross sell other products, such as HELOCs, checking accounts, certificates of deposit, and other deposit services. In a declining interest rate environment, our servicing portfolio provides an existing base of customers who may be in the market to refinance. Capturing or “retaining” these customers helps mitigate the decline in the value of our mortgage servicing asset caused by prepayment of the original loan.
 
The fair value of our MSRs is determined using discounted cash flow techniques benchmarked against third-party opinions. Estimates of fair value involve several assumptions, including assumptions about future prepayment rates, market expectations of future interest rates cost to service the loans (including default management costs), ancillary incomes, and discount rates. Prepayment speeds are projected using a prepayment model developed by a third-party vendor and calibrated for the Company’s collateral. The model considers key factors, such as refinance incentive, housing turnover, seasonality and aging of the pool of loans. Prepayment speeds incorporate expectations of future rates implied by the market forward LIBOR/swap curve, as well as collateral specific current coupon information. Refer to table 14 “Valuation of MSRs, Interest-Only, Prepayment Penalty, and Residual Securities” on page 70 for further detail on the valuation assumptions.
 
Total capitalized MSRs reached $2.5 billion as of September 30, 2007, up $858.3 million, or 53%, from $1.6 billion at September 30, 2006 and $667.2 million, or 37%, from $1.8 billion at December 31, 2006.


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The following tables provide additional detail on the results for the mortgage servicing division of our mortgage banking segment for the periods indicated (dollars in thousands):
 
                         
    Mortgage
          Total
 
    Servicing
    Servicing
    Mortgage
 
    Rights
    Retention
    Servicing
 
    Channel     Channel     Division  
 
Three Months Ended September 30, 2007
                       
Operating Results
                       
Net interest income (expense)
  $ (15,042 )   $ 2,962     $ (12,080 )
Provision for loan losses
                 
Gain (loss) on sale of loans
    279       2,264       2,543  
Service fee income (expense)
    171,508             171,508  
Gain (loss) on MBS
    (3,321 )           (3,321 )
Other income (expense)
    2,274       1,504       3,778  
                         
Net revenues (expense)
    155,698       6,730       162,428  
Operating expenses
    11,874       13,950       25,824  
Deferral of expenses under SFAS 91
          (3,421 )     (3,421 )
                         
Pre-tax earnings (loss)
    143,824       (3,799 )     140,025  
                         
Net earnings (loss)
  $ 87,589     $ (2,314 )   $ 85,275  
                         
Performance Data
                       
Average interest-earning assets
  $ 600,337     $ 883,860     $ 1,484,197  
Allocated capital
    358,217       41,020       399,237  
Loans produced
          1,051,464       1,051,464  
Loans sold
          674,074       674,074  
MBR margin
    N/A       0.34 %     0.38 %
ROE
    97 %     (22 )%     85 %
Net interest margin
    N/A       1.33 %     N/A  
Average FTE
    89       207       296  
Three Months Ended September 30, 2006
                       
Operating Results
                       
Net interest income (expense)
  $ (4,600 )   $ 1,277     $ (3,323 )
Provision for loan losses
                 
Gain (loss) on sale of loans
    1,575       7,817       9,392  
Service fee income (expense)
    24,328             24,328  
Gain (loss) on MBS
    15,622             15,622  
Other income (expense)
    309       1,344       1,653  
                         
Net revenues (expense)
    37,234       10,438       47,672  
Operating expenses
    8,605       8,263       16,868  
Deferral of expenses under SFAS 91
          (2,128 )     (2,128 )
                         
Pre-tax earnings (loss)
    28,629       4,303       32,932  
                         
Net earnings (loss)
  $ 17,435     $ 2,621     $ 20,056  
                         
Performance Data
                       
Average interest-earning assets
  $ 273,277     $ 372,288     $ 645,565  
Allocated capital
    252,148       17,316       269,464  
Loans produced
          721,019       721,019  
Loans sold
    19,249       634,774       654,023  
MBR margin
    N/A       1.23 %     1.44 %
ROE
    27 %     60 %     30 %
Net interest margin
    N/A       N/A       N/A  
Average FTE
    93       82       175  
Quarter to Quarter Comparison
                       
% change in net earnings
    402 %     (188 )%     325 %
% change in capital
    42 %     137 %     48 %
 
Total loans serviced for others reached $173.9 billion (including reverse mortgages and HELOCs) at September 30, 2007, with a weighted average coupon of 7.04%. In comparison, we serviced $124.4 billion of


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mortgage loans owned by others at September 30, 2006, with a weighted average coupon of 6.96%; and $167.7 billion at June 30, 2007, with a weighted average coupon of 7.06%.
 
The following table provides the activity in the servicing portfolios for the periods indicated (dollars in millions):
 
                                         
    Three Months Ended     Nine Months Ended  
    September 30,
    September 30,
    June 30,
    September 30,
    September 30,
 
    2007     2006     2007     2007     2006  
 
Unpaid principal balance of loans serviced at beginning of period
  $ 167,710     $ 109,989     $ 156,144     $ 139,817     $ 84,495  
Additions
    13,377       20,709       20,580       58,647       56,822  
Clean-up calls exercised
                (153 )     (153 )     (31 )
Loan payments and prepayments
    (7,172 )     (6,303 )     (8,861 )     (24,396 )     (16,891 )
                                         
Unpaid principal balance of loans serviced at end of period
  $ 173,915     $ 124,395     $ 167,710     $ 173,915     $ 124,395  
                                         
 
The following tables also provide additional information related to the servicing portfolio as of the dates indicated:
 
                         
    September 30,
    September 30,
    June 30,
 
    2007     2006     2007  
 
By Product Type:
                       
Fixed-rate mortgages
    37 %     34 %     36 %
Intermediate term fixed-rate loans
    35 %     29 %     34 %
Pay option adjustable-rate mortgages (“ARMs”)
    16 %     25 %     18 %
Reverse mortgages (all ARMs)
    9 %     9 %     9 %
HELOCs
    2 %     2 %     2 %
Other
    1 %     1 %     1 %
                         
Total
    100 %     100 %     100 %
                         
Additional Information(1):
                       
Weighted average FICO(2)
    705       703       704  
Weighted average original loan-to-value (“LTV”) ratio(3)
    73 %     73 %     72 %
Average original loan size (in thousands)
    243       228       239  
Percent of portfolio with prepayment penalty
    37 %     42 %     39 %
Portfolio delinquency (% of unpaid principal balance)(4)
    6.77 %     4.02 %     5.23 %
By Geographic Distribution:
                       
California
    43 %     42 %     43 %
Florida
    8 %     8 %     8 %
New York
    8 %     8 %     8 %
New Jersey
    4 %     4 %     4 %
Virginia
    4 %     4 %     4 %
Other
    33 %     34 %     33 %
                         
Total
    100 %     100 %     100 %
                         
 
 
(1) Portfolio delinquency is calculated for the entire servicing portfolio. All other information presented excludes reverse mortgages.
 
(2) FICO scores are the result of a credit scoring system developed by Fair Isaacs and Co. and are generally used by lenders to evaluate a borrower’s credit history. FICO scores of 700 or higher are generally considered in the mortgage industry to be very high quality borrowers with low risk of default, but in general, the secondary market will consider FICO scores of 620 or higher to be prime.
 
(3) Combined loan-to-value (“CLTV”) ratio for loans in the second lien position is used to calculate weighted average original LTV ratio for the portfolio.
 
(4) Delinquency is defined as 30 days or more past the due date excluding loans in foreclosure.


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THRIFT SEGMENT
 
Our thrift segment invests in loans originated by our various production units as well as in mortgage-backed securities. We manage our investments in the thrift portfolio based on the extent to which (1) the ROEs exceed the cost of both core and risk-based capital, or (2) they are needed to support the core mortgage banking investments in mortgage servicing rights and residual and non-investment grade securities, if the ROEs are below our cost of capital. Additionally, the segment engages in warehouse lending and consumer construction and homebuilder financing. These investing activities provide core spread income and generally, a more stable return on equity.
 
In addition to the $50.5 million net loss in our mortgage banking segment, our thrift segment reported a $104.4 million net loss in the third quarter of this year that was also caused by a large increase in credit related costs. Credit related costs for the thrift segment are reflected in the provision for loan losses as well as the valuation of our investment grade, non-investment grade and residual securities. Credit costs in the thrift segment for the third quarter of 2007 totaled $181.7 million pre-tax compared with essentially no credit costs in the thrift segment in last year’s third quarter as last year’s provision for loan losses was offset by credit related valuation gain on residual securities. Although all the divisions in the thrift segment incurred higher credit costs this quarter, the majority of the increase was concentrated in the homebuilder and the non-investment grade and residual securities divisions. Included in the total $98.3 million provision for loan losses for this segment was $78.2 million for the homebuilder division reflecting an expectation of increasing non-performing assets from this division as the housing market continues to deteriorate.


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The following tables provide detail on the results for divisions of our thrift segment for the periods indicated (dollars in thousands):
 
                                                                                 
          Non-
                                                 
          Investment
    Total
                                           
    Investment
    Grade and
    Mortgage-
    SFR
                                     
    Grade
    Residual
    Backed
    Mortgage
    Home
    Consumer
          Warehouse
    Discontinued
    Total
 
    Securities
    Securities
    Securities
    Loans HFI
    Equity
    Construction
    Homebuilder
    Lending
    Products
    Thrift
 
    Channel     Channel     Division     Division     Division     Division     Division     Division     Division     Segment  
 
Three Months Ended
September 30, 2007
                                                                               
Operating Results
                                                                               
Net interest income
  $ 8,576     $ 16,560     $ 25,136     $ 10,948     $ 9,021     $ 14,228     $ 12,754     $ 1,321     $ 421     $ 73,829  
Provision for loan losses
                      (12,000 )     (800 )     (6,750 )     (78,191 )     (88 )     (450 )     (98,279 )
Gain (loss) on sale of loans
                      (5,784 )     (37,051 )     7,052                         (35,783 )
Service fee income (expense)
                            1,571                               1,571  
Gain (loss) on MBS
    (19,213 )     (67,231 )     (86,444 )           (4,870 )     (303 )                       (91,617 )
Other income (expense)
                      543       1,606       6,415       (204 )     375             8,735  
                                                                                 
Net revenues (expense)
    (10,637 )     (50,671 )     (61,308 )     (6,293 )     (30,523 )     20,642       (65,641 )     1,608       (29 )     (141,544 )
Operating expenses
    59       842       901       4,649       3,490       18,755       5,410       980       65       34,250  
Deferral of expenses under SFAS 91
                            (43 )     (2,862 )     (1,444 )                 (4,349 )
                                                                                 
Pre-tax earnings (loss)
    (10,696 )     (51,513 )     (62,209 )     (10,942 )     (33,970 )     4,749       (69,607 )     628       (94 )     (171,445 )
                                                                                 
Net earnings (loss)
  $ (6,514 )   $ (31,371 )   $ (37,885 )   $ (6,664 )   $ (20,688 )   $ 2,892     $ (42,391 )   $ 382     $ (57 )   $ (104,411 )
                                                                                 
Performance Data
                                                                               
Average interest-earning assets
  $ 4,602,711     $ 403,030     $ 5,005,741     $ 5,455,887     $ 1,706,154     $ 2,963,940     $ 1,264,835     $ 190,996     $ 30,841     $ 16,618,394  
Allocated capital
    88,247       229,011       317,258       199,024       124,106       151,704       104,399       15,211       2,771       914,473  
Loans produced
                            3,726       759,900       121,106                   884,732  
Loans sold
                      329,996       82,596       413,974                         826,566  
ROE
    (29 )%     (54 )%     (47 )%     (13 )%     (66 )%     8 %     (161 )%     10 %     (8 )%     (45 )%
Net interest margin, thrift. 
    0.74 %     16.30 %     1.99 %     0.80 %     2.10 %     1.90 %     4.00 %     2.74 %     5.42 %     1.76 %
Efficiency ratio
    (1 )%     (2 )%     (1 )%     81 %     (12 )%     58 %     32 %     58 %     15 %     (69 )%
Average FTE
    2       9       11       11       75       405       128       30             660  
Three Months Ended
September 30, 2006
                                                                               
Operating Results
                                                                               
Net interest income
  $ 8,274     $ 11,002     $ 19,276     $ 20,430     $ 10,851     $ 10,454     $ 16,488     $ 1,035     $ 509     $ 79,043  
Provision for loan losses
                      (2,000 )           (720 )     (2,200 )     (18 )     (50 )     (4,988 )
Gain (loss) on sale of loans
                      748       5,788       10,022                         16,558  
Service fee income (expense)
                            (397 )                             (397 )
Gain (loss) on MBS
    (361 )     5,991       5,630             (3,607 )     (47 )                       1,976  
Other income (expense)
    (14 )           (14 )     429       2,392       6,655       703       466             10,631  
                                                                                 
Net revenues (expense)
    7,899       16,993       24,892       19,607       15,027       26,364       14,991       1,483       459       102,823  
Operating expenses
    315       658       973       1,365       5,607       17,690       4,911       1,134       77       31,757  
Deferral of expenses under SFAS 91
                            (361 )     (2,321 )     (1,810 )                 (4,492 )
                                                                                 
Pre-tax earnings (loss)
    7,584       16,335       23,919       18,242       9,781       10,995       11,890       349       382       75,558  
                                                                                 
Net earnings (loss)
  $ 4,619     $ 9,948     $ 14,567     $ 11,109     $ 5,957     $ 6,696     $ 7,241     $ 213     $ 233     $ 46,016  
                                                                                 
Performance Data
                                                                               
Average interest-earning assets
  $ 3,603,050     $ 242,911     $ 3,845,961     $ 5,851,294     $ 1,947,724     $ 2,568,007     $ 1,112,338     $ 135,511     $ 39,236     $ 15,500,071  
Allocated capital
    70,215       123,494       193,709       220,811       151,013       130,975       108,408       11,583       3,544       820,043  
Loans produced
                            29,806       770,937       471,150                   1,271,893  
Loans sold
                            635,366       646,605                         1,281,971  
ROE
    26 %     32 %     30 %     20 %     16 %     20 %     26 %     7 %     26 %     22 %
Net interest margin, thrift. 
    0.91 %     17.97 %     1.99 %     1.39 %     2.21 %     1.62 %     5.88 %     3.03 %     5.15 %     2.02 %
Efficiency ratio
    4 %     4 %     4 %     6 %     35 %     57 %     18 %     76 %     15 %     25 %
Average FTE
    6       7       13       14       76       416       111       27             657  
Quarter to Quarter Comparison
                                                                               
% change in net earnings
    (241 )%     (415 )%     (360 )%     (160 )%     (447 )%     (57 )%     N/M       79 %     (124 )%     (327 )%
% change in capital
    26 %     85 %     64 %     (10 )%     (18 )%     16 %     (4 )%     31 %     (22 )%     12 %


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The following tables and discussion present supplemental information to help understand the composition and credit quality of the assets held in our thrift portfolios. This section refers to company-wide assets, a small portion of which may be held in our mortgage banking divisions.
 
MORTGAGE-BACKED SECURITIES DIVISION
 
The following table provides the details of the mortgage-backed securities portfolio as of the dates indicated (dollars in thousands):
 
                                                                         
    September 30, 2007     September 30, 2006     December 31, 2006  
    Trading     AFS     Total     Trading     AFS     Total     Trading     AFS     Total  
 
Mortgage Banking Segment:                                                                        
AAA-rated agency securities
  $ 350,694     $     $ 350,694     $     $     $     $     $ 2,915     $ 2,915  
AAA-rated and agency interest-only securities
    71,901             71,901       64,083             64,083       66,581             66,581  
AAA-rated principal-only securities
    72,488             72,488       35,158             35,158       38,478             38,478  
Prepayment penalty and other securities
    83,205             83,205       92,326             92,326       93,176             93,176  
                                                                         
Total Mortgage Banking
    578,288             578,288       191,567             191,567       198,235       2,915       201,150  
                                                                         
Thrift segment:
                                                                       
AAA-rated non-agency securities
    152,773       3,762,877       3,915,650       33,829       4,130,995       4,164,824       43,957       4,604,489       4,648,446  
AAA-rated agency securities
    45,414       47,408       92,822             50,084       50,084             62,260       62,260  
AAA-rated and agency interest-only securities
                      4,357             4,357       6,989             6,989  
Prepayment penalty and other securities
    5,034             5,034       6,096             6,096       4,400             4,400  
Other investment grade securities
    255,390       468,766       724,156       29,906       163,289       193,195       29,015       160,238       189,253  
Other non-investment grade securities
    152,340       37,939       190,279       38,999       39,279       78,278       41,390       38,784       80,174  
Non-investment grade residual securities
    218,405       7,410       225,815       222,825       38,833       261,658       218,745       31,828       250,573  
                                                                         
Total thrift 
    829,356       4,324,400       5,153,756       336,012       4,422,480       4,758,492       344,496       4,897,599       5,242,095  
                                                                         
Total mortgage-backed securities
  $ 1,407,644     $ 4,324,400     $ 5,732,044     $ 527,579     $ 4,422,480     $ 4,950,059     $ 542,731     $ 4,900,514     $ 5,443,245  
                                                                         
 
AAA-rated mortgage-backed securities represented 79%, 87% and 89% of the total portfolio at September 30, 2007 and 2006 and December 31, 2006, respectively. These securities had an expected weighted average life of 3.2 years, 2.8 years and 2.9 years at September 30, 2007 and 2006 and December 31, 2006, respectively.
 
SFR MORTGAGE LOANS HFI DIVISION
 
The SFR mortgage loans HFI portfolio is comprised primarily of adjustable-rate and intermediate term fixed-rate mortgage loans. We invest in this portfolio depending on external market conditions.
 
Included in our loans HFI portfolio at September 30, 2007 were $1.1 billion in pay option ARM loans, or 22% of the portfolio, as compared to $1.2 billion, or 18% of the portfolio, at September 30, 2006 and $1.2 billion, or 18% of the portfolio, at December 31, 2006. As of September 30, 2007, approximately 88% (based on loan count) of our pay option ARM loans had negatively amortized, resulting in an increase of $46.5 million to their original loan balance. This is an increase from 80% and 83% at September 30, 2006 and December 31, 2006, respectively. The net increase in unpaid principal balance due to negative amortization was $7.9 million and $19.7 million for the three and nine months ended September 30, 2007, respectively, which approximated the deferred interest recognized for the periods.


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The following tables provide a composition of the SFR mortgage loans HFI portfolio and the relevant credit quality characteristics as of the dates indicated (dollars in thousands):
 
                         
    September 30,
    September 30,
    December 31,
 
    2007     2006     2006  
 
Outstanding balance (book value)
  $ 4,913,471     $ 6,462,610     $ 6,519,340  
Average loan size
    344       304       310  
Non-performing loans
    3.64 %     0.90 %     1.09 %
Estimated average life in years(1)
    3.5       2.4       2.6  
Estimated average net duration in month(2)
    2.2       (1.0 )     (3.5 )
Annualized yield
    6.32 %     6.00 %     6.01 %
Percent of loans with active prepayment penalty
    34 %     34 %     34 %
Fixed-rate mortgages
    6 %     5 %     5 %
Intermediate term fixed-rate loans
    16 %     14 %     15 %
Interest-only loans
    54 %     61 %     60 %
Pay option ARMs
    22 %     18 %     18 %
Other
    2 %     2 %     2 %
Additional Information:
                       
Average FICO score
    712       716       716  
Original average LTV ratio
    73 %     73 %     73 %
Current average LTV ratio(3)
    70 %     59 %     61 %
Geographic distribution of top five states:
                       
Southern California
    33 %     32 %     32 %
Northern California
    22 %     20 %     20 %
                         
Total California
    55 %     52 %     52 %
Florida
    6 %     6 %     6 %
New York
    5 %     4 %     4 %
Virginia
    3 %     3 %     3 %
Arizona
    3 %     3 %     3 %
Other
    28 %     32 %     32 %
                         
Total
    100 %     100 %     100 %
                         
 
 
(1) Represents the estimated length of time, on average, the SFR loan portfolio will remain outstanding based on our estimates for prepayments.
 
(2) Average net duration measures the expected change in the value of a financial instrument in response to changes in interest rates, taking into consideration the impact of the related hedges. The negative net duration implies an increase in value as rates rise while the positive net duration implies a decrease in value.
 
(3) Current average LTV ratio is estimated based on the Office of Federal Housing Enterprise Oversight House Price Index Metropolitan Statistical Area data for the second quarter of 2007 on a loan level basis.
 
HOME EQUITY DIVISION
 
The home equity division specializes in providing HELOC and closed-end second mortgages nationwide through our wholesale and retail channels. At September 30, 2007, our total HELOC servicing portfolio amounted to $4.1 billion, an increase of approximately $515.3 million from the portfolio size at December 31, 2006.
 
We produced $566.7 million of new HELOC commitments through our mortgage banking segment and internal channels during the third quarter of 2007, but sold none during the period. During the third quarter of 2006, we produced $1.0 billion of HELOC loans and sold $635.4 million with a corresponding gain on sale of $6.8 million.


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All HELOC loans are adjustable-rate loans and indexed to the prime rate. Information on the combined HELOC portfolio, including both HFS and HFI loans, is presented as of the dates indicated (dollars in thousands):
 
                         
    September 30,
    September 30,
    December 31,
 
    2007     2006     2006  
 
Outstanding balance (book value)
  $ 1,509,125     $ 765,760     $ 656,714  
Total commitments(1)
    3,149,353       2,115,407       2,211,298  
Average spread over prime
    1.23 %     1.17 %     1.39 %
Average FICO score
    729       736       737  
Average CLTV ratio(2)
    77 %     77 %     77 %
 
Additional Information on HELOC Portfolio
 
                                         
          Average Loan
          Current
    30+ Days
 
September 30, 2007
  Outstanding
    Commitment
    Average Spread
    Average
    Delinquency
 
CLTV Ratio
  Balance     Balance     Over Prime     FICO     Percentage(3)  
 
96% to 100%
  $ 90,729     $ 87       2.45 %     698       5.59 %
91% to 95%
    285,029       92       1.77 %     716       2.70 %
81% to 90%
    521,551       81       1.64 %     711       2.29 %
71% to 80%
    340,373       138       0.52 %     737       1.50 %
70% or less
    271,443       143       0.37 %     747       0.92 %
                                         
Total
  $ 1,509,125       109       1.23 %     729       2.14 %
                                         
September 30, 2006
CLTV Ratio
                                       
96% to 100%
  $ 80,904     $ 116       2.05 %     731       3.03 %
91% to 95%
    99,220       99       2.10 %     713       0.62 %
81% to 90%
    304,942       92       1.48 %     718       0.92 %
71% to 80%
    161,165       165       0.35 %     745       0.50 %
70% or less
    119,529       158       0.15 %     752       0.83 %
                                         
Total
  $ 765,760       126       1.17 %     736       1.00 %
                                         
 
 
(1) On funded loans.
 
(2) The CLTV ratio combines the LTV on both the first mortgage loan and the HELOC.
 
(3) 30+ days delinquency include loans that are 30 days or more past the due date including loans in foreclosure.
 
CONSUMER CONSTRUCTION DIVISION
 
Our consumer construction division provides construction financing for individual consumers who want to build a new primary residence or second home. The primary product is a construction-to-permanent residential mortgage loan. This product typically provides financing for a construction term from 6 to 12 months and automatically converts to a permanent mortgage loan at the end of construction. The end result is a loan product that represents a hybrid activity between our portfolio lending and mortgage banking activities. As of September 30, 2007, based on the underlying note agreements, 77% of the construction loans will be converted to adjustable-rate permanent loans, 15% to intermediate term fixed-rate loans, and 8% to fixed-rate loans.
 
During the third quarter of 2007, we entered into new consumer construction commitments of $0.9 billion, which is a decrease of 20%, or $213 million, from the second quarter of 2007 and a decrease of 4%, or $37 million, from the third quarter of 2006. Approximately 70% of new commitments are generated through mortgage broker customers of the MPG and the remaining 30% of new commitments are retail originations. Once each loan has converted to a permanent mortgage loan, the mortgage is classified as a mortgage loan HFS and may be sold in the secondary market or acquired by our SFR mortgage loan portfolio. The amount of construction loans that were


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converted to permanent status was $479 million for the third quarter of 2007, a decrease of 11% over the second quarter of 2007 but an increase of 6% over the third quarter of 2006. Overall, we are one of the largest custom residential construction lenders in the nation. Consumer construction loans outstanding at September 30, 2007 increased 17% from December 31, 2006 and September 30, 2006.
 
Since the introduction of a monthly adjusting construction period ARM product in the second quarter of 2006, the percentage of adjustable-rate loans in our portfolio has increased to 61% at September 30, 2007 from 20% and 29% at September 30, 2006 and December 31, 2006, respectively. The ratio of non-performing loans increased to 2.02% of the portfolio at September 30, 2007, compared to 0.82% and 1.14% at September 30, 2006 and December 31, 2006, respectively. As a result, we increased the provision for loan losses to $6.8 million for the third quarter of 2007 and increased the percentage of allowance for loan losses to book value to 0.57% at the end of the quarter.
 
Information on our consumer construction portfolio is presented in the following tables as of the dates indicated (dollars in thousands):
 
                         
    September 30,
    September 30,
    December 31,
 
    2007     2006     2006  
 
Outstanding balance (book value)
  $ 2,658,292     $ 2,271,995     $ 2,276,133  
Total commitments
    4,044,659       3,694,295       3,600,454  
Average loan commitment
    478       477       474  
Non-performing loans
    2.02 %     0.82 %     1.14 %
Fixed-rate loans
    39 %     80 %     71 %
Adjustable-rate loans
    61 %     20 %     29 %
Additional Information:
                       
Average LTV ratio(1)
    74 %     73 %     73 %
Average FICO score
    721       713       718  
Geographic distribution of top five states:
                       
Southern California
    29 %     28 %     28 %
Northern California
    13 %     15 %     15 %
                         
Total California
    42 %     43 %     43 %
Florida
    7 %     9 %     9 %
Washington
    4 %     4 %     4 %
New York
    4 %     4 %     4 %
Arizona
    4 %     3 %     3 %
Other
    39 %     37 %     37 %
                         
Total
    100 %     100 %     100 %
                         
 
 
(1) The average LTV ratio is based on the estimated appraised value of the completed project compared to the commitment amount at the date indicated.
 
HOMEBUILDER DIVISION
 
The homebuilder division provides land acquisition, development and construction financing to small to mid-sized homebuilders for residential construction. Our typical customer is a mid-size, professional homebuilder who builds between 20 and 2,000 homes per year. We do a limited amount of business with large private and public homebuilders. Builder construction loans are typically adjustable-rate loans, indexed to the prime interest rate with terms ranging from 12 to 24 months. We earn net interest income on these loans. 95% of the loans in this portfolio are secured by corporate or personal guarantees of the builders as well as the underlying real estate. At September 30, 2007, 22% of these loans have balances over $25 million, down from 34% at September 30, 2006. The homebuilder division has central operations in Pasadena, California with 17 satellite sales offices in


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California, Florida, Georgia, Illinois, Massachusetts, North Carolina, Oregon, Pennsylvania, Tennessee, Texas, Washington, and Washington D.C.. We have closed our operations in Arizona due to the current market condition.
 
During the third quarter of 2007, we entered into new commitments of $121 million, which is a decrease of 74%, or $352 million, from the second quarter of 2007 and a decrease of 74%, or $350 million, from the third quarter of 2006. Renewals or refinances accounted for 72% of new commitments in the third quarter of 2007, as compared to 59% for the second quarter of 2007 and 55% for the third quarter of 2006. Builder loans outstanding, including tract construction and land and other mortgage loans, totaled $1.2 billion, or 3% of the Company’s total assets at September 30, 2007.
 
The rapid deterioration in the California and Florida real estate markets and the disruption in the mortgage market in the third quarter had a significant impact on our homebuilder portfolio, resulting in an increase in classified and non-performing loans and our allowance for loan losses at quarter-end. All loans in the portfolio are assigned a credit grade quarterly. Classified assets are ones with ratings of substandard, loss or doubtful. A substandard loan, for instance, is one that has a well-defined weakness such that the asset is inadequately protected by net worth, cash flow, or collateral value. There is a distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. A loan classified as doubtful has a high likelihood of a loss. Finally, the classification of loss is assigned to that portion of an asset that is considered uncollectible. We use the asset grades to determine our allowance for losses. As loans are assigned lower credit grades, the general allowance for loss number for the asset increases.
 
At September 30, 2007, non-performing loans for the builder construction portfolio rose to 9.03%, or $106.1 million, from 0.78%, or $9.0 million, at December 31, 2006, and zero at September 30, 2006. Classified assets were $421 million, or 35% of outstandings, at September 30, 2007, up from $121 million, or 10.3%, at December 31, 2006. Provision to the allowance for loan losses was $78.2 million or 6.0% of average loans for the third quarter of 2007, up from $2.2 million or 0.2% of average loans for the third quarter of 2006. The total allowance for loan losses as a percentage of book value increased to 8.48% of book value of total loans at September 30, 2007, compared to $19.4 million or 1.7% at September 30, 2006. Charge-offs and REO are currently zero but we do not expect they will remain at this level. The weighted average LTV ratio of this portfolio increased three percentage points to 76% compared to December 31, 2006 and September 30, 2006.
 
Characteristics of our homebuilder construction and development loan portfolios are detailed below:
 
  •  Land acquisition and development loans: This category of 55 loans totals $372 million in outstanding balances, of which three loans totaling $21 million are non-accrual and an additional seven loans at $86 million were considered classified.
 
  •  Land acquisition, development and construction loans: This category of 179 loans totals $803 million in outstanding balances, of which 6 loans totaling $85 million are non-accrual and an additional 20 loans at $138 million were considered classified assets at quarter-end.
 
We are monitoring this portfolio very closely due to rapidly changing conditions affecting both the underlying collateral values and the projected repayment sources in the current environment. We do not anticipate that the housing market will improve in the near-term, and accordingly, additional downgrades, provisions for loan losses and charge-offs relating to this portfolio are anticipated.


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Information on our homebuilder portfolio is presented in the following tables as of the dates indicated (dollars in thousands):
 
                         
    September 30,
    September 30,
    December 31,
 
    2007     2006     2006  
 
Outstanding balance (book value)
  $ 1,175,473     $ 1,124,330     $ 1,144,835  
Total commitments
    1,783,395       2,093,345       2,010,727  
Average loan commitments
    8,574       11,135       10,810  
Percentage of homes under construction or completed that are sold
    34 %     41 %     37 %
Median sales price of homes
    413       403       420  
Non-performing loans
    9.03 %     0.00 %     0.78 %
Allowance for loan losses as a percentage of book value
    8.48 %     1.72 %     1.79 %
Additional Information:
                       
Average LTV ratio(1)
    76 %     73 %     73 %
Geographic distribution of top five states:
                       
Southern California
    37 %     38 %     41 %
Northern California
    29 %     19 %     19 %
                         
Total California
    66 %     57 %     60 %
Florida
    11 %     12 %     11 %
Illinois
    6 %     10 %     9 %
Oregon
    4 %     6 %     6 %
Arizona
    3 %     5 %     4 %
Other
    10 %     10 %     10 %
                         
Total
    100 %     100 %     100 %
                         
 
 
(1) The average LTV ratio is based on the estimated appraised value of the completed project compared to the commitment amount at the date indicated.
 
ELIMINATIONS & OTHER SEGMENT
 
This segment contains the fixed costs of our deposit raising and treasury functions that are not allocated to our operating divisions, as well as entries to eliminate the impact of transactions between segments. In addition to selling loans into the secondary market, our production divisions regularly sell loans to our SFR mortgage division. These transactions are recorded at arms-length in our segment results resulting in intercompany gain on sale in the production divisions and a premium in the SFR mortgage division that is amortized over the life of the loan. Both the gain and the premium amortization are eliminated in consolidation.
 
Production divisions and mortgage servicing are exposed to movements in the intermediate fixed-rate loan spreads. Mortgage spread is the difference between mortgage interest rates and LIBOR/Swap rates. Tighter spreads benefit the mortgage bank as they lead to improved loan sales execution while wider spreads lead to slower projected prepayment speeds and an increase in the MSR value. Due to the inherent difficulty in hedging the movement of these spreads, the potential for an internal hedge exists whereby the risks from the spread movements will be shared between the two groups. Starting in the first quarter of 2007, the production divisions and mortgage servicing entered into an inter-divisional transaction to economically hedge their respective financial risks to mortgage spreads for certain products in the absence of readily available derivative instruments. With all else remaining constant, when mortgage spreads widen, the pipeline of mortgage loans held for sale is negatively impacted and mortgage servicing is positively impacted. The impact of the hedges has been reflected in the respective channel results with the consolidation adjustment recorded under “Interdivision Hedge Transactions” within eliminations.


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The following tables provide additional detail on deposits, treasury and eliminations for the periods indicated (dollars in thousands):
 
                                                 
                Eliminations        
                      Interdivision
             
                Interdivision
    Hedge
             
    Deposits     Treasury     Loan Sales(1)     Transactions     Other     Total  
    (Dollars in thousands)  
 
Three Months Ended September 30, 2007
                                       
Operating Results
                                               
Net interest income
  $     $ 13,015     $ 10,422     $     $ 6,463     $ 29,900  
Provision for loan losses
                                   
Gain (loss) on sale of loans
                (17,124 )     (43,884 )     3,342       (57,666 )
Service fee income (expense)
                      43,884       (15,799 )     28,085  
Gain (loss) on MBS
                            1,269       1,269  
Other income (expense)
    1,152       237                   (491 )     898  
                                                 
Net revenues (expense)
    1,152       13,252       (6,702 )           (5,216 )     2,486  
Operating expenses
    7,314       15,247                   (5,216 )     17,345  
Deferral of expenses under SFAS 91
                                   
                                                 
Pre-tax earnings (loss)
    (6,162 )     (1,995 )     (6,702 )                 (14,859 )
                                                 
Net earnings (loss)
  $ (3,753 )   $ (1,215 )   $ (4,049 )   $     $     $ (9,017 )
                                                 
Three Months Ended September 30, 2006
                                       
Operating Results
                                               
Net interest income
  $     $ 8,912     $ 8,290     $     $ 4,832     $ 22,034  
Provision for loan losses
                                   
Gain (loss) on sale of loans
                (22,996 )                 (22,996 )
Service fee income (expense)
                422             (8,894 )     (8,472 )
Gain (loss) on MBS
                1,370                   1,370  
Other income (expense)
    896       150                   (1,656 )     (610 )
                                                 
Net revenues (expense)
    896       9,062       (12,914 )           (5,718 )     (8,674 )
Operating expenses
    7,173       11,121                   (5,357 )     12,937  
Deferral of expenses under SFAS 91
                            (718 )     (718 )
                                                 
Pre-tax earnings (loss)
    (6,277 )     (2,059 )     (12,914 )           357       (20,893 )
                                                 
Net earnings (loss)
  $ (3,823 )   $ (1,254 )   $ (7,865 )   $     $ (199 )   $ (13,141 )
                                                 
 
 
(1) Includes loans sold of $1.6 billion and $3.0 billion for the three months ended September 30, 2007 and 2006, respectively.


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CORPORATE OVERHEAD SEGMENT
 
As previously mentioned, we do not allocate fixed corporate overhead costs to our profit center divisions, because the methodologies to do so are arbitrary and distort each division’s marginal contribution to our profits. These unallocated corporate overhead costs are reported in the corporate overhead segment. The after-tax loss from this segment increased 45% from a loss of $26.7 million in the third quarter of 2006 to $38.8 million in third quarter of 2007. The largest driver of this increase was the previously described $27.6 million pre-tax severance expenses ($16.8 million after-tax) related to our workforce rightsizing executed during the quarter. Additionally, we paid the first dividend in the amount of $12.4 million on approximately $500 million of 8.5% preferred stock raised in May 2007. Offsetting these expense increases was a $24 million pre-tax gain ($14.6 million after-tax) on the sale and leaseback of one of our properties in Pasadena. Excluding these three items, after-tax corporate overhead expenses in the third quarter of 2007 were $24.2 million, down 9.6% versus the prior year same quarter, driven by an 11% year over year reduction in average FTEs in the corporate overhead segment and execution of other non-labor cost savings initiatives.


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CONSOLIDATED RISK MANAGEMENT DISCUSSION
 
We manage many types of risks with several layers of risk management and oversight, using both a centralized and decentralized approach. Our philosophy is to put risk management at the core of our operations and establish a unified framework for measuring and managing risk across the enterprise, providing our business units with the tools — and accountability — to manage risk. At the corporate level, this consolidated risk management is known as Enterprise Risk Management (“ERM”). ERM, in partnership with the Board of Directors and senior management, provide support to and oversight of the business units.
 
ERM, as a part of management, develops, maintains and monitors our cost effective yet comprehensive enterprise-wide risk management framework, including our system of operating internal controls. ERM fosters a risk management culture throughout Indymac and exists to protect us from unexpected losses, earnings surprises and reputation damage. It also provides management and the Board with a better understanding of the trade-offs between risks and rewards, leading to smarter investment decisions and more consistent and generally higher long-term returns on equity.
 
CAMELS FRAMEWORK FOR RISK MANAGEMENT
 
The framework for organizing ERM is based on the six-point rating scale used by the Office of Thrift Supervision (“OTS”), our regulating body, to evaluate the financial condition of savings and loan associations. A discussion of the areas covered by CAMELS (Capital, Asset Quality, Management, Earnings, Liquidity and Sensitivity to Market Risk) follows.
 
CAPITAL
 
The Bank is subject to regulatory capital regulations administered by the federal banking agencies. As of September 30, 2007, the Bank met all of the requirements of a “well-capitalized” institution under the general regulatory capital regulations.
 
Our business is primarily centered on single-family lending and the related production and sale of loans. As such, the accumulation of MSRs is a large component of our strategy. As of September 30, 2007, the capitalized value of MSRs was $2.5 billion. OTS regulations generally impose higher capital requirements on MSRs that exceed total tier 1 capital. These higher capital requirements could result in lowered returns on our retained assets and could limit our ability to retain servicing assets. We have flexibility to sell or retain MSRs and the ability to increase our capital base through retention of earnings and other capital raising activities. While management believes that compliance with the capital limits on MSRs will not materially impact future results, no assurance can be given that our plans and strategies will be successful.
 
Capital Ratios
 
The following presents the Bank’s actual and required capital ratios and the minimum required capital ratios to be categorized as “well-capitalized” as of the period indicated (dollars in thousands):
 
                                 
    Capital Ratios  
    Tangible     Tier 1 Core     Tier 1 Risk-Based     Total Risk-Based  
 
September 30, 2007:                                
As reported pre-subprime risk-weighting
    7.48 %     7.48 %     11.26 %     12.01 %
Adjusted for additional subprime risk weighting
    7.48 %     7.48 %     11.06 %     11.79 %
Well-capitalized minimum
    2.00 %     5.00 %     6.00 %     10.00 %
Excess over well-capitalized minimum requirement
  $ 1,818,528     $ 823,114     $ 1,018,656     $ 360,630  
 
The OTS guidance for subprime lending programs requires a lender to quantify the additional risks in its subprime lending activities and determine the appropriate amounts of allowances for loan losses and capital it needs


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to offset those risks. We generally classify all non-GSE loans in a first lien position with a FICO score less than 620 and all non-GSE loans in a second lien position with a FICO score less than 660 as subprime. We report our subprime loan calculation in an addendum to the Thrift Financial Report that we file quarterly with the OTS. Subprime loans HFS and subprime loans HFI, which are either delinquent or more than 90 days old since origination, are supported by capital two times that of similar prime loans. These subprime loans totaled $463.7 million at September 30, 2007. The impact of the additional risk-weighting criteria related to subprime loans had the effect of reducing our total risk-based capital by 22 basis points from 12.01% to 11.79%.
 
We believe that, under current regulations, the Bank will continue to meet its “well-capitalized” minimum capital requirements in the foreseeable future. The Bank’s regulatory capital compliance could be impacted, however, by a number of factors, such as changes to applicable regulations, adverse action by our regulators, changes in our mix of assets, interest rate fluctuations, loan loss provisions and credit losses, or significant changes in the economy in areas where we have most of our loans, or future disruptions in the secondary mortgage market. Any of these factors could cause actual future results to vary from anticipated future results and consequently could have an adverse impact on the ability of the Bank to meet its future minimum capital requirements.
 
Capital Management and Allocation
 
As a federally regulated thrift, we are required to measure regulatory capital using two different methods: core capital and risk-based capital. Under the core capital method, a fixed percentage of capital is required against each dollar of assets without regard to the type of asset. Under the risk-based capital method, capital is held against assets which are adjusted for their relative risk using standard “risk weighting” percentages. We allocate capital using the regulatory minimums for well-capitalized institutions for each applicable asset class. The ratios are below the minimums due to the use of trust preferred securities as a form of regulatory capital.


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The following provides information on the core and risk-based capital ratios for the two primary segments and each of their operating divisions for the period indicated (dollars in thousands):
 
                                                                                 
    Total Assets     Core     Risk-Based  
          % of
    Avg.
    % of
                Avg.
    % of
             
    Average
    Total
    Allocated
    Total
    Capital/
          Allocated
    Total
    Capital/
       
Three Months Ended September 30, 2007
  Assets     Assets     Capital     Capital     Assets     ROE     Capital     Capital     Assets     ROE  
 
Mortgage Banking:
                                                                               
Consumer Direct
  $ 124,560       0.3 %   $ 4,982       0.2 %     4.0 %     (14 )%   $ 6,053       0.3 %     4.9 %     (11 )%
                                                                                 
Retail
    227,631       0.6 %     9,105       0.4 %     4.0 %     (445 )%     17,939       0.9 %     7.9 %     (224 )%
Wholesale
    5,623,117       15.3 %     224,925       10.9 %     4.0 %     (77 )%     275,232       13.4 %     4.9 %     (62 )%
Correspondent
    1,261,039       3.4 %     50,442       2.5 %     4.0 %     (112 )%     64,199       3.1 %     5.1 %     (87 )%
Conduit
    4,958,140       13.5 %     198,326       9.7 %     4.0 %     (119 )%     236,397       11.5 %     4.8 %     (99 )%
                                                                                 
Total Mortgage Professionals Group
    12,069,927       32.8 %     482,798       23.5 %     4.0 %     (105 )%     593,767       28.9 %     4.9 %     (84 )%
Financial Freedom
    1,263,677       3.4 %     146,331       7.1 %     11.6 %     8 %     135,741       6.6 %     10.7 %     8 %
                                                                                 
Total Production Divisions
    13,458,164       36.5 %     634,111       30.8 %     4.7 %     (78 )%     735,561       35.8 %     5.5 %     (67 )%
                                                                                 
Mortgage Servicing Rights
    3,714,352       10.1 %     243,378       11.8 %     6.6 %     141 %     358,217       17.4 %     9.6 %     97 %
Servicing/Customer Retention
    887,211       2.4 %     35,488       1.7 %     4.0 %     (26 )%     41,020       2.0 %     4.6 %     (22 )%
                                                                                 
Total Mortgage Servicing
    4,601,563       12.5 %     278,866       13.5 %     6.1 %     120 %     399,237       19.4 %     8.7 %     85 %
Mortgage Bank Overhead
    158,231       0.4 %     6,330       0.3 %     4.0 %     N/A       17,315       0.8 %     10.9 %     N/A  
                                                                                 
Total Consumer Mortgage Banking
    18,217,958       49.4 %     919,307       44.6 %     5.0 %     (22 )%     1,152,113       56.0 %     6.3 %     (17 )%
Commercial Mortgage Banking
    68,200       0.2 %     2,728       0.1 %     4.0 %     (207 )%     5,551       0.3 %     8.1 %     (100 )%
                                                                                 
Total Mortgage Banking
    18,286,158       49.6 %     922,035       44.7 %     5.0 %     (23 )%     1,157,664       56.3 %     6.3 %     (17 )%
Thrift:
                                                                               
Investment grade securities
    4,628,416       12.6 %     185,137       9.0 %     4.0 %     (12 )%     88,247       4.3 %     1.9 %     (29 )%
Non-investment grade and residuals
    448,297       1.2 %     17,932       0.9 %     4.0 %     (733 )%     229,011       11.1 %     51.1 %     (54 )%
                                                                                 
Total Mortgage-Backed Securities
    5,076,713       13.8 %     203,069       9.9 %     4.0 %     (76 )%     317,258       15.4 %     6.2 %     (47 )%
                                                                                 
Consumer lending portfolio Prime SFR mortgage loans     5,483,500       14.9 %     219,340       10.7 %     4.0 %     (12 )%     199,024       9.7 %     3.6 %     (13 )%
Home equity division
    1,745,687       4.7 %     69,989       3.4 %     4.0 %     (120 )%     124,106       6.0 %     7.1 %     (66 )%
                                                                                 
Total Consumer Loans
    7,229,187       19.6 %     289,329       14.1 %     4.0 %     (38 )%     323,130       15.7 %     4.5 %     (34 )%
Consumer construction division
    2,976,162       8.1 %     119,046       5.8 %     4.0 %     9 %     151,704       7.4 %     5.1 %     8 %
                                                                                 
Total Consumer Thrift Activities
    10,205,349       27.7 %     408,375       19.9 %     4.0 %     (24 )%     474,834       23.1 %     4.7 %     (20 )%
                                                                                 
Home builder division
    1,249,004       3.4 %     49,960       2.4 %     4.0 %     (340 )%     104,399       5.1 %     8.4 %     (161 )%
Warehouse Lending
    182,644       0.5 %     7,306       0.4 %     4.0 %     17 %     15,211       0.7 %     8.3 %     10 %
                                                                                 
Total Commercial Thrift Activities
    1,431,648       3.9 %     57,266       2.8 %     4.0 %     (295 )%     119,610       5.8 %     8.4 %     (139 )%
Discontinued products
    26,574       0.1 %     1,063       0.1 %     4.0 %     (27 )%     2,771       0.1 %     10.4 %     (8 )%
                                                                                 
Total Thrift Activities
    16,740,284       45.5 %     669,773       32.7 %     4.0 %     (63 )%     914,473       44.4 %     5.5 %     (45 )%
Consumer Bank — Deposits
    59,589       0.2 %     2,384       0.1 %     4.0 %     N/A       11,335       0.6 %     19.0 %     N/A  
Treasury
                            N/A       N/A                   N/A       N/A  
Eliminations
                            N/A       N/A                   N/A       N/A  
                                                                                 
Total Operating Activities
    35,086,031       95.3 %     1,594,192       77.5 %     4.5 %     (42 )%     2,083,472       101.3 %     5.9 %