10-K 1 v38189e10vk.htm FORM 10-K Indymac Bancorp, Inc.
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 10-K
     
(Mark One)    
þ
  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    For the fiscal year ended December 31, 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
  95-3983415
(State or other jurisdiction of incorporation)   (I.R.S. Employer Identification No.)
888 East Walnut Street, Pasadena, California   91101-7211
(Address of principal executive offices)   (Zip Code)
 
Registrant’s telephone number, including area code:
(800) 669-2300
 
Securities registered pursuant to Section 12(b) of the Act:
 
     
Title of Each Class
 
Name of Each Exchange on Which Registered
 
Common Stock, $.01 Par Value
(including related preferred stock purchase rights)
  New York Stock Exchange
WIRES Units
(Trust Preferred Securities and Warrants)
  New York Stock Exchange
 
Securities registered pursuant to Section 12(g) of the Act:
[None.]
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes þ     No o
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.  Yes o     No þ
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.  Yes þ     No o
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K þ.
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “accelerated filer and large accelerated filer and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer þ Accelerated filer o Non-accelerated filer o Smaller reporting company  o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o     No þ
 
Based on the closing price for shares of Common Stock as of June 30, 2007, the aggregate market value of Common Stock held by non-affiliates of the registrant was approximately $2,126,645,122. For the purposes of the foregoing calculation only, in addition to affiliated companies, all directors and executive officers of the registrant have been deemed affiliates.
 
As of February 15, 2008, 80,894,900 shares of IndyMac Bancorp, Inc. Common Stock, $.01 par value per share, were outstanding.
 
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement for the 2008 Annual Meeting — Part III
 


Table of Contents

 
INDYMAC BANCORP, INC.
2007 ANNUAL REPORT ON FORM 10-K

TABLE OF CONTENTS
 
             
        Page
 
    Forward-Looking Statements     3  
  Business     3  
    Business Model     4  
      Segments     4  
         Mortgage Banking Segment     5  
           Mortgage Production Division     6  
           Mortgage Servicing Division     7  
         Thrift Segment     7  
           Portfolio Divisions     7  
         Discontinued Business Activities     8  
    Regulation and Supervision     8  
      General     8  
      Regulation of Indymac Bank     8  
         General     8  
         Qualified Thrift Lender Test     9  
         Regulatory Capital Requirements     9  
         Insurance of Deposit Accounts     10  
         Capital Distribution Regulations     10  
         Community Reinvestment Act and the Fair Lending Laws     10  
         Privacy Protection     10  
    Income Tax Considerations     10  
    Employees     10  
    Competition     11  
    Website Access to United States Securities and Exchange Commission Filings     11  
  Risk Factors     11  
  Unresolved Staff Comments     11  
  Properties     12  
  Legal Proceedings     12  
  Submission of Matters to a Vote of Security Holders     13  
 
PART II
  Market for IndyMac Bancorp, Inc.’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities     13  
  Selected Financial Data     16  
  Management’s Discussion and Analysis of Financial Condition and Results of Operations     19  
    Overview     19  
    Narrative Summary of Consolidated Financial Results     20  
    Summary of Business Segment Results     22  
      Mortgage Banking Segment     24  
         Mortgage Production Division     26  
         Mortgage Servicing Division     32  
      Thrift Segment     35  
         Mortgage-Backed Securities Division     37  
         SFR Mortgage Loans HFI Division     37  
         Consumer Construction Division     39  


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        Page
 
      Elimination & Other Segment     40  
      Corporate Overhead Segment     42  
      Discontinued Business Activities     42  
    Consolidated Risk Management Discussion     46  
      CAMELS Framework For Risk Management     47  
         Capital     47  
         Asset Quality     49  
         Management     55  
         Earnings     56  
         Liquidity     56  
         Sensitivity to Market Risk     59  
    Expenses     65  
    Prospective Trends and Future Outlook     66  
    Off-Balance Sheet Arrangements     66  
    Aggregate Contractual Obligations     67  
    Risk Factors That May Affect Future Results     68  
         Risks Related to Our Business Generally     68  
         Risks Related to Our Interest Rate Hedging Strategies     71  
         Risks Related to Our Valuation of Assets     73  
         Risks Related to Our Assumption of Credit Risk     74  
         Risks Related to Our Liquidity     76  
    Critical Accounting Policies and Judgments     77  
    Sensitivity Analysis     84  
    Regulatory Update     85  
    Other Considerations     85  
    Appendix A: Additional Quantitative Disclosures     86  
  Quantitative and Qualitative Disclosures About Market Risk     105  
  Financial Statements and Supplementary Data     105  
  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure     105  
  Controls and Procedures     105  
  Other Information     106  
 
PART III
  Directors and Executive Officers of the Registrant     106  
  Executive Compensation     106  
  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters     106  
  Certain Relationships and Related Transactions     106  
  Principal Accounting Fees and Services     106  
 
PART IV
  Exhibits, Financial Statement Schedules     106  
    Financial Statements     106  
    Exhibits     106  
    Signature     109  
 EXHIBIT 10.17
 EXHIBIT 10.18
 EXHIBIT 10.19
 EXHIBIT 10.20
 EXHIBIT 10.21
 EXHIBIT 10.22
 EXHIBIT 10.23
 EXHIBIT 21.1
 EXHIBIT 23.1
 EXHIBIT 31.1
 EXHIBIT 31.2
 EXHIBIT 32.1
 EXHIBIT 32.2
 EXHIBIT 99.1


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PART I
 
FORWARD-LOOKING STATEMENTS
 
Certain statements contained in this Form 10-K may be deemed to be forward-looking statements within the meaning of the federal securities laws. Words such as “anticipate,” “believe,” “estimate,” “expect,” “project,” “plan,” “forecast,” “intend,” “goal,” “target,” and similar expressions, as well as future or conditional verbs, such as “will,” “would,” “should,” “could,” or “may,” identify forward-looking statements that are inherently subject to risks and uncertainties, many of which cannot be predicted or quantified. Actual results and the timing of certain events could differ materially from those projected in or contemplated by the forward-looking statements due to a number of factors, including: the effect of economic and market conditions including, but not limited to, the level of housing prices, industry volumes and margins; the level and volatility of interest rates; Indymac’s hedging strategies, hedge effectiveness and overall asset and liability management; the accuracy of subjective estimates used in determining the fair value of financial assets of Indymac; the various credit risks associated with our loans and other financial assets, including increased credit losses due to demand trends in the economy and the real estate market and increased delinquency rates of borrowers; the adequacy of credit reserves and the assumptions underlying them; the actions undertaken by both current and potential new competitors; the availability of funds from Indymac’s lenders, loan sales, securitizations, funds from deposits and all other sources used to fund mortgage loan originations and portfolio investments; the execution of Indymac’s business and growth plans and its ability to gain market share in a significant and turbulent market transition. Additional risk factors include the impact of disruptions triggered by natural disasters; pending or future legislation, regulations and regulatory action, or litigation, and factors described in the reports that Indymac files with the Securities and Exchange Commission, including this Annual Report on Form 10-K, its Quarterly Reports on Form 10-Q, and its reports on Form 8-K. Indymac does not undertake to update or revise forward-looking statements to reflect the impact of circumstances for events that arise after the date the forward-looking statements are made.
 
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.
 
ITEM 1.   BUSINESS
 
IndyMac Bancorp, Inc. is the holding company for IndyMac Bank, F.S.B., a $33 billion hybrid thrift/mortgage bank, headquartered in Pasadena, California. Indymac Bank originates mortgages in all 50 states of the U.S. and is the (1) largest savings and loan headquartered in Los Angeles County, California, and the seventh largest nationwide, based on assets according to American Banker, (2) the second largest independent mortgage lender in the nation according to National Mortgage News, (3) the ninth largest residential mortgage originator, based on third quarter 2007 mortgage origination volume according to National Mortgage News, and (4) the eighth largest mortgage servicer, according to National Mortgage News as of September 30, 2007. Indymac Bank provides cost-efficient financing for the acquisition of single-family homes and also provides financing secured by single-family homes and other banking products to facilitate consumers’ personal financial goals. We originate mortgage loans through our e-MITS® (Electronic Mortgage Information and Transaction System) platform that automates underwriting, risk-based pricing and rate locking on a nationwide basis via the Internet at the point of sale. Indymac Bank offers highly competitive mortgage products and services tailored to meet the needs of both consumers and mortgage professionals.
 
Indymac was founded as a passive mortgage real estate investment trust (“REIT”) in 1985 and transitioned its business model to become an active, operating mortgage lender in 1993. In response to the global liquidity crisis during the fourth quarter of 1998, in which many non-regulated financial institutions, mortgage lenders and mortgage REITs were adversely impacted or did not survive, we determined that it would be advantageous to become a depository institution. The depository structure provides significant advantages in the form of diversified financing sources, the retention of capital to support growth and a strong platform for the origination of mortgages. Effective January 1, 2000, we terminated our status as a REIT and converted to a fully taxable entity, and, on July 1, 2000, we acquired SGV Bancorp, Inc. (“SGVB”), which then was the parent of First Federal Savings and Loan


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Association of San Gabriel Valley, a federal savings association. We contributed substantially all of our assets and operations to the subsidiary savings association, which we renamed Indymac Bank.
 
We entered the reverse mortgage industry through the acquisition of 93.75% of the outstanding shares of common stock of Financial Freedom Holdings, Inc. (“Financial Freedom”), the leading provider of reverse mortgages in the U.S., and the related assets from Lehman Brothers Bank, F.S.B. and its affiliates on July 16, 2004. The remaining shares of the common stock of Financial Freedom were purchased by us from Financial Freedom’s chief executive officer, James Mahoney, on July 3, 2006. The acquisition was consummated as part of our strategy to offer niche mortgage products and servicing a broad customer base.
 
BUSINESS MODEL
 
Indymac’s hybrid thrift/mortgage banking business model provides a strong framework and the flexibility to operate efficiently in varying interest-rate environments. Our businesses are aligned into two primary operating segments, mortgage banking and thrift. Mortgage banking involves the originating and trading of mortgage loans and related assets, as well as the servicing of these loans. Revenues from mortgage banking consist primarily of gains on the sale of the loans; interest income earned while the loans are held for sale; and servicing fee income. The thrift side of our business invests in single-family residential mortgage assets, primarily whole loan and mortgage-backed securities (“MBS”), which we hold on our balance sheet. Revenues from the thrift side of our business consists primarily of spread income, which represents the difference between the interest earned on the loans and the cost of funds.
 
Mortgage banking is less capital-intensive than thrift investing and offers higher returns on invested capital. However, mortgage banking is cyclical: origination volumes are significantly correlated to interest rates, rising when rates fall and declining when rates rise. Thrift investing requires more capital than mortgage banking, resulting in lower returns on invested capital. However, the returns tend to be more stable and less cyclical than those from mortgage banking, and they generally improve as returns on mortgage banking decline. As interest rates rise, there is little incentive for borrowers to refinance, so portfolio runoff (i.e., loan payoffs) is reduced. Thrift profitability is also more exposed to credit risk as we retain credit risk on most thrift assets. Significant changes in the asset quality after acquisition impact returns.
 
During 2007, there has been an unprecedented disruption in the U.S. mortgage market. Secondary markets for virtually every loan type other than GSE and government guaranteed loan has virtually ceased to exist. Numerous originators have failed and remaining lenders have dramatically tightened lending guidelines.
 
This disruption has resulted in home prices declining in virtually all markets in the U.S. The combination of significantly reduced lending activity and declining home prices has contributed to increasing delinquencies and foreclosures nationally. These increased loan defaults have been particularly severe in higher LTV lending products and in second lien products.
 
These market factors have had a dramatic impact on our business and results both from declining volumes and increased expectations of credit losses. These factors make comparisons to prior years very difficult.
 
SEGMENTS
 
Indymac is structured to achieve synergies among its operations and to enhance customer service, operating through its two main segments, mortgage banking and thrift. The common denominator of our business is providing consumers with single-family residential mortgages through relationships with each segment’s core customers via the channel in which each operates.
 
For further information on the revenues earned and expenses incurred by each of our segments, refer to “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Summary of Business Segment Results” and “Note 3 — Segment Reporting” included in our consolidated financial statements incorporated herein.


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MORTGAGE BANKING SEGMENT
 
The mortgage banking segment’s core activities are loan production, loan sales, and the performance of our servicing functions. Loan production is achieved by delivering a suite of prime mortgage products to our customers using a technology-based approach across multiple channels on a nationwide basis supported by 11 strategically distributed regional mortgage centers. Our broad product offering includes adjustable-rate mortgages (“ARMs”), intermediate term fixed-rate loans, pay option ARMs offering borrowers multiple payment options, fixed-rate mortgages, and reverse mortgages.
 
Our largest production channel, the mortgage professionals group (“MPG”), originates or purchases mortgage loans through its relationships with mortgage brokers, mortgage bankers, and financial institutions. In April 2007, we acquired the retail platform of New York Mortgage Company (“NYMC”) and hired over 1,400 retail lending professionals. We also offer mortgages and reverse mortgages to consumers through channels such as direct mail, internet leads, online advertising, affinity relationships, real estate professionals, including realtors, and through our Southern California retail bank branches.
 
We sell mortgage loans, which are usually on a non-recourse basis, but we do make certain representations and warranties concerning the loans. We generally retain the servicing rights with respect to loans sold to the government sponsored enterprises (“GSEs”), primarily Federal National Mortgage Association (“Fannie Mae”) and Federal Home Loan Mortgage Company (“Freddie Mac”). The credit losses on these loans are absorbed by the GSEs. We pay guarantee fees to the GSEs to compensate them for their assumption of credit risk. The continued severe disruption in the secondary market for loans and securities not sold to the GSEs has caused us to rapidly change our production business model from a primary focus on non-GSE mortgage banking to a model that now produces production that is 75%-85% eligible for sale to the GSEs.
 
We also sell loans through private-label securitizations. Loans sold through private-label securitizations consist primarily of non-conforming loans and subprime loans. The securitization process involves the sale of the loans to one of our wholly-owned bankruptcy remote special purpose entities, which then sells the loans to a separate, transaction-specific securitization trust in exchange for cash and certain trust interests that we retain. The securitization trust issues and sells undivided interests to third-party investors that entitle the investors to specified cash flows generated from the securitized loans. These undivided interests are usually represented by certificates with varying interest rates and are secured by the payments on the loans acquired by the trust, and commonly include senior and subordinated classes. The senior class securities are usually rated “AAA” by at least two of the major independent rating agencies and have priority over the subordinated classes in the receipt of payments. We have no obligation to provide funding support (other than temporary servicing advances) to either the third-party investors or securitization trusts. Neither the third-party investors nor the securitization trusts have recourse to our assets or us, and neither have the ability to require us to repurchase their securities. We do make certain representations and warranties concerning the loans, such as lien status or mortgage insurance coverage, and if we are found to have breached a representation or warranty, we could be required to repurchase the loan from the securitization trust. We do not guarantee any securities issued by the securitization trusts. The securitization trusts represent “qualified special purpose entities,” which meet the legal isolation criteria of Statement of Financial Accounting Standards No. 140, “Accounting for Transfer and Servicing of Financial Assets and Extinguishments of Liabilities” (“SFAS 140”), and are therefore not consolidated for financial reporting purposes. We also sell loans on a whole-loan basis to institutional investors with servicing on such loans either retained by us or released to the institutional investors.
 
In addition to the cash we receive from the sale of MBS, we typically retain certain interests in the securitization trust as payment for the loans. These retained interests may include mortgage servicing rights (“MSRs”), AAA-rated interest-only securities, AAA-rated principal-only securities, AAA-rated senior securities, securities associated with prepayment charges and late fee charges on the underlying mortgage loans, subordinated classes of securities, residual securities, cash reserve funds, or an over collateralization account. Other than MSRs, AAA-rated interest-only and principal-only securities, AAA-rated senior securities, and the securities associated with prepayment charges and late fees on the underlying mortgage loans, these retained interests are subordinated and serve as credit enhancement for the more senior securities issued by the securitization trust. We are entitled to receive payment on most of these retained interests only after the third party investors are repaid their investment


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plus interest and there is excess cash in the securitization trust. Our ability to obtain repayment of our residual interests depends solely on the performance of the underlying mortgage loans. Material adverse changes in performance of the loans, including actual credit losses and prepayment speeds differing from our assumptions, may have a significant adverse effect on the value of these retained interests.
 
We usually retain the servicing rights for the securitized mortgage loans, as discussed in the description of servicing operations below under the caption “Loan Servicing.” As a servicer, we are entitled to receive a servicing fee equal to a specified percentage of the outstanding principal balance of each loan. This servicing fee is calculated and payable on a monthly basis. We may also be entitled to receive additional servicing compensation, such as late payment fees or prepayment charges. Our servicing fees have priority in payment over each class of securities issued by the securitization trusts.
 
Refer to “Note 13 — Transfers and Servicing of Financial Assets” in the accompanying notes to consolidated financial statements for additional information.
 
Mortgage Production Division
 
Consumer Direct Division
 
This division markets mortgage products directly to existing and new consumers nationwide through direct mail, Internet lead aggregators, outbound telesales, online advertising, and referral programs, as well as through our Southern California retail bank branches.
 
Through our call center operations and our Southern California retail bank branch network, loan consultants counsel consumers on the loan application process and make lending decisions using our e-MITS technology. Loans are processed and funded by our operations group within our regional mortgage centers.
 
Mortgage Professionals Group
 
Our largest production division, the MPG, was responsible for 62% of our total mortgage production during 2007. This group is responsible for the production of mortgage loans through relationships with mortgage brokers, mortgage bankers, financial institutions, capital market participants across the country, realtors, and homebuilders, and is composed of two channels: retail, and mortgage broker and banker.
 
Mortgage loans could be either funded by us or purchased by us as closed loans on a flow basis from mortgage bankers or community financial institutions. When originating or purchasing mortgage loans, we generally acquire the rights to “service” the mortgage loans (as described below). When we sell the loans, we may either retain the related servicing rights and service the loans through our mortgage servicing division or sell those rights. See “Loan Servicing” below.
 
This division targets customers based on their loan production volume, product mix and projected revenue to us. The sales force is responsible for maintaining and increasing loan production from these customers by marketing our strengths, which include a “one stop shop” for all products, competitive pricing and response time efficiencies in the loan purchase process through our e-MITS underwriting capability and high customer service standards.
 
The retail lending group, a channel of the MPG, provides mortgage financing primarily to home purchase oriented consumers by targeting realtors, homebuilders and financial professionals via storefront mortgage loan offices. As of December 31, 2007, we had 182 retail mortgage offices.
 
During 2007, in light of the current market conditions, Indymac’s MPG did not open any additional regional wholesale mortgage centers. We had 16 regional mortgage centers as of December 31, 2007. We have decided to close five regional wholesale mortgage centers, including Tampa, Philadelphia, Boston, Columbia (South Carolina) and Kansas City, and consolidate these mortgage operations into our remaining 11 regional wholesale mortgage wholesale centers by the end of the first quarter of 2008.
 
Financial Freedom Division
 
Financial Freedom is the leading provider of reverse mortgages in the United States. This group is responsible for the origination, purchase and servicing of reverse mortgage products with senior customers via a retail loan


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officer sales force and a mortgage banker and broker relationship sales force. Reverse mortgages allow homeowners age 62 and older to convert home equity into cash to supplement their retirement income. The equity may be withdrawn in a lump sum, as annuity-style monthly payments, as a credit line, or any combination thereof. Reverse mortgages offered by us feature: no recourse to the borrower, no repayment during the borrower’s occupancy of the home, and a repayment amount that cannot exceed the value of the home (after costs of sale). Comparing 2007 to 2006, our reverse mortgage volume decreased 6% to $4.7 billion in 2007 from $5.0 billion in 2006 primarily due to the expected increased competition and the secondary market disruption in the later half of 2007. As a result, margin for this product was negatively impacted. However, with the increased familiarity that senior homeowners and their financial advisors have with this product, the reverse mortgage market is expected to continue to grow.
 
Mortgage Servicing Division
 
This division manages the assets we retain in conjunction with our mortgage loan sales. The assets held include the following: (i) MSRs, interest-only securities, prepayment penalty securities and late fee securities; (ii) derivatives and securities held as hedges of such assets, including forward rate agreements swaps, options, futures, principal-only securities, agency debentures and U.S. Treasury bonds; and (iii) loans acquired through clean-up calls or originated through our customer retention programs. We hedge the MSRs to protect the economic value of the MSRs.
 
At December 31, 2007, primarily through our Home Loan Servicing operation in Kalamazoo, Michigan, we serviced $198.2 billion of mortgage loans, of which $181.7 billion was serviced for others, an increase of 30% from $139.8 billion serviced for others in 2006. The servicing portfolio includes prime loans, reverse mortgages, manufactured housing loans and home improvement loans.
 
Servicing of mortgage loans includes: collecting loan payments; responding to customers’ inquiries; accounting for principal and interest; holding custodial (impound) funds for payment of property taxes and insurance; counseling delinquent mortgagors; modifying and refinancing loans; supervising foreclosures and liquidation of foreclosed property; performing required tax reporting; and performing other loan administration functions necessary to protect investors’ interests and comply with applicable laws and regulations. Servicing operations also include remitting loan payments, less servicing fees, to trustees and, in some cases, advancing delinquent borrower payments to investors, subject to a right of reimbursement.
 
THRIFT SEGMENT
 
The strategy of our thrift segment has been to leverage our capital infrastructure with prudent mortgage related asset growth to diversify company-wide earnings, targeting a return on equity exceeding the cost of both core and risk-based capital. The thrift segment principally invests in single-family residential (“SFR”) mortgage loans (predominantly prime ARMs, including intermediate term fixed-rate loans), mortgage-backed securities and construction financing for single-family residences or lots provided directly to individual consumers. The primary sources of revenue for the thrift segment are net interest income on loans and securities, and to a lesser extent, the gain on sale of loans.
 
Portfolio Divisions
 
Mortgage-Backed Securities Division
 
MBS includes predominantly AAA-rated private label MBS.
 
SFR Mortgage Loans HFI Division
 
Single-family residential mortgage loans held for investment (“HFI”) are generally originated or acquired through our mortgage banking production divisions and transferred to the thrift. Held for investment loans may also be acquired from third party sellers and such loans are typically prime loans. The thrift attempts to invest in loans on


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which it can earn an acceptable return on equity. This division had significant asset growth in 2007 as we transferred a significant amount of loans from held for sale as market conditions made the sale of these loans uneconomic.
 
Consumer Construction Division
 
Our consumer construction division provides construction financing for individual consumers who want to build a new primary residence or second home. Through our streamlined e-MITS online application process, the division offers a single-close construction-to-permanent loan that provides borrowers with the funds to build a primary residence or vacation home. This product typically provides financing for a construction term of 6 to 12 months and automatically converts to a permanent mortgage loan at the end of construction. The end result is a product that represents a hybrid activity between our portfolio lending and mortgage banking activities. We earn net interest income on these loans during the construction phase. When the home is completed, the loan automatically converts to a permanent mortgage loan without any additional cost or closing documents, which is typically sold in the secondary market or acquired by the SFR mortgage loans HFI division. This division also provides financing to builders who are building single-family residences without a guaranteed sale at inception of project, or on a speculative basis. Approximately 68% of new commitments are generated through mortgage broker customers of the mortgage professional group and the remaining 32% of new commitments are retail originations. Beginning in 2008, we have temporarily suspended production in this division to reduce our balance sheet size.
 
DISCONTINUED BUSINESS ACTIVITIES
 
As conditions in the U.S. mortgage market have deteriorated, we have exited certain production channels and are reporting them in a separate category in our segment reporting, “Discontinued Business Activities”. These exited production channels include the conduit, homebuilder and home equity channels. These activities are not considered discontinued operations pursuant to Generally Accepted Accounting Principles (“GAAP”) under Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”) due to our significant continuing involvement in these activities. For additional information, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Summary of Business Segment Results — Discontinued Business Activities.”
 
REGULATION AND SUPERVISION
 
GENERAL
 
As a savings and loan holding company, IndyMac Bancorp is subject to regulation by the Office of Thrift Supervision (“OTS”) under the savings and loan holding company provisions of the Federal Home Owners’ Loan Act (“HOLA”). As a federally chartered and insured savings and loan association, Indymac Bank is subject to regulation, supervision and periodic examination by the OTS, which is the primary federal regulator of savings associations, and the Federal Deposit Insurance Corporation (“FDIC”), in its role as federal deposit insurer. The primary purpose of regulatory examination and supervision is to protect depositors, financial institutions and the financial system as a whole rather than the shareholders of financial institutions or their holding companies. The following summary is not intended to be a complete description of the applicable laws and regulations or their effects on us, and it is qualified in its entirety by reference to the particular statutory and regulatory provisions described.
 
REGULATION OF INDYMAC BANK
 
General
 
Both Indymac Bank and the Company are required to file periodic reports with the OTS concerning our activities and financial condition. The OTS has substantial enforcement authority with respect to savings associations, including authority to bring enforcement actions against a savings association and any of its “institution-affiliated parties,” which term includes directors, officers, employees, controlling shareholders, agents and other


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persons who participate in the conduct of the affairs of the institution. The FDIC has “backup” enforcement authority over us and has the power to terminate a savings association’s FDIC deposit insurance. In addition, we are subject to regulations of the Federal Reserve Board relating to equal credit opportunity, electronic fund transfers, collection of checks, truth in lending, truth in savings, and availability of funds for deposit customers.
 
Qualified Thrift Lender Test
 
Like all savings and loan holding company subsidiaries, Indymac Bank is required to meet a qualified thrift lender (“QTL”) test to avoid certain restrictions on our operations, including the activities restrictions applicable to multiple savings and loan holding companies, restrictions on our ability to branch interstate and IndyMac Bancorp’s mandatory registration as a bank holding company under the Bank Holding Company Act of 1956. A savings association satisfies the QTL test if: (i) on a monthly average basis, for at least nine months out of each twelve month period, at least 65% of a specified asset base of the savings association consists of loans to small businesses, credit card loans, educational loans, or certain assets related to domestic residential real estate, including residential mortgage loans and mortgage securities; or (ii) at least 60% of the savings association’s total assets consist of cash, U.S. government or government agency debt or equity securities, fixed assets, or loans secured by deposits, real property used for residential, educational, church, welfare, or health purposes, or real property in certain urban renewal areas. Indymac Bank is currently, and expects to remain, in compliance with QTL standards.
 
Regulatory Capital Requirements
 
OTS capital regulations require savings associations to satisfy three sets of capital requirements: tangible capital, Tier 1 capital, and risk-based capital. In general, an association’s tangible capital, which must be at least 1.5% of tangible assets, is the sum of common shareholders’ equity adjusted for the effects of other comprehensive income (“OCI”), less goodwill and other disallowed assets. An association’s ratio of Tier 1 (core) capital to adjusted total assets (the “core capital” or “leverage” ratio) must be at least 3% for strong associations that are not anticipating or experiencing significant growth and have well-diversified risks, including no undue interest rate risk exposure, excellent asset quality, high liquidity, and good earnings; and 4% for others. Higher capital ratios may be required if warranted by the particular circumstances, risk profile, or growth rate of a given association. Under the risk-based capital requirement, a savings association must have Tier 1 risk-based capital equal to at least 4% of risk-weighted assets and total risk-based capital (core capital plus supplementary capital) equal to at least 8% of risk-weighted assets. Tier 1 capital must represent at least 50% of total capital and consists of core capital elements, which include common shareholders’ equity, qualifying noncumulative, nonredeemable perpetual preferred stock, and minority interests in the equity accounts of consolidated subsidiaries, but exclude goodwill and certain other intangible assets. Supplementary capital consists mainly of qualifying subordinated debt, preferred stock that does not meet Tier 1 capital requirements, and a portion of the allowance for loan losses.
 
The above capital requirements are viewed as minimum standards by the OTS. The OTS regulations also specify minimum requirements for a savings association to be considered a “well-capitalized institution” as defined in the “prompt corrective action” regulation described below. A “well-capitalized” savings association must have a total risk-based capital ratio of 10% or greater, a Tier 1 risk-based capital ratio of 6% or greater and a Tier 1 (core) capital ratio of 5% or greater. Indymac Bank currently meets the requirements of a “well-capitalized institution.”
 
The OTS regulations include prompt corrective action provisions that require certain remedial actions and authorize certain other discretionary actions to be taken by the OTS against a savings association that falls within specified categories of capital deficiency. The relevant regulations establish five categories of capital classification for this purpose, ranging from “well-capitalized” to “adequately capitalized” through “undercapitalized,” “significantly undercapitalized” and “critically undercapitalized.” In general, the prompt corrective action regulations prohibit an OTS-regulated institution from declaring any dividends, making any other capital distributions, or paying a management fee to a controlling person, such as its parent holding company, if, following the distribution or payment, the institution would be within any of the three undercapitalized categories.


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Insurance of Deposit Accounts
 
Deposits of the Bank are presently insured by the FDIC, up to $100,000 per depositor. The FDIC has established a risk-based system for setting deposit insurance assessments. Under the risk-based assessment system, a savings association’s insurance assessments vary according to the level of capital the institution holds and the degree to which it is the subject of supervisory concern. Assessment rates currently range between five and 43 cents per $100 in deposits. Insurance of deposits may be terminated by the FDIC upon a finding that the savings association has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC or the OTS. All insured depository institutions, including the Bank, are required to pay an additional assessment, currently 1.14 cents per $100 in deposits, in order to retire Financial Corporation bonds that were issued between 1987 and 1989.
 
Capital Distribution Regulations
 
OTS regulations limit “capital distributions” by savings associations, which include, among other things, dividends and payments for stock repurchases. Refer to “Note 22 — Regulatory Requirements” in the accompanying notes to our consolidated financial statements for further discussion.
 
Community Reinvestment Act and the Fair Lending Laws
 
Savings associations are examined under the Community Reinvestment Act (“CRA”) and related regulations of the OTS on the extent of their efforts to help meet the credit needs of their communities, including low and moderate-income neighborhoods. In addition, the Equal Credit Opportunity Act and the Fair Housing Act, together known as the “Fair Lending Laws,” prohibit lenders from discriminating in their lending practices on the basis of characteristics specified in those statutes. Enforcement of these regulations has been an important focus of federal regulatory authorities and of community groups in recent years. A failure by Indymac Bank to comply with the provisions of the CRA could, at a minimum, result in adverse action on branch and certain other corporate applications, and regulatory restrictions on our activities, and failure to comply with the Fair Lending Laws could result in enforcement actions by the OTS, as well as other federal regulatory agencies and the Department of Justice. Indymac Bank received an overall “Satisfactory” rating during our most recent CRA evaluation.
 
Privacy Protection
 
The OTS has adopted privacy protection regulations which require each savings association to adopt procedures to protect consumers’ and customers’ “nonpublic personal information.” It is Indymac Bank’s policy not to share customers’ information with any unaffiliated third parties, except as expressly permitted by law, or to allow third party companies to provide marketing services on our behalf, or under joint marketing agreements between us and other unaffiliated financial institutions. In addition to federal laws and regulations, we are required to comply with any privacy requirements prescribed by California and other states in which we do business that afford consumers with protections greater than those provided under federal law.
 
INCOME TAX CONSIDERATIONS
 
We report our income on a calendar year basis using the liability method of accounting. We are subject to federal income taxation under existing provisions of the Internal Revenue Code of 1986, as amended, in generally the same manner as other corporations. We are also subject to state taxes in the areas in which we conduct business.
 
EMPLOYEES
 
As of December 31, 2007, we had 9,907 full-time equivalent employees (“FTE”), including 870 FTE off-shore as part of our Global Resources program.


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COMPETITION
 
While the current disruptions in the housing and credit markets have reduced the number of competitors, we still face significant competition for lending volume. Many of our competitors are larger and enjoy both financial and customer awareness advantages over us. In addition, the reduction in salability of many mortgages has caused us to temporarily discontinue certain lending products that many of our competitors are able to originate.
 
While we believe that our current plans and strategies will allow us to compete in the market, there can be no assurance that we will succeed and as a result, our financial results could be materially worse than we expect.
 
WEBSITE ACCESS TO UNITED STATES SECURITIES AND EXCHANGE COMMISSION FILINGS
 
All reports filed electronically by us with the Securities and Exchange Commission (“SEC”), including Annual Reports on Form 10-K, quarterly reports on Form 10-Q, and current event reports on Form 8-K, as well as any amendments to those reports, are made accessible as soon as reasonably practicable after filing with the SEC at no cost on our website at www.imb.com. These filings are also accessible on the SEC’s website at www.sec.gov.
 
We have a Code of Business Conduct and Ethics that is applicable to all of our employees and officers, including the principal executive officer, the principal financial officer and the principal accounting officer. In addition, Indymac has a Director Code of Ethics that sets forth the policy and standards concerning ethical conduct for directors of Indymac. We also adopted formal corporate governance standards in January 2002, which the Corporate Governance Committee of the Board of Directors reviews annually to ensure they incorporate recent corporate governance developments and generally meet the corporate governance needs of Indymac. You may obtain copies of each of the Code of Business Conduct and Ethics, the Director Code of Ethics, and the Board of Directors’ Guidelines for Corporate Governance Issues by accessing the “Corporate Governance” subsection of the “Investors” section of www.imb.com, or free of charge by writing to our Corporate Secretary at IndyMac Bancorp, Inc., 888 East Walnut Street, Pasadena, California 91101. Indymac intends to post amendments to or waivers of the Code of Business Conduct and Ethics (to the extent applicable to Indymac’s principal executive officer, principal financial officer or principal accounting officer) and of the Director Code of Ethics at the website location referenced above.
 
ITEM 1A.   RISK FACTORS
 
KEY OPERATING RISKS
 
Like all businesses, we assume a certain amount of risk in order to earn returns on our capital. For further information on these and other key operating risks, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Risk Factors That May Affect Future Results.”
 
ITEM 1B.   UNRESOLVED STAFF COMMENTS
 
None.


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ITEM 2.   PROPERTIES
 
Our significant leased properties are as follows:
 
                     
        Approximate
    Principal Lease
 
Purpose
 
Location
  Square Feet     Expiration  
 
Corporate Headquarters/Administration
  Pasadena, California     192,000       2010  
Corporate Headquarters/Administration*
  Pasadena, California     179,000       2016  
Mortgage Banking Headquarters
  Pasadena, California     190,000       2017  
Corporate IT
  Tempe, Arizona     28,500       2015  
Home Loan Servicing — Customer Service and Loan Administration
  Kalamazoo, Michigan     46,000       2013  
Home Loan Servicing — Master Servicing and Investor Reporting
  Austin, Texas     106,000       2012  
Consumer Cross-Sell and Retention Headquarters; Mortgage Bank Operations; Financial Freedom Headquarters, Legal/Administration
  Irvine, California     138,000       2012  
Regional Mortgage Banking Center, Consumer Direct Operations and Sales
  Kansas City, Missouri     53,000       2009  
Regional Mortgage Banking Center, Consumer Direct Operations and Sales
  Overland Park, Kansas     21,000       2009  
Regional Mortgage Banking Center
  Ontario, California     41,500       2012  
Regional Mortgage Banking Center
  San Ramon, California     46,500       2010  
Regional Mortgage Banking Center
  Atlanta (Norcross), Georgia     67,500       2009  
Regional Mortgage Banking Center
  Scottsdale, Arizona     46,000       2009-2011  
Regional Mortgage Banking Center
  Marlton, New Jersey     62,000       2012  
Regional Mortgage Banking Center
  East Norriton, Pennsylvania     39,000       2011  
Regional Mortgage Banking Center
  Columbia, South Carolina     36,000       2009  
Regional Mortgage Banking Center
  Dallas (Irving), Texas     41,000       2008  
Regional Mortgage Banking Center
  Seattle (Bellevue), Washington     31,000       2008  
Regional Mortgage Banking Center
  Sacramento (Rancho Cordova), California     34,000       2012  
Regional Mortgage Banking Center
  Tampa, Florida     34,000       2013  
Regional Mortgage Banking Center
  Chicago (Schaumburg), Illinois     62,000       2013  
Regional Mortgage Banking Center
  Boston (Quincy), Massachusetts     26,000       2013  
Eastern Operations Center — Financial Freedom
  Atlanta, Georgia     44,000       2012  
Western Operations Center — Financial Freedom
  Sacramento (Roseville), California     55,000       2008-2009  
Loan Servicing, Accounting and Finance — Financial Freedom
  San Francisco, California     23,000       2008  
Retail Lending Group
  182 locations in various states     494,000       2008-2013  
Consumer Bank Retail Operations
  28 locations in Southern California     101,000       2008-2017  
Other Sales Offices and Locations
  55 locations in various states     48,000       2008-2010  
 
 
* 5,203 square feet relates to a Consumer Bank Retail Operation
 
In addition to the above leased office space, we own a building in La Mirada, California of approximately 16,500 square feet, which houses our information technology data center. We own an additional four retail banking properties, containing an aggregate of approximately 56,000 square feet, located in Southern California.
 
ITEM 3.   LEGAL PROCEEDINGS
 
In the ordinary course of business, the Company and its subsidiaries are defendants in or parties to a number of legal actions. Certain of such actions involve alleged violations of employment laws, unfair trade practices,


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consumer protection laws, including claims relating to the Company’s sales, loan origination and collection efforts, and other federal and state banking laws. Management believes, based on current knowledge and after consultation with counsel, that these legal actions, individually and in the aggregate, and the losses, if any, resulting from the likely final outcome thereof, will not have a material adverse effect on the Company and its subsidiaries’ financial position, but may have a material impact on the results of operations of particular periods. Refer to “Note 20 — Commitments and Contingencies” in the accompanying notes to consolidated financial statements for further discussion.
 
ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
No matters were submitted to a vote of shareholders during the quarter ended December 31, 2007.
 
PART II
 
ITEM 5.   MARKET FOR INDYMAC BANCORP, INC.’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
 
STOCK INFORMATION
 
IndyMac Bancorp, Inc.’s common stock is traded on the New York Stock Exchange (“NYSE”) under the symbol “IMB” effective May 1, 2007. Previously, it was trading under the symbol “NDE”.
 
The following table sets forth the high and low sales prices (as reported by Bloomberg Financial Service) for shares of IndyMac Bancorp, Inc.’s common stock for the years ended December 31, 2007 and 2006:
 
                                 
    2007     2006  
    High
    Low
    High
    Low
 
    ($)     ($)     ($)     ($)  
 
First Quarter
    45.82       26.27       43.24       37.71  
Second Quarter
    37.50       28.37       50.50       40.44  
Third Quarter
    31.50       16.86       47.24       37.15  
Fourth Quarter
    25.38       5.75       48.14       40.35  
 
ISSUANCE OF COMMON STOCK
 
The Company has a direct stock purchase plan which offers investors the ability to purchase shares of our common stock directly over the Internet. Investors interested in investing over $10,000 can also participate in the waiver program administered by Mellon Investor Services LLC. For the year ended December 31, 2007, we issued 7,427,104 shares of common stock at an average market price of $19.60 through this plan, as compared to the year ended December 31, 2006, for which we issued 3,532,360 shares of common stock at an average market price of $42.04 through this plan.


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SHARE REPURCHASE ACTIVITIES
 
The following summarizes share repurchase activities during the three months ended December 31, 2007:
 
                                 
                Total Number of
    Maximum Approximate
 
    Total
          Shares Purchased
    Dollar Value (In Million) of
 
    Number of
    Weighted
    as Part of Publicly
    Shares that may yet be
 
    Shares
    Average Price
    Announced Plans or
    Purchased Under the
 
    Purchased(1)     Paid per Share     Programs     Plans or Programs(2)  
 
Calendar Month:
                               
October 2007
        $           $ 300  
November 2007
    2,886       17.63             300  
December 2007
    375       8.48             300  
                                 
Total
    3,261       16.58             300  
                                 
 
 
(1) All shares purchased during the periods indicated represent withholding of a portion of shares to cover taxes in connection with vesting of restricted stock or exercise of stock options.
 
(2) Our Board of Directors previously approved a $500 million share repurchase program. Since its inception in 1999, we have repurchased a total of 28.0 million shares through this program. In January 2007, we obtained an authorization from the Board of Directors to repurchase an additional $236.4 million of common stock for a total current authorization of up to $300 million.
 
As of February 15, 2008, 80,894,900 shares of IndyMac Bancorp, Inc.’s common stock were held by approximately 1,847 shareholders of record.
 
DIVIDEND POLICY
 
In light of the current financial performance of Indymac, the Board of Directors indefinitely suspended its quarterly cash dividend payments on our common stock beginning the first quarter of 2008.
 
For the years ended December 31, 2007 and 2006, we declared the following cash dividends:
 
                 
    Dividend
    Dividend
 
    per
    Payout
 
    Share     Ratio(1)  
 
2007
               
First Quarter
  $ 0.50       71 %
Second Quarter
  $ 0.50       83 %
Third Quarter
  $ 0.50       (18 )%
Fourth Quarter
  $ 0.25       (4 )%
2006
               
First Quarter
  $ 0.44       37 %
Second Quarter
  $ 0.46       31 %
Third Quarter
  $ 0.48       40 %
Fourth Quarter
  $ 0.50       52 %
 
 
(1) Dividend payout ratio represents dividends declared per share as a percentage of diluted earnings (loss) per share. This ratio was negative for the third and fourth quarters of 2007 due to the Company’s net loss and resulting diluted loss per share for those two periods.


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In 2007 and 2006, we funded the payment of dividends primarily from the dividend from Indymac Bank and cash on hand at the Parent Company. The future principal source of funds for the dividend payments is anticipated to be the dividends we will receive from Indymac Bank. The payment of dividends by Indymac Bank is subject to regulatory requirements and review. See “Item 1. Business- Regulation and Supervision-Regulations of Indymac Bank-Capital Distribution Regulations” for further information. There is no assurance that the Bank will be able to pay dividends to the Company in the future.
 
EQUITY COMPENSATION PLANS INFORMATION
 
The equity compensation plans information required under this Item 5 is hereby incorporated by reference to Indymac Bancorp’s definitive proxy statement, to be filed pursuant to Regulation 14A within 120 days after the end of our 2007 fiscal year.


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ITEM 6.  SELECTED FINANCIAL DATA
(Dollars in millions, except per share data)
 
                                         
    Year Ended December 31  
    2007     2006     2005(2)     2004(2,3,4)     2003(2,4)  
 
Selected Balance Sheet Information (at December 31)(1)
                                       
Cash and cash equivalents
  $ 562     $ 542     $ 443     $ 356     $ 115  
Securities (trading and available for sale)
    7,328       5,443       4,102       3,689       1,838  
Loans held for sale
    3,777       9,468       6,024       4,446       2,573  
Loans held for investment
    16,454       10,177       8,278       6,750       7,449  
Allowance for loan losses
    (398 )     (62 )     (55 )     (53 )     (53 )
Mortgage servicing rights
    2,495       1,822       1,094       641       444  
Other assets
    2,516       2,105       1,566       997       874  
                                         
Total Assets
  $ 32,734     $ 29,495     $ 21,452     $ 16,826     $ 13,240  
                                         
Deposits
  $ 17,815     $ 10,898     $ 7,672     $ 5,743     $ 4,351  
Advances from Federal Home Loan Bank
    11,189       10,413       6,953       6,162       4,935  
Other borrowings
    652       4,637       4,367       3,162       2,622  
Other liabilities and preferred stock in subsidiary
    1,734       1,519       917       478       301  
                                         
Total Liabilities and Preferred Stock in Subsidiary
  $ 31,390     $ 27,467     $ 19,909     $ 15,545     $ 12,209  
                                         
Shareholders’ Equity
  $ 1,344     $ 2,028     $ 1,543     $ 1,280     $ 1,032  
                                         
Statement of Operations Information(1)
                                       
Net interest income
  $ 567     $ 527     $ 425     $ 405     $ 311  
Provision for loan losses
    (396 )     (20 )     (10 )     (8 )     (20 )
Gain (loss) on sale of loans
    (354 )     668       592       431       387  
Service fee income
    519       101       44       (12 )     (16 )
Gain (loss) on securities
    (439 )     21       18       (24 )     (31 )
Fee and other income
    107       50       37       27       19  
                                         
Net revenues
    4       1,347       1,106       819       650  
Total expenses
    (999 )     (791 )     (621 )     (483 )     (382 )
(Provision) benefit for income taxes
    380       (213 )     (192 )     (134 )     (107 )
                                         
Net earnings (loss)
  $ (615 )   $ 343     $ 293     $ 202     $ 161  
                                         
Operating Data
                                       
SFR mortgage loan production
  $ 76,979     $ 89,951     $ 60,774     $ 37,902     $ 29,236  
Total loan production(5)
    78,316       91,698       62,714       39,048       30,036  
Mortgage industry market share(6)
    3.30 %     3.30 %     2.01 %     1.37 %     0.77 %
Pipeline of SFR mortgage loans in process (at December 31)
  $ 7,506     $ 11,821     $ 10,488     $ 6,689     $ 4,116  
Loans sold
    71,164       79,049       52,297       31,036       23,176  
Loans sold/SFR mortgage loans production
    92 %     88 %     86 %     82 %     79 %
SFR mortgage loans serviced for others (at December 31)(7)
  $ 181,724     $ 139,817     $ 84,495     $ 50,219     $ 30,774  
Total SFR mortgage loans serviced (at December 31)
    198,170       155,656       90,721       56,038       37,066  
Average number of full-time equivalent employees (“FTEs”)
    9,518       7,935       6,240       4,715       3,882  
                                         
                                         
Per Common Share Data
                                       
                                         
                                         
Basic earnings (loss) per share(8)
  $ (8.28 )   $ 5.07     $ 4.67     $ 3.41     $ 2.92  
Diluted earnings (loss) per share(9)
    (8.28 )     4.82       4.43       3.27       2.88  
Dividends declared per share
    1.75       1.88       1.56       1.21       0.55  
Dividend payout ratio(10)
    (21 )%     39 %     35 %     37 %     19 %
Book value per share (at December 31)
  $ 16.61     $ 27.78     $ 24.02     $ 20.65     $ 18.17  
Closing price per share (at December 31)
    5.95       45.16       39.02       34.45       29.79  
Average shares (in thousands):
                                       
Basic
    74,261       67,701       62,760       59,513       55,247  
Diluted
    74,261       71,118       66,115       62,010       55,989  
                                         
                                         
Performance Ratios
                                       
                                         
                                         
Return on average equity
    (31.10 )%     19.09 %     21.23 %     17.38 %     17.02 %
Return on average assets
    (1.71 )%     1.17 %     1.38 %     1.20 %     1.38 %
Net interest margin, consolidated
    1.81 %     2.02 %     2.16 %     2.61 %     2.91 %
Net interest margin, thrift(11)
    2.16 %     2.11 %     2.27 %     2.15 %     1.78 %
Mortgage banking revenue (“MBR”) margin on loans sold(12)
    (0.22 )%     1.06 %     1.36 %     1.80 %     2.21 %
Efficiency ratio(13)
    244 %     58 %     55 %     58 %     57 %
Operating expenses to loan production
    1.24 %     0.86 %     0.99 %     1.24 %     1.27 %
                                         
                                         
Average Balance Sheet Data and Asset Quality Ratios
                                       
                                         
                                         
Average interest-earning assets
  $ 31,232     $ 26,028     $ 19,645     $ 15,521     $ 10,675  
Average assets
    35,969       29,309       21,278       16,871       11,712  
Average equity
    1,977       1,796       1,381       1,167       949  
Debt to equity ratio (at December 31)(14)
    16.2:1       13.5:1       12.9:1       12.1:1       11.8:1  
Tier 1 (core) capital ratio (at December 31)(15)
    6.24 %     7.39 %     8.21 %     7.66 %     7.56 %
Risk-based capital ratio (at December 31)(15)
    10.50 %     11.72 %     12.20 %     12.02 %     12.29 %
Non-performing assets to total assets (at December 31)
    4.61 %     0.63 %     0.34 %     0.73 %     0.76 %
Allowance for loan losses to total loans held for investment
(at December 31)
    2.42 %     0.61 %     0.67 %     0.78 %     0.71 %
Allowance for loan losses to non-performing loans held for investment
(at December 31)
    30.44 %     57.51 %     127.10 %     107.67 %     140.04 %


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(1) The items under the balance sheet and statement of operations sections are rounded individually and therefore may not necessarily add to the total.
 
(2) 2003-2005 data has been retrospectively adjusted to reflect the stock option expenses under Statement of Financial Accounting Standards (“SFAS”) No. 123(R), “Share Based Payment” (“SFAS 123(R)”). Refer to “Note 23 — Benefit Plans” in the accompanying notes to our consolidated financial statements for further discussion.
 
(3) For the year ended December 31, 2004, the data is presented on a pro forma basis excluding the effect of change in accounting principle for rate lock commitments under Staff Accounting Bulletin No. 105, “Application of Accounting Principles to Loan Commitments” (“SAB 105”), effective April 1, 2004, and for the impact of the purchase accounting adjustments for Financial Freedom. The SAB 105 impact for the year ended December 31, 2004 was $59.5 million. Additionally, the impact of the purchase accounting adjustment for Financial Freedom totaled $7.9 million before-tax. The pro forma results are provided so that investors can evaluate our results on a comparable basis. A full reconciliation between the pro forma and GAAP amounts, with the relevant performance ratios, is as follows:
 
                         
    Year Ended December 31, 2004  
    GAAP     Adjustments     Pro Forma  
    (Dollars in millions, except per share data)  
 
Gain on sale of loans
  $ 364     $ 67     $ 431  
Net revenues
    751       67       818  
Other expense
    483             483  
Income taxes
    106       27       133  
                         
Net earnings
  $ 162     $ 40     $ 202  
                         
Diluted earnings per share
  $ 2.61     $ 0.66     $ 3.27  
ROE
    13.89 %             17.38 %
ROA
    0.96 %             1.20 %
 
(4) The Company previously classified the initial deferral of the incremental direct origination costs net of the fees collected on the loans as a net reduction in operating expenses. However, during 2005, we revised the presentation to reflect the deferral of the total fees collected as a reduction of fee and other income and the deferral of the incremental direct origination costs as a reduction of operating expenses. All prior periods were revised to conform to the current year presentation. This revision had no impact on reported earnings or the balance sheet in 2005 or in any prior period. Certain performance ratios based on net revenues or operating expenses were revised accordingly.
 
(5) Total loan production includes newly originated commitments on builder construction loans as well as commercial real estate loan production, which started in March 2007.
 
(6) Mortgage industry market share is calculated based on our total SFR mortgage loan production, both purchased (mortgage broker and banker) and originated (retail and mortgage broker and banker), in all channels (the numerator) divided by the Mortgage Bankers Association (“MBA”) February 15, 2008 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 financial institutions and conduit channels) of the mortgages. Therefore, our market share calculation may not be mathematically precise, but it is consistent with industry calculations, which we believe provides investors with a good view of our relative standing compared to our top mortgage lending peers.
 
(7) 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.
 
(8) Net earnings (loss) divided by weighted average basic shares outstanding for the year.


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(9) Net earnings (loss) divided by weighted average diluted shares outstanding for the year. Due to the net loss for the year ended December 31, 2007, no potentially dilutive shares are included in the diluted loss per share calculation as including such shares in the calculation would be anti-dilutive.
 
(10) Dividend payout ratio represents dividends declared per share as a percentage of diluted earnings (loss) per share. This ratio was negative for 2007 due to the Company’s net loss and resulting diluted loss per share for the year.
 
(11) Net interest margin, thrift, represents the combined margin for thrift, elimination and other, and corporate overhead.
 
(12) 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.
 
(13) Efficiency ratio is defined as operating expenses divided by net revenues, excluding provision for loan losses.
 
(14) Total debt divided by total shareholders’ equity. For December 31, 2007, preferred stock in subsidiary is included in the calculation.
 
(15) 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.


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ITEM 7.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
The following discussion and analysis should be read in conjunction with our consolidated financial statements, and the notes thereto and the other information incorporated by reference herein.
 
OVERVIEW
 
The U.S. mortgage industry experienced unprecedented disruption in 2007. A combination of credit tightening and softening real estate prices throughout the U.S. has resulted in an industry-wide increase in delinquencies and foreclosures. Many mortgage lenders were forced to sell loans and securities at distressed prices, and many that were not depository institutions collapsed or were severely affected. As a result of this disruption, Indymac has made significant changes in its business model. We are currently expecting to originate a significant portion of our loans for sale to the GSEs as that market remains the only reliable secondary market, at present.
 
We have reduced our mortgage production by eliminating production channels and suspending products. We have suspended or eliminated many higher risk products, including high CLTV closed-end second liens and HELOCs, consumer and builder construction loans, and most non-conforming loan production. Also, we exited certain production channels, including the conduit channel, the homebuilder division and the home equity division. As a result, production results for 2007 show a significant decline from the prior year.
 
2007 was also severely impacted by worsening credit conditions as home prices and home sales declined. This has led to a significant increase in delinquencies in many products, particularly in higher loan-to-value (“LTV”) first and second lien loans and builder construction loans. As a result of the significantly worsening trends in home prices and loan delinquencies, we recorded significant charges, principally related to credit risk in our HFI portfolio, builder construction portfolio, and consumer construction portfolio. In addition, we recorded significant valuation adjustments in our loans held for sale, investment and non-investment grade securities and in residual securities. Finally, delinquency and repurchase demand trends, predominantly in our higher CLTV/LTV loan products, increased significantly.
 
As a result of these changes, virtually all of our operating segments, except for the mortgage servicing division and Financial Freedom, our reverse mortgage lending subsidiary, reported material losses in 2007. For the year ended December 31, 2007, Indymac had a consolidated net loss of $614.8 million. Regarding business segment performance1(, the mortgage production division had a net loss of $96.8 million in 2007 while the mortgage servicing division had earnings of $181.4 million. Combining mortgage production and servicing, the mortgage banking segment recorded net earnings of $33.0 million. The thrift segment recorded a net loss of $199.2 million for 2007 and our discontinued business activities recorded a net loss of $281.1 million. As a result of our thrift structure and strong capital and liquidity positions, 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 division, mortgage servicing division and the thrift segment is before divisional and corporate overhead. Net income for the total mortgage banking segment is after divisional overhead but before corporate overhead.


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NARRATIVE SUMMARY OF CONSOLIDATED FINANCIAL RESULTS
 
Year ended December 31, 2007 Compared to Year ended December 31, 2006
 
The Company recorded a net loss of $614.8 million, or $8.28 loss per diluted share, for the year ended December 31, 2007, compared with net earnings of $342.9 million, or $4.82 per diluted share, for the year ended December 31, 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. We recorded $1.4 billion of credit costs for the year ended December 31, 2007 compared to $126.1 million for the year ended December 31, 2006. As a result, our total credit reserves increased to $2.4 billion at December 31, 2007 compared to $619 million as of December 31, 2006. See the “Asset Quality” section for further information on credit reserves.
 
SFR Mortgage Loan Production
 
Our total SFR mortgage loan production for the year ended December 31, 2007 dropped 14%, to $77.0 billion, as compared to $90.0 billion for 2006. This decline in volume is mainly reflected in the 47%, or $14.0 billion, drop in production from our conduit channel from 2006 as we exited this channel due to its inherently lower profit margins and the current uncertainty with respect to secondary market spreads and execution. Also, volume from the mortgage broker and banker channel declined by $1.7 billion, or 4%, from 2006 as we migrated our production efforts to focus primarily on GSE-eligible loans. Total SFR mortgage loan production, excluding the conduit channel, produced $60.9 billion in 2007, reflecting a slight increase of 2% from $59.9 billion in 2006. Our retail channel continued to grow with production reaching $2.0 billion this year, significantly up from $7.0 million in 2006. The servicing retention channel saw an increase of 70% from 2006. The pipeline of SFR mortgage loans in process ended at $7.5 billion, down 37% from $11.8 billion at December 31, 2006.
 
Mortgage Banking Revenue Margin
 
Net revenues for the Company declined to $3.6 million for 2007 compared to $1.3 billion for 2006. This decline in net revenues 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 held for sale (“HFS”), HFI and credit risk securities portfolios. Our MBR margin declined to a negative 0.22% for the year ended December 31, 2007 from a positive 1.06% for the year ended December 31, 2006. This year over year MBR margin decline was primarily due to higher credit costs and the change in product mix of loans sold.
 
In the fourth quarter of 2007, we transferred HFS loans with an original cost basis of $10.9 billion to HFI loans as we no longer intend to sell these loans given the extreme disruption in the secondary mortgage market. These loans were transferred at the lower of cost or market (“LOCOM”), and, accordingly, we reduced the cost basis by $0.6 billion, resulting in an increase in HFI loans of $10.3 billion. The $0.6 billion reduction was a combination of LOCOM reserves existing at the third quarter of 2007 and additional charges to the gain on sale of loans during the fourth quarter of 2007. Embedded in this reduction are estimated credit losses of $474 million.
 
During 2007, we sold a total of $71.2 billion in loans and recorded a loss on sale of $354.4 million. By comparison, we sold a total of $79.0 billion in loans during 2006, which generated $668.0 million in gain on sale.
 
Other Credit Costs
 
As discussed earlier, credit costs during the year ended December 31, 2007 significantly increased primarily due to higher delinquency and foreclosure rates in both our HFS and HFI portfolios. For the HFI portfolio, we increased the provision for loan losses to $395.5 million for the year ended December 31, 2007 compared to $20.0 million for the year ended December 31, 2006. We repurchased $613 million of loans for the year ended December 31, 2007, mainly due to early payment defaults, compared to $194 million during the year ended December 31, 2006. Based on delinquency trends and demand activity, we expect to repurchase additional loans in 2008 and beyond. Accordingly, we recorded a provision for the secondary market reserve of $232.5 million for the year ended December 31, 2007, compared to $37.3 million for the prior year.


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Non-interest Income
 
Total non-interest income, excluding gain on sale of loans, increased 9% from $171.9 million for the year ended December 31, 2006 to $186.7 million for the year ended December 31, 2007. This increase is largely due to the strong performance from our mortgage servicing division. Service fee income increased $417.9 million as a direct result of the growth in our servicing portfolio, slower prepayment rates and effective hedge performance. These increases were offset by a reduction in revenue from our mortgage-backed securities (“MBS”) portfolio. The MBS portfolio revenue declined from a gain of $20.5 million for the year ended December 31, 2006 to a loss of $439.7 million for the year ended December 31, 2007, primarily due to valuation adjustments on non-investment grade and residual securities.
 
Operating Expenses
 
Total operating expenses increased 23% from $789.0 million for the year ended December 31, 2006 to $973.7 million for the year ended December 31, 2007. The increase is primarily reflected in the 20% growth of our average FTEs from 7,935 for 2006 to 9,518 for 2007, which was necessary to support the expansion of our retail lending group and growth in loan servicing and default management functions. Contributing to the increase in expenses were REO related expenses, which increased by $42.2 million due to further write-downs on REOs resulting from the rapid decline in values, as well as higher foreclosures resulting from worsened delinquencies in our portfolio. In addition, we recorded severance charges of approximately $28 million in the third quarter of 2007 related to the reduction of our workforce.
 
Year ended December 31, 2006 Compared to Year ended December 31, 2005
 
Industry loan volumes of $2.7 trillion were 28% below 2003’s historic high level and 10% lower than in 2005. Mortgage banking revenue margins declined further after sharp declines in 2005, and net interest margins continued to compress, as the yield curve inverted with the average spread between the 10-year Treasury yield and the 1-month LIBOR declining from 89 basis points in 2005 to negative 31 basis points in 2006. The housing industry slowed down significantly, increasing loan delinquencies and non-performing assets and driving up credit costs for all mortgage lenders. Yet, despite these challenges, Indymac reached new performance heights in 2006, achieving:
 
  •  Record mortgage loan production of $90 billion, a 48% increase over 2005;
 
  •  Record mortgage market share of 3.30%, a 64% gain over the 2.01% share we had in 2005;
 
  •  Record net revenues of $1.3 billion, a 22% increase over 2005;
 
  •  Record earnings per share of $4.82, a 9% gain;
 
  •  Record growth in total assets, which increased by $8 billion, or 37%, to $29.5 billion;
 
  •  Record growth in our portfolio of loans served for others, which increased by $55 billion, or 65%, to 140 billion;
 
  •  Strong return on equity of 19%, slightly lower than last year’s 21% level.
 
Net revenues of $1.3 billion for 2006 reflect an increase of 22% over 2005. Key drivers of this growth included the following:
 
1) Growth in average interest earning assets of 32% from $19.6 billion in 2005 to $26.0 billion in 2006, leading to an increase in net interest income of 24% to $526.7 million. The increase was primarily driven by the growth in production, increased retention of securities and loans in our held for investment portfolio, offset by the sale of loans. Net interest margin declined from 2.16% to 2.02% during a period of inverted yield curve. Factors contributing to this decline included higher cost of funds and hedging cost, higher premium amortization and increased non-performing loans. This decline somewhat mitigated the positive impact from the growth in average interest earning assets.
 
2) Growth in mortgage production of 48% in 2006 over 2005 to a record high of $90.0 billion, led to a 51% increase in loans sold to $79.0 billion. Our market share increased from 2.01% in 2005 to 3.58% in 2006. Leading


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this growth were our Financial Freedom and conduit channels with increases in production of 71% and 90%, respectively. This volume growth mitigated a decline in the MBR margin on loans sold, resulting from a decline in higher margin pay option ARM volume and a higher mix of lower margin conduit and correspondent channel volume. The MBR margin on loans sold was 1.06% in 2006, down from 1.36% in 2005.
 
3) Provision for loan loss increased from $10.0 million for 2005 to $20.0 million for 2006 mainly due to an increase in our non-performing assets as delinquencies worsened. As of December 31, 2006, the allowance for loan losses represented 4.9 times net charge-offs, down from 7.2 times at December 31, 2005 as net charge-offs for 2006 increased 4 basis points to 0.14% of average loans held for investment.
 
4) Service fee income of $101.3 million in 2006 grew 129% over 2005 driven by the increase in the principal balance of loans serviced for others combined with effective hedging performance and slowing prepayments attributable to reduced refinancing and home sales.
 
Operating expenses of $789.0 million in 2006 reflected an increase of 28%, consistent with the growth in our operations and infrastructure investments in order to execute on our strategy to increase production and revenue. During 2006, we opened three new regional centers, which increased our total regional centers to 16 at December 31, 2006. In addition, average FTE increased 27% from 6,240 to 7,935 during the year supporting this growth.
 
SUMMARY OF BUSINESS SEGMENT RESULTS
 
Our segment reporting is organized consistent with our hybrid business model. 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 the loans, fees earned from origination, net interest income earned while the loans are held pending sale, and servicing fees. On the thrift side, we generate core spread income from our investment portfolio of prime SFR mortgage loans, MBS and consumer construction loans.
 
As conditions in the U.S. mortgage market have deteriorated, we have exited certain production channels and are reporting them in a separate category in our segment reporting, “Discontinued Business Activities” as a result of our continuing involvement with these activities. These exited production channels include the conduit, homebuilder and home equity channels. These activities are not considered discontinued operations as defined by SFAS 144. We segregated the business activities we have exited so that the segments represent our new business model. See the “Discontinued Business Activities” section for more information.
 
We have developed a detailed reporting process that computes net earnings and ROE for our key business segments each reporting period, and we use 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 that earn the best returns for our shareholders.
 
We predominantly use 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 would 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.
 
The following table and discussions 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 and discontinued business activities, 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 major operating segments.


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The following summarizes the Company’s financial results by segment for the years indicated (dollars in thousands):
 
                                                                 
    Mortgage
                Total
          Total
    Discontinued
       
    Banking
    Thrift
    Eliminations
    Operating
    Corporate
    On-Going
    Business
    Total
 
    Segment     Segment     & Other(1)     Results     Overhead     Businesses     Activities     Company  
 
Year Ended December 31, 2007
                                                               
Operating Results
                                                               
Net interest income
  $ 93,248     $ 234,865     $ 107,937     $ 436,050     $ (9,437 )   $ 426,613     $ 140,129     $ 566,742  
Provision for loan losses
          (185,919 )           (185,919 )           (185,919 )     (209,629 )     (395,548 )
Gain (loss) on sale of loans
    96,858       24,409       (168,083 )     (46,816 )           (46,816 )     (307,544 )     (354,360 )
Service fee income (expense)
    427,490             88,357       515,847             515,847       3,406       519,253  
Gain (loss) on securities
    (35,595 )     (339,010 )     (42,965 )     (417,570 )           (417,570 )     (22,143 )     (439,713 )
Gain on sale and leaseback of building
                            23,982       23,982             23,982  
Other income (expense)
    43,467       29,349       3,582       76,398       1,408       77,806       5,402       83,208  
                                                                 
Net revenues (expense)
    625,468       (236,306 )     (11,172 )     377,990       15,953       393,943       (390,379 )     3,564  
Operating expenses
    812,639       97,130       65,182       974,951       161,188       1,136,139       76,912       1,213,051  
Severance charges
                            31,850       31,850             31,850  
Pension curtailment gain
                            (10,335 )     (10,335 )           (10,335 )
Deferral of expenses under SFAS 91
    (244,421 )     (8,251 )     (78 )     (252,750 )           (252,750 )     (6,405 )     (259,155 )
                                                                 
Pre-tax earnings (loss)
    57,250       (325,185 )     (76,276 )     (344,211 )     (166,750 )     (510,961 )     (460,886 )     (971,847 )
                                                                 
Minority interests
    1,288       1,207       20,029       22,524       48       22,572       449       23,021  
                                                                 
Net earnings (loss)
  $ 32,964     $ (199,247 )   $ (65,797 )   $ (232,080 )   $ (101,599 )   $ (333,679 )   $ (281,129 )   $ (614,808 )
                                                                 
Performance Data
                                                               
Average interest-earning assets
  $ 8,386,138     $ 14,976,535     $ (88,143 )   $ 23,274,530     $ 553,740     $ 23,828,270     $ 7,403,916     $ 31,232,186  
Allocated capital
    823,308       670,476       4,325       1,498,109       58,570       1,556,679       420,253       1,976,932  
Loans produced
    58,217,003       2,988,322       N/A       61,205,325             61,205,325       17,111,059       78,316,384  
Loans sold
    59,148,675       6,363,003       (15,194,611 )     50,317,067             50,317,067       20,846,657       71,163,724  
MBR margin
    0.39 %     0.38 %     N/A       N/A       N/A       0.17 %     (1.17 )%     (0.22 )%
ROE
    4 %     (30 )%     N/A       (15 )%     N/A       (21 )%     (67 )%     (31 )%
Net interest margin
    N/A       1.57 %     N/A       1.87 %     N/A       1.79 %     1.89 %     1.81 %
Net interest margin, thrift
    N/A       1.57 %     N/A       N/A       N/A       2.16 %     N/A       N/A  
Average FTE
    7,173       436       333       7,942       1,241       9,183       335       9,518  
                                                                 
                                                                 
Year Ended December 31, 2006
                                                               
Operating Results
                                                               
Net interest income
  $ 80,721     $ 197,333     $ 76,139     $ 354,193     $ (8,737 )   $ 345,456     $ 181,265     $ 526,721  
Provision for loan losses
          (12,728 )           (12,728 )           (12,728 )     (7,265 )     (19,993 )
Gain (loss) on sale of loans
    616,594       42,649       (67,639 )     591,604             591,604       76,450       668,054  
Service fee income (expense)
    136,790             (35,939 )     100,851             100,851       466       101,317  
Gain (loss) on securities
    19,173       3,434       10,809       33,416             33,416       (12,934 )     20,482  
Other income (expense)
    12,268       26,771       (1,664 )     37,375       2,220       39,595       10,527       50,122  
                                                                 
Net revenues (expense)
    865,546       257,459       (18,294 )     1,104,711       (6,517 )     1,098,194       248,509       1,346,703  
Operating expenses
    685,867       81,720       49,009       816,596       168,697       985,293       72,160       1,057,453  
Deferral of expenses under SFAS 91
    (247,047 )     (8,812 )     (2,229 )     (258,088 )           (258,088 )     (8,158 )     (266,246 )
                                                                 
Pre-tax earnings (loss)
    426,726       184,551       (65,074 )     546,203       (175,214 )     370,989       184,507       555,496  
                                                                 
Net earnings (loss)
  $ 259,225     $ 112,394     $ (34,352 )   $ 337,267     $ (106,705 )   $ 230,562     $ 112,367     $ 342,929  
                                                                 
Performance Data
                                                               
Average interest-earning assets
  $ 6,291,661     $ 12,037,309     $ (89,838 )   $ 18,239,132     $ 588,649     $ 18,827,781     $ 7,200,495     $ 26,028,276  
Allocated capital
    636,786       536,943       2,108       1,175,837       182,550       1,358,387       437,873       1,796,260  
Loans produced
    56,802,029       2,937,596             59,739,625             59,739,625       31,958,199       91,697,824  
Loans sold
    54,536,739       2,666,610       (9,184,815 )     48,018,534             48,018,534       31,030,428       79,048,962  
MBR margin
    1.30 %     1.60 %     N/A       N/A       N/A       1.42 %     N/A       1.06 %
ROE
    41 %     21 %     N/A       29       N/A       17 %     26 %     19 %
Net interest margin
    N/A       1.64 %     N/A       1.94 %     N/A       1.83 %     2.52 %     2.02 %
Net interest margin, thrift
    N/A       1.64 %     N/A       N/A       N/A       2.11 %     N/A       N/A  
Average FTE
    5,586       473       314       6,373       1,232       7,605       330       7,935  
                                                                 
                                                                 
Year over Year Comparison
                                                               
% change in net earnings
    (87 )%     (277 )%     (92 )%     (169 )%     5 %     (245 )%     (350 )%     (279 )%
% change in capital
    29 %     25 %     105 %     27 %     (68 )%     15 %     (4 )%     10 %
 
 
(1) Included are eliminations, deposits, and treasury items. See the “Eliminations and Other Segment” section for details.


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MORTGAGE BANKING SEGMENT
 
Our mortgage banking segment primarily consists of the mortgage production division 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 net earnings of $33.0 million for the year ended December 31, 2007 compared with net earnings of $259.2 million in the prior year. These lower results were caused by a large decline in earnings from our mortgage production division, which reported a $96.8 million after-tax loss this year, partially offset by very strong returns and growth in the mortgage servicing division.
 
The primary driver of the loss in the mortgage production division in 2007 was the decline in the MBR margin from 1.29% of loans sold in 2006 to 0.32% of loans sold in 2007. A large increase in production credit costs was the primary cause of this decline. Mortgage banking revenue was reduced by $476.5 million in pre-tax credit related costs in 2007, representing a $377.6 million increase from $98.9 million in 2006. As credit conditions in the U.S. mortgage market have deteriorated, our loan production credit costs have increased. Thus, we discontinued the offering of products where these losses were concentrated. As a result, substantially all of the production credit losses we incurred in the fourth quarter of 2007 resulted from products we no longer offer.
 
In addition to the increased credit losses, the continued severe disruption in the secondary market for loans and securities not sold to the GSEs has caused us to rapidly change our production business model from a primary focus on non-GSE mortgage banking to a model that now produces production that is 75%-85% eligible for sale to the GSEs. This change in our business model has temporarily reduced the profitability of our production divisions, as we have worked to lower our costs and our salesforce has adapted to selling these GSE products.
 
The mortgage banking segment was also negatively impacted in 2007 as it includes two start-up businesses, the retail lending group and commercial mortgage banking division, which are currently unprofitable. These two businesses reported a combined after-tax loss of $38.8 million in 2007. We expect these businesses to contribute to mortgage banking profits in 2008.
 
The significant disruption in credit and housing markets that occurred during 2007 had a materially negative impact on our production results. These disruptions have 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 10% in 2007 compared with 20% in 2006. 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 174% from $66.1 million in 2006 to $181.4 million in 2007 and resulted in a 50% return on the approximately $400 million of capital we have invested in this division.


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The following provides details on total mortgage banking segment for the years indicated (dollars in thousands):
 
                                         
                Consumer
    Commercial
    Total
 
    Mortgage
    Mortgage
    Mortgage
    Mortgage
    Mortgage
 
    Production
    Servicing
    Banking
    Banking
    Banking
 
    Division     Division     O/H(1)     Division     Segment  
 
Year Ended December 31, 2007
                                       
Operating Results
                                       
Net interest income
  $ 132,086     $ (40,563 )   $ 853     $ 872     $ 93,248  
Provision for loan losses
                             
Gain (loss) on sale of loans
    45,872       56,124             (5,138 )     96,858  
Service fee income (expense)
    38,046       389,441             3       427,490  
Gain (loss) on securities
          (35,595 )                 (35,595 )
Other income (expense)
    29,543       12,986       701       237       43,467  
                                         
Net revenues (expense)
    245,547       382,393       1,554       (4,026 )     625,468  
Operating expenses
    632,431       97,073       73,998       9,137       812,639  
Deferral of expenses under SFAS 91
    (229,972 )     (13,619 )           (830 )     (244,421 )
                                         
Pre-tax earnings (loss)
    (156,912 )     298,939       (72,444 )     (12,333 )     57,250  
                                         
Minority interests
    604       627       28       29       1,288  
                                         
Net earnings (loss)
  $ (96,777 )   $ 181,427     $ (44,146 )   $ (7,540 )   $ 32,964  
                                         
Performance Data
                                       
Average interest-earning assets
  $ 7,135,160     $ 1,176,711     $ 2,427     $ 71,840     $ 8,386,138  
Allocated capital
    441,917       361,405       14,208       5,778       823,308  
Loans produced
    53,263,377       4,592,979             360,647       58,217,003  
Loans sold
    55,035,002       4,071,678             41,995       59,148,675  
MBR margin
    0.32 %     1.38 %     N/A       N/A       0.39 %
ROE
    (22 )%     50 %     N/A       (130 )%     4 %
Net interest margin
    1.85 %     N/A       N/A       1.21 %     N/A  
Average FTE
    5,433       281       1,420       39       7,173  
                                         
Year Ended December 31, 2006
                                       
Operating Results
                                       
Net interest income
  $ 91,648     $ (11,489 )   $ 562     $     $ 80,721  
Provision for loan losses
                             
Gain (loss) on sale of loans
    585,501       31,093                   616,594  
Service fee income (expense)
    21,141       115,649                   136,790  
Gain (loss) on securities
          19,173                   19,173  
Other income (expense)
    1,958       7,015       3,295             12,268  
                                         
Net revenues (expense)
    700,248       161,441       3,857             865,546  
Operating expenses
    564,200       60,894       59,997       776       685,867  
Deferral of expenses under SFAS 91
    (238,979 )     (8,068 )                 (247,047 )
                                         
Pre-tax earnings (loss)
    375,027       108,615       (56,140 )     (776 )     426,726  
                                         
Net earnings (loss)
  $ 227,739     $ 66,147     $ (34,189 )   $ (472 )   $ 259,225  
                                         
Performance Data
                                       
Average interest-earning assets
  $ 5,707,401     $ 581,789     $ 2,471     $     $ 6,291,661  
Allocated capital
    370,703       253,235       12,848             636,786  
Loans produced
    54,103,697       2,698,332                   56,802,029  
Loans sold
    52,480,834       2,055,905                   54,536,739  
MBR margin
    1.29 %     1.51 %     N/A       N/A       1.30 %
ROE
    61 %     26 %     N/A       N/A       41 %
Net interest margin
    1.61 %     N/A       N/A       N/A       N/A  
Average FTE
    4,324       201       1,060       1       5,586  
                                         
Year over Year Comparison
                                       
% change in net earnings
    (142 )%     174 %     (29 )%     N/A       (87 )%
% change in capital
    19 %     43 %     11 %     N/A       29 %
 
 
(1) Included mortgage production division overhead, servicing overhead and secondary marketing overhead of $(16.6) million, $(14.1) million and $(13.5) million, respectively, for the year ended December 31, 2007. For the year ended December 31, 2006, the mortgage production division overhead, servicing overhead and secondary marketing overhead were $(14.4) million, $(10.1) million and $(9.7) million, respectively.


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MORTGAGE PRODUCTION DIVISION
 
The mortgage production division originates loans through three divisions: mortgage professionals group (“MPG”), Financial Freedom and consumer direct. The MPG sources loans through relationships with mortgage brokers, financial institutions, Realtors, and homebuilders, and is composed of two channels: retail and mortgage broker and banker.
 
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 April 2007 acquisition of the retail platform of NYMC and the hiring of retail lending professionals provide a model for this division. As of December 31, 2007, we have 182 retail mortgage offices/branches throughout the U.S.
 
Mortgage broker and banker is the largest channel in our MPG, funding loans originated through mortgage brokers and emerging mortgage bankers nationwide. This channel also purchases closed loans — those already funded — on a flow basis from mortgage brokers, realtors, homebuilders, mortgage bankers and financial institutions.
 
Financial Freedom provides reverse mortgage products directly to seniors (age 62 and older) and through the mortgage broker and banker channel. Through this division, we remain the leader in the fast growing reverse mortgage market. Financial Freedom also retains MSRs and receives fees and ancillary revenues for servicing loans sold into the secondary market.


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The following provides details on the results for the mortgage production division for the years indicated (dollars in thousands):
 
                                                 
          Mortgage Professionals Group              
                Mortgage
    Total
          Total
 
    Consumer
          Broker and
    Mortgage
    Financial
    Mortgage
 
    Direct
    Retail
    Banker
    Professionals
    Freedom
    Production
 
    Division     Channel     Channel     Group     Division     Division  
 
Year Ended December 31, 2007
                               
Operating Results
                                               
Net interest income
  $ 1,238     $ 4,324     $ 106,736     $ 111,060     $ 19,788     $ 132,086  
Provision for loan losses
                                   
Gain (loss) on sale of loans
    7,804       (1,511 )     (99,838 )     (101,349 )     139,417       45,872  
Service fee income (expense)
                            38,046       38,046  
Other income (expense)
    726       12,485       15,978       28,463       354       29,543  
                                                 
Net revenues (expense)
    9,768       15,298       22,876       38,174       197,605       245,547  
Operating expenses
    23,917       104,122       367,567       471,689       136,825       632,431  
Severance charges
                                   
Deferral of expenses under SFAS 91
    (10,856 )     (37,512 )     (153,973 )     (191,485 )     (27,631 )     (229,972 )
                                                 
Pre-tax earnings (loss)
    (3,293 )     (51,312 )     (190,718 )     (242,030 )     88,411       (156,912 )
                                                 
Minority interests
    7       46       319       365       232       604  
                                                 
Net earnings (loss)
  $ (2,013 )   $ (31,295 )   $ (116,466 )   $ (147,761 )   $ 52,997     $ (96,777 )
                                                 
Performance Data
                               
Average interest-earning assets
  $ 116,713     $ 171,477     $ 5,879,797     $ 6,051,274     $ 967,173     $ 7,135,160  
Allocated capital
    5,710       13,761       288,202       301,963       134,244       441,917  
Loans produced
    1,062,934       2,027,631       45,449,927       47,477,558       4,722,885       53,263,377  
Loans sold
    1,139,515       1,569,648       47,536,034       49,105,682       4,789,805       55,035,002  
MBR margin(1)
    0.79 %     0.18 %     0.01 %     0.02 %     3.32 %     0.32 %
ROE
    (35 )%     (227 )%     (40 )%     (49 )%     39 %     (22 )%
Net interest margin
    1.06 %     2.52 %     1.82 %     1.84 %     2.05 %     1.85 %
Average FTE
    266       1,005       2,814       3,819       1,348       5,433  
                                                 
Year Ended December 31, 2006
                                               
Operating Results
                                               
Net interest income
  $ 2,478     $ 30     $ 79,222     $ 79,252     $ 9,918     $ 91,648  
Provision for loan losses
                                   
Gain (loss) on sale of loans
    32,162       315       392,180       392,495       160,844       585,501  
Service fee income (expense)
                            21,141       21,141  
Other income (expense)
    469       336       1       337       1,152       1,958  
                                                 
Net revenues (expense)
    35,109       681       471,403       472,084       193,055       700,248  
Operating expenses
    54,248       3,654       371,052       374,706       135,246       564,200  
Deferral of expenses under SFAS 91
    (22,330 )     (98 )     (184,295 )     (184,393 )     (32,256 )     (238,979 )
                                                 
Pre-tax earnings (loss)
    3,191       (2,875 )     284,646       281,771       90,065       375,027  
                                                 
Net earnings (loss)
  $ 1,943     $ (1,751 )   $ 173,349     $ 171,598     $ 54,198     $ 227,739  
                                                 
Performance Data
                                               
Average interest-earning assets
  $ 202,035     $ 2,637     $ 4,885,249     $ 4,887,886     $ 617,480     $ 5,707,401  
Allocated capital
    10,814       131       263,328       263,459       96,430       370,703  
Loans produced
    1,922,448       35,845       47,121,871       47,157,716       5,023,533       54,103,697  
Loans sold
    1,968,766       31,548       45,982,168       46,013,716       4,498,352       52,480,834  
MBR margin(1)
    1.76 %     1.09 %     1.03 %     1.03 %     3.80 %     1.29 %
ROE
    18 %     N/M       66 %     65 %     56 %     61 %
Net interest margin
    1.23 %     1.14 %     1.62 %     1.62 %     1.61 %     1.61 %
Average FTE
    372       25       2,655       2,680       1,272       4,324  
                                                 
Year over Year Comparison
                                               
% change in net earnings
    (204 )%     N/M       (167 )%     (186 )%     (2 )%     (142 )%
% change in capital
    (47 )%     N/M       9 %     15 %     39 %     19 %
 
 
(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 production division divided by 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 year that are not included in the amount of total loans sold.


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The following summarizes the key production drivers for the mortgage broker and banker channel for the years indicated:
 
                                         
    Year Ended December 31  
                % Change
          % Change
 
    2007     2006     2007/2006     2005     2007/2005  
 
Key Production Drivers:
                                       
Active customers(1)
    8,294       7,927       5 %     6,728       23 %
Sales personnel
    1,140       1,025       11 %     712       60 %
Number of regional offices
    16       16             13       23 %
 
 
 
(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 drivers of our mortgage banking segment. While the mortgage production division of our mortgage banking segment contributes 68% to our total loan originations, the following discussion refers to our total production, through both the mortgage banking and thrift segments and the discontinued business activities.
 
We generated SFR mortgage loan production of $77.0 billion for the year ended December 31, 2007, down $13.0 billion from the year ended December 31, 2006, and up $16.2 billion from the year ended December 31, 2005. Total loan production, including commercial real estate loans and builder financings, reached $78.3 billion for 2007, compared to $91.7 billion for 2006 and $62.7 billion for 2005. At December 31, 2007, our total pipeline of SFR mortgage loans in process was $7.5 billion, down 37% from $11.8 billion at December 31, 2006, and down 28% from $10.5 billion at December 31, 2005. On February 15, 2008, the MBA issued an estimate of the industry volume for 2007 of $2,332 billion, which represents a 14% drop from 2006, and a 23% drop from 2005. Based on this estimate, our market share is 3.30% for the year ended December 31, 2007 and remained flat compared to the year ended December 31, 2006, but up from 2.01% for the year ended December 31, 2005.
 
The decline in our SFR mortgage loan production from 2006 was attributable to the overall drop in industry mortgage origination volumes and from our transition to becoming primarily a GSE lender as a result of the severe disruption in housing and credit markets. Total SFR mortgage loan production decreased primarily due to the $14.0 billion decrease in our conduit business and the discontinuance of various products due to credit and liquidity concerns. We exited the conduit channel as a response to the disruption in the secondary market. Excluding production from the conduit channel, total SFR production increased $1.0 billion year-over-year. MPG’s mortgage broker and banker channel declined $1.7 billion in production from 2006. Our retail channel generated $2.0 billion in production for 2007. The Financial Freedom division saw a 6% decline in its reverse mortgage production from 2006 as competition intensified in the reverse mortgage market.


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The following summarizes our loan production by division and channel for the years indicated (dollars in millions):
 
                                         
    Year Ended December 31  
                % Change
          % Change
 
    2007     2006     2007/2006     2005     2007/2005  
 
Production by Division:
                                       
SFR mortgage loan production:
                                       
Mortgage professionals group:
                                       
Mortgage broker and banker channel(1)
  $ 45,449     $ 47,123       (4 )%   $ 34,864       30 %
Retail channel
    2,027       7       N/M             N/A  
Consumer direct division
    1,063       1,951       (46 )%     2,883       (63 )%
Financial Freedom division
    4,723       5,024       (6 )%     2,935       61 %
Servicing retention division
    4,593       2,698       70 %     1,079       326 %
Consumer construction division(2)
    2,988       2,937       2 %     2,994        
                                         
Total on-going businesses
    60,843       59,740       2 %     44,755       36 %
                                         
Conduit channel
    16,097       30,101       (47 )%     15,811       2 %
Home equity division(2)
    39       110       (65 )%     208       (81 )%
                                         
Total discontinued business activities
    16,136       30,211       (47 )%     16,019       1 %
                                         
Total SFR mortgage loan production
    76,979       89,951       (14 )%     60,774       27 %
Commercial loan production:
                                       
Commercial mortgage banking division — on-going businesses
    361             N/A             N/A  
Homebuilder division(2) — discontinued business activities
    976       1,747       (44 )%     1,940       (50 )%
                                         
Total loan production
  $ 78,316     $ 91,698       (15 )%   $ 62,714       25 %
                                         
Total pipeline of SFR mortgage loans in process at year end
  $ 7,506     $ 11,821       (37 )%   $ 10,488       (28 )%
                                         
 
 
(1) The mortgage broker and banker channel includes $5.3 billion, $3.3 billion and $1.3 billion of production from wholesale inside sales for 2007, 2006 and 2005, respectively. The mortgage broker and banker 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 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 years indicated (dollars in millions):
 
                                                 
    Year Ended December 31        
                % Change
          % Change
       
    2007     2006     2007/2006     2005     2007/2005        
 
Production by Product Type:
                                               
Standard first mortgage products:
                                               
Prime(1)
  $ 62,917     $ 71,403       (12 )%   $ 48,315       30 %        
Subprime(1)
    2,617       2,674       (2 )%     2,276       15 %        
                                                 
Total standard first mortgage products (S&P evaluated)
    65,534       74,077       (12 )%     50,591       30 %        
Specialty consumer home mortgage products:
                                               
HELOCs(1)/Seconds
    3,496       7,199       (51 )%     3,653       (4 )%        
Reverse mortgages
    4,723       5,024       (6 )%     2,935       61 %        
Consumer construction(2)
    3,182       3,651       (13 )%     3,595       (11 )%        
Government — FHA/VA(3)
    44             N/A             N/A          
                                                 
Subtotal SFR mortgage production
    76,979       89,951       (14 )%     60,774       27 %        
                                                 
Commercial loan products:
                                               
Commercial real estate
    361             N/A             N/A          
Builder construction commitments(2)
    976       1,747       (44 )%     1,940       (50 )%        
                                                 
Total production
  $ 78,316     $ 91,698       (15 )%   $ 62,714       25 %        
                                                 
Total S&P lifetime loss estimate(4)
    1.14 %     1.90 %             1.49 %                
                                                 
 
 
(1) The 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 further classification may not accurately reflect the credit quality of loans produced implied through such classification.
 
(2) Amounts represent total commitments.
 
(3) Amounts represent loans insured by the Federal Housing Administration (“FHA”) and loans guaranteed by the Veterans Administration (“VA”).
 
(4) 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. All loss estimates reported here have been restated to use S&P’s new 6.1 model which was released in November 2007.


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Loan Sale and Distribution
 
The following shows the various channels through which loans were distributed for the Company during the years indicated (dollars in millions):
 
                         
    Year Ended December 31  
    2007     2006     2005  
 
Distribution of Loans by Channel:
                       
Sales of GSE equivalent loans
    48 %     20 %     17 %
Private-label securitizations
    34 %     40 %     60 %
Whole loan sales, servicing retained
    17 %     38 %     20 %
Whole loan sales, servicing released
    1 %     2 %     3 %
                         
Total loan sales percentage
    100 %     100 %     100 %
                         
Total loan sales
  $ 71,164     $ 79,049     $ 52,297  
                         
 
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 48% of total loan distribution for the year ended December 31, 2007, up from 20% for the year ended December 31, 2006. 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). During the year ended December 31, 2007, the calculation of gain (loss) on sales of loans included the retention of $988.2 million of MSRs and $2.8 billion of other retained assets, consisting of investment-grade securities of $581.4 million and non-investment grade and residual securities of $169.0 million. During the year ended December 31, 2007, assets previously retained generated cash flows of $858.5 million. For more information on the valuation assumptions related to our retained assets, see “Table 12. Valuation of MSRs, Interest-Only, Prepayment Penalty, and Residual Securities” of “Appendix A: Additional Quantitative Disclosures.”
 
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 is included in the MBR margin calculation.
 
The following summarizes the amount of loans sold and the MBR margin during the years indicated (dollars in millions):
 
                                         
    Year Ended December 31  
                % Change
          % Change
 
    2007     2006     2007/2006     2005     2007/2005  
 
Total loans sold
  $ 71,164     $ 79,049       (10 )%   $ 52,297       36 %
MBR margin after production hedging
    0.99 %     1.41 %     (30 )%     1.70 %     (42 )%
MBR margin after credit costs
          1.28 %           1.62 %      
Net MBR margin
    (0.22 )%     1.06 %     (121 )%     1.37 %     (116 )%
 
For more details on our MBR margin, see “Table 7. MBR Margin” of “Appendix A: Additional Quantitative Disclosures.”


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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. Our mortgage servicing platform remains a strong and stable source of profitability in the midst of the current mortgage market turmoil.
 
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 and/or mortgage spreads widen, 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 and/or mortgage spreads tighten, 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.
 
During 2007, our MSRs experienced a decline in value due to significantly lower mortgage interest rates. However, this was more than offset by gains in value in our hedging instruments and from a continued decline in actual prepayment speeds in the year. Actual prepayment speeds have declined due to the impact of tighter guidelines on available mortgage loans in the market and declining home prices limiting the refinance capability of consumers.
 
Our servicing portfolio provides opportunities to cross sell other products, such as 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 a third-party opinion of value. 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. For further detail on the valuation assumptions, see “Table 12. Valuation of MSRs, Interest-Only, Prepayment Penalty, and Residual Securities” of “Appendix A: Additional Quantitative Disclosures.”
 
Total capitalized MSRs reached $2.5 billion as of December 31, 2007, up $673.0 million, or 37%, from $1.8 billion at December 31, 2006.


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The following provides additional details on the results for the mortgage servicing division for the years indicated (dollars in thousands):
 
                         
    Mortgage
          Total
 
    Servicing
    Servicing
    Mortgage
 
    Rights
    Retention
    Servicing
 
    Channel     Channel     Division  
 
Year Ended December 31, 2007
                       
Operating Results
                       
Net interest income (expense)
  $ (52,008 )   $ 11,445     $ (40,563 )
Provision for loan losses
                 
Gain (loss) on sale of loans
    2,241       53,883       56,124  
Service fee income
    389,441             389,441  
Gain (loss) on securities
    (35,595 )           (35,595 )
Other income
    6,042       6,944       12,986  
                         
Net revenues (expense)
    310,121       72,272       382,393  
Operating expenses
    48,390       48,683       97,073  
Deferral of expenses under SFAS 91
          (13,619 )     (13,619 )
                         
Pre-tax earnings (loss)
    261,731       37,208       298,939  
                         
Minority interests
    562       65       627  
                         
Net earnings (loss)
  $ 158,833     $ 22,594     $ 181,427  
                         
Performance Data
                       
Average interest-earning assets
  $ 343,595     $ 833,116     $ 1,176,711  
Allocated capital
    324,001       37,404       361,405  
Loans produced
          4,592,979       4,592,979  
Loans sold
          4,071,678       4,071,678  
MBR Margin
    N/A       1.32 %     1.38 %
ROE
    49 %     60 %     50 %
Net interest margin
    N/A       1.37 %     N/A  
Average FTE
    91       190       281  
                         
Year Ended December 31, 2006
                       
Operating Results
                       
Net interest income (expense)
  $ (16,277 )   $ 4,788     $ (11,489 )
Provision for loan losses
                 
Gain (loss) on sale of loans
    1,994       29,099       31,093  
Service fee income
    115,657       (8 )     115,649  
Gain (loss) on securities
    19,173             19,173  
Other income
    1,755       5,260       7,015  
                         
Net revenues (expense)
    122,302       39,139       161,441  
Operating expenses
    31,529       29,365       60,894  
Deferral of expenses under SFAS 91
          (8,068 )     (8,068 )
                         
Pre-tax earnings (loss)
    90,773       17,842       108,615  
                         
Net earnings (loss)
  $ 55,281     $ 10,866     $ 66,147  
                         
Performance Data
                       
Average interest-earning assets
  $ 242,837     $ 338,952     $ 581,789  
Allocated capital
    236,770       16,465       253,235  
Loans produced
          2,698,332       2,698,332  
Loans sold
    29,961       2,025,944       2,055,905  
MBR Margin
    N/A       1.44 %     1.51 %
ROE
    23 %     66 %     26 %
Net interest margin
    N/A       N/A       N/A  
Average FTE
    88       113       201  
                         
Year over Year Comparison
                       
% change in net earnings
    187 %     108 %     174 %
% change in capital
    37 %     127 %     43 %
 
SFR mortgage loans serviced for others reached $181.7 billion (including reverse mortgages and HELOCs) at December 31, 2007, with a weighted average coupon of 6.89%. In comparison, we serviced $139.8 billion of mortgage loans owned by others at December 31, 2006, with a weighted average coupon of 7.05%.


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The following provides the activity in the servicing portfolio for the years indicated (dollars in millions):
 
                 
    Year Ended December 31  
    2007     2006  
 
Unpaid principal balance at beginning of year
  $ 139,817     $ 84,495  
Additions
    72,613       80,237  
Clean-up calls exercised
    (153 )     (31 )
Loan payments and prepayments
    (30,553 )     (24,884 )
                 
Unpaid principal balance at end of year
  $ 181,724     $ 139,817  
                 
 
The following provides additional information related to the servicing portfolio as of the dates indicated:
 
                 
    December 31  
    2007     2006  
 
By Product Type:
               
Fixed rate mortgages
    36 %     35 %
Intermediate term fixed-rate loans
    35 %     30 %
Pay option ARMs
    17 %     23 %
Reverse mortgages
    10 %     9 %
HELOCs
    1 %     2 %
Other
    1 %     1 %
                 
Total
    100 %     100 %
                 
Additional Information(1)
               
Weighted average FICO(2)
    702       703  
Weighted average original LTV(3)
    73 %     73 %
Average original loan size (in thousands)
    247       232  
Percent of portfolio with prepayment penalty
    33 %     42 %
Portfolio delinquency (% of unpaid principal balance)(4)
    7.31 %     5.02 %
By Geographic Distribution:
               
California
    43 %     43 %
Florida
    8 %     8 %
New York
    8 %     8 %
New Jersey
    4 %     4 %
Virginia
    4 %     4 %
Other
    33 %     33 %
                 
Total
    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 (“LTV”) 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 MBS. We manage our investments in the thrift portfolio based on the extent to which the ROEs exceed the cost of both core and risk-based capital, or 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 consumer construction lending. These investing activities provide core spread income and generally, a more stable return on equity.
 
In addition to the $33.0 million net earnings in our mortgage banking segment, our thrift segment reported a $199.2 million net loss in 2007 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 year ended December 31, 2007 totaled $748 million pre-tax compared with only $28 million in credit costs in the thrift segment for the year ended December 31, 2006, as the 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 in 2007, the majority of the increase was concentrated in the non-investment grade and residual securities divisions.


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Table of Contents

The following provides details on the results for divisions of our thrift segment for the years indicated (dollars in thousands):
 
                                                         
          Non-
                               
          Investment
    Total
                         
    Investment
    Grade and
    Mortgage-
    SFR
                   
    Grade
    Residual
    Backed
    Mortgage
    Consumer
    Warehouse
    Total
 
    Securities
    Securities
    Securities
    Loans HFI
    Construction
    Lending
    Thrift
 
    Channel     Channel     Division     Division     Division     Division     Segment  
 
Year Ended December 31, 2007
                                                       
Operating Results
                                                       
Net interest income
  $ 37,723     $ 57,033     $ 94,756     $ 78,201     $ 56,715     $ 5,193     $ 234,865  
Provision for loan losses
                      (145,364 )     (40,256 )     (299 )     (185,919 )
Gain (loss) on sale of loans
                      (7,225 )     31,634             24,409  
Service fee income (expense)
                                         
Gain (loss) on securities
    (53,206 )     (284,175 )     (337,381 )           (1,629 )           (339,010 )
Gain on sale and leaseback of building
                                         
Other income (expense)
    613       (3 )     610       2,065       24,660       2,014       29,349  
                                                         
Net revenues (expense)
    (14,870 )     (227,145 )     (242,015 )     (72,323 )     71,124       6,908       (236,306 )
Operating expenses
    1,023       2,771       3,794       23,091       66,547       3,698       97,130  
Severance charges
                                         
Deferral of expenses under SFAS 91
                            (8,251 )           (8,251 )
                                                         
Pre-tax earnings (loss)
    (15,893 )     (229,916 )     (245,809 )     (95,414 )     12,828       3,210       (325,185 )
                                                         
Minority interests
    176       324       500       492       208       7       1,207  
                                                         
Net earnings (loss)
  $ (9,855 )   $ (140,343 )   $ (150,198 )   $ (58,600 )   $ 7,604     $ 1,947     $ (199,247 )
                                                         
Performance Data
                                                       
Average interest-earning assets
  $ 4,850,600     $ 346,845     $ 5,197,445     $ 6,782,388     $ 2,802,416     $ 194,286     $ 14,976,535  
Allocated capital
    88,879       191,489       280,368       239,633       135,035       15,440       670,476  
Loans produced
                            2,988,322             2,988,322  
Loans sold
                      3,735,736       2,627,267             6,363,003  
ROE
    (11 )%     (73 )%     (54 )%     (24 )%     6 %     13 %     (30 )%
Net interest margin, thrift. 
    0.78 %     16.44 %     1.82 %     1.15 %     2.02 %     2.67 %     1.57 %
Efficiency ratio
    (7 )%     (1 )%     (2 )%     32 %     52 %     51 %     (176 )%
Average FTE
    3       8       11       12       384       29       436  
                                                         
Year Ended December 31, 2006
                                                       
Operating Results
                                                       
Net interest income
  $ 35,158     $ 37,059     $ 72,217     $ 76,081     $ 45,546     $ 3,489     $ 197,333  
Provision for loan losses
                      (9,225 )     (3,322 )     (181 )     (12,728 )
Gain (loss) on sale of loans
    (122 )           (122 )     3,703       39,068             42,649  
Service fee income (expense)
                                         
Gain (loss) on securities
    (1,359 )     3,750       2,391       384       659             3,434  
Other income (expense)
    (3 )           (3 )     1,637       23,412       1,725       26,771  
                                                         
Net revenues (expense)
    33,674       40,809       74,483       72,580       105,363       5,033       257,459  
Operating expenses
    1,131       2,418       3,549       4,978       69,073       4,120       81,720  
Deferral of expenses under SFAS 91
                            (8,812 )           (8,812 )
                                                         
Pre-tax earnings (loss)
    32,543       38,391       70,934       67,602       45,102       913       184,551  
                                                         
Net earnings (loss)
  $ 19,819     $ 23,380     $ 43,199     $ 41,170     $ 27,468     $ 557     $ 112,394  
                                                         
Performance Data
                                                       
Average interest-earning assets
  $ 3,329,118     $ 210,352     $ 3,539,470     $ 5,876,399     $ 2,502,397     $ 119,043     $ 12,037,309  
Allocated capital
    65,735       109,616       175,351       227,937       123,273       10,382       536,943  
Loans produced
                            2,937,596             2,937,596  
Loans sold
                      170,296       2,496,314             2,666,610  
ROE
    30 %     21 %     25 %     18 %     22 %     5 %     21 %
Net interest margin, thrift. 
    1.06 %     17.62 %     2.04 %     1.29 %     1.82 %     2.93 %     1.64 %
Efficiency ratio
    3 %     6 %     5 %     6 %     55 %     79 %     27 %
Average FTE
    5       7       12       13       422       26       473  
                                                         
Year over Year Comparison
                                                       
% change in net earnings
    (150 )%     N/M       (448 )%     (242 )%     (72 )%     250 %     (277 )%
% change in capital
    35 %     75 %     60 %     5 %     10 %     49 %     25 %


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The following tables and discussions 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 segment.
 
MORTGAGE-BACKED SECURITIES DIVISION
 
The following provides the details of the MBS portfolio as of the dates indicated (dollars in thousands):
 
                                                                         
    December 31, 2007     December 31, 2006     December 31, 2005  
    Trading     AFS     Total     Trading     AFS     Total     Trading     AFS     Total  
 
Mortgage banking segment:
                                                                       
AAA-rated agency securities
  $     $     $     $     $ 2,915     $ 2,915     $     $     $  
AAA-rated and agency interest-only securities
    59,844             59,844       66,581             66,581       73,430             73,430  
AAA-rated principal-only securities
    88,024             88,024       38,478             38,478       9,483             9,483  
Prepayment penalty and late fee securities
    79,678             79,678       93,176             93,176       73,443             73,443  
                                                                         
Total mortgage banking
    227,546             227,546       198,235       2,915       201,150       156,356             156,356  
                                                                         
Thrift segment:
                                                                       
AAA-rated non-agency securities
    510,371       5,543,306       6,053,677       43,957       4,604,489       4,648,446       52,633       3,524,952       3,577,585  
AAA-rated agency securities
          45,296       45,296             62,260       62,260             43,014       43,014  
AAA-rated and agency interest-only securities
                      6,989             6,989       5,301             5,301  
Prepayment penalty and other securities
    2,349             2,349       4,400             4,400       2,298             2,298  
Other investment grade securities
    275,691       451,798       727,489       29,015       160,238       189,253       8,829       83,291       92,120  
Other non-investment grade securities
    93,859       61,889       155,748       41,390       38,784       80,174       4,480       53,232       57,712  
Non-investment grade residual securities
    112,727       3,687       116,414       218,745       31,828       250,573       119,065       48,706       167,771  
                                                                         
Total thrift 
    994,997       6,105,976       7,100,973       344,496       4,897,599       5,242,095       192,606       3,753,195       3,945,801  
                                                                         
Total mortgage-backed securities
  $ 1,222,543     $ 6,105,976     $ 7,328,519     $ 542,731     $ 4,900,514     $ 5,443,245     $ 348,962     $ 3,753,195     $ 4,102,157  
                                                                         
 
AAA-rated MBS represented 85%, 89% and 90% of the total portfolio at December 31, 2007, 2006 and 2005, respectively. These securities had an expected weighted average life of 3.0 years, 2.9 years and 2.6 years at December 31, 2007, 2006 and 2005, respectively. Due to downgrades of investment grade securities in January 2008, we anticipate an increase in non-investment grade securities.
 
In 2007, the Bank securitized $24.0 billion of mortgage loans. The Bank retained $2.8 billion of the securities and sold $21.2 billion. Of the $2.8 billion retained securities recorded as MBS, $2.2 billion and $0.6 billion were classified as available for sale and trading, respectively.
 
SFR MORTGAGE LOANS HFI DIVISION
 
The SFR mortgage HFI portfolio is comprised primarily of interest-only loans and adjustable-rate mortgage loans.
 
At December 31, 2007, we had $3.0 billion in pay option ARM loans, or 26% of the portfolio, as compared to $1.2 billion, or 18% of the portfolio, at December 31, 2006. As of December 31, 2007, approximately 91% (based on loan count) of our pay option ARM loans had negatively amortized, resulting in an increase of $102.3 million to their original loan balance. This is an increase from 83% at December 31, 2006. The net increase in unpaid principal


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balance due to negative amortization was $75.5 million for the year ended December 31, 2007, which approximated the deferred interest recognized for the years.
 
We transferred HFS mortgage loans in the fourth quarter of 2007 with an original cost basis of $10.9 billion to HFI as we no longer intend to sell these loans given the extreme disruption in the secondary mortgage market. These loans were transferred at LOCOM and, accordingly, we reduced the cost basis by $0.6 billion resulting in an increase in HFI loans of $10.3 billion. The $0.6 billion reduction was a combination of LOCOM reserves existing in the third quarter of 2007 and additional charges to gain on sale of loans during the fourth quarter of 2007. Embedded in this reduction are estimated credit losses of $474 million. During the year, the Bank securitized $24.0 billion, of which $2.0 billion of mortgage loans came from the SFR mortgage loans HFI division.
 
The following provides a composition of the SFR mortgage loans HFI portfolio and the relevant credit quality characteristics as of the dates indicated (dollars in thousands):
 
                 
    December 31  
    2007     2006  
 
Outstanding balance (recorded value)(1)
  $ 11,411,464     $ 6,519,340  
Average loan size
  $ 270     $ 310  
Non-performing loans
    6.47 %     1.09 %
Estimated average life in years(2)
    2.4       2.6  
Estimated average net duration in months(3)
    2.1       (3.5 )
Annualized yield
    7.03 %     6.01 %
Percent of loans with active prepayment penalty
    43 %     34 %
By Product Type:
               
Fixed-rate mortgages
    15 %     5 %
Intermediate term fixed-rate loans
    15 %     15 %
Interest-only loans
    43 %     60 %
Pay option ARMs
    26 %     18 %
Other
    1 %     2 %
                 
      100 %     100 %
Additional Information:
               
Average FICO score
    693       716  
Original average LTV
    76 %     73 %
Current average LTV(4)
    77 %     61 %
Geographic distribution of top five states:
               
Southern California
    30 %     32 %
Northern California
    15 %     20 %
                 
Total California
    45 %     52 %
Florida
    9 %     6 %
New York
    7 %     4 %
New Jersey
    3 %     2 %
Maryland
    3 %     2 %
Other
    33 %     34 %
                 
Total
    100 %     100 %
                 
 
 
(1) The outstanding balance at December 31, 2007 includes $286.3 million of lot loans.
 
(2) Represents the estimated length of time, on average, the SFR loan portfolio will remain outstanding based on our estimates for prepayments.
 
(3) 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.
 
(4) Current average LTV ratio is estimated based on the Office of the Federal Housing Enterprise Oversight House Price Index Metropolitan Statistical Area data for the year ended December 31, 2007 on a loan level basis.


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CONSUMER CONSTRUCTION DIVISION
 
Our consumer construction division provided construction financing for individual consumers who want to build a new primary residence or second home. The primary product is a construction-to-permanent (“CTP”) 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 December 31, 2007, based on the underlying note agreements, 80% of the construction loans will be converted to adjustable-rate permanent loans, 13% to intermediate term fixed-rate loans, and 7% to fixed-rate loans.
 
The consumer construction division temporarily suspended all new CTP production on January 31, 2008 to help manage our balance sheet. Our consumer construction division had previously suspended lot and single spec production in 2007.
 
During 2007, we entered into new consumer construction commitments of $3.2 billion, which is a decrease of 13%, or $470 million from 2006. Approximately 68% of new commitments are generated through mortgage broker customers of the MPG, and the remaining 32% of new commitments are retail originations. Consumer construction loans outstanding at December 31, 2007 increased 3% from December 31, 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 72% at December 31, 2007 from 29% at December 31, 2006. The ratio of non-performing loans increased to 3.31% of the portfolio at December 31, 2007, compared to 1.14% at December 31, 2006. As a result, we increased the allowance for loan losses to $32.3 million for the year ended December 31, 2007 from $11.8 million for the year ended December 31, 2006 and increased the percentage of allowance for loan losses to recorded value to 1.38% at the end of 2007 from 0.52% at the end of 2006.


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Information on our consumer construction portfolio is presented in the following table as of the dates indicated (dollars in thousands):
 
                                 
    December 31              
    2007     2006              
 
Outstanding balance (recorded value)
  $ 2,343,094     $ 2,276,133                  
Total commitments
    3,503,790       3,600,454                  
Average loan commitment(1)
    570       474                  
Non-performing loans
    3.31 %     1.14 %                
By Product Type:
                               
Fixed-rate loans
    28 %     71 %                
Adjustable-rate loans
    72 %     29 %                
                                 
      100 %     100 %                
                                 
Additional Information:
                               
Average LTV ratio(2)
    73 %     73 %                
Average FICO score
    722       718                  
Geographic distribution of top five states:
                               
Southern California
    30 %     28 %                
Northern California
    12 %     15 %                
                                 
Total California
    42 %     43 %                
Florida
    7 %     9 %                
Washington
    4 %     4 %                
New York
    4 %     4 %                
Arizona
    4 %     3 %                
Other
    39 %     37 %                
                                 
Total
    100 %     100 %                
                                 
 
 
(1) In March 2007, estate lending was introduced for loans on commitments greater than $2.5 million. We originated approximately $306 million or 96 loans in 2007 for an average loan size of $3.2 million which contributed to the increase in loan size during the year.
 
(2) The average LTV ratio is based on the most recent estimated appraised value of the completed project compared to the commitment amount at the date indicated.
 
The following provides details on the aggregate maturities of construction loan balances due at December 31, 2007 (dollars in thousands):
 
                 
Within one year or less
  $ 2,229,491          
Between one to five years (98% adjustable-rate and 2% fixed-rate)
    112,569          
                 
Total
  $ 2,342,060          
                 
 
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 mortgage production division regularly sells loans to our SFR mortgage loans HFI division. These transactions are recorded at arms-length in our segment results resulting in intercompany gain on sale in the mortgage production division and a premium in the SFR mortgage loans HFI division that is amortized over the life of the loan. Both the gain and the premium amortization are eliminated in consolidation.


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The mortgage production division and the mortgage servicing division are exposed to movements in the intermediate fixed-rate loan spreads. Mortgage spread is the difference between mortgage interest rates and LIBOR/interest rate swap rates. Tighter spreads benefit mortgage production 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 mortgage production division and the mortgage servicing division 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”.
 
The following provides additional details on deposits, treasury and eliminations for the years indicated (dollars in thousands):
 
                                                 
                Eliminations        
                      Interdivision
             
                Interdivision
    Hedge
             
    Deposits     Treasury     Loan Sales(1)     Transactions     Other     Total  
 
Year Ended December 31, 2007
                                               
Operating Results
                                               
Net interest income
  $     $ 45,072     $ 37,513     $     $ 25,352     $ 107,937  
Provision for loan losses
                                   
Gain (loss) on sale of loans
                (82,081 )     (84,921 )     (1,081 )     (168,083 )
Service fee income
                      84,921       3,436       88,357  
Gain (loss) on securities
                            (42,965 )     (42,965 )
Other income
    4,431       1,269                   (2,118 )     3,582  
                                                 
Net revenues (expense)
    4,431       46,341       (44,568 )           (17,376 )     (11,172 )
Operating expenses
    27,815       54,665                   (17,298 )     65,182  
Deferral of expenses under SFAS 91
                            (78 )     (78 )
                                                 
Pre-tax earnings (loss)
    (23,384 )     (8,324 )     (44,568 )                 (76,276 )
                                                 
Minority interests
    3       20,026                         20,029  
                                                 
Net earnings (loss)
  $ (14,244 )   $ (25,095 )   $ (26,458 )   $     $     $ (65,797 )
                                                 
Year Ended December 31, 2006
                                               
Operating Results
                                               
Net interest income
  $     $ 28,235     $ 32,275     $     $ 15,629     $ 76,139  
Provision for loan losses
                                   
Gain (loss) on sale of loans
                (67,639 )                 (67,639 )
Service fee income
                (4,361 )           (31,578 )     (35,939 )
Gain (loss) on securities
                10,809                   10,809  
Other income
    3,476       677                   (5,817 )     (1,664 )
                                                 
Net revenues (expense)
    3,476       28,912       (28,916 )           (21,766 )     (18,294 )
Operating expenses
    26,764       40,107                   (17,862 )     49,009  
Deferral of expenses under SFAS 91
                            (2,229 )     (2,229 )
                                                 
Pre-tax earnings (loss)
    (23,288 )     (11,195 )     (28,916 )           (1,675 )     (65,074 )
                                                 
Net earnings (loss)
  $ (14,182 )   $ (6,818 )   $ (17,610 )   $     $ 4,258     $ (34,352 )
                                                 
 
 
(1) Includes loans sold of $15.2 billion and $9.2 billion for the years ended December 31, 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 from a loss of $106.7 million in 2006 to a loss of $101.6 million in 2007.
 
DISCONTINUED BUSINESS ACTIVITIES
 
As conditions in the U.S. mortgage market have deteriorated, we have exited certain production channels and are reporting them in a separate category in our segment reporting. These exited production channels include conduit, home equity and homebuilder. Of the $698.6 million in total credit costs we reported in 2007, $543.5 million were in these discontinued businesses, driving the total after-tax loss of $281.1 million for these discontinued businesses for the year. These activities are not considered discontinued operations as defined by SFAS 144 due to our significant continuing involvement in these activities.


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The following provides details on the results of our exited businesses for the years indicated (dollars in thousands):
 
                                                   
    Discontinued Business Activities    
            Home
                           
    Conduit
      Equity
      Homebuilder
                   
    Channel       Division       Division       Other       Total    
 
Year Ended December 31, 2007
                                                 
Operating Results
                                                 
Net interest income
  $ 63,658       $ 28,072       $ 46,602       $ 1,797       $ 140,129    
Provision for loan losses
            (29,960 )       (178,144 )       (1,525 )       (209,629 )  
Gain (loss) on sale of loans
    (205,207 )       (102,337 )                       (307,544 )  
Service fee income (expense)
            3,406                         3,406    
Gain on sale and leaseback of building
            (22,143 )                       (22,143 )  
Other income (expense)
    (316 )       6,295         (577 )               5,402    
                                         
Net revenues (expense)
    (141,865 )       (116,667 )       (132,119 )       272         (390,379 )  
Operating expenses
    37,667         15,461         23,539         245         76,912    
Severance charges
                                       
Deferral of expenses under SFAS 91
            (455 )       (5,950 )               (6,405 )  
                                         
Pre-tax earnings (loss)
    (179,532 )       (131,673 )       (149,708 )       27         (460,886 )  
                                         
Minority interests
    133         234         78         4         44