10-Q 1 a2185707z10-q.htm 10-Q
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549


Form 10-Q

ý   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

For the quarterly period ended March 31, 2008

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 or organization)
  (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

        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 ý    No o

        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 definitions of "large accelerated filer", "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer ý   Accelerated filer o   Non-accelerated filer o
(Do not check if smaller
reporting company)
  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 ý

        Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

Common stock outstanding as of May 6, 2008: 100,888,469 shares




INDYMAC BANCORP, INC.
FORM 10-Q QUARTERLY REPORT
For the Quarter Ended March 31, 2008

TABLE OF CONTENTS

 
   
  Page
PART I. FINANCIAL INFORMATION

 

 

Forward-Looking Statements

 

3
Item 2.   Management's Discussion and Analysis of Financial Condition and Results of Operations   3
    Overview and Narrative Summary of Consolidated Financial Results   3
    Selected Consolidated Financial Highlights   6
    Summary of Business Segment Results   8
    Mortgage Banking Segment   10
    Mortgage Production Division   12
    Mortgage Servicing Division   17
    Thrift Segment   20
    Mortgage-Backed Securities Division   22
    SFR Mortgage Loans HFI Division   23
    Consumer Construction Division   24
    Eliminations & Other Segment   25
    Corporate Overhead Segment   26
    Discontinued Business Activities   26
    Consolidated Risk Management Discussion   30
    CAMELS Framework For Risk Management   30
    Capital   31
    Asset Quality   35
    Management   43
    Earnings   43
    Liquidity   44
    Sensitivity to Market Risk   48
    Expenses   54
    Prospective Trends and Future Outlook   55
    Off-Balance Sheet Arrangements   56
    Aggregate Contractual Obligations   56
    Critical Accounting Policies and Judgments   57
    Other Considerations   59
    Appendix A: Additional Quantitative Disclosures   60
Item 3.   Quantitative and Qualitative Disclosures About Market Risk   71
Item 4.   Controls and Procedures   71
Item 1.   Financial Statements (Unaudited)   72
    Consolidated Balance Sheets   72
    Consolidated Statements of Operations   73
    Consolidated Statements of Changes in Shareholders' Equity and Comprehensive Income (Loss)   74
    Consolidated Statements of Cash Flows   75
    Notes to Consolidated Financial Statements   76

PART II. OTHER INFORMATION

Item 1.

 

Legal Proceedings

 

86
Item 1A.   Risk Factors   86
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds   88
Item 6.   Exhibits   89
    Signature   90

2



PART I. FINANCIAL INFORMATION

FORWARD-LOOKING STATEMENTS

        Certain statements contained in this Form 10-Q may be deemed to be forward-looking statements within the meaning of the federal securities laws. Examples include forecasts of continued declines in credit costs and overall losses for the remainder of 2008, the anticipation that the deferral/suspension of the interest/dividends will be temporary, improving capital ratios and our expectation to remain well-capitalized. 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, recent disruptions in the housing and credit markets, including 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 implementation of new accounting pronouncements and guidance; 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 (in particular, the Federal Home Loan Bank), loan sales, securitizations, deposits and all other sources used to fund mortgage loan originations and portfolio investments; and 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 ("SEC"), including its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, and its reports on Form 8-K. For further information on our risk factors, please refer to "Risk Factors" on pages 68 to 77 in Indymac's annual report on Form 10-K for the year ended December 31, 2007 ("2007 Form 10-K") and Part II. Item 1A. "Risk Factors" of this Form 10-Q. 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.

        The following discussion addresses the Company's financial condition and results of operations for the three months ended March 31, 2008.

ITEM 2.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

OVERVIEW AND NARRATIVE SUMMARY OF CONSOLIDATED FINANCIAL RESULTS

        The unprecedented ongoing disruption in the U.S. housing and mortgage markets continued throughout the first quarter of 2008. These negative trends included increased mortgage delinquencies and foreclosures, accelerating declines in home prices, and significantly wider credit spreads on mortgage-backed securities, and had an adverse impact on our financial results this quarter. Although these trends combined with our business model that is solely focused on home lending resulted in our recording a net loss of $184 million for the first quarter of 2008, this loss is down 64% from the fourth quarter of 2007.

3



This declining loss reflects $249 million pre-tax in credit costs during the quarter, a 71% reduction from $863 million in the fourth quarter of last year. Additionally, the Company incurred a nonrecurring restructuring charge of $72 million in the first quarter of 2008 to right-size our costs to the current environment. Furthermore, we recorded net losses of $66 million on our mortgage-backed securities ("MBS") trading portfolio during the quarter primarily due to the non-agency mortgage-backed securities credit spread widening. These losses are unrealized and we believe are a result of reduced liquidity in the currently disrupted market for these bonds and that actual realized losses will be much lower. As a result, we expect to substantially recover these losses over time as we have the ability and intent to hold the securities to recovery or maturity.

        Given this worsening state of the industry, Indymac has intensified its efforts in maintaining strong capital and liquidity positions, which included primarily focusing on being a profitable government-sponsored entities ("GSE") lender, as this presently remains the only reliable secondary market; tightening lending standards to enhance credit quality of current loan production; implementing credit loss prevention and mitigation strategies on mortgage loans; capital raising activities; initiating cost reduction measures; and improving customer service.

        Other significant items affecting first quarter of 2008 results include the following:

    We built our total credit reserves to $2.7 billion, a 12.50% increase over last quarter and more than a three-fold increase over $813 million in the first quarter of 2007. Actual realized credit losses during the first quarter totaled $334 million, such that the Company's total reserves at March 31, 2008 equate to 8.0 times current quarterly realized credit losses. Excluding non-investment grade and residual securities, total first quarter 2008 realized credit losses were $178 million, and the total related credit reserve at March 31 was $1.3 billion, or 7.2 times the realized credit losses in the first quarter.

    Our capital levels continue to exceed the levels defined as "well capitalized" by our regulators. At March 31, 2008 Indymac Bank's Tier 1 "core" capital ratio was 5.74%, our Tier 1 risk-based ratio was 9.00%, and our total risk-based capital ratio was 10.26%, each above the "well-capitalized" regulatory levels of 5.00%, 6.00% and 10.00%, respectively.1 In an effort to keep our regulatory capital ratios above these "well capitalized" levels, we supplemented the $676 million of equity capital we prudently raised in 2007, by raising $39 million in new equity through March 31, 2008. We are continuing to raise capital nearly every business day through the DSPP and have raised $97 million through this program year to date through May 9, 2008.

1
These capital ratios reflect two regulatory requirements that we believe do not fully reflect Indymac's financial condition. First, we are currently required to hold capital on a dollar-for-dollar basis against the portion of our mortgage servicing rights (MSR) that exceed our Tier 1 core capital, even though we have a long track record of successfully hedging this asset, and it is our highest earning asset in this environment. Excluding the penalty we receive on the MSR that exceeds our Tier 1 core capital, our capital ratios as of March 31, 2008 would be 6.07% Tier 1 core, 9.53% Tier 1 risk-based and 10.79% total risk-based.

Second, the regulations require us to exclude from our Tier 2 capital the portion of our allowance for loan losses (ALL) that exceeds the 1.25% of risk-weighted assets limitation. If we were further allowed to include in Tier 2 capital our ALL that exceeds 1.25% of our risk-weighted assets, our capital ratios would be 6.07% Tier 1 core, 9.47% Tier 1 risk-based and 11.36% total risk-based.

4


    In a further effort to preserve our capital and improve our capital ratios, we have made the decision to exercise our contractual rights and defer the interest on our trust preferred stock at the holding company and suspend the dividends on our non-cumulative, perpetual preferred stock at Indymac Bank, as this represents the most efficient and least dilutive means of generating capital in the current environment. The contractual provisions in these preferred stock issues that allow us to take these actions were clearly put in place for extraordinary times and events such as we are now experiencing, and the presence of these provisions is one reason why these preferred stock issues are considered "core" capital for regulatory purposes. This decision is described in more detail in the "Liquidity" section of this discussion.

    Our operating liquidity remained solid at $4.1 billion, about the same as a year ago. Our liquidity needs are significantly lower now than last year, as last year we had roughly three times the mortgage production as we currently have and our current GSE/FHA/VA-dominated production is far more liquid. In addition, we have no capital markets funding sources today (no commercial paper or reverse repurchase borrowings), while we had a roughly $3 billion of such funding a year ago. Our solid liquidity is enabled by the fact that virtually all of Indymac's business is conducted, and assets are held, within Indymac Bank. As a result, we are 100% funded with deposits (over 95% of our deposits are fully insured by the FDIC), FHLB advances, long-term debt and equity.

    We continue to successfully convert our production to a GSE/Federal Housing Administration ("FHA")/ Veterans Administration ("VA") model. We produced $9.6 billion in new mortgage loans in the first quarter of 2008 with 88% of this production being saleable to the GSEs or into Ginnie Mae securities. Importantly, the credit quality of our new production has improved significantly. As calculated using Standard & Poor's (S&P) LEVELS model, the lifetime loss estimate for the first quarter of 2008 evaluated production of $8.2 billion is 0.23%, compared with 1.86% in the first quarter of 2007, an 88% year-over-year reduction.2 In addition, first payment defaults ("FPDs") on our new production continue to improve. FPDs based on the first payment due date declined to 0.6% in April 2008 from 1.1% in March 2008, 1.8% in February 2008, 2.1% in January 2008, 2.2% in December 2007 and 3.2% in the third quarter of 2007 (when we started tracking them). Generally 25% to 35% of FPDs cure in the subsequent month and 60% to 70% cure within six months. Although mortgage production volumes and profit margins continue to be a struggle in the current environment, we are improving the profit performance of our new production model. Mortgage production had a net loss of $17 million in the first quarter of 2008, which was an 85% improvement from the prior quarter. All of our 9 regional wholesale centers and 104 of our 152 retail lending branches were profitable in March. We project that mortgage production will be close to break-even in the second quarter of 2008 and will be profitable in the second half of 2008.

2
While our production is evaluated using the S&P LEVELS model, the data is not audited or endorsed by S&P. The estimates reported here are from S&P's 6.3 model released in March 2008.

5



SELECTED CONSOLIDATED FINANCIAL HIGHLIGHTS

        The following highlights our consolidated financial condition and results of operations for the periods indicated (dollars in millions, except per share data):

 
  Three Months Ended
 
 
  March 31,
2008

  December 31,
2007

  September 30,
2007

  June 30,
2007

  March 31,
2007

 
Balance Sheet Information (at period end)(1)                                

Cash and cash equivalents

 

$

808

 

$

562

 

$

785

 

$

618

 

$

577

 
Securities (trading and available for sale)     6,619     7,328     5,732     5,608     5,253  
Loans held for sale (includes $2,411 carried at fair value at March 31, 2008)     3,325     3,775     14,040     11,764     10,514  
Loans held for investment     16,726     16,497     8,553     8,648     8,988  
Allowance for loan losses     (483 )   (398 )   (162 )   (77 )   (68 )
Mortgage servicing rights     2,560     2,495     2,490     2,387     2,053  
Other assets     2,750     2,475     2,295     2,711     2,377  
   
 
 
 
 
 
Total Assets   $ 32,305   $ 32,734   $ 33,733   $ 31,659   $ 29,694  
   
 
 
 
 
 
Deposits   $ 18,938   $ 17,815   $ 16,775   $ 11,747   $ 11,452  
Advances from Federal Home Loan Bank     10,359     11,189     11,095     10,873     10,350  
Other borrowings     633     652     2,189     4,527     4,313  
Other liabilities and preferred stock in subsidiary     1,416     1,734     1,803     2,462     1,525  
   
 
 
 
 
 
Total Liabilities and Preferred Stock in Subsidiary   $ 31,346   $ 31,390   $ 31,862   $ 29,609   $ 27,639  
   
 
 
 
 
 
Shareholders' Equity   $ 959   $ 1,344   $ 1,871   $ 2,050   $ 2,055  
   
 
 
 
 
 
Statement of Operations Information(1)                                

Net interest income

 

$

111

 

$

140

 

$

142

 

$

149

 

$

135

 
Provision for loan losses     (132 )   (269 )   (98 )   (17 )   (11 )
Gain (loss) on sale of loans(2)     92     (322 )   (251 )   101     118  
Service fee income     193     171     213     86     49  
Loss on mortgage-backed securities ("MBS")     (160 )   (294 )   (94 )   (46 )   (5 )
Fee and other income(2)     39     20     46     25     16  
   
 
 
 
 
 
Net revenues (loss)     143     (554 )   (42 )   298     302  
Operating expenses(2)     (316 )   (231 )   (231 )   (220 )   (214 )
Restructuring/severance charges     (72 )   (4 )   (28 )        
REO related expenses     (47 )   (30 )   (11 )   (4 )   (2 )
Minority interests     (10 )   (10 )   (13 )        
(Provision) benefit for income taxes     118     320     122     (29 )   (34 )
   
 
 
 
 
 
Net earnings (loss)   $ (184 ) $ (509 ) $ (203 ) $ 45   $ 52  
   
 
 
 
 
 
Operating Data                                

SFR mortgage loan production

 

$

9,591

 

$

12,089

 

$

16,816

 

$

22,505

 

$

25,569

 
Total loan production(3)     9,712     12,301     17,062     23,023     25,930  
Mortgage industry market share(4)     1.70 %   2.62 %   3.02 %   3.27 %   4.08 %
Pipeline of SFR mortgage loans in process (at period end)   $ 5,107   $ 7,506   $ 7,421   $ 13,376   $ 16,112  
Loans sold     9,920     13,425     13,009     20,194     24,537  
Loans sold/SFR mortgage loan production     103 %   111 %   77 %   90 %   96 %
SFR mortgage loans serviced for others (at period end)(5)   $ 184,535   $ 181,724   $ 173,915   $ 167,710   $ 156,144  
Total SFR mortgage loans serviced (at period end)     200,696     198,170     192,629     183,574     171,955  
Average number of full-time equivalent employees ("FTEs")     8,169     9,994     9,890     9,431     8,755  

Per Common Share Data

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings (loss) per share(6)

 

$

(2.27

)

$

(6.43

)

$

(2.77

)

$

0.62

 

$

0.72

 
Diluted earnings (loss) per share(7)     (2.27 )   (6.43 )   (2.77 )   0.60     0.70  
Dividends declared per share         0.25     0.50     0.50     0.50  
Dividend payout ratio(8)     N/M     (4 )%   (18 )%   83 %   71 %
Book value per share (at period end)(9)   $ 14.00   $ 16.61   $ 24.31   $ 27.83   $ 27.93  
Closing price per share (at period end)     4.96     5.95     23.61     29.17     32.05  
Average Shares (in thousands):                                
Basic     81,177     79,139     73,134     72,412     72,297  
Diluted     81,177     79,139     73,134     73,976     74,305  

Performance Ratios

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Return on equity ("ROE")

 

 

(57.09

)%

 

(115.74

)%

 

(39.15

)%

 

8.62

%

 

10.45

%
Return on assets ("ROA")     (2.15 )%   (5.63 )%   (2.18 )%   0.50 %   0.60 %
Net interest margin, consolidated     1.51 %   1.80 %   1.78 %   1.92 %   1.77 %
Net interest margin, thrift(10)     2.09 %   2.33 %   2.27 %   2.09 %   1.88 %
Mortgage banking revenue ("MBR") margin on loans sold(11)(2)     1.03 %   (2.18 )%   (1.54 )%   0.80 %   0.68 %
Efficiency ratio(12)     115 %   (81 )%   414 %   70 %   68 %
Operating expenses to total loan production     3.24 %   1.88 %   1.36 %   0.95 %   0.82 %

Average Balance Sheet Data and Asset Quality Ratios

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average interest-earning assets

 

$

29,490

 

$

30,945

 

$

31,695

 

$

31,255

 

$

31,030

 
Average assets     34,312     35,851     36,833     35,837     35,341  
Average equity     1,295     1,745     2,054     2,078     2,033  
Debt to equity ratio (at period end)(13)     20.6:1     16.2:1     12.7:1     10.7:1     12.7:1  
Tier 1 (core) capital ratio (at period end)(14)     5.74 %   6.24 %   7.48 %   8.10 %   7.41 %
Total risk-based capital ratio (at period end)(14)     10.26 %   10.81 %   12.01 %   12.24 %   11.37 %
Non-performing assets to total assets (at period end)(15)     6.51 %   4.61 %   2.46 %   1.63 %   1.09 %
Allowance for loan losses to total loans held for investment (at period end)(16)     5.76 %   5.29 %   1.89 %   0.89 %   0.75 %
Allowance for loan losses to non-performing loans held for investment (at period end)(17)     52.14 %   66.67 %   47.64 %   36.07 %   44.11 %

6



(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)
We adopted Statement of Financial Accounting Standards No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities, including an amendment of FASB No. 115" ("SFAS 159"), on January 1, 2008 and elected the fair value option for certain held for sale mortgage loans. For further information on SFAS 159, refer to "Notes to Consolidated Financial Statements—Note 5—Fair Value of Financial Instruments" and our "Critical Accounting Policies and Judgments" section of this Form 10-Q. As a result of this adoption, we did not defer fees and expenses related to these mortgage loans that would have previously been deferred under Statement of Financial Accounting Standards No. 91, "Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases, an amendment of FASB Statements No. 13, 60 and 65 and a rescission of FASB Statement No. 17" ("SFAS 91"). Had we recorded deferred fees and expenses related to these mortgage loans under SFAS 91, total fee and other income would have been lower $12 million to $27 million and operating expenses would have been lower $46 million for those expenses that previously would have been deferred. In addition, the premium paid to brokers, previously recorded as an adjustment in the basis of the loan and a reduction in gain on sale, is now being recorded as an operating expense in the period the loan was acquired due to SFAS 159 adoption. This expense totaled $58 million in the first quarter of 2008. Taking these two expense adjustments into account, operating expenses would have been $212 million on a comparable basis to the fourth quarter of 2007, reflecting a reduction of 8%. Also, as a result of the Company's adoption of SEC's Staff Accounting Bulletin No. 109, "Written Loan Commitments Recorded at Fair Value Through Earnings" ("SAB 109") beginning January 1, 2008, we recorded revenue at the inception of the rate lock commitment in the amount of $18 million for the quarter ended March 31, 2008. Previously, rate lock commitments were initially valued at zero and were adjusted for changes in value resulting from changes in market interest rates pursuant to SAB No. 105, "Application of Accounting Principles to Loan Commitments" ("SAB 105"). Gain (loss) on sale of loans is impacted by these items and would have been lower by the net of the above or $110 million. Furthermore, MBR margin is impacted by these items and would have been lower by the net of the above or 110 basis points ("bps").

The following non-GAAP information presents the impact of the discussion above (in millions):

 
  Three Months Ended
 
  March 31,
2008

  December 31,
2007

  September 30,
2007

  June 30,
2007

  March 31,
2007

Gain (loss) on sale of loans, as reported   $ 92   $ (322 ) $ (251 ) $ 101   $ 118
As-if effect of deferring income under SFAS 91     12                
As-if effect of deferring expenses under SFAS 91     (46 )              
Broker premium recorded due to SFAS 159 adoption beginning January 1, 2008     (58 )              
Revenue recorded for the first quarter of 2008 due to SAB 109 adoption     (18 )              
   
 
 
 
 
    $ (18 ) $ (322 ) $ (251 ) $ 101   $ 118
   
 
 
 
 

Fee and other income, as reported

 

$

39

 

$

20

 

$

46

 

$

25

 

$

16
As-if effect of deferring income under SFAS 91     (12 )              
   
 
 
 
 
    $ 27   $ 20   $ 46   $ 25   $ 16
   
 
 
 
 

Operating expenses, as reported

 

$

316

 

$

231

 

$

231

 

$

220

 

$

214
As-if effect of deferring expenses under SFAS 91     (46 )              
Broker premium recorded due to SFAS 159 adoption beginning January 1, 2008     (58 )              
   
 
 
 
 
    $ 212   $ 231   $ 231   $ 220   $ 214
   
 
 
 
 

Net MBR margin, as reported (in bps based on loans sold)

 

 

103

 

 

(218

)

 

154

 

 

80

 

 

68
As-if effect of deferring income under SFAS 91 (in bps based on loans sold)     12                
As-if effect of deferring expenses under SFAS 91 (in bps based on loans sold)     (46 )              
Broker premium recorded due to SFAS 159 adoption beginning January 1, 2008 (in bps based on loans sold)     (58 )              
Revenue recorded for the first quarter of 2008 due to SAB 109 adoption (in bps based on loans sold)     (18 )              
   
 
 
 
 
      (7 )   (218 )   154     80     68
   
 
 
 
 
(3)
Total loan production includes newly originated commitments on builder construction loans as well as commercial real estate loan production, which commenced operations in March 2007.

(4)
Mortgage industry market share is calculated based on our total single-family residential ("SFR") mortgage loan production, both purchased (mortgage professionals channel) and originated (mortgage professionals and retail channels), in all channels (the numerator) divided by the Mortgage Bankers Association ("MBA") April 10, 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. In addition, since we discontinued purchasing loans through our conduit division in the fourth quarter of 2007, this difference is no longer a significant item.

(5)
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.

(6)
Net earnings (loss) for the period divided by weighted average basic shares outstanding for the period.

(7)
Net earnings (loss) divided by weighted average diluted shares outstanding for the period. Due to the net loss for the three months ended March 31, 2008, December 31, 2007 and September 30, 2007, respectively, no potentially dilutive shares are included in the diluted loss per share calculation as including such shares in the calculation would be anti-dilutive.

7


(8)
Dividend payout ratio represents dividends declared per share as a percentage of diluted earnings (loss) per share. This ratio was negative for the three months ended December 31, 2007 and September 30, 2007, respectively, due to the Company's net loss and resulting diluted loss per share for the period. This ratio was not meaningful ("N/M") for the three months ended March 31, 2008 as there were no dividends declared for this period.

(9)
Book value per share at March 31, 2008 excluding these write-downs in the amount of $271 million after-tax has been significantly impacted by write-downs on our investment grade securities due to spread widening. Including these write-downs, book value per share is $10.92.

(10)
Net interest margin, thrift, represents the combined margin for thrift, elimination and other, and corporate overhead.

(11)
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.

(12)
Efficiency ratio is defined as operating expenses divided by net revenues, excluding provision for loan losses.

(13)
Total debt divided by total shareholders' equity. Preferred stock in subsidiary is included in the calculation.

(14)
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 ratios are those reported by the Bank on the Thrift Financial Report, which is filed quarterly with the Office of Thrift Supervision.

(15)
Non-performing assets are non-performing loans plus foreclosed assets. Loans are generally placed on non-accrual status when they are 90 days past due.

(16)
This ratio is defined as allowance for loan losses and estimated credit losses embedded in basis reductions due to loans transferred from HFS divided by total loans HFI.

(17)
This ratio is defined as allowance for loan losses and estimated credit losses embedded in basis reductions due to loans transferred from HFS divided by non-performing loans HFI.


SUMMARY OF BUSINESS SEGMENT RESULTS

        Our segment reporting is organized consistent with our hybrid mortgage banking/thrift 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 exited certain production channels in the fourth quarter of 2007 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 as defined by 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. We segregated the business activities we have exited so that the mortgage and thrift segments presented represent our new business model. See the "Discontinued Business Activities and Restructuring Charges" 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. 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 U.S. Generally Accepted Accounting Principles ("GAAP") to compute each division's financial results as if it were a stand-alone entity. Consistent with this approach, borrowed funds and their interest costs are allocated based on the funds actually used by the Company to fund the division's assets and we allocate capital 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, form our total operating results. Our unallocated corporate overhead costs and discontinued business activities are also presented and discussed. We have also included supplemental tables showing detailed division level financial results for each of our major operating segments.

8


        The following summarizes our financial results by segment for the periods indicated (dollars in millions):

 
  Mortgage
Banking
Segment

  Thrift
Segment

  Eliminations
& Other(1)

  Total
Operating
Results

  Corporate
Overhead

  Total
On-Going
Businesses

  Discontinued
Business
Activities and
Restructuring
Charges

  Total
Company

 
Three Months Ended March 31, 2008                                      
Operating Results                                                  
Net interest income (expense)   $ (10.1 ) $ 91.8   $ 23.1   $ 104.8   $ (1.2 ) $ 103.6   $ 7.3   $ 110.9  
Provision for loan losses         (96.1 )       (96.1 )       (96.1 )   (35.4 )   (131.5 )
Gain (loss) on sale of loans     134.9     0.9     (22.5 )   113.2         113.2     (21.2 )   92.1  
Service fee income (expense)     77.2         115.5     192.7         192.7     0.2     192.9  
Gain (loss) on securities     (1.8 )   (53.5 )   (102.4 )   (157.7 )       (157.7 )   (2.6 )   (160.3 )
Other income (expense)     31.1     4.3     (0.3 )   35.1     1.4     36.5     2.1     38.6  
   
 
 
 
 
 
 
 
 
Net revenues (expense)     231.3     (52.6 )   13.4     192.1     0.2     192.3     (49.6 )   142.7  
Operating expenses     238.2     44.6     16.0     298.8     41.1     339.9     22.6     362.5  
Restructuring charges                             72.4     72.4  
   
 
 
 
 
 
 
 
 
  Pre-tax loss     (6.9 )   (97.2 )   (2.6 )   (106.7 )   (40.9 )   (147.6 )   (144.6 )   (292.2 )
   
 
 
 
 
 
 
 
 
  Minority interests     3.9     4.5     1.1     9.5     0.2     9.7     0.9     10.6  
   
 
 
 
 
 
 
 
 
    Net loss   $ (8.2 ) $ (63.9 ) $ (2.6 ) $ (74.7 ) $ (25.1 ) $ (99.8 ) $ (84.4 ) $ (184.2 )
   
 
 
 
 
 
 
 
 
Performance Data                                                  
Average interest-earning assets   $ 4,372.2   $ 21,308.7   $ (32.4 ) $ 25,648.5   $ 644.1   $ 26,292.6   $ 3,197.0   $ 29,489.6  
Allocated capital     574.6     668.4     1.5     1,244.5     (91.1 )   1,153.4     141.5     1,294.9  
Loans produced     9,368.5     343.7     N/A     9,712.2     N/A     9,712.2     0.2     9,712.4  
Loans sold     10,142.2     503.6     (905.6 )   9,740.2     N/A     9,740.2     179.7     9,919.9  
MBR margin     1.43 %   0.17 %   N/A     N/A     N/A     1.27 %   (11.78 )%   1.03 %
ROE     (6 )%   (38 )%   N/A     (24 )%   N/A     (35 )%   (240 )%   (57 )%
Net interest margin     N/A     1.73 %   N/A     1.64 %   N/A     1.59 %   0.91 %   1.51 %
Net interest margin, thrift     N/A     1.73 %   N/A     N/A     N/A     2.09 %   N/A     N/A  
Average FTE     6,405     224     351     6,980     1,046     8,026     143     8,169  

Three Months Ended March 31, 2007

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Operating Results                                                  
Net interest income (expense)   $ 24.7   $ 47.2   $ 24.3   $ 96.2   $ (3.8 ) $ 92.4   $ 42.7   $ 135.1  
Provision for loan losses         (10.0 )       (10.0 )       (10.0 )   (0.7 )   (10.7 )
Gain (loss) on sale of loans     137.6     3.9     (22.2 )   119.3         119.3     (1.8 )   117.5  
Service fee income (expense)     51.1         (2.4 )   48.7         48.7     0.5     49.2  
Gain (loss) on securities     (0.3 )   (1.6 )   0.7     (1.2 )       (1.2 )   (4.1 )   (5.3 )
Other income     5.8     7.1     1.0     13.9     0.6     14.5     1.8     16.3  
   
 
 
 
 
 
 
 
 
Net revenues (expense)     218.9     46.6     1.4     266.9     (3.2 )   263.7     38.4     302.1  
Operating expenses     187.6     19.0     14.2     220.8     44.5     265.3     19.4     284.7  
Deferral of expenses under SFAS 91     (64.6 )   (1.9 )       (66.5 )       (66.5 )   (2.0 )   (68.5 )
   
 
 
 
 
 
 
 
 
    Pre-tax earnings (loss)     95.9     29.5     (12.8 )   112.6     (47.7 )   64.9     21.0     85.9  
   
 
 
 
 
 
 
 
 
      Net earnings (loss)   $ 58.2   $ 17.9   $ (7.5 ) $ 68.6   $ (29.0 ) $ 39.6   $ 12.8   $ 52.4  
   
 
 
 
 
 
 
 
 
Performance Data                                                  
Average interest-earning assets   $ 7,938.9   $ 14,277.3   $ (90.7 ) $ 22,125.5   $ 399.7   $ 22,525.2   $ 8,504.4   $ 31,029.6  
Allocated capital     779.2     619.1     2.0     1,400.3     160.3     1,560.6     472.3     2,032.9  
Loans produced     16,365.8     812.5     N/A     17,178.3     N/A     17,178.3     8,752.0     25,930.3  
Loans sold     16,139.3     1,427.3     (2,025.0 )   15,541.6     N/A     15,541.6     8,995.3     24,536.9  
MBR margin     1.04 %   0.27 %   N/A     N/A     N/A     0.96 %   0.20 %   0.68 %
ROE     30 %   12 %   N/A     20 %   N/A     10 %   11 %   10 %
Net interest margin     N/A     1.34 %   N/A     1.76 %   N/A     1.66 %   2.04 %   1.77 %
Net interest margin, thrift     N/A     1.34 %   N/A     N/A     N/A     1.88 %   N/A     N/A  
Average FTE     6,259     440     319     7,018     1,353     8,371     384     8,755  
Quarter to Quarter Comparison                                                  
% change in net earnings     (114 )%   (456 )%   65 %   (209 )%   13 %   (352 )%   (193 )%   (452 )%
% change in capital     (26 )%   8 %   (27 )%   (11 )%   (157 )%   (26 )%   (70 )%   (36 )%

(1)
Included are eliminations, deposits, and treasury items. See the "Eliminations and Other Segment" section for details.

9



MORTGAGE BANKING SEGMENT

        Our mortgage banking segment consists of the mortgage production division, the mortgage servicing division and the commercial banking division. The mortgage banking segment reported a net loss of $8 million for the quarter ended March 31, 2008 compared with net earnings of $58 million for the quarter ended March 31, 2007. These lower results were caused by a large decline in earnings from our mortgage production division, which reported a $17 million after-tax loss this quarter, partially offset by strong returns in the mortgage servicing division.

        The loss this quarter in our production division reflects the continued severe disruption in the secondary market for loans and securities not sold to the GSEs and our resulting efforts to rapidly change our production business model from a primary focus on non-GSE mortgage banking to a model that produces loans that are more than 85% eligible for sale to the GSEs. Although our production segment was not profitable for the quarter, we have reduced the loss 66% from the fourth quarter 2007 loss of $51 million as we right-size our costs and adjust our sales efforts towards the GSE product. As these efforts continue, we expect our production segment to be close to break-even in the second quarter of 2008 and will be profitable in the second half of 2008.

        Also hindering profitability in the production segment is the inclusion of 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 $14 million in the first quarter of 2008. We expect these businesses to contribute to mortgage banking profits in the subsequent quarters in 2008.

        The significant disruption in credit and housing markets that occurred during 2007 and continued this quarter 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 the first quarter of 2008 compared with 18% in the first quarter of 2007. The expectation of slower non-GSE prepayments offset the impact of lower market interest rates and resulted in positive servicing results.

        Net income from our mortgage servicing division decreased from $25 million in the first quarter of 2007 to $20 million in the first quarter of 2008 and resulted in a 23% return on the approximately $349 million of capital we have invested in this division.

10


        The following provides details on total mortgage banking segment for the periods indicated (dollars in millions):

 
  Mortgage
Production
Division

  Mortgage
Servicing
Division

  Consumer
Mortgage
Banking
O/H(1)

  Commercial
Mortgage
Banking
Division

  Total
Mortgage
Banking
Segment

 
Three Months Ended March 31, 2008                                
Operating Results                                
Net interest income (expense)   $ 10.4   $ (22.3 ) $ (0.2 ) $ 2.0   $ (10.1 )
Gain (loss) on sale of loans     119.4     17.2         (1.7 )   134.9  
Service fee income (expense)     10.0     67.2             77.2  
Gain (loss) on securities         (1.8 )           (1.8 )
Other income     25.9     4.8     0.3     0.1     31.1  
   
 
 
 
 
 
Net revenues     165.7     65.1     0.1     0.4     231.3  
Operating expenses     191.8     29.2     15.0     2.2     238.2  
   
 
 
 
 
 
  Pre-tax earnings (loss)     (26.1 )   35.9     (14.9 )   (1.8 )   (6.9 )
   
 
 
 
 
 
  Minority interests     1.3     2.4     0.1     0.1     3.9  
   
 
 
 
 
 
    Net earnings (loss)   $ (17.3 ) $ 19.6   $ (9.2 ) $ (1.3 ) $ (8.2 )
   
 
 
 
 
 
Performance Data                                
Average interest-earning assets   $ 3,024.0   $ 1,015.7   $ 2.5   $ 330.0   $ 4,372.2  
Allocated capital     195.9     348.8     8.4     21.5     574.6  
Loans produced     8,019.3     1,228.1     N/A     121.2     9,368.5  
Loans sold     8,692.5     1,324.1     N/A     125.5     10,142.2  
MBR margin     1.49 %   1.30 %   N/A     N/A     1.43 %
ROE     (36 )%   23 %   N/A     (24 )%   (6 )%
Net interest margin     1.38 %   N/A     N/A     2.45 %   N/A  
Average FTE     4,452     454     1,449     50     6,405  

Three Months Ended March 31, 2007

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Operating Results                                
Net interest income (expense)   $ 29.7   $ (5.0 ) $   $   $ 24.7  
Gain (loss) on sale of loans     120.3     17.3             137.6  
Service fee income     7.2     43.9             51.1  
Loss on securities         (0.3 )           (0.3 )
Other income     0.8     3.8     1.2         5.8  
   
 
 
 
 
 
Net revenues     158.0     59.7     1.2         218.9  
Operating expenses     148.1     21.9     16.5     1.1     187.6  
Deferral of expenses under SFAS 91     (61.5 )   (3.1 )           (64.6 )
   
 
 
 
 
 
  Pre-tax earnings (loss)     71.4     40.9     (15.3 )   (1.1 )   95.9  
   
 
 
 
 
 
    Net earnings (loss)   $ 43.2   $ 24.9   $ (9.3 ) $ (0.6 ) $ 58.2  
   
 
 
 
 
 
Performance Data                                
Average interest-earning assets   $ 7,027.7   $ 908.6   $ 2.6   $   $ 7,938.9  
Allocated capital     440.5     332.1     6.6         779.2  
Loans produced     15,247.4     1,118.4     N/A     1.0     16,365.8  
Loans sold     14,961.7     1,177.6     N/A         16,139.3  
MBR margin     1.00 %   1.47 %   N/A     N/A     1.04 %
ROE     40 %   30 %   N/A     N/A     30 %
Net interest margin     1.71 %   N/A     N/A     N/A     N/A  
Average FTE     4,781     278     1,186     14     6,259  
Quarter to Quarter Comparison                                
% change in net earnings (loss)     (140 )%   (21 )%   2 %   (88 )%   (114 )%
% change in equity     (56 )%   5 %   27 %   N/M     (26 )%

(1)
Included production division overhead, servicing overhead and secondary marketing overhead of $3 million, $3 million and $3 million, respectively, for the first quarter of 2008. For the first quarter of 2007, the production division overhead, servicing overhead and secondary marketing overhead were $3 million each for these overhead items mentioned.

11



MORTGAGE PRODUCTION DIVISION

        The mortgage production division originates loans through three divisions: retail channel, mortgage professionals channel and Financial Freedom. This division sources loans through relationships with mortgage brokers, financial institutions, Realtors®, and homebuilders.

        The mortgage professionals channel is the largest channel in our mortgage production division, funding loans originated through mortgage brokers and emerging mortgage bankers nationwide. The retail channel provides mortgage financing directly to home purchase oriented consumers by targeting Realtors®, homebuilders and financial professionals via storefront mortgage loan offices. As of March 31, 2008, we have 152 retail mortgage offices/branches throughout the U.S. Financial Freedom provides reverse mortgage products directly to seniors (age 62 and older) through the mortgage professionals channel. Through this division, we remain the leader in the fast growing reverse mortgage market. Financial Freedom also retains mortgage servicing rights ("MSRs") and receives fees and ancillary revenues for servicing loans sold into the secondary market.

        The following provides details on the results for the mortgage production division for the periods indicated (dollars in millions):

 
  Consumer
Direct
Division(1)

  Retail
Channel

  Mortgage
Professionals
Channel

  Financial
Freedom
Division

  Total
Mortgage
Production
Division

 
Three Months Ended March 31, 2008                                
Operating Results                                
Net interest income   $   $ 1.3   $ 4.4   $ 4.7   $ 10.4  
Gain on sale of loans         22.8     78.4     18.2     119.4  
Service fee income                 10.0     10.0  
Other income         11.1     14.8         25.9  
   
 
 
 
 
 
Net revenues         35.2     97.6     32.9     165.7  
Operating expenses         55.3     107.8     28.7     191.8  
   
 
 
 
 
 
  Pre-tax earnings (loss)         (20.1 )   (10.2 )   4.2     (26.1 )
   
 
 
 
 
 
  Minority interests         0.2     0.4     0.7     1.3  
   
 
 
 
 
 
    Net earnings (loss)   $   $ (12.4 ) $ (6.7 ) $ 1.8   $ (17.3 )
   
 
 
 
 
 
Performance Data                                
Average interest-earning assets   $   $ 462.7   $ 1,842.8   $ 718.5   $ 3,024.0  
Allocated capital         24.8     64.2     106.9     195.9  
Loans produced         1,232.7     5,728.9     1,057.7     8,019.3  
Loans sold         1,015.0     6,014.6     1,662.9     8,692.5  
MBR margin         2.37 %   1.38 %   1.38 %   1.49 %
ROE         (203 )%   (42 )%   7 %   (36 )%
Net interest margin         1.09 %   0.97 %   2.62 %   1.38 %
Average FTE         1,952     1,419     1,081     4,452  

12



Three Months Ended March 31, 2007

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Operating Results                                
Net interest income   $ 0.4   $ 0.1   $ 23.5   $ 5.7   $ 29.7  
Gain on sale of loans     3.9     0.5     52.8     63.1     120.3  
Service fee income                 7.2     7.2  
Other income     0.2     0.4         0.2     0.8  
   
 
 
 
 
 
Net revenues     4.5     1.0     76.3     76.2     158.0  
Operating expenses     7.8     2.0     101.0     37.3     148.1  
Deferral of expenses under SFAS 91     (3.5 )   (0.1 )   (50.4 )   (7.5 )   (61.5 )
   
 
 
 
 
 
  Pre-tax earnings (loss)     0.2     (0.9 )   25.7     46.4     71.4  
   
 
 
 
 
 
    Net earnings (loss)   $ 0.1   $ (0.5 ) $ 15.6   $ 28.0   $ 43.2  
   
 
 
 
 
 
Performance Data                                
Average interest-earning assets   $ 133.8   $ 18.0   $ 5,892.4   $ 983.5   $ 7,027.7  
Allocated capital     6.6     0.8     298.7     134.4     440.5  
Loans produced     319.5     49.4     13,656.1     1,221.4     15,246.4  
Loans sold     329.1     44.7     13,061.8     1,526.1     14,961.7  
MBR margin     1.3 %   N/A     0.58 %   4.51 %   1.00 %
ROE     7 %   N/A     21 %   85 %   40 %
Net interest margin     1.18 %   N/A     1.62 %   2.36 %   1.71 %
Average FTE     281     78     2,974     1,448     4,781  

Quarter to Quarter Comparison

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
% change in net earnings     N/M     N/M     (143 )%   (94 )%   (140 )%
% change in capital     N/M     N/M     (78 )%   (20 )%   (56 )%

(1)
We exited this division in the first quarter of 2008 and is included to present prior year results.

        The following summarizes the key production drivers for the mortgage professionals channel for the periods indicated:

 
  Three Months Ended
 
 
  March 31
   
   
   
 
 
  %
Change

  December 31,
2007

  %
Change

 
 
  2008
  2007
 
Key Production Drivers:                      
Active customers(1)   5,754   8,290   (31 )% 8,294   (31 )%
Sales personnel   927   1,182   (22 )% 1,140   (19 )%
Number of regional offices   9   16   (44 )% 16   (44 )%

(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 contributes 83% to our total loan originations, the following discussion refers to our total production, through both the mortgage banking and thrift segments.

        We generated SFR mortgage loan production of $9.6 billion for the quarter ended March 31, 2008, down 62.5% and 21.0%, respectively, compared to $25.9 billion and $12.3 billion for the first quarter of 2007 and fourth quarter of 2007, respectively. The current quarter decline in loan production from the first quarter of 2007 was attributable to the discontinuation of the conduit channel, the elimination of the majority of our non-agency product, and the decline in the overall mortgage market. We exited the conduit channel in the last quarter of 2007 as a response to the disruption in the secondary market. Additionally, in

13



all of our origination channels, we significantly restricted our guidelines on non-agency loans. As a result, our non-agency production decreased to 12% of total production during the first quarter of 2008.

        On April 10, 2008, the MBA issued an estimate of the industry volume for the quarter ended March 31, 2008 of $565.0 billion, which represents a 9.7% decrease from $626.0 billion at March 31, 2007 but an increase of 22.6% from $461.0 billion at December 31, 2007. Based on this estimate, our market share is 1.7% for the quarter ended March 31, 2008, down from 4.1% and 2.6% in the quarters ended March 31, 2007 and December 31, 2007, respectively. At March 31, 2008, our total pipeline of SFR mortgage loans in process was $5.1 billion, down 68.3% from $16.1 billion at March 31, 2007, and down 32.0% from $7.5 billion at December 31, 2007.

        The following summarizes our loan production by division and channel for the periods indicated (dollars in millions):

 
  Three Months Ended
 
 
  March 31
   
   
   
 
 
  %
Change

  December 31,
2007

  %
Change

 
 
  2008
  2007
 
Production by Division:                            
SFR mortgage loan production:                            
Mortgage professionals channel   $ 5,729   $ 13,656   (58 )% $ 8,186   (30 )%
Retail channel     1,233     49   N/M     1,056   17 %
Consumer direct division         320   (100 )%   191   (100 )%
Financial Freedom division     1,058     1,221   (13 )%   1,164   (9 )%
Servicing retention division     1,228     1,118   10 %   933   32 %
Consumer construction division(1)     343     812   (58 )%   499   (31 )%
   
 
 
 
 
 
  Total on-going businesses     9,591     17,176   (44 )%   12,029   (20 )%
   
 
 
 
 
 
Conduit channel         8,368   (100 )%   57   (100 )%
Home equity division(1)         25   (100 )%   3   (100 )%
   
 
 
 
 
 
  Total discontinued business activities         8,393   (100 )%   60   (100 )%
   
 
 
 
 
 
  Total SFR mortgage loan production     9,591     25,569   (62 )%   12,089   (21 )%
Commercial loan production:                            
Commercial mortgage banking division—on-going businesses     121     1   N/M     190   (36 )%
Homebuilder division(1)—discontinued business activities         360   (100 )%   22   (100 )%
   
 
 
 
 
 
  Total loan production   $ 9,712   $ 25,930   (63 )% $ 12,301   (21 )%
   
 
 
 
 
 
  Total pipeline of SFR mortgage loans in process at period end   $ 5,107   $ 16,112   (68 )% $ 7,506   (32 )%
   
 
 
 
 
 

(1)
The amounts of home equity lines of credit ("HELOCs"), consumer construction loans and builder construction loans originated by these channels represent commitments.

14


        The following summarizes our loan production by product type for the periods indicated (dollars in millions):

 
  Three Months Ended
 
 
  March 31
   
   
   
 
 
  %
Change

  December 31,
2007

  %
Change

 
 
  2008
  2007
 
Production by Product Type:                            
Standard first mortgage products:                            
  Agency eligible(1)   $ 7,512   $ 11,830   (37 )% $ 8,356   (10 )%
  Prime jumbo(1)     670     6,816   (90 )%   1,674   (60 )%
  Other prime(1)         2,073   (100 )%     N/A  
  Subprime(1)         1,084   (100 )%   186   (100 )%
   
 
 
 
 
 
Total standard first mortgage products (S&P evaluated)     8,182     21,803   (62 )%   10,216   (20 )%
Specialty consumer home mortgage products:                            
HELOCs(2)/Seconds     42     1,703   (98 )%   280   (85 )%
Reverse mortgages     1,058     1,221   (13 )%   1,164   (9 )%
Consumer construction(2)     112     842   (87 )%   385   (71 )%
Government—FHA/VA(3)     197       N/A     44   348 %
   
 
 
 
 
 
  Subtotal SFR mortgage production     9,591     25,569   (62 )%   12,089   (21 )%
   
 
 
 
 
 
Commercial loan products:                            
  Commercial real estate     121     1   N/M     190   (36 )%
  Builder construction commitments(2)         360   (100 )%   22   (100 )%
   
 
 
 
 
 
    Total production   $ 9,712   $ 25,930   (63 )% $ 12,301   (21 )%
   
 
 
 
 
 
    Total S&P lifetime loss estimate(4)     0.23 %   1.86 % (88 )%   0.43 % (47 )%

(1)
The loan production by product type provides a breakdown of standard first mortgage products by agency eligible, prime jumbo, other 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 FHA and loans guaranteed by the VA.

(4)
All loss estimates reported here have been restated to use Standard & Poor's ("S&P") new 6.3 model which was released in March 2008. While our production is evaluated using the S&P's 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.

15



Loan Sale and Distribution

        The following shows the various channels through which loans were distributed for the Company during the periods indicated (dollars in millions):

 
  Three Months Ended
 
 
  March 31
   
 
 
  December 31,
2007

 
 
  2008
  2007
 
Distribution of Loans by Channel:                    
Sales to GSE's     84 %   30 %   75 %
Private-label securitizations     1 %   30 %   25 %
Whole loan sales, servicing retained     4 %   39 %    
Whole loan sales, servicing released     11 %   1 %    
   
 
 
 
  Total loan sales percentage     100 %   100 %   100 %
   
 
 
 
  Total loan sales   $ 9,920   $ 24,537   $ 13,425  
   
 
 
 

        Due to the disruptions in the secondary mortgage market, we have tightened our guidelines and focused primarily on GSE eligible mortgage products. As a result, sales to GSEs increased significantly to 84% of total loan distribution for the first quarter of 2008, up from 30% and 75% for the first quarter of 2007 and fourth quarter of 2007, respectively. We expect that a very high percentage of our loan sales going forward 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 quarter ended March 31, 2008, the calculation of gain (loss) on sales of loans included the retention of $135 million of MSRs and $1 million of residual securities. For more information on the valuation assumptions related to our retained assets, see "Table 15. 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 the amount of 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 division. 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.

16


        The following summarizes the amount of loans sold and the MBR margin during the periods indicated (dollars in millions):

 
  Three Months Ended
 
 
  March 31
   
   
   
 
 
  % Change
  December 31, 2007
  % Change
 
 
  2008
  2007
 
Total loans sold   $ 9,920   $ 24,537   (60 )% $ 13,425   (26 )%
MBR margin after production hedging     1.30 %   1.11 % 17 %   0.77 % 69 %
MBR margin after credit costs     1.03 %   0.88 % 17 %   (1.88 )% (155 )%
Net MBR margin     1.03 %   0.68 % 51 %   (2.18 )% (147 )%

        For more details on our MBR margin, see "Table 6. MBR Margin" of "Appendix A: Additional Quantitative Disclosures."


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.

        Our MSRs increased to $2,560 million at March 31, 2008 from $2,495 million at December 31, 2007. The lower mortgage interest rates were 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 15. Valuation of MSRs, Interest-Only, Prepayment Penalty, and Residual Securities" of "Appendix A: Additional Quantitative Disclosures."

17


        The following provides additional details on the results for the mortgage servicing division for the periods indicated (dollars in millions):

 
  Mortgage Servicing Rights Channel
  Servicing Retention Channel
  Total Mortgage Servicing Division
 
Three Months Ended March 31, 2008                    
Operating Results                    
Net interest income (expense)   $ (24.7 ) $ 2.4   $ (22.3 )
Gain on sale of loans         17.2     17.2  
Service fee income     67.2         67.2  
Loss on securities     (1.8 )       (1.8 )
Other income     2.1     2.7     4.8  
   
 
 
 
Net revenues     42.8     22.3     65.1  
Operating expenses     14.5     14.7     29.2  
   
 
 
 
  Pre-tax earnings     28.3     7.6     35.9  
   
 
 
 
  Minority interests     2.2     0.2     2.4  
   
 
 
 
    Net earnings   $ 15.2   $ 4.4   $ 19.6  
   
 
 
 
Performance Data                    
Average interest-earning assets   $ 224.8   $ 790.9   $ 1,015.7  
Allocated capital     321.5     27.3     348.8  
Loans produced         1,228.1     1,228.1  
Loans sold         1,324.1     1,324.1  
MBR Margin     N/A     1.30 %   1.30 %
ROE     19 %   64 %   23 %
Net interest margin     N/A     1.19 %   N/A  
Average FTE     99     355     454  

Three Months Ended March 31, 2007

 

 

 

 

 

 

 

 

 

 
Operating Results                    
Net interest income (expense)   $ (8.0 ) $ 3.0   $ (5.0 )
Gain (loss) on sale of loans     0.6     16.7     17.3  
Service fee income     43.9         43.9  
Loss on securities     (0.3 )       (0.3 )
Other income     1.8     2.0     3.8  
   
 
 
 
Net revenues     38.0     21.7     59.7  
Operating expenses     11.2     10.7     21.9  
Deferral of expenses under SFAS 91         (3.1 )   (3.1 )
   
 
 
 
  Pre-tax earnings     26.8     14.1     40.9  
   
 
 
 
    Net income   $ 16.2   $ 8.7   $ 24.9  
   
 
 
 
Performance Data                    
Average interest-earning assets   $ 214.1   $ 694.5   $ 908.6  
Allocated capital     300.4     31.7     332.1  
Loans produced         1,118.4     1,118.4  
Loans sold         1,177.6     1,177.6  
MBR Margin     N/A     1.42 %   1.47 %
ROE     22 %   111 %   30 %
Net interest margin     N/A     N/A     N/A  
Average FTE     91     187     278  
Quarter to Quarter Comparison                    
% change in net earnings     (6 )%   (50 )%   (21 )%
% change in capital     7 %   (14 )%   5 %

18


        SFR mortgage loans serviced for others reached $184.5 billion (including reverse mortgages and HELOCs) at March 31, 2008, with a weighted average coupon of 6.60%. In comparison, we serviced $156.1 billion of mortgage loans owned by others at March 31, 2007, with a weighted average coupon of 7.09%, and $181.7 billion at December 31, 2007, with a weighted average coupon of 6.89%.

        The following provides the activity in the servicing portfolio for the periods indicated (in millions):

 
  Three Months Ended
 
 
  March 31
   
 
 
  December 31,
2007

 
 
  2008
  2007
 
Unpaid principal balance at beginning of period   $ 181,724   $ 139,817   $ 173,915  
Additions     9,450     24,690     13,967  
Loan payments and prepayments     (6,639 )   (8,363 )   (6,158 )
   
 
 
 
Unpaid principal balance at end of period   $ 184,535   $ 156,144   $ 181,724  
   
 
 
 

        The following provides additional information related to the servicing portfolio as of the dates indicated:

 
  March 31
   
 
 
  December 31,
2007

 
 
  2008
  2007
 
By Product Type:                    
Fixed-rate mortgages     39 %   35 %   36 %
Intermediate term fixed-rate loans     33 %   32 %   35 %
Pay option adjustable-rate mortgages ("ARMs")     16 %   21 %   17 %
Reverse mortgages     10 %   9 %   10 %
HELOCs     1 %   2 %   1 %
Other     1 %   1 %   1 %
   
 
 
 
  Total     100 %   100 %   100 %
   
 
 
 
Additional Information(1):                    
Weighted average FICO(2)     703     703     702  
Weighted average original loan-to-value ("LTV") ratio(3)     72 %   72 %   73 %
Average original loan size (in millions)   $ 0.2   $ 0.2   $ 0.2  
Percent of portfolio with prepayment penalty     29 %   41 %   33 %
Portfolio delinquency (% of unpaid principal balance)(4)     8.26 %   5.41 %   7.31 %
By Geographic Distribution:                    
  California     43 %   43 %   43 %
  Florida     8 %   8 %   8 %
  New York     8 %   8 %   8 %
  New Jersey     4 %   4 %   4 %
  Virginia     3 %   4 %   4 %
  Others     34 %   33 %   33 %
   
 
 
 
    Total     100 %   100 %   100 %
   
 
 
 

(1)
Portfolio delinquency is calculated for the entire servicing portfolio. All other information presented excludes reverse mortgages.

(2)
Fair Isaac Corporation ("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

19


    with low risk of default, but in general, the secondary market will consider FICO scores of 620 or higher to be prime.

(3)
Combined loan-to-value ("CLTV") ratio for loans in the second lien position is used to calculate weighted average original LTV ratio for the portfolio.

(4)
Delinquency is defined as 30 days or more past the due date excluding loans in foreclosure.


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. These investing activities provide core spread income and we believe, generally, a more stable return on equity. Additionally, the segment engages in consumer construction lending.

        Our thrift segment reported a $64 million net loss in the first quarter of 2008, as compared to net earnings of $18 million in the first quarter of 2007, primarily due to an 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 quarter ended March 31, 2008 totaled $223 million pre-tax compared with only $23 million for the quarter ended March 31, 2007. Although all the divisions in the thrift segment incurred higher credit costs in the first quarter of 2008, the majority of the increase was concentrated in the SFR Mortgage Loans HFI division.

20


        The following provides details on the results for divisions of our thrift segment for the periods indicated (dollars in millions):

 
  Investment Grade Securities Channel
  Non-
Investment Grade and Residual Securities Channel

  Total Mortgage-
Backed Securities Division

  SFR Mortgage Loans HFI Division
  Consumer Construction Division
  Warehouse Lending Division
  Total Thrift Segment
 
Three Months Ended March 31, 2008                                            
Operating Results                                            
Net interest income   $ 24.2   $ 12.8   $ 37.0   $ 45.2   $ 9.5   $ 0.1   $ 91.8  
Provision for loan losses                 (75.0 )   (21.1 )       (96.1 )
Gain on sale of loans                 (2.3 )   3.2         0.9  
Gain (loss) on securities     (25.6 )   (27.4 )   (53.0 )   (0.6 )   0.1         (53.5 )
Other income (expense)                 1.4     2.8     0.1     4.3  
   
 
 
 
 
 
 
 
Net revenues (expense)     (1.4 )   (14.6 )   (16.0 )   (31.3 )   (5.5 )   0.2     (52.6 )
Operating expenses     0.3     1.0     1.3     31.8     11.0     0.5     44.6  
   
 
 
 
 
 
 
 
  Pre-tax loss     (1.7 )   (15.6 )   (17.3 )   (63.1 )   (16.5 )   (0.3 )   (97.2 )
   
 
 
 
 
 
 
 
  Minority interests     0.6     0.9     1.5     2.5     0.5         4.5  
   
 
 
 
 
 
 
 
    Net loss   $ (1.7 ) $ (10.4 ) $ (12.1 ) $ (41.1 ) $ (10.6 ) $ (0.1 ) $ (63.9 )
   
 
 
 
 
 
 
 
Performance Data                                            
Average interest-earning assets   $ 6,638.6   $ 280.5   $ 6,919.1   $ 11,829.4   $ 2,480.7   $ 79.5   $ 21,308.7  
Allocated capital     90.7     129.3     220.0     365.2     78.6     4.6     668.4  
Loans produced                     343.7         343.7  
Loans sold                 380.6     123.0         503.6  
ROE     (7 )%   (32 )%   (22 )%   (45 )%   (54 )%   (13 )%   (38 )%
Net interest margin, thrift.      1.46 %   18.31 %   2.15 %   1.54 %   1.55 %   0.87 %   1.73 %
Efficiency ratio     (23 )%   (7 )%   (8 )%   73 %   70 %   161 %   102 %
Average FTE     5     12     17     13     173     21     224  

Three Months Ended March 31, 2007

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Operating Results                                            
Net interest income   $ 6.9   $ 10.8   $ 17.7   $ 14.3   $ 13.7   $ 1.5   $ 47.2  
Provision for loan losses                 (8.5 )   (1.4 )   (0.1 )   (10.0 )
Gain (loss) on sale of loans                 (5.0 )   8.9         3.9  
Gain (loss) on securities     (0.2 )   (1.4 )   (1.6 )               (1.6 )
Other income (expense)     0.6         0.6     0.5     5.3     0.7     7.1  
   
 
 
 
 
 
 
 
Net revenues (expense)     7.3     9.4     16.7     1.3     26.5     2.1     46.6  
Operating expenses     0.3     0.4     0.7     1.6     15.9     0.8     19.0  
Deferral of expenses under SFAS 91                     (1.9 )       (1.9 )
   
 
 
 
 
 
 
 
  Pre-tax earnings (loss)     7.0     9.0     16.0     (0.3 )   12.5     1.3     29.5  
   
 
 
 
 
 
 
 
    Net earnings (loss)   $ 4.3   $ 5.5   $ 9.8   $ (0.2 ) $ 7.6   $ 0.7   $ 17.9  
   
 
 
 
 
 
 
 
Performance Data                                            
Average interest-earning assets   $ 4,406.2   $ 271.0   $ 4,677.2   $ 6,724.5   $ 2,646.5   $ 229.1   $ 14,277.3  
Allocated capital     82.5     137.0     219.5     253.6     127.7     18.3     619.1  
Loans produced                     812.5         812.5  
Loans sold                 737.5     689.8         1,427.3  
ROE     21 %   16 %   18 %       24 %   16 %   12 %
Net interest margin, thrift.      0.64 %   16.04 %   1.53 %   0.86 %   2.11 %   2.59 %   1.34 %
Efficiency ratio     4 %   4 %   4 %   16 %   50 %   40 %   30 %
Average FTE     4     5     9     11     391     29     440  

Quarter to Quarter Comparison

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
% change in net earnings     (139 )%   (290 )%   (224 )%   N/M     (238 )%   (120 )%   (456 )%
% change in capital     10 %   (6 )%       44 %   (39 )%   (75 )%   8 %

21


        The following tables and discussion present supplemental information to help understand the composition and credit quality of the assets held in our thrift portfolios. This section refers to company-wide assets, a small portion of which may be held in our mortgage banking segment.


MORTGAGE-BACKED SECURITIES DIVISION

        The following provides the details of the MBS portfolio as of the dates indicated (in millions):

 
  March 31, 2008
  March 31, 2007
  December 31, 2007
 
  Trading
  AFS
  Total
  Trading
  AFS
  Total
  Trading
  AFS
  Total
Mortgage banking segment:                                                      
AAA-rated and agency interest-only securities   $ 49   $   $ 49   $ 69   $   $ 69     60   $   $ 60
AAA-rated principal-only securities     89         89     56         56     88         88
Prepayment penalty and late fee securities     74         74     86         86     80         80
   
 
 
 
 
 
 
 
 
Total mortgage banking     212         212     211         211     228         228
   
 
 
 
 
 
 
 
 
Thrift segment:                                                      
AAA-rated non-agency securities     384     4,938     5,322     24     4,237     4,261     418     5,478     5,896
AAA-rated agency securities         41     41         58     58         45     45
AAA-rated and agency interest-only securities                 6         6            
Prepayment penalty and other securities     1         1     7         7     2         2
Other investment grade securities     289     434     723     67     262     329     368     517     885
Other non-investment grade securities     103     89     192     71     39     110     94     62     156
Non-investment grade residual securities     126     2     128     245     26     271     113     4     117
   
 
 
 
 
 
 
 
 
Total thrift     903     5,504     6,407     420     4,622     5,042     995     6,106     7,101
   
 
 
 
 
 
 
 
 
Total mortgage-backed securities   $ 1,115   $ 5,504   $ 6,619   $ 631   $ 4,622   $ 5,253   $ 1,223   $ 6,106   $ 7,329
   
 
 
 
 
 
 
 
 

        AAA-rated MBS represented 83%, 85% and 83% of the total portfolio at March 31, 2008, and 2007, and December 31, 2007, respectively. These securities had an expected weighted average life of 4.4 years, 2.8 years and 3.0 years at March 31, 2008, 2007, and December 31, 2007, respectively. Due to downgrades of investment grade securities, we anticipate an increase in non-investment grade securities. Such an increase could require that we hold additional capital against these securities.

        The capital markets have taken another turn for the worse with credit spreads widening significantly due to disrupted market conditions caused by uncertainty in the U.S. housing and mortgage markets, margin calls by Wall Street repo lenders on mortgage real estate investment trust and hedge funds, and other economic and financial uncertainties. As a result of this spread widening, the value of our MBS portfolio was adversely affected. We believe that most of any potential negative financial impact is not warranted by the present underlying performance and/or ratings of these assets and, therefore, any unrealized losses will likely reverse and have a positive financial impact in subsequent quarters, either when spreads tighten or over time via an increased asset yield. We have the intent and ability to continue to hold these assets to recovery as a result of funding our balance sheet with deposits, FHLB advances, long-term debt and equity.

        During April 2008, Moody's Investor Services ("Moody's") and Standard & Poor's Rating Services ("S&P") downgraded the ratings on significant number of MBS backed by non-agency collateral, including certain of those issued by Indymac and for which Indymac has retained interests in its MBS portfolio. A total of 29 bonds with carrying value of $160 million were downgraded. These downgrades will negatively impact the Company's Tier 1 risk-based capital ratio and total risk-based capital ratio as of June 30, 2008, as the risk-weighting of MBS is dependent upon the ratings provided by these rating agencies. For valuation of our financial instruments, refer to "Earnings—Impact of Recent Changes in Fair Value Accounting in our Financial Results" section.

22



SFR MORTGAGE LOANS HFI DIVISION

        The SFR mortgage HFI portfolio generates core spread income. These loans are priced to an ROE that exceeds our cost of capital and provides support for our Mortgage Banking Segment by providing liquidity. The portfolio has grown substantially in the previous two quarters as we have transferred non-GSE eligible loans into the portfolio that would have previously been sold in the secondary market.

        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 millions):

 
  March 31
   
 
 
  December 31,
2007

 
 
  2008
  2007
 
Outstanding balance(1)   $ 11,965   $ 5,214   $ 11,411  
Average loan size   $ 0.3   $ 0.3   $ 0.3  
Non-performing loans     9.47 %   2.12 %   6.47 %
Estimated average life in years(2)     3.6     2.8     2.4  
Estimated average net duration in month(3)     12.0     (2.7 )   2.1  
Annualized yield     6.35 %   6.21 %   7.03 %
Percent of loans with active prepayment penalty     42 %   38 %   43 %

By Product Type:

 

 

 

 

 

 

 

 

 

 
Fixed-rate mortgages     15 %   7 %   15 %
Intermediate term fixed-rate loans     11 %   14 %   15 %
Interest-only loans     43 %   55 %   43 %
Pay option ARMs(4)     29 %   22 %   26 %
Others     2 %   2 %   1 %
   
 
 
 
      100 %   100 %   100 %
   
 
 
 
Additional Information:                    
Average FICO score     694     714     693  
Original average LTV (First liens)     76 %   73 %   76 %
Current average LTV (First liens)(5)     79 %   61 %   76 %
Geographic distribution of top five states:                    
  Southern California     30 %   34 %   30 %
  Northern California     15 %   21 %   15 %
   
 
 
 
Total California     45 %   55 %   45 %
Florida     9 %   6 %   9 %
New York     7 %   4 %   7 %
New Jersey     3 %   2 %   3 %
Maryland     3 %   2 %   3 %
Others     33 %   31 %   33 %
   
 
 
 
  Total     100 %   100 %   100 %
   
 
 
 

(1)
The outstanding balance at March 31, 2008 includes $271 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.

23


(4)
The net increase in unpaid principal balance due to negative amortization was $15 million for the quarter ended March 31, 2008, which approximated the deferred interest recognized for the periods. As of March 31, 2008, approximately 92% (based on loan count) of our pay option ARM loans had negatively amortized, resulting in an increase of $117 million to their original loan balance or approximately 3.4% of the original UPB. This is an increase from 86% and 91% (based on loan count) at March 31, 2007 and December 31, 2007, respectively.

(5)
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 first quarter of 2008 on a loan level basis.


CONSUMER CONSTRUCTION DIVISION

        Our consumer construction division provides construction financing for individual consumers who want to build a new primary residence or second home. The primary product is a 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 March 31, 2008, based on the underlying note agreements, 82% of the construction loans will be converted to adjustable-rate permanent loans, 12% to intermediate term fixed-rate loans, and 6% 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 the first quarter of 2008, we entered into new consumer construction commitments of $112 million, which is a decrease of 87%, or $730 million, from the first quarter of 2007 and a decrease of 71%, or $273 million, from the fourth quarter of 2007. Approximately 72% of new commitments are generated through mortgage professional customers, and the remaining 28% of new commitments are retail originations. Consumer construction loans outstanding at March 31, 2008 decreased 3% from March 31, 2007 and 6% from December 31, 2007.

        We introduced a monthly adjusting construction period ARM product in 2006. The percentage of these adjustable-rate loans in our portfolio was 71% at March 31, 2008, compared to 39% and 72% at March 31, 2007 and December 31, 2007, respectively. The ratio of non-performing loans increased to 6.15% of the portfolio at March 31, 2008, compared to 1.23% and 3.31% at March 31, 2007 and December 31, 2007, respectively. The ratio of charged-off non-performing loans increased to 69% at March 31, 2008, compared to 59% and 29% at March 31, 2007 and December 31, 2007, respectively. Total charges taken against the portfolio was $22 million for the first quarter of 2008, up from $1 million and $12 million for the first quarter and fourth quarter of 2007, respectively. As a result, we adjusted the allowance for loan losses to $30 million at March 31, 2008, compared to $12 million and $32 million at March 31, 2007 and December 31, 2007, respectively. This resulted in a percentage of allowance for loan losses to recorded value of 1.36% at March 31, 2008, from 1.38% at December 31, 2007.

24


        Information on our consumer construction portfolio is presented below as of the dates indicated (dollars in millions):

 
  March 31
   
 
 
  December 31,
2007

 
 
  2008
  2007
 
Outstanding balance   $ 2,196   $ 2,275   $ 2,343  
Total commitments   $ 3,080   $ 3,625   $ 3,504  
Average loan commitment   $ 0.6   $ 0.5   $ 0.6  
Non-performing loans     6.15 %   1.23 %   3.31 %

By Product Type:

 

 

 

 

 

 

 

 

 

 
Fixed-rate loans     29 %   61 %   28 %
Adjustable-rate loans     71 %   39 %   72 %
   
 
 
 
      100 %   100 %   100 %
   
 
 
 
Additional Information:                    
Average LTV ratio(1)     73 %   73 %   73 %
Average FICO score     722     712     722  
Geographic distribution of top five states:                    
  Southern California     31 %   29 %   30 %
  Northern California     13 %   14 %   12 %
   
 
 
 
Total California     44 %   43 %   42 %
Florida     7 %   8 %   7 %
Washington     5 %   4 %   4 %
New York     4 %   4 %   4 %
Arizona     4 %   3 %   4 %
Others     36 %   38 %   39 %
   
 
 
 
Total     100 %   100 %   100 %
   
 
 
 

(1)
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.


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.

        The mortgage-backed securities division and the mortgage servicing division are exposed to movements in the intermediate fixed-rate non-agency loan spreads. Mortgage spread is the difference between mortgage interest rates and LIBOR/interest rate swap rates. Tighter spreads benefit mortgage-backed securities valuations 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. The mortgage production division and the mortgage servicing division have entered periodically into formal inter-divisional transactions to economically hedge their respective financial risks to mortgage spreads for certain products in the absence of readily available derivative instruments. The impact of the hedges has been reflected in the respective channel results with the consolidation adjustment recorded under "Interdivision Hedge Transactions" within "Eliminations".

25


        The following provides additional details on deposits, treasury and eliminations for the periods indicated (dollars in millions):

 
   
   
  Eliminations
   
 
 
  Deposits
  Treasury
  Interdivision Loan Sales(1)
  Interdivision Hedge Transactions
  Other
  Total
 
Three Months Ended March 31, 2008                                      
Operating Results                                      
Net interest income   $   $ 9.7   $ 2.7   $   $ 10.7   $ 23.1  
Gain (loss) on sale of loans             (0.7 )   (9.5 )   (12.3 )   (22.5 )
Service fee income                 111.9     3.6     115.5  
Gain (loss) on securities                 (102.4 )       (102.4 )
Other income     0.9     0.2             (1.4 )   (0.3 )
   
 
 
 
 
 
 
Net revenues (expense)     0.9     9.9     2.0         0.6     13.4  
Operating expenses     6.5     11.6             (2.1 )   16.0  
   
 
 
 
 
 
 
  Pretax earnings (loss)     (5.6 )   (1.7 )   2.0         2.7     (2.6 )
   
 
 
 
 
 
 
  Minority interests         1.1                 1.1  
   
 
 
 
 
 
 
    Net earnings (loss)   $ (3.4 ) $ (2.0 ) $ 1.2   $   $ 1.6   $ (2.6 )
   
 
 
 
 
 
 

Three Months Ended March 31, 2007

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Operating Results                                      
Net interest income   $   $ 9.6   $ 9.1   $   $ 5.6   $ 24.3  
Gain (loss) on sale of MBS             (14.9 )   (7.8 )   0.5     (22.2 )
Service fee income                 7.8     (10.2 )   (2.4 )
Gain (loss) on securities                     0.7     0.7  
Other income     1.0     0.6             (0.6 )   1.0  
   
 
 
 
 
 
 
Net revenues (expense)     1.0     10.2     (5.8 )       (4.0 )   1.4  
Operating expenses     6.5     11.7             (4.0 )   14.2  
   
 
 
 
 
 
 
  Pretax loss     (5.5 )   (1.5 )   (5.8 )           (12.8 )
   
 
 
 
 
 
 
    Net loss   $ (3.4 ) $ (0.9 ) $ (3.2 ) $   $   $ (7.5 )
   
 
 
 
 
 
 

(1)
Includes loans sold of $0.9 billion and $2.0 billion for the quarters ended March 31, 2008, and 2007, respectively.


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 decreased from a loss of $29 million in the first quarter of 2007 to a loss of $25 million in the first quarter of 2008.


DISCONTINUED BUSINESS ACTIVITIES AND RESTRUCTURING CHARGES

        As conditions in the U.S. mortgage market have deteriorated, we exited certain production channels and are reporting them in a separate category in our segment reporting ("Discontinued Business Activities and Restructuring Charges"). These exited production channels include conduit, home equity and homebuilder channels. These activities are not considered discontinued operations as defined by SFAS 144 due to our significant continuing involvement in these activities. Of the $249 million in total credit costs we reported in the first quarter of 2008, $57 million were in these discontinued businesses, driving the total after-tax loss of $84 million for these discontinued businesses for the quarter. Also, embedded in this net loss was $44 million restructuring charges after-tax. There were no restructuring charges in the prior quarters. In January 2008, the Company initiated a program to reduce costs and improve operating efficiencies in response to the significant changes to its business model and market conditions.

26


        The following provides details on the results of our exited businesses for the periods indicated (dollars in millions):

 
  Discontinued Business Activities and Restructuring Charges
 
 
  Conduit Channel
  Home Equity Division
  Homebuilder Division
  Prior Production Model
  Other
  Total
 
Three Months Ended March 31, 2008                                      
Operating Results                                      
Net interest income (expense)   $ (0.6 ) $ 6.9   $ (0.1 ) $ 0.6   $ 0.5   $ 7.3  
Provision for loan losses         (20.0 )   (15.0 )       (0.4 )   (35.4 )
Loss on sale of loans     (6.2 )   (2.6 )       (12.4 )       (21.2 )
Service fee income (expense)         0.2                 0.2  
Loss on securities         (2.6 )               (2.6 )
Other income         2.1                 2.1  
   
 
 
 
 
 
 
Net revenues (expense)     (6.8 )   (16.0 )   (15.1 )   (11.8 )       (49.6 )
Operating expenses     8.6     2.6     6.1     5.3         22.6  
Restructuring charges                     72.4     72.4  
   
 
 
 
 
 
 
  Pre-tax loss     (15.4 )   (18.6 )   (21.2 )   (17.1 )   (72.4 )   (144.6 )
   
 
 
 
 
 
 
  Minority interests         0.6     0.2         0.1     0.9  
   
 
 
 
 
 
 
    Net loss   $ (9.4 ) $ (12.1 ) $ (13.1 ) $ (10.5 ) $ (39.3 ) $ (84.4 )
   
 
 
 
 
 
 
Performance Data                                      
Average interest-earning assets                                      
Allocated capital   $ 73.2   $ 1,890.3   $ 1,134.3   $ 71.0   $ 28.2   $ 3,197.0  
Loans produced     3.9     91.7     34.8     9.2     1.9     141.5  
Loans sold         0.2                 0.2  
MBR margin     122.1     57.6                 179.7  
ROE     (5.53 )%   N/A     N/A     N/A     N/A     (11.78 )%
Net interest margin     N/M     (53 )%   (152 )%   (457 )%   N/M     (240 )%
Net interest margin, thrift     (3.04 )%   1.47 %   (0.04 )%   3.09 %   6.52 %   0.91 %
Efficiency ratio     N/A     68 %   N/M     N/A     4 %   (159 )%
Average FTE     6     56     78     3         143  

Three Months Ended March 31, 2007

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Operating Results                                      
Net interest income   $ 20.1   $ 7.0   $ 15.1   $   $ 0.5   $ 42.7  
Provision for loan losses         (0.2 )           (0.5 )   (0.7 )
Gain (loss) on sale of loans     (9.9 )   8.1                 (1.8 )
Service fee income         0.5                 0.5  
Loss on securities         (4.1 )               (4.1 )
Other income (expense)     (0.1 )   1.6     0.3             1.8  
   
 
 
 
 
 
 
Net revenues (expense)     10.1     12.9     15.4             38.4  
Operating expenses     8.7     4.6     6.1             19.4  
Deferral of expenses under SFAS 91         (0.3 )   (1.7 )           (2.0 )
   
 
 
 
 
 
 
    Pre-tax earnings     1.4     8.6     11.0             21.0  
   
 
 
 
 
 
 
      Net earnings   $ 0.8   $ 5.3   $ 6.7   $   $   $ 12.8  
   
 
 
 
 
 
 
Performance Data                                      
Average interest-earning assets   $ 5,724.1   $ 1,563.7   $ 1,182.1   $   $ 34.5   $ 8,504.4  
Allocated capital     239.4     122.9     106.8         3.2     472.3  
Loans produced     8,367.6     24.6     359.8             8,752.0  
Loans sold     8,255.0     740.3                 8,995.3  
MBR margin     0.12 %   N/A     N/A         N/A     0.20 %
ROE     1 %   17 %   26 %       (4 )%   11 %
Net interest margin     1.42 %   1.82 %   5.19 %       5.86 %   2.04 %
Net interest margin, thrift     N/A     N/A     N/A         N/A     N/A  
Efficiency ratio     N/A     33 %   28 %       11 %   44 %
Average FTE     177     82     125             384  

Year to Year Comparison

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
% change in net earnings     N/M     (328 )%   (295 )%   N/A     N/M     N/M  
% change in capital     (98 )%   (25 )%   (67 )%   N/A     (39 )%   (70 )%

27



CONDUIT CHANNEL

        The conduit channel purchased pools of closed loans for portfolio, resale, or securitization and this channel was characterized by its low cost operations and quick asset turn times. For the quarter ended March 31, 2008, there were no loans produced by our discontinued conduit channel, as compared to $8.4 billion and $57 million for the quarters ended March 31, 2007 and December 31, 2007, respectively. We exited this channel in the fourth quarter of 2007 due to its inherently lower profit margins and the current uncertainty with respect to secondary market spreads and execution. The conduit channel recorded a net loss of $9 million for the quarter ended March 31, 2008, from net earnings of $1 million for the quarter ended March 31, 2007 and from a net loss of $49 million for the quarter ended December 31, 2007.


HOME EQUITY DIVISION

        The home equity division provides HELOC and closed-end second mortgages nationwide through our mortgage professionals and retail channels. We ceased new originations in this division from all but our retail deposit branches in the fourth quarter of 2007 as a response to extreme disruptions in the housing and mortgage markets.

        At March 31, 2008, our total HELOC servicing portfolio amounted to $4.1 billion, an increase of approximately $239 million from March 31, 2007 and a decrease of approximately $125 million from December 31, 2007. We produced $42 million of new HELOC commitments through our mortgage banking segment and internal channels during the first quarter of 2008, sold $58 million and realized a net loss on sale of $3 million. During the first quarter of 2007, we produced $725 million of HELOC loans and sold $740 million with a corresponding net gain on sale of $8 million. In the fourth quarter of 2007, we produced $280 million of new HELOC commitments, sold $68 million and realized a net loss on sale of $83 million.

        Our HELOC securitization agreements contain provisions that, under certain circumstances, the securitization enters a "rapid amortization period". During this period, all new draws on revolving HELOC loans are allocated to a seller's interest on our consolidated balance sheets. This causes the outstanding bonds to pay down quickly.

        Our securitization agreements generally treat our seller's interest as "pari passu" to the securitization trust. Accordingly, any cash received on the underlying loans is distributed on a pro-rata basis, and our seller's interest is not subordinated to the securitization trust, even in rapid amortization. As of March 31, 2008, none of our securitizations were in a rapid amortization period. Since our seller's interest is not subordinated, the expected impact on our financial statements is projected to be a modest increase in HELOC loans outstanding, which will likely be offset by the run-off in the existing HFI portfolio.

        All HELOC loans are adjustable-rate loans and indexed to the prime rate. Information on the combined HELOC portfolio, including both HFS and HFI loans, is presented as of the dates indicated (dollars in millions):

 
  March 31
   
 
 
  December 31,
2007

 
 
  2008
  2007
 
Outstanding balance(1)   $ 1,498   $ 366   $ 1,460  
Total commitments(2)   $ 2,840   $ 1,445   $ 2,911  
Average spread over prime     1.13 %   1.42 %   1.16 %
Average FICO score(3)     729     738     736  
Average combined LTV ratio(4)     77 %   76 %   77 %

(1)
Excludes seller's interest of $180 million, $192 million and $169 million at March 31, 2008, March 31, 2007 and December 31, 2007, respectively.

(2)
On funded loans.

28


(3)
The average FICO score is based on HELOC commitments.

(4)
The combined LTV ratio combines the LTV on both the first mortgage loan and the HELOC commitments.

        The following contains some additional information in our HELOC portfolio as of the dates indicated (dollars in millions):

 
  Outstanding Balance
  Average Loan Commitment Balance
  Average Spread Over Prime
  Current Average FICO
  30+ Days
Delinquency
%(1)

 
March 31, 2008                          
Combined LTV                          
96% to 100%   $ 65   $ 0.08   2.42 % 699   10.81 %
91% to  95%     236     0.08   1.73 % 707   6.71 %
81% to  90%     495     0.07   1.51 % 710   6.54 %
71% to  80%     409     0.12   0.59 % 738   3.61 %
70% or less     293     0.13   0.39 % 750   2.43 %
   
                   
Total   $ 1,498     0.10   1.13 % 729   5.15 %
   
                   
March 31, 2007                          
Combined LTV                          
96% to 100%   $ 41   $ 0.11   2.48 % 718   11.00 %
91% to  95%     64     0.09   2.21 % 715   2.77 %
81% to  90%     136     0.09   1.70 % 719   3.17 %
71% to  80%     70     0.15   0.41 % 747   1.55 %
70% or less     55     0.15   0.26 % 754   0.56 %
   
                   
Total   $ 366     0.12   1.42 % 738   3.27 %
   
                   

(1)
30+ days delinquency include loans that are more than 30 days past the due date including loans in foreclosure.


HOMEBUILDER DIVISION

        The rapid deterioration in the real estate markets and the ongoing disruption in the mortgage market nationwide continue to have a significant impact on our homebuilder borrowers and portfolio of loans. The homebuilder division continues to workout its portfolio of performing and non-performing loans toward pay-off or eventual foreclosure and sale. Effective fourth quarter of 2007, we ceased new originations and do not anticipate being in this business once all loans and/or REO are paid-off or liquidated. We are monitoring this portfolio very closely, as the housing markets are expected to continue to weaken, which affects both the underlying collateral values and the projected repayment sources for these loans. Accordingly, we expect to have additional downgrades, provisions for loan losses, and charge-offs relating to this portfolio.

        Adversely classified assets were $761 million, or 72% of the outstanding balance at March 31, 2008, up from $112 million, or 10%, and $675 million, or 56%, of the outstanding balances at March 31, 2007 and December 31, 2007, respectively. At March 31, 2008, non-performing loans rose to $552 million, up from $9 million and $480 million at March 31, 2007 and December 31, 2007, respectively.

        The increase in non-performing loans and adversely classified assets resulted in a provision to the allowance for loan losses of $15 million for the first quarter of 2008, or 1.32% of average loans, up from a zero provision for the first quarter of 2007 but down from $99 million, or 8.21% of average loans, for the fourth quarter of 2007. The total allowance for loan losses increased to $204 million, or 19.3% of the outstanding balance of total loans, at March 31, 2008, up from $20 million, or 1.74% of the outstanding balance of total loans and $199 million, or 16.66% of the outstanding balance of total loans, at March 31,

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2007 and December 31, 2007, respectively. There were charge-offs of $10 million during the first quarter of 2008, while there were no charge-offs during the quarters ended March 31, 2007 and December 31, 2007. There were REO of $33 million at March 31, 2008, while there were no REO at March 31, 2007 and December 31, 2007.

        Information on our homebuilder portfolio is presented below as of the dates indicated (dollars in millions):

 
  March 31
   
 
 
  December 31,
2007

 
 
  2008
  2007
 
Outstanding balance   $ 1,056   $ 1,173   $ 1,192  
Total commitments   $ 1,362   $ 1,967   $ 1,662  
Average loan commitments   $ 8   $ 10   $ 8  
Non-performing loans     52.26 %   0.77 %   40.28 %
REO   $ 33   $   $  
Allowance for loan losses as a percentage of recorded value     19.30 %   1.74 %   16.66 %

Additional Information: