UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

Form 10-K

 

Commission file number: 1-8972

INDYMAC BANCORP, INC.

(Exact name of registrant as specified in its charter)

 

 

Registrant’s telephone number, including area code:

(800) 669-2300

 

Securities registered pursuant to Section 12(b) of the Act:

 

 

Securities registered pursuant to Section 12(g) of the Act:

[None.]

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes þ     No o

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.  Yes o     No þ

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.  Yes þ     No o

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K þ.

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “accelerated filer and large accelerated filer and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o     No þ

 

Based on the closing price for shares of Common Stock as of June 30, 2007, the aggregate market value of Common Stock held by non-affiliates of the registrant was approximately $2,126,645,122. For the purposes of the foregoing calculation only, in addition to affiliated companies, all directors and executive officers of the registrant have been deemed affiliates.

 

As of February 15, 2008, 80,894,900 shares of IndyMac Bancorp, Inc. Common Stock, $.01 par value per share, were outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE

Proxy Statement for the 2008 Annual Meeting — Part III

 

 

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

TABLE OF CONTENTS

 

 

Certain statements contained in this Form 10-K may be deemed to be forward-looking statements within the meaning of the federal securities laws. Words such as “anticipate,” “believe,” “estimate,” “expect,” “project,” “plan,” “forecast,” “intend,” “goal,” “target,” and similar expressions, as well as future or conditional verbs, such as “will,” “would,” “should,” “could,” or “may,” identify forward-looking statements that are inherently subject to risks and uncertainties, many of which cannot be predicted or quantified. Actual results and the timing of certain events could differ materially from those projected in or contemplated by the forward-looking statements due to a number of factors, including: the effect of economic and market conditions including, but not limited to, the level of housing prices, industry volumes and margins; the level and volatility of interest rates; Indymac’s hedging strategies, hedge effectiveness and overall asset and liability management; the accuracy of subjective estimates used in determining the fair value of financial assets of Indymac; the various credit risks associated with our loans and other financial assets, including increased credit losses due to demand trends in the economy and the real estate market and increased delinquency rates of borrowers; the adequacy of credit reserves and the assumptions underlying them; the actions undertaken by both current and potential new competitors; the availability of funds from Indymac’s lenders, loan sales, securitizations, funds from deposits and all other sources used to fund mortgage loan originations and portfolio investments; the execution of Indymac’s business and growth plans and its ability to gain market share in a significant and turbulent market transition. Additional risk factors include the impact of disruptions triggered by natural disasters; pending or future legislation, regulations and regulatory action, or litigation, and factors described in the reports that Indymac files with the Securities and Exchange Commission, including this Annual Report on Form 10-K, its Quarterly Reports on Form 10-Q, and its reports on Form 8-K. Indymac does not undertake to update or revise forward-looking statements to reflect the impact of circumstances for events that arise after the date the forward-looking statements are made.

 

References to “IndyMac Bancorp” or the “Parent Company” refer to the parent company alone, while references to “Indymac,” the “Company,” or “we” refer to the parent company and its consolidated subsidiaries. References to “Indymac Bank” or the “Bank” refer to our subsidiary, IndyMac Bank, F.S.B., and its consolidated subsidiaries.

 

 

IndyMac Bancorp, Inc. is the holding company for IndyMac Bank, F.S.B., a $33 billion hybrid thrift/mortgage bank, headquartered in Pasadena, California. Indymac Bank originates mortgages in all 50 states of the U.S. and is the (1) largest savings and loan headquartered in Los Angeles County, California, and the seventh largest nationwide, based on assets according to American Banker, (2) the second largest independent mortgage lender in the nation according to National Mortgage News, (3) the ninth largest residential mortgage originator, based on third quarter 2007 mortgage origination volume according to National Mortgage News, and (4) the eighth largest mortgage servicer, according to National Mortgage News as of September 30, 2007. Indymac Bank provides cost-efficient financing for the acquisition of single-family homes and also provides financing secured by single-family homes and other banking products to facilitate consumers’ personal financial goals. We originate mortgage loans through our e-MITS^® (Electronic Mortgage Information and Transaction System) platform that automates underwriting, risk-based pricing and rate locking on a nationwide basis via the Internet at the point of sale. Indymac Bank offers highly competitive mortgage products and services tailored to meet the needs of both consumers and mortgage professionals.

 

Indymac was founded as a passive mortgage real estate investment trust (“REIT”) in 1985 and transitioned its business model to become an active, operating mortgage lender in 1993. In response to the global liquidity crisis during the fourth quarter of 1998, in which many non-regulated financial institutions, mortgage lenders and mortgage REITs were adversely impacted or did not survive, we determined that it would be advantageous to become a depository institution. The depository structure provides significant advantages in the form of diversified financing sources, the retention of capital to support growth and a strong platform for the origination of mortgages. Effective January 1, 2000, we terminated our status as a REIT and converted to a fully taxable entity, and, on July 1, 2000, we acquired SGV Bancorp, Inc. (“SGVB”), which then was the parent of First Federal Savings and Loan

Association of San Gabriel Valley, a federal savings association. We contributed substantially all of our assets and operations to the subsidiary savings association, which we renamed Indymac Bank.

 

We entered the reverse mortgage industry through the acquisition of 93.75% of the outstanding shares of common stock of Financial Freedom Holdings, Inc. (“Financial Freedom”), the leading provider of reverse mortgages in the U.S., and the related assets from Lehman Brothers Bank, F.S.B. and its affiliates on July 16, 2004. The remaining shares of the common stock of Financial Freedom were purchased by us from Financial Freedom’s chief executive officer, James Mahoney, on July 3, 2006. The acquisition was consummated as part of our strategy to offer niche mortgage products and servicing a broad customer base.

 

Indymac’s hybrid thrift/mortgage banking business model provides a strong framework and the flexibility to operate efficiently in varying interest-rate environments. Our businesses are aligned into two primary operating segments, mortgage banking and thrift. Mortgage banking involves the originating and trading of mortgage loans and related assets, as well as the servicing of these loans. Revenues from mortgage banking consist primarily of gains on the sale of the loans; interest income earned while the loans are held for sale; and servicing fee income. The thrift side of our business invests in single-family residential mortgage assets, primarily whole loan and mortgage-backed securities (“MBS”), which we hold on our balance sheet. Revenues from the thrift side of our business consists primarily of spread income, which represents the difference between the interest earned on the loans and the cost of funds.

 

Mortgage banking is less capital-intensive than thrift investing and offers higher returns on invested capital. However, mortgage banking is cyclical: origination volumes are significantly correlated to interest rates, rising when rates fall and declining when rates rise. Thrift investing requires more capital than mortgage banking, resulting in lower returns on invested capital. However, the returns tend to be more stable and less cyclical than those from mortgage banking, and they generally improve as returns on mortgage banking decline. As interest rates rise, there is little incentive for borrowers to refinance, so portfolio runoff (i.e., loan payoffs) is reduced. Thrift profitability is also more exposed to credit risk as we retain credit risk on most thrift assets. Significant changes in the asset quality after acquisition impact returns.

 

During 2007, there has been an unprecedented disruption in the U.S. mortgage market. Secondary markets for virtually every loan type other than GSE and government guaranteed loan has virtually ceased to exist. Numerous originators have failed and remaining lenders have dramatically tightened lending guidelines.

 

This disruption has resulted in home prices declining in virtually all markets in the U.S. The combination of significantly reduced lending activity and declining home prices has contributed to increasing delinquencies and foreclosures nationally. These increased loan defaults have been particularly severe in higher LTV lending products and in second lien products.

 

These market factors have had a dramatic impact on our business and results both from declining volumes and increased expectations of credit losses. These factors make comparisons to prior years very difficult.

 

Indymac is structured to achieve synergies among its operations and to enhance customer service, operating through its two main segments, mortgage banking and thrift. The common denominator of our business is providing consumers with single-family residential mortgages through relationships with each segment’s core customers via the channel in which each operates.

 

For further information on the revenues earned and expenses incurred by each of our segments, refer to “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Summary of Business Segment Results” and “Note 3 — Segment Reporting” included in our consolidated financial statements incorporated herein.

 

The mortgage banking segment’s core activities are loan production, loan sales, and the performance of our servicing functions. Loan production is achieved by delivering a suite of prime mortgage products to our customers using a technology-based approach across multiple channels on a nationwide basis supported by 11 strategically distributed regional mortgage centers. Our broad product offering includes adjustable-rate mortgages (“ARMs”), intermediate term fixed-rate loans, pay option ARMs offering borrowers multiple payment options, fixed-rate mortgages, and reverse mortgages.

 

Our largest production channel, the mortgage professionals group (“MPG”), originates or purchases mortgage loans through its relationships with mortgage brokers, mortgage bankers, and financial institutions. In April 2007, we acquired the retail platform of New York Mortgage Company (“NYMC”) and hired over 1,400 retail lending professionals. We also offer mortgages and reverse mortgages to consumers through channels such as direct mail, internet leads, online advertising, affinity relationships, real estate professionals, including realtors, and through our Southern California retail bank branches.

 

We sell mortgage loans, which are usually on a non-recourse basis, but we do make certain representations and warranties concerning the loans. We generally retain the servicing rights with respect to loans sold to the government sponsored enterprises (“GSEs”), primarily Federal National Mortgage Association (“Fannie Mae”) and Federal Home Loan Mortgage Company (“Freddie Mac”). The credit losses on these loans are absorbed by the GSEs. We pay guarantee fees to the GSEs to compensate them for their assumption of credit risk. The continued severe disruption in the secondary market for loans and securities not sold to the GSEs has caused us to rapidly change our production business model from a primary focus on non-GSE mortgage banking to a model that now produces production that is 75%-85% eligible for sale to the GSEs.

 

We also sell loans through private-label securitizations. Loans sold through private-label securitizations consist primarily of non-conforming loans and subprime loans. The securitization process involves the sale of the loans to one of our wholly-owned bankruptcy remote special purpose entities, which then sells the loans to a separate, transaction-specific securitization trust in exchange for cash and certain trust interests that we retain. The securitization trust issues and sells undivided interests to third-party investors that entitle the investors to specified cash flows generated from the securitized loans. These undivided interests are usually represented by certificates with varying interest rates and are secured by the payments on the loans acquired by the trust, and commonly include senior and subordinated classes. The senior class securities are usually rated “AAA” by at least two of the major independent rating agencies and have priority over the subordinated classes in the receipt of payments. We have no obligation to provide funding support (other than temporary servicing advances) to either the third-party investors or securitization trusts. Neither the third-party investors nor the securitization trusts have recourse to our assets or us, and neither have the ability to require us to repurchase their securities. We do make certain representations and warranties concerning the loans, such as lien status or mortgage insurance coverage, and if we are found to have breached a representation or warranty, we could be required to repurchase the loan from the securitization trust. We do not guarantee any securities issued by the securitization trusts. The securitization trusts represent “qualified special purpose entities,” which meet the legal isolation criteria of Statement of Financial Accounting Standards No. 140, “Accounting for Transfer and Servicing of Financial Assets and Extinguishments of Liabilities” (“SFAS 140”), and are therefore not consolidated for financial reporting purposes. We also sell loans on a whole-loan basis to institutional investors with servicing on such loans either retained by us or released to the institutional investors.

 

In addition to the cash we receive from the sale of MBS, we typically retain certain interests in the securitization trust as payment for the loans. These retained interests may include mortgage servicing rights (“MSRs”), AAA-rated interest-only securities, AAA-rated principal-only securities, AAA-rated senior securities, securities associated with prepayment charges and late fee charges on the underlying mortgage loans, subordinated classes of securities, residual securities, cash reserve funds, or an over collateralization account. Other than MSRs, AAA-rated interest-only and principal-only securities, AAA-rated senior securities, and the securities associated with prepayment charges and late fees on the underlying mortgage loans, these retained interests are subordinated and serve as credit enhancement for the more senior securities issued by the securitization trust. We are entitled to receive payment on most of these retained interests only after the third party investors are repaid their investment

plus interest and there is excess cash in the securitization trust. Our ability to obtain repayment of our residual interests depends solely on the performance of the underlying mortgage loans. Material adverse changes in performance of the loans, including actual credit losses and prepayment speeds differing from our assumptions, may have a significant adverse effect on the value of these retained interests.

 

We usually retain the servicing rights for the securitized mortgage loans, as discussed in the description of servicing operations below under the caption “Loan Servicing.” As a servicer, we are entitled to receive a servicing fee equal to a specified percentage of the outstanding principal balance of each loan. This servicing fee is calculated and payable on a monthly basis. We may also be entitled to receive additional servicing compensation, such as late payment fees or prepayment charges. Our servicing fees have priority in payment over each class of securities issued by the securitization trusts.

 

Refer to “Note 13 — Transfers and Servicing of Financial Assets” in the accompanying notes to consolidated financial statements for additional information.

 

 

Consumer Direct Division

 

This division markets mortgage products directly to existing and new consumers nationwide through direct mail, Internet lead aggregators, outbound telesales, online advertising, and referral programs, as well as through our Southern California retail bank branches.

 

Through our call center operations and our Southern California retail bank branch network, loan consultants counsel consumers on the loan application process and make lending decisions using our e-MITS technology. Loans are processed and funded by our operations group within our regional mortgage centers.

 

Mortgage Professionals Group

 

Our largest production division, the MPG, was responsible for 62% of our total mortgage production during 2007. This group is responsible for the production of mortgage loans through relationships with mortgage brokers, mortgage bankers, financial institutions, capital market participants across the country, realtors, and homebuilders, and is composed of two channels: retail, and mortgage broker and banker.

 

Mortgage loans could be either funded by us or purchased by us as closed loans on a flow basis from mortgage bankers or community financial institutions. When originating or purchasing mortgage loans, we generally acquire the rights to “service” the mortgage loans (as described below). When we sell the loans, we may either retain the related servicing rights and service the loans through our mortgage servicing division or sell those rights. See “Loan Servicing” below.

 

This division targets customers based on their loan production volume, product mix and projected revenue to us. The sales force is responsible for maintaining and increasing loan production from these customers by marketing our strengths, which include a “one stop shop” for all products, competitive pricing and response time efficiencies in the loan purchase process through our e-MITS underwriting capability and high customer service standards.

 

The retail lending group, a channel of the MPG, provides mortgage financing primarily to home purchase oriented consumers by targeting realtors, homebuilders and financial professionals via storefront mortgage loan offices. As of December 31, 2007, we had 182 retail mortgage offices.

 

During 2007, in light of the current market conditions, Indymac’s MPG did not open any additional regional wholesale mortgage centers. We had 16 regional mortgage centers as of December 31, 2007. We have decided to close five regional wholesale mortgage centers, including Tampa, Philadelphia, Boston, Columbia (South Carolina) and Kansas City, and consolidate these mortgage operations into our remaining 11 regional wholesale mortgage wholesale centers by the end of the first quarter of 2008.

 

Financial Freedom Division

 

Financial Freedom is the leading provider of reverse mortgages in the United States. This group is responsible for the origination, purchase and servicing of reverse mortgage products with senior customers via a retail loan

officer sales force and a mortgage banker and broker relationship sales force. Reverse mortgages allow homeowners age 62 and older to convert home equity into cash to supplement their retirement income. The equity may be withdrawn in a lump sum, as annuity-style monthly payments, as a credit line, or any combination thereof. Reverse mortgages offered by us feature: no recourse to the borrower, no repayment during the borrower’s occupancy of the home, and a repayment amount that cannot exceed the value of the home (after costs of sale). Comparing 2007 to 2006, our reverse mortgage volume decreased 6% to $4.7 billion in 2007 from $5.0 billion in 2006 primarily due to the expected increased competition and the secondary market disruption in the later half of 2007. As a result, margin for this product was negatively impacted. However, with the increased familiarity that senior homeowners and their financial advisors have with this product, the reverse mortgage market is expected to continue to grow.

 

This division manages the assets we retain in conjunction with our mortgage loan sales. The assets held include the following: (i) MSRs, interest-only securities, prepayment penalty securities and late fee securities; (ii) derivatives and securities held as hedges of such assets, including forward rate agreements swaps, options, futures, principal-only securities, agency debentures and U.S. Treasury bonds; and (iii) loans acquired through clean-up calls or originated through our customer retention programs. We hedge the MSRs to protect the economic value of the MSRs.

 

At December 31, 2007, primarily through our Home Loan Servicing operation in Kalamazoo, Michigan, we serviced $198.2 billion of mortgage loans, of which $181.7 billion was serviced for others, an increase of 30% from $139.8 billion serviced for others in 2006. The servicing portfolio includes prime loans, reverse mortgages, manufactured housing loans and home improvement loans.

 

Servicing of mortgage loans includes: collecting loan payments; responding to customers’ inquiries; accounting for principal and interest; holding custodial (impound) funds for payment of property taxes and insurance; counseling delinquent mortgagors; modifying and refinancing loans; supervising foreclosures and liquidation of foreclosed property; performing required tax reporting; and performing other loan administration functions necessary to protect investors’ interests and comply with applicable laws and regulations. Servicing operations also include remitting loan payments, less servicing fees, to trustees and, in some cases, advancing delinquent borrower payments to investors, subject to a right of reimbursement.

 

The strategy of our thrift segment has been to leverage our capital infrastructure with prudent mortgage related asset growth to diversify company-wide earnings, targeting a return on equity exceeding the cost of both core and risk-based capital. The thrift segment principally invests in single-family residential (“SFR”) mortgage loans (predominantly prime ARMs, including intermediate term fixed-rate loans), mortgage-backed securities and construction financing for single-family residences or lots provided directly to individual consumers. The primary sources of revenue for the thrift segment are net interest income on loans and securities, and to a lesser extent, the gain on sale of loans.

 

Mortgage-Backed Securities Division

 

MBS includes predominantly AAA-rated private label MBS.

 

SFR Mortgage Loans HFI Division

 

Single-family residential mortgage loans held for investment (“HFI”) are generally originated or acquired through our mortgage banking production divisions and transferred to the thrift. Held for investment loans may also be acquired from third party sellers and such loans are typically prime loans. The thrift attempts to invest in loans on

which it can earn an acceptable return on equity. This division had significant asset growth in 2007 as we transferred a significant amount of loans from held for sale as market conditions made the sale of these loans uneconomic.

 

Consumer Construction Division

 

Our consumer construction division provides construction financing for individual consumers who want to build a new primary residence or second home. Through our streamlined e-MITS online application process, the division offers a single-close construction-to-permanent loan that provides borrowers with the funds to build a primary residence or vacation home. This product typically provides financing for a construction term of 6 to 12 months and automatically converts to a permanent mortgage loan at the end of construction. The end result is a product that represents a hybrid activity between our portfolio lending and mortgage banking activities. We earn net interest income on these loans during the construction phase. When the home is completed, the loan automatically converts to a permanent mortgage loan without any additional cost or closing documents, which is typically sold in the secondary market or acquired by the SFR mortgage loans HFI division. This division also provides financing to builders who are building single-family residences without a guaranteed sale at inception of project, or on a speculative basis. Approximately 68% of new commitments are generated through mortgage broker customers of the mortgage professional group and the remaining 32% of new commitments are retail originations. Beginning in 2008, we have temporarily suspended production in this division to reduce our balance sheet size.

 

As conditions in the U.S. mortgage market have deteriorated, we have exited certain production channels and are reporting them in a separate category in our segment reporting, “Discontinued Business Activities”. These exited production channels include the conduit, homebuilder and home equity channels. These activities are not considered discontinued operations pursuant to Generally Accepted Accounting Principles (“GAAP”) under Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”) due to our significant continuing involvement in these activities. For additional information, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Summary of Business Segment Results — Discontinued Business Activities.”

 

As a savings and loan holding company, IndyMac Bancorp is subject to regulation by the Office of Thrift Supervision (“OTS”) under the savings and loan holding company provisions of the Federal Home Owners’ Loan Act (“HOLA”). As a federally chartered and insured savings and loan association, Indymac Bank is subject to regulation, supervision and periodic examination by the OTS, which is the primary federal regulator of savings associations, and the Federal Deposit Insurance Corporation (“FDIC”), in its role as federal deposit insurer. The primary purpose of regulatory examination and supervision is to protect depositors, financial institutions and the financial system as a whole rather than the shareholders of financial institutions or their holding companies. The following summary is not intended to be a complete description of the applicable laws and regulations or their effects on us, and it is qualified in its entirety by reference to the particular statutory and regulatory provisions described.

 

Both Indymac Bank and the Company are required to file periodic reports with the OTS concerning our activities and financial condition. The OTS has substantial enforcement authority with respect to savings associations, including authority to bring enforcement actions against a savings association and any of its “institution-affiliated parties,” which term includes directors, officers, employees, controlling shareholders, agents and other

persons who participate in the conduct of the affairs of the institution. The FDIC has “backup” enforcement authority over us and has the power to terminate a savings association’s FDIC deposit insurance. In addition, we are subject to regulations of the Federal Reserve Board relating to equal credit opportunity, electronic fund transfers, collection of checks, truth in lending, truth in savings, and availability of funds for deposit customers.

 

Like all savings and loan holding company subsidiaries, Indymac Bank is required to meet a qualified thrift lender (“QTL”) test to avoid certain restrictions on our operations, including the activities restrictions applicable to multiple savings and loan holding companies, restrictions on our ability to branch interstate and IndyMac Bancorp’s mandatory registration as a bank holding company under the Bank Holding Company Act of 1956. A savings association satisfies the QTL test if: (i) on a monthly average basis, for at least nine months out of each twelve month period, at least 65% of a specified asset base of the savings association consists of loans to small businesses, credit card loans, educational loans, or certain assets related to domestic residential real estate, including residential mortgage loans and mortgage securities; or (ii) at least 60% of the savings association’s total assets consist of cash, U.S. government or government agency debt or equity securities, fixed assets, or loans secured by deposits, real property used for residential, educational, church, welfare, or health purposes, or real property in certain urban renewal areas. Indymac Bank is currently, and expects to remain, in compliance with QTL standards.

 

OTS capital regulations require savings associations to satisfy three sets of capital requirements: tangible capital, Tier 1 capital, and risk-based capital. In general, an association’s tangible capital, which must be at least 1.5% of tangible assets, is the sum of common shareholders’ equity adjusted for the effects of other comprehensive income (“OCI”), less goodwill and other disallowed assets. An association’s ratio of Tier 1 (core) capital to adjusted total assets (the “core capital” or “leverage” ratio) must be at least 3% for strong associations that are not anticipating or experiencing significant growth and have well-diversified risks, including no undue interest rate risk exposure, excellent asset quality, high liquidity, and good earnings; and 4% for others. Higher capital ratios may be required if warranted by the particular circumstances, risk profile, or growth rate of a given association. Under the risk-based capital requirement, a savings association must have Tier 1 risk-based capital equal to at least 4% of risk-weighted assets and total risk-based capital (core capital plus supplementary capital) equal to at least 8% of risk-weighted assets. Tier 1 capital must represent at least 50% of total capital and consists of core capital elements, which include common shareholders’ equity, qualifying noncumulative, nonredeemable perpetual preferred stock, and minority interests in the equity accounts of consolidated subsidiaries, but exclude goodwill and certain other intangible assets. Supplementary capital consists mainly of qualifying subordinated debt, preferred stock that does not meet Tier 1 capital requirements, and a portion of the allowance for loan losses.

 

The above capital requirements are viewed as minimum standards by the OTS. The OTS regulations also specify minimum requirements for a savings association to be considered a “well-capitalized institution” as defined in the “prompt corrective action” regulation described below. A “well-capitalized” savings association must have a total risk-based capital ratio of 10% or greater, a Tier 1 risk-based capital ratio of 6% or greater and a Tier 1 (core) capital ratio of 5% or greater. Indymac Bank currently meets the requirements of a “well-capitalized institution.”

 

The OTS regulations include prompt corrective action provisions that require certain remedial actions and authorize certain other discretionary actions to be taken by the OTS against a savings association that falls within specified categories of capital deficiency. The relevant regulations establish five categories of capital classification for this purpose, ranging from “well-capitalized” to “adequately capitalized” through “undercapitalized,” “significantly undercapitalized” and “critically undercapitalized.” In general, the prompt corrective action regulations prohibit an OTS-regulated institution from declaring any dividends, making any other capital distributions, or paying a management fee to a controlling person, such as its parent holding company, if, following the distribution or payment, the institution would be within any of the three undercapitalized categories.

 

Deposits of the Bank are presently insured by the FDIC, up to $100,000 per depositor. The FDIC has established a risk-based system for setting deposit insurance assessments. Under the risk-based assessment system, a savings association’s insurance assessments vary according to the level of capital the institution holds and the degree to which it is the subject of supervisory concern. Assessment rates currently range between five and 43 cents per $100 in deposits. Insurance of deposits may be terminated by the FDIC upon a finding that the savings association has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC or the OTS. All insured depository institutions, including the Bank, are required to pay an additional assessment, currently 1.14 cents per $100 in deposits, in order to retire Financial Corporation bonds that were issued between 1987 and 1989.

 

OTS regulations limit “capital distributions” by savings associations, which include, among other things, dividends and payments for stock repurchases. Refer to “Note 22 — Regulatory Requirements” in the accompanying notes to our consolidated financial statements for further discussion.

 

Savings associations are examined under the Community Reinvestment Act (“CRA”) and related regulations of the OTS on the extent of their efforts to help meet the credit needs of their communities, including low and moderate-income neighborhoods. In addition, the Equal Credit Opportunity Act and the Fair Housing Act, together known as the “Fair Lending Laws,” prohibit lenders from discriminating in their lending practices on the basis of characteristics specified in those statutes. Enforcement of these regulations has been an important focus of federal regulatory authorities and of community groups in recent years. A failure by Indymac Bank to comply with the provisions of the CRA could, at a minimum, result in adverse action on branch and certain other corporate applications, and regulatory restrictions on our activities, and failure to comply with the Fair Lending Laws could result in enforcement actions by the OTS, as well as other federal regulatory agencies and the Department of Justice. Indymac Bank received an overall “Satisfactory” rating during our most recent CRA evaluation.

 

The OTS has adopted privacy protection regulations which require each savings association to adopt procedures to protect consumers’ and customers’ “nonpublic personal information.” It is Indymac Bank’s policy not to share customers’ information with any unaffiliated third parties, except as expressly permitted by law, or to allow third party companies to provide marketing services on our behalf, or under joint marketing agreements between us and other unaffiliated financial institutions. In addition to federal laws and regulations, we are required to comply with any privacy requirements prescribed by California and other states in which we do business that afford consumers with protections greater than those provided under federal law.

 

We report our income on a calendar year basis using the liability method of accounting. We are subject to federal income taxation under existing provisions of the Internal Revenue Code of 1986, as amended, in generally the same manner as other corporations. We are also subject to state taxes in the areas in which we conduct business.

 

As of December 31, 2007, we had 9,907 full-time equivalent employees (“FTE”), including 870 FTE off-shore as part of our Global Resources program.

 

While the current disruptions in the housing and credit markets have reduced the number of competitors, we still face significant competition for lending volume. Many of our competitors are larger and enjoy both financial and customer awareness advantages over us. In addition, the reduction in salability of many mortgages has caused us to temporarily discontinue certain lending products that many of our competitors are able to originate.

 

While we believe that our current plans and strategies will allow us to compete in the market, there can be no assurance that we will succeed and as a result, our financial results could be materially worse than we expect.

 

All reports filed electronically by us with the Securities and Exchange Commission (“SEC”), including Annual Reports on Form 10-K, quarterly reports on Form 10-Q, and current event reports on Form 8-K, as well as any amendments to those reports, are made accessible as soon as reasonably practicable after filing with the SEC at no cost on our website at www.imb.com. These filings are also accessible on the SEC’s website at www.sec.gov.

 

We have a Code of Business Conduct and Ethics that is applicable to all of our employees and officers, including the principal executive officer, the principal financial officer and the principal accounting officer. In addition, Indymac has a Director Code of Ethics that sets forth the policy and standards concerning ethical conduct for directors of Indymac. We also adopted formal corporate governance standards in January 2002, which the Corporate Governance Committee of the Board of Directors reviews annually to ensure they incorporate recent corporate governance developments and generally meet the corporate governance needs of Indymac. You may obtain copies of each of the Code of Business Conduct and Ethics, the Director Code of Ethics, and the Board of Directors’ Guidelines for Corporate Governance Issues by accessing the “Corporate Governance” subsection of the “Investors” section of www.imb.com, or free of charge by writing to our Corporate Secretary at IndyMac Bancorp, Inc., 888 East Walnut Street, Pasadena, California 91101. Indymac intends to post amendments to or waivers of the Code of Business Conduct and Ethics (to the extent applicable to Indymac’s principal executive officer, principal financial officer or principal accounting officer) and of the Director Code of Ethics at the website location referenced above.

 

 

KEY OPERATING RISKS

 

Like all businesses, we assume a certain amount of risk in order to earn returns on our capital. For further information on these and other key operating risks, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Risk Factors That May Affect Future Results.”

 

 

None.

 

Our significant leased properties are as follows:

 

 

 

 

In addition to the above leased office space, we own a building in La Mirada, California of approximately 16,500 square feet, which houses our information technology data center. We own an additional four retail banking properties, containing an aggregate of approximately 56,000 square feet, located in Southern California.

 

 

In the ordinary course of business, the Company and its subsidiaries are defendants in or parties to a number of legal actions. Certain of such actions involve alleged violations of employment laws, unfair trade practices,

consumer protection laws, including claims relating to the Company’s sales, loan origination and collection efforts, and other federal and state banking laws. Management believes, based on current knowledge and after consultation with counsel, that these legal actions, individually and in the aggregate, and the losses, if any, resulting from the likely final outcome thereof, will not have a material adverse effect on the Company and its subsidiaries’ financial position, but may have a material impact on the results of operations of particular periods. Refer to “Note 20 — Commitments and Contingencies” in the accompanying notes to consolidated financial statements for further discussion.

 

 

No matters were submitted to a vote of shareholders during the quarter ended December 31, 2007.

 

 

STOCK INFORMATION

 

IndyMac Bancorp, Inc.’s common stock is traded on the New York Stock Exchange (“NYSE”) under the symbol “IMB” effective May 1, 2007. Previously, it was trading under the symbol “NDE”.

 

The following table sets forth the high and low sales prices (as reported by Bloomberg Financial Service) for shares of IndyMac Bancorp, Inc.’s common stock for the years ended December 31, 2007 and 2006:

 

 

ISSUANCE OF COMMON STOCK

 

The Company has a direct stock purchase plan which offers investors the ability to purchase shares of our common stock directly over the Internet. Investors interested in investing over $10,000 can also participate in the waiver program administered by Mellon Investor Services LLC. For the year ended December 31, 2007, we issued 7,427,104 shares of common stock at an average market price of $19.60 through this plan, as compared to the year ended December 31, 2006, for which we issued 3,532,360 shares of common stock at an average market price of $42.04 through this plan.

SHARE REPURCHASE ACTIVITIES

 

The following summarizes share repurchase activities during the three months ended December 31, 2007:

 

 

 

 

As of February 15, 2008, 80,894,900 shares of IndyMac Bancorp, Inc.’s common stock were held by approximately 1,847 shareholders of record.

 

DIVIDEND POLICY

 

In light of the current financial performance of Indymac, the Board of Directors indefinitely suspended its quarterly cash dividend payments on our common stock beginning the first quarter of 2008.

 

For the years ended December 31, 2007 and 2006, we declared the following cash dividends:

 

 

 

 

In 2007 and 2006, we funded the payment of dividends primarily from the dividend from Indymac Bank and cash on hand at the Parent Company. The future principal source of funds for the dividend payments is anticipated to be the dividends we will receive from Indymac Bank. The payment of dividends by Indymac Bank is subject to regulatory requirements and review. See “Item 1. Business- Regulation and Supervision-Regulations of Indymac Bank-Capital Distribution Regulations” for further information. There is no assurance that the Bank will be able to pay dividends to the Company in the future.

 

EQUITY COMPENSATION PLANS INFORMATION

 

The equity compensation plans information required under this Item 5 is hereby incorporated by reference to Indymac Bancorp’s definitive proxy statement, to be filed pursuant to Regulation 14A within 120 days after the end of our 2007 fiscal year.

(Dollars in millions, except per share data)

 

 

 

 

 

 

 

The following discussion and analysis should be read in conjunction with our consolidated financial statements, and the notes thereto and the other information incorporated by reference herein.

 

The U.S. mortgage industry experienced unprecedented disruption in 2007. A combination of credit tightening and softening real estate prices throughout the U.S. has resulted in an industry-wide increase in delinquencies and foreclosures. Many mortgage lenders were forced to sell loans and securities at distressed prices, and many that were not depository institutions collapsed or were severely affected. As a result of this disruption, Indymac has made significant changes in its business model. We are currently expecting to originate a significant portion of our loans for sale to the GSEs as that market remains the only reliable secondary market, at present.

 

We have reduced our mortgage production by eliminating production channels and suspending products. We have suspended or eliminated many higher risk products, including high CLTV closed-end second liens and HELOCs, consumer and builder construction loans, and most non-conforming loan production. Also, we exited certain production channels, including the conduit channel, the homebuilder division and the home equity division. As a result, production results for 2007 show a significant decline from the prior year.

 

2007 was also severely impacted by worsening credit conditions as home prices and home sales declined. This has led to a significant increase in delinquencies in many products, particularly in higher loan-to-value (“LTV”) first and second lien loans and builder construction loans. As a result of the significantly worsening trends in home prices and loan delinquencies, we recorded significant charges, principally related to credit risk in our HFI portfolio, builder construction portfolio, and consumer construction portfolio. In addition, we recorded significant valuation adjustments in our loans held for sale, investment and non-investment grade securities and in residual securities. Finally, delinquency and repurchase demand trends, predominantly in our higher CLTV/LTV loan products, increased significantly.

 

As a result of these changes, virtually all of our operating segments, except for the mortgage servicing division and Financial Freedom, our reverse mortgage lending subsidiary, reported material losses in 2007. For the year ended December 31, 2007, Indymac had a consolidated net loss of $614.8 million. Regarding business segment performance¹(, the mortgage production division had a net loss of $96.8 million in 2007 while the mortgage servicing division had earnings of $181.4 million. Combining mortgage production and servicing, the mortgage banking segment recorded net earnings of $33.0 million. The thrift segment recorded a net loss of $199.2 million for 2007 and our discontinued business activities recorded a net loss of $281.1 million. As a result of our thrift structure and strong capital and liquidity positions, we were not forced to sell assets at liquidation prices and our funding capacity was not materially impacted.

 

 

(¹ Net income for the mortgage production division, mortgage servicing division and the thrift segment is before divisional and corporate overhead. Net income for the total mortgage banking segment is after divisional overhead but before corporate overhead.

 

Year ended December 31, 2007 Compared to Year ended December 31, 2006

 

The Company recorded a net loss of $614.8 million, or $8.28 loss per diluted share, for the year ended December 31, 2007, compared with net earnings of $342.9 million, or $4.82 per diluted share, for the year ended December 31, 2006. The decline in profitability is mainly attributable to higher credit costs and significant reduction in gain on sale of loans due to spread widening and illiquidity in the secondary mortgage market. We recorded $1.4 billion of credit costs for the year ended December 31, 2007 compared to $126.1 million for the year ended December 31, 2006. As a result, our total credit reserves increased to $2.4 billion at December 31, 2007 compared to $619 million as of December 31, 2006. See the “Asset Quality” section for further information on credit reserves.

 

SFR Mortgage Loan Production

 

Our total SFR mortgage loan production for the year ended December 31, 2007 dropped 14%, to $77.0 billion, as compared to $90.0 billion for 2006. This decline in volume is mainly reflected in the 47%, or $14.0 billion, drop in production from our conduit channel from 2006 as we exited this channel due to its inherently lower profit margins and the current uncertainty with respect to secondary market spreads and execution. Also, volume from the mortgage broker and banker channel declined by $1.7 billion, or 4%, from 2006 as we migrated our production efforts to focus primarily on GSE-eligible loans. Total SFR mortgage loan production, excluding the conduit channel, produced $60.9 billion in 2007, reflecting a slight increase of 2% from $59.9 billion in 2006. Our retail channel continued to grow with production reaching $2.0 billion this year, significantly up from $7.0 million in 2006. The servicing retention channel saw an increase of 70% from 2006. The pipeline of SFR mortgage loans in process ended at $7.5 billion, down 37% from $11.8 billion at December 31, 2006.

 

Mortgage Banking Revenue Margin

 

Net revenues for the Company declined to $3.6 million for 2007 compared to $1.3 billion for 2006. This decline in net revenues is primarily due to the decline in MBR margin caused by the secondary market disruption discussed earlier and higher credit costs due to worsening delinquencies in our held for sale (“HFS”), HFI and credit risk securities portfolios. Our MBR margin declined to a negative 0.22% for the year ended December 31, 2007 from a positive 1.06% for the year ended December 31, 2006. This year over year MBR margin decline was primarily due to higher credit costs and the change in product mix of loans sold.

 

In the fourth quarter of 2007, we transferred HFS loans with an original cost basis of $10.9 billion to HFI loans as we no longer intend to sell these loans given the extreme disruption in the secondary mortgage market. These loans were transferred at the lower of cost or market (“LOCOM”), and, accordingly, we reduced the cost basis by $0.6 billion, resulting in an increase in HFI loans of $10.3 billion. The $0.6 billion reduction was a combination of LOCOM reserves existing at the third quarter of 2007 and additional charges to the gain on sale of loans during the fourth quarter of 2007. Embedded in this reduction are estimated credit losses of $474 million.

 

During 2007, we sold a total of $71.2 billion in loans and recorded a loss on sale of $354.4 million. By comparison, we sold a total of $79.0 billion in loans during 2006, which generated $668.0 million in gain on sale.

 

Other Credit Costs

 

As discussed earlier, credit costs during the year ended December 31, 2007 significantly increased primarily due to higher delinquency and foreclosure rates in both our HFS and HFI portfolios. For the HFI portfolio, we increased the provision for loan losses to $395.5 million for the year ended December 31, 2007 compared to $20.0 million for the year ended December 31, 2006. We repurchased $613 million of loans for the year ended December 31, 2007, mainly due to early payment defaults, compared to $194 million during the year ended December 31, 2006. Based on delinquency trends and demand activity, we expect to repurchase additional loans in 2008 and beyond. Accordingly, we recorded a provision for the secondary market reserve of $232.5 million for the year ended December 31, 2007, compared to $37.3 million for the prior year.

Non-interest Income

 

Total non-interest income, excluding gain on sale of loans, increased 9% from $171.9 million for the year ended December 31, 2006 to $186.7 million for the year ended December 31, 2007. This increase is largely due to the strong performance from our mortgage servicing division. Service fee income increased $417.9 million as a direct result of the growth in our servicing portfolio, slower prepayment rates and effective hedge performance. These increases were offset by a reduction in revenue from our mortgage-backed securities (“MBS”) portfolio. The MBS portfolio revenue declined from a gain of $20.5 million for the year ended December 31, 2006 to a loss of $439.7 million for the year ended December 31, 2007, primarily due to valuation adjustments on non-investment grade and residual securities.

 

Operating Expenses

 

Total operating expenses increased 23% from $789.0 million for the year ended December 31, 2006 to $973.7 million for the year ended December 31, 2007. The increase is primarily reflected in the 20% growth of our average FTEs from 7,935 for 2006 to 9,518 for 2007, which was necessary to support the expansion of our retail lending group and growth in loan servicing and default management functions. Contributing to the increase in expenses were REO related expenses, which increased by $42.2 million due to further write-downs on REOs resulting from the rapid decline in values, as well as higher foreclosures resulting from worsened delinquencies in our portfolio. In addition, we recorded severance charges of approximately $28 million in the third quarter of 2007 related to the reduction of our workforce.

 

Year ended December 31, 2006 Compared to Year ended December 31, 2005

 

Industry loan volumes of $2.7 trillion were 28% below 2003’s historic high level and 10% lower than in 2005. Mortgage banking revenue margins declined further after sharp declines in 2005, and net interest margins continued to compress, as the yield curve inverted with the average spread between the 10-year Treasury yield and the 1-month LIBOR declining from 89 basis points in 2005 to negative 31 basis points in 2006. The housing industry slowed down significantly, increasing loan delinquencies and non-performing assets and driving up credit costs for all mortgage lenders. Yet, despite these challenges, Indymac reached new performance heights in 2006, achieving:

 

 

Net revenues of $1.3 billion for 2006 reflect an increase of 22% over 2005. Key drivers of this growth included the following:

 

1) Growth in average interest earning assets of 32% from $19.6 billion in 2005 to $26.0 billion in 2006, leading to an increase in net interest income of 24% to $526.7 million. The increase was primarily driven by the growth in production, increased retention of securities and loans in our held for investment portfolio, offset by the sale of loans. Net interest margin declined from 2.16% to 2.02% during a period of inverted yield curve. Factors contributing to this decline included higher cost of funds and hedging cost, higher premium amortization and increased non-performing loans. This decline somewhat mitigated the positive impact from the growth in average interest earning assets.

 

2) Growth in mortgage production of 48% in 2006 over 2005 to a record high of $90.0 billion, led to a 51% increase in loans sold to $79.0 billion. Our market share increased from 2.01% in 2005 to 3.58% in 2006. Leading

this growth were our Financial Freedom and conduit channels with increases in production of 71% and 90%, respectively. This volume growth mitigated a decline in the MBR margin on loans sold, resulting from a decline in higher margin pay option ARM volume and a higher mix of lower margin conduit and correspondent channel volume. The MBR margin on loans sold was 1.06% in 2006, down from 1.36% in 2005.

 

3) Provision for loan loss increased from $10.0 million for 2005 to $20.0 million for 2006 mainly due to an increase in our non-performing assets as delinquencies worsened. As of December 31, 2006, the allowance for loan losses represented 4.9 times net charge-offs, down from 7.2 times at December 31, 2005 as net charge-offs for 2006 increased 4 basis points to 0.14% of average loans held for investment.

 

4) Service fee income of $101.3 million in 2006 grew 129% over 2005 driven by the increase in the principal balance of loans serviced for others combined with effective hedging performance and slowing prepayments attributable to reduced refinancing and home sales.

 

Operating expenses of $789.0 million in 2006 reflected an increase of 28%, consistent with the growth in our operations and infrastructure investments in order to execute on our strategy to increase production and revenue. During 2006, we opened three new regional centers, which increased our total regional centers to 16 at December 31, 2006. In addition, average FTE increased 27% from 6,240 to 7,935 during the year supporting this growth.

 

Our segment reporting is organized consistent with our hybrid business model. Mortgage banking involves the origination, securitization and sale of mortgage loans and related assets, and the servicing of those loans. The revenues from mortgage banking consist primarily of gains on the sale of the loans, fees earned from origination, net interest income earned while the loans are held pending sale, and servicing fees. On the thrift side, we generate core spread income from our investment portfolio of prime SFR mortgage loans, MBS and consumer construction loans.

 

As conditions in the U.S. mortgage market have deteriorated, we have exited certain production channels and are reporting them in a separate category in our segment reporting, “Discontinued Business Activities” as a result of our continuing involvement with these activities. These exited production channels include the conduit, homebuilder and home equity channels. These activities are not considered discontinued operations as defined by SFAS 144. We segregated the business activities we have exited so that the segments represent our new business model. See the “Discontinued Business Activities” section for more information.

 

We have developed a detailed reporting process that computes net earnings and ROE for our key business segments each reporting period, and we use the results to evaluate our managers’ performance and determine their incentive compensation. In addition, we use the results to evaluate the performance and prospects of our divisions and adjust our capital allocations to those that earn the best returns for our shareholders.

 

We predominantly use GAAP to compute each division’s financial results as if it were a stand-alone entity. Consistent with this approach, borrowed funds and their interest cost are allocated based on the funds actually used by the Company to fund the division’s assets and capital is allocated based on regulatory capital rules for the specific assets of each segment. Additionally, transactions between divisions are reflected at arms-length in these financial results, and intercompany profits are eliminated in consolidation. We do not allocate fixed corporate and business unit overhead costs to our profit center divisions, because the methodologies to do so are arbitrary and would distort each division’s marginal contribution to our profits. However, the cost of these overhead activities is included in the following tables to reconcile to our consolidated results and is tracked closely, so the responsible managers can be held accountable for the level of these costs and their efficient use.

 

The following table and discussions explain the recent results of our two major operating segments, mortgage banking and thrift. These activities, combined with the eliminations and other category, which includes supporting deposit and treasury costs as well as eliminating entries and discontinued business activities, form our total operating results. Our unallocated corporate overhead costs are also presented and discussed. We have also included supplemental tables showing detailed division level financial results for each of our major operating segments.

 

The following summarizes the Company’s financial results by segment for the years indicated (dollars in thousands):

 

 

 

 

Our mortgage banking segment primarily consists of the mortgage production division and the mortgage servicing division, which services the loans that Indymac originates, whether they have been sold into the secondary market or are held for investment on our balance sheet.

 

The mortgage banking segment reported net earnings of $33.0 million for the year ended December 31, 2007 compared with net earnings of $259.2 million in the prior year. These lower results were caused by a large decline in earnings from our mortgage production division, which reported a $96.8 million after-tax loss this year, partially offset by very strong returns and growth in the mortgage servicing division.

 

The primary driver of the loss in the mortgage production division in 2007 was the decline in the MBR margin from 1.29% of loans sold in 2006 to 0.32% of loans sold in 2007. A large increase in production credit costs was the primary cause of this decline. Mortgage banking revenue was reduced by $476.5 million in pre-tax credit related costs in 2007, representing a $377.6 million increase from $98.9 million in 2006. As credit conditions in the U.S. mortgage market have deteriorated, our loan production credit costs have increased. Thus, we discontinued the offering of products where these losses were concentrated. As a result, substantially all of the production credit losses we incurred in the fourth quarter of 2007 resulted from products we no longer offer.

 

In addition to the increased credit losses, the continued severe disruption in the secondary market for loans and securities not sold to the GSEs has caused us to rapidly change our production business model from a primary focus on non-GSE mortgage banking to a model that now produces production that is 75%-85% eligible for sale to the GSEs. This change in our business model has temporarily reduced the profitability of our production divisions, as we have worked to lower our costs and our salesforce has adapted to selling these GSE products.

 

The mortgage banking segment was also negatively impacted in 2007 as it includes two start-up businesses, the retail lending group and commercial mortgage banking division, which are currently unprofitable. These two businesses reported a combined after-tax loss of $38.8 million in 2007. We expect these businesses to contribute to mortgage banking profits in 2008.

 

The significant disruption in credit and housing markets that occurred during 2007 had a materially negative impact on our production results. These disruptions have resulted in higher non-GSE mortgage rates, significantly more restrictive underwriting guidelines and declining home prices, all of which worked to slow prepayments in our servicing portfolio. The loans in our servicing portfolio prepaid at an annual rate of 10% in 2007 compared with 20% in 2006. The expectation of slower non-GSE prepayments offset the impact of lower market interest rates and resulted in strong hedging results. As a result, the net income from our mortgage servicing division increased 174% from $66.1 million in 2006 to $181.4 million in 2007 and resulted in a 50% return on the approximately $400 million of capital we have invested in this division.

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