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Indymac Bancorp Inc – ‘10-Q’ for 3/31/08

On:  Monday, 5/12/08, at 7:02am ET   ·   For:  3/31/08   ·   Accession #:  1047469-8-6343   ·   File #:  1-08972

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  As Of                Filer                Filing    For·On·As Docs:Size              Issuer               Agent

 5/12/08  Indymac Bancorp Inc               10-Q        3/31/08    5:2.3M                                   Merrill Corp/New/FA

Document/Exhibit                   Description                      Pages   Size 

 1: 10-Q        Quarterly Report                                    HTML   1.80M 
 2: EX-31.1     Certification per Sarbanes-Oxley Act (Section 302)  HTML     12K 
 3: EX-31.2     Certification per Sarbanes-Oxley Act (Section 302)  HTML     11K 
 4: EX-32.1     Certification per Sarbanes-Oxley Act (Section 906)  HTML      8K 
 5: EX-32.2     Certification per Sarbanes-Oxley Act (Section 906)  HTML      8K 

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

Form 10-Q

INDYMAC BANCORP, INC.
(Exact name of registrant as specified in its charter)

        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):

        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

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):

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):

(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):