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Indymac Bancorp Inc – ‘10-Q’ for 9/30/06

On:  Thursday, 11/2/06, at 7:01am ET   ·   For:  9/30/06   ·   Accession #:  950134-6-20251   ·   File #:  1-08972

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

11/02/06  Indymac Bancorp Inc               10-Q        9/30/06    8:2.7M                                   RR Donnelley

Quarterly Report   —   Form 10-Q
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 10-Q        Quarterly Report                                    HTML   1.90M 
 2: EX-4.1      Instrument Defining the Rights of Security Holders  HTML     97K 
 3: EX-4.2      Instrument Defining the Rights of Security Holders  HTML    113K 
 4: EX-10.1     Material Contract                                   HTML     31K 
 5: EX-31.1     Certification per Sarbanes-Oxley Act (Section 302)  HTML     12K 
 6: EX-31.2     Certification per Sarbanes-Oxley Act (Section 302)  HTML     12K 
 7: EX-32.1     Certification per Sarbanes-Oxley Act (Section 906)  HTML      9K 
 8: EX-32.2     Certification per Sarbanes-Oxley Act (Section 906)  HTML      8K 


10-Q   —   Quarterly Report
Document Table of Contents

Page (sequential) | (alphabetic) Top
 
11st Page   -   Filing Submission
"Table of Contents
"Forward-Looking Statements
"Item 2
"Management's Discussion and Analysis of Financial Condition and Results of Operations
"Highlights
"Summary of Business Segment Results
"Product Profitability Analysis
"Loan Production
"Loan Sales
"Mortgage Servicing and Other Retained Assets
"Mortgage-Backed Securities and Loans Held for Investment
"Net Interest Margin
"Interest Rate Sensitivity
"Credit Risk and Reserves
"Expenses
"Share Repurchase Activities
"Future Outlook
"Liquidity and Capital Resources
"Off-Balance Sheet Arrangements
"Aggregate Contractual Obligations
"Critical Accounting Policies and Judgments
"Regulatory Updates
"Item 3
"Quantitative and Qualitative Disclosures About Market Risk
"Item 1
"Financial Statements (Unaudited)
"Consolidated Balance Sheets
"Consolidated Statements of Earnings
"Consolidated Statements of Shareholders' Equity and Comprehensive Income
"Consolidated Statements of Cash Flows
"Notes to Consolidated Financial Statements
"Item 4
"Controls and Procedures
"Part Ii. Other Information
"Legal Proceedings
"Item 1A
"Risk Factors
"Unregistered Sales of Equity Securities and Use of Proceeds
"Item 5
"Other Information
"Item 6
"Exhibits

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Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
 
Form 10-Q
 
 
     
þ
  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
    For the quarterly period ended September 30, 2006
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
(Zip Code)
(Address of principal executive offices)    
 
 
(Registrant’s telephone number, including area code)
(800) 669-2300
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ     No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer þ     Accelerated filer o     Non-accelerated filer o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o     No þ
 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
 
Common stock outstanding as of October 27, 2006: 70,871,489 shares
 



 

FORM 10-Q QUARTERLY REPORT
For the Period Ended September 30, 2006
 
TABLE OF CONTENTS
 
             
        Page  
PART I.  FINANCIAL INFORMATION
    Forward-Looking Statements     2  
  Management’s Discussion and Analysis of Financial Condition and Results of Operations     2  
    Highlights     2  
    Summary of Business Segment Results     7  
    Product Profitability Analysis     13  
    Loan Production     23  
    Loan Sales     28  
    Mortgage Servicing and Other Retained Assets     30  
    Mortgage-Backed Securities and Loans Held for Investment     39  
    Net Interest Margin     45  
    Interest Rate Sensitivity     48  
    Credit Risk and Reserves     50  
    Expenses     54  
    Share Repurchase Activities     55  
    Future Outlook     55  
    Liquidity and Capital Resources     55  
    Off-Balance Sheet Arrangements     59  
    Aggregate Contractual Obligations     60  
    Critical Accounting Policies and Judgments     60  
    Regulatory Updates     60  
  Quantitative and Qualitative Disclosures About Market Risk     61  
  Financial Statements (Unaudited)     62  
    Consolidated Balance Sheets     62  
    Consolidated Statements of Earnings     64  
    Consolidated Statements of Shareholders’ Equity and Comprehensive Income     65  
    Consolidated Statements of Cash Flows     66  
    Notes to Consolidated Financial Statements     67  
  Controls and Procedures     76  
 
  Legal Proceedings     76  
  Risk Factors     76  
  Unregistered Sales of Equity Securities and Use of Proceeds     76  
  Other Information     76  
  Exhibits     77  
 EXHIBIT 4.1
 EXHIBIT 4.2
 EXHIBIT 10.1
 EXHIBIT 31.1
 EXHIBIT 31.2
 EXHIBIT 32.1
 EXHIBIT 32.2


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Table of Contents

 
FORWARD-LOOKING STATEMENTS
 
Certain statements contained in this Form 10-Q may be deemed to be forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements include statements regarding our financial condition, results of operations, plans, objectives and future performance and business. Forward-looking statements typically include the words “anticipate,” “believe,” “estimate,” “expect,” “project,” “plan,” “forecast,” “intend,” and other similar expressions. These statements reflect our current views with respect to future events and financial performance. They are subject to risks and uncertainties which could cause future results to differ materially from historical results or from the results anticipated. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their dates or as of the date hereof if no other date is identified. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. For further information on our risk factors, refer to “Risk Factors” in our quarterly report on Form 10-Q for the fiscal quarter ended March 31, 2006, filed with the SEC on April 25, 2006.
 
ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
HIGHLIGHTS
 
The following highlights the Company’s consolidated financial condition and results of operations for the three and nine months ended September 30, 2006 and 2005. The 2005 data has been retrospectively adjusted to reflect the stock option expenses under Statement of Financial Accounting Standards No.  123(R), Share-Based Payment (“SFAS No. 123(R)”). References to “Indymac Bancorp” or the “Parent Company” refer to the parent company, IndyMac Bancorp, Inc., 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.
 
                                         
    Three Months Ended     Nine Months Ended  
    September 30,
    September 30,
    June 30,
    September 30,
    September 30,
 
    2006     2005     2006     2006     2005  
    (Dollars in millions, except per share data)  
 
Select Balance Sheet Information (at period end)
                                       
Cash and cash equivalents
  $ 521     $ 308     $ 165     $ 521     $ 308  
Securities (trading and available for sale)
    4,950       3,740       4,890       4,950       3,740  
Loans held for sale
    8,341       5,366       6,493       8,341       5,366  
Loans held for investment
    10,030       7,977       8,773       10,030       7,977  
Allowance for loan losses
    (61 )     (56 )     (58 )     (61 )     (56 )
Mortgage servicing rights
    1,631       941       1,599       1,631       941  
Other
    1,973       1,352       1,894       1,973       1,352  
Total Assets
    27,385       19,628       23,756       27,385       19,628  
Deposits
    10,111       7,261       9,352       10,111       7,261  
Advances from Federal Home Loan Bank
    9,333       6,621       7,070       9,333       6,621  
Other borrowings
    4,595       3,585       4,165       4,595       3,585  
Other liabilities
    1,409       664       1,366       1,409       664  
Total Liabilities
    25,448       18,131       21,952       25,448       18,131  
Shareholders’ Equity
    1,938       1,497       1,804       1,938       1,497  


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Table of Contents

                                         
    Three Months Ended     Nine Months Ended  
    September 30,
    September 30,
    June 30,
    September 30,
    September 30,
 
    2006     2005     2006     2006     2005  
    (Dollars in millions, except per share data)  
 
Income Statement
                                       
Net interest income before provision for loan losses
  $ 137     $ 113     $ 130     $ 394     $ 315  
Provision for loan losses
    5       4       2       11       8  
Gain on sale of loans
    160       151       202       503       455  
Service fee income
    21       10       27       79       26  
Gain on mortgage-backed securities, net
    19       1       8       25       12  
Fee and other income
    14       11       12       37       26  
Net revenues
    346       283       377       1,027       825  
Operating expenses
    203       154       204       578       455  
Net earnings
    86       78       105       271       223  
Basic earnings per share(1)
    1.25       1.23       1.57       4.07       3.57  
Diluted earnings per share(2)
    1.19       1.16       1.49       3.87       3.38  
Other Operating Data
                                       
Mortgage production
  $ 23,968     $ 16,950     $ 20,060     $ 64,005     $ 42,751  
Total loan production(3)
    24,439       17,489       20,591       65,370       44,237  
Mortgage industry share(4)
    3.87 %     1.95 %     2.78 %     3.31 %     1.85 %
Pipeline of mortgage loans in process(5)
    14,556       10,333       12,527       14,556       10,333  
Loans sold
    19,508       15,539       19,415       55,632       36,727  
Loans sold/mortgage loans produced
    81 %     92 %     97 %     87 %     86 %
Mortgage loans serviced for others (as of quarter end)(6)
    124,395       73,787       109,989       124,395       73,787  
Total mortgage loans serviced (as of quarter end)
    130,807       80,484       117,417       130,807       80,484  
Average full-time equivalent headcount
    8,186       6,376       7,861       7,759       6,076  
 

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Table of Contents

                                         
    Three Months Ended     Nine Months Ended  
    September 30,
    September 30,
    June 30,
    September 30,
    September 30,
 
    2006     2005     2006     2006     2005  
    (Dollars in millions, except per share data)  
 
Other Per Share Data
                                       
Dividends declared per share
  $ 0.48     $ 0.40     $ 0.46     $ 1.38     $ 1.14  
Dividend payout ratio(7)
    40 %     34 %     31 %     36 %     34 %
Book value per share at period end
    27.35       23.32       26.29       27.35       23.32  
Closing price per share at period end
    41.16       39.58       45.85       41.16       39.58  
Average Common Shares (in thousands)
                                       
Basic
    68,866       63,268       66,483       66,570       62,460  
Diluted
    72,286       67,100       70,213       70,009       65,908  
Performance Ratios
                                       
Return on average equity (“ROE”) (annualized)
    18.27 %     21.73 %     24.09 %     20.82 %     22.20 %
Return on average assets (“ROA”) (annualized)
    1.17 %     1.35 %     1.51 %     1.30 %     1.45 %
Net interest income to pretax income after minority interest
    95.97 %     87.95 %     75.40 %     88.11 %     85.67 %
Net interest margin
    2.13 %     2.12 %     2.12 %     2.13 %     2.22 %
Net interest margin, thrift
    2.02 %     2.07 %     2.01 %     2.03 %     2.14 %
Mortgage banking revenue (“MBR”) margin on loans sold(8)
    1.03 %     1.22 %     1.23 %     1.12 %     1.51 %
Efficiency ratio(9)
    58 %     54 %     54 %     56 %     55 %
Operating expenses to loan production
    0.83 %     0.88 %     0.99 %     0.88 %     1.03 %
Balance Sheet and Asset Quality Ratios
                                       
Average interest-earning assets
  $ 25,507     $ 21,122     $ 24,681     $ 24,734     $ 18,989  
Average equity
    1,871       1,415       1,742       1,738       1,341  
Debt to equity ratio(10)
    13.1:1       12.1:1       12.2:1       13.1:1       12.1:1  
Core capital ratio(11)
    7.60 %     7.51 %     8.24 %     7.60 %     7.51 %
Risk-based capital ratio(11)
    11.62 %     11.58 %     11.97 %     11.62 %     11.58 %
Non-performing assets to total assets
    0.51 %     0.36 %     0.49 %     0.51 %     0.36 %
Allowance for loan losses to total loans held for investment
    0.61 %     0.70 %     0.66 %     0.61 %     0.70 %
Allowance for loan losses to non-performing loans held for investment
    77.43 %     127.24 %     90.61 %     77.43 %     127.24 %
Loan Loss Activity
                                       
Allowance for loan losses to annualized net charge-offs
    8.2 x     6.7 x     8.8 x     8.8 x     7.2x  
Provision for loan losses to net charge-offs
    267.45 %     170.93 %     136.06 %     213.42 %     145.69 %
Net charge-offs (annualized) to average non-performing loans held for investment
    10.45 %     19.08 %     11.12 %     11.29 %     16.62 %
Net charge-offs (annualized) to average loans held for investment
    0.08 %     0.11 %     0.08 %     0.08 %     0.11 %
 
 
(1) Net earnings for the period divided by weighted average basic shares outstanding for the period.

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Table of Contents

(2) Net earnings for the period divided by weighted average dilutive shares outstanding for the period.
 
(3) Includes newly originated commitments on construction loans.
 
(4) Our market share is calculated based on our total loan production, both purchased (correspondent and conduit) and originated (retail and wholesale), in all channels (the numerator) divided by the Mortgage Bankers Association (“MBA”) October 24, 2006 Mortgage Finance Long-Term Forecast estimate of the overall mortgage market (the denominator). As we review industry publications such as National Mortgage News, we have confirmed that our calculation is consistent with its methodologies for reporting market share of Indymac and our mortgage banking peers. It is important to note that these industry calculations cause purchased mortgages to be counted more than once, i.e., first when they are originated and again by the purchasers (through correspondent and conduit channels) of the mortgages. Therefore, our market share calculation may not be mathematically precise, but it is consistent with industry calculations, which provide investors with a good view of our relative standing compared to the other top mortgage lending peers.
 
(5) The amount includes $2.8 billion, $1.6 billion and $2.5 billion of non-specific rate locks on bulk purchases in our conduit channel at September 30, 2006, September 30, 2005 and June 30, 2006, respectively.
 
(6) Represents the unpaid principal balance on loans sold with servicing retained by Indymac.
 
(7) Dividends declared per common share as a percentage of diluted earnings per share.
 
(8) Mortgage banking revenue margin is calculated using the sum of consolidated gain 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.
 
(9) Defined as operating expenses divided by net interest income and other income.
 
(10) Debt includes deposits.
 
(11) Ratio is for Indymac Bank and excludes unencumbered cash at the Parent Company available for investment in Indymac Bank. Risk-based capital ratio is calculated based on the regulatory standard risk weighting adjusted for the additional risk weightings for subprime loans.
 
SUMMARY OF OVERALL RESULTS
 
Three Months ended September 30, 2006
 
The Company recorded net earnings of $86.2 million, or $1.19 per share, for the third quarter of 2006. This represented an increase of 11% and 3% in net earnings and earnings per share, respectively, compared with net earnings of $77.5 million, or $1.16 per share, for the third quarter of 2005. The earnings for the third quarter of 2005 were retrospectively adjusted to reflect the stock option expenses due to the adoption of SFAS No. 123(R). Return on equity was 18% for the third quarter of 2006 compared with 22% for the third quarter of 2005.
 
Net revenues in the third quarter of 2006 were $345.6 million, reflecting an increase of 22% over the third quarter of 2005. Key drivers of this growth included the following:
 
1) Growth in average interest earning assets of 21% from $21.1 billion during the quarter ended September 30, 2005 to $25.5 billion for the quarter ended September 30, 2006, leading to an increase in net interest income of 21% to $136.7 million. Indymac’s net interest margin remained stable at 2.13% in the third quarter of 2006 compared to 2.12% in the third quarter of 2005. The increase in average interest earning assets primarily resulted from growth in production, increased retention of securities in conjunction with the sale of loans, and retention of loans in our held for investment portfolio.
 
2) Growth in our mortgage production of 41% over the third quarter of 2005 to an all-time record of $24.0 billion, representing market share of 3.87% based on the industry volume published by the MBA on October 24, 2006. The increase in production led to an increase in loans sold, a key component of net revenue, to $19.5 billion, or 81% of mortgage loans produced in the third quarter of 2006. The amount of loans sold is up 26% from $15.5 billion, or 92% of mortgage loans produced, during the third quarter of 2005. This increase in loans sold mitigated the year-over-year decline in the revenue margin on sales. Gain on sale of loans of $160.2 million increased 6% over the third quarter of 2005. Had we sold a more normal 92% level of mortgage loans produced, our third quarter 2006 earnings per share would have been higher. The MBR margin on loans


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sold was 1.03% in the third quarter of 2006, which was down from 1.22% in the third quarter of 2005, and 1.23% in the second quarter of 2006. The decline in MBR margin is mainly due to a change in channel and product mix of loans sold.
 
3) Net gain on mortgage-backed securities increased from $0.7 million in the third quarter of 2005 to $19.0 million in the third quarter of 2006. The increases in unrealized gain on prepayment penalty securities of $11.9 million, and net gain on trading securities used to hedge AAA-rated and agency interest-only and residual securities of $7.1 million, contributed 65% and 39%, respectively, to the overall increase in gain.
 
4) Service fee income of $21.1 million in the third quarter of 2006 grew 104% over the third quarter of 2005 driven by a 69% increase in the principal amount of loans serviced for others to $124.4 billion at September 30, 2006 combined with slowing prepayments as long-term interest rates have increased.
 
Operating expenses of $202.7 million also reflected a 32% increase from the third quarter of 2005, consistent with the growth in our operations and infrastructure investments to open new regional mortgage centers across the country to expand our mortgage operations platform. We had 16 regional centers at September 30, 2006, as compared to the 11 that were operational at September 30, 2005. We are opening these new regional centers as part of our strategy to expand our mortgage market share through geographic expansion.
 
Non-performing assets increased during the quarter but remained low as a percentage of total assets at 0.51% at September 30, 2006 compared to 0.36% of total assets at September 30, 2005. The allowance for loan losses currently represents 8.2 times annualized net charge-offs, up from 6.7 times at September 30, 2005. Net charge-offs (annualized) in the third quarter of 2006 represent 0.08% of average loans held for investment, down from 0.11% during the third quarter of 2005.
 
Nine Months ended September 30, 2006
 
For the nine months ended September 30, 2006, the Company’s net earnings were $270.7 million, or $3.87 per share, up 22% from $222.7 million, or $3.38 per share for the same period in 2005. The earnings for the nine months ended September 30, 2005 were also retrospectively adjusted to reflect stock option expenses resulting from the adoption of SFAS No. 123(R). Return on equity was 21% for the nine months ended September 30, 2006 compared with 22% for the nine months ended September 30, 2005.
 
Net revenues of $1.0 billion for the first nine months of 2006 reflect an increase of 25% over the first nine months of 2005. Key drivers of this growth included the following:
 
1) Growth in average interest earning assets of 30% from $19.0 billion in the first nine months of 2005 to $24.7 billion in the first nine months of 2006, leading to an increase in net interest income of 25% to $394.1 million. The increase is primarily driven by the growth in production as mentioned above. Indymac’s net interest margin declined to 2.13% from 2.22%, during a period where the Federal Reserve increased short term interest rates by 150 basis points, somewhat mitigating the impact of the average earning asset growth.
 
2) Growth in mortgage production of 50% in the first nine months of 2006 over the first nine months of 2005 to $64.0 billion, led to a 51% increase in loans sold to $55.6 billion. This volume growth outpaced a decline in the MBR margin on loans sold, which reflected a more competitive mortgage market and Indymac’s strategy to grow market share and revenue. The MBR margin on loans sold was 1.12% in the first nine months of 2006, down from 1.51% in the first nine months of 2005.
 
Included in the gain on sale of loans in the nine months of 2006 were $9.7 million of losses related to the establishment of a reserve for fraud losses on certain lot loans. The Company discovered that 45 lot loans related to two developments in Michigan and Florida were the subject of criminal fraud on the part of the developers, brokers, appraisers and closing agents. Indymac has since performed a full portfolio review and implemented a series of product guideline changes, operational changes and fraud prevention measures to mitigate future occurrences of this kind. Indymac believes there are no further incidences of fraud in its existing book of lot loans of similar size and scope.


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3) Service fee income of $79.2 million in the first nine months of 2006 grew 210% over the first nine months of 2005 driven by the increase in the principal balance of loans serviced for others combined with solid hedging performance and slowing prepayments attributable to higher mortgage rates.
 
Operating expenses of $578.1 million reflected an increase of 27%, consistent with the growth in Indymac’s revenues and operations as mentioned above. Accordingly, average full-time equivalent employees (“FTE”) increased 28% from 6,076 to 7,759 during the period supporting this growth.
 
SUMMARY OF BUSINESS SEGMENT RESULTS
 
The Company conducts business substantially through IndyMac Bank, F.S.B. via two primary operating segments, the mortgage banking and the thrift segments. These segments provide clear transparency to the two primary activities in our hybrid model: mortgage banking with high asset turn and high returns on equity, and thrift investing characterized by lower but more consistent returns on equity. Please refer to the Company’s annual report on Form 10-K for the year ended December 31, 2005 (“2005 10-K”), page 23, for further discussions of the divisions within the mortgage banking and thrift segments.
 
The tables below summarize the quarter-over-quarter performance of Indymac’s divisions. Detailed operating results for each division are provided on pages 9 to 12.
 
                                                                         
    Mortgage Banking                                
          MSRs and
                                           
          Other
    Mortgage
                      Total
             
    Production
    Retained
    Banking
                Elimination
    Operating
    Corporate
    Total
 
    Divisions     Assets     Overhead(1)     Total     Thrift     & Other     Results     Overhead     Company  
          (Dollars in thousands)  
 
Net Income Q306
  $ 68,635     $ 30,404     $ (8,899 )   $ 90,140     $ 35,232     $ (12,641 )   $ 112,731     $ (26,551 )   $ 86,180  
Net Income Q305
    64,817       9,564       (6,119 )     68,262       36,239       (4,015 )     100,486       (22,960 )     77,526  
                                                                         
$ Change
    3,818       20,840       (2,780 )     21,878       (1,007 )     (8,626 )     12,245       (3,591 )     8,654  
% Change
    6 %     218 %     (45 )%     32 %     (3 )%     (215 )%     12 %     (16 )%     11 %
Average Capital Q306
  $ 509,136     $ 401,545     $ 10,677     $ 921,358     $ 687,962     $ 1,939     $ 1,611,259     $ 260,120     $ 1,871,379  
Average Capital Q305
    415,031       189,744       10,762       615,537       546,094       1,440       1,163,071       252,290       1,415,361  
% Change
    23 %     112 %     (1 )%     50 %     26 %     35 %     39 %     3 %     32 %
ROE Q306
    53 %     30 %     N/A       39 %     20 %     N/A       28 %     N/A       18 %
ROE Q305
    62 %     20 %     N/A       44 %     26 %     N/A       34 %     N/A       22 %
% Change
    (14 )%     50 %     N/A       (12 )%     (23 )%     N/A       (19 )%     N/A       (16 )%
 
 
(1) Included production division overhead and servicing overhead of $6.2 million and $2.7 million, respectively, for the third quarter of 2006. For the third quarter of 2005, the production division overhead and servicing overhead were $4.2 million and $1.9 million, respectively.
 
                                                         
    Mortgage Banking Production Divisions  
    Mortgage Professionals Group     Consumer
    Financial
    Production
 
    Wholesale     Correspondent     Conduit     Total     Direct     Freedom     Divisions  
    (Dollars in thousands)  
 
Net Income Q306
  $ 31,800     $ 3,194     $ 17,256     $ 52,250     $ 103     $ 16,282     $ 68,635  
Net Income Q305
    43,769       8,839       4,365       56,973       864       6,980       64,817  
                                                         
$ Change
  $ (11,969 )   $ (5,645 )   $ 12,891     $ (4,723 )   $ (761 )   $ 9,302     $ 3,818  
% Change
    (27 )%     (64 )%     295 %     (8 )%     (88 )%     133 %     6 %
Average Capital Q306
  $ 192,689     $ 42,780     $ 149,894     $ 385,363     $ 8,822     $ 114,951     $ 509,136  
Average Capital Q305
    172,731       33,623       125,371       331,725       18,206       65,100       415,031  
% Change
    12 %     27 %     20 %     16 %     (52 )%     77 %     23 %
ROE Q306
    65 %     30 %     46 %     54 %     5 %     56 %     53 %
ROE Q305
    101 %     104 %     14 %     68 %     19 %     43 %     62 %
% Change
    (35 )%     (72 )%     231 %     (21 )%     (75 )%     32 %     (14 )%
 


7



Table of Contents

                                                                 
    Thrift  
                      Consumer
                         
    Mortgage-
    Prime SFR
    Home
    Construction
    Builder
                   
    Backed
    Mortgage
    Equity
    and Lot
    Construction
    Warehouse
    Discontinued
       
    Securities     Loans     Division     Loans     Financing     Lending     Products     Total Thrift  
    (Dollars in thousands)  
 
Net Income Q306
  $ 3,991     $ 11,036     $ 5,918     $ 6,652     $ 7,193     $ 211     $ 231     $ 35,232  
Net Income Q305
    4,802       12,856       5,553       7,695       5,447       (138 )     24       36,239  
                                                                 
$ Change
  $ (811 )   $ (1,820 )   $ 365     $ (1,043 )   $ 1,746     $ 349     $ 207     $ (1,007 )
% Change
    (17 )%     (14 )%     7 %     (14 )%     32 %     253 %     863 %     (3 )%
Average Capital Q306
  $ 61,628     $ 220,811     $ 151,013     $ 130,975     $ 108,408     $ 11,583     $ 3,544     $ 687,962  
Average Capital Q305
    39,787       208,202       98,744       106,799       84,970       3,301       4,291       546,094  
% Change
    55 %     6 %     53 %     23 %     28 %     251 %     (17 )%     26 %
ROE Q306
    26 %     20 %     16 %     20 %     26 %     7 %     26 %     20 %
ROE Q305
    48 %     24 %     22 %     29 %     25 %     (17 )%     2 %     26 %
% Change
    (46 )%     (19 )%     (30 )%     (30 )%     4 %     N/M       N/M       (23 )%
 
Total capital deployed in our operating business segments increased 39% to $1.6 billion in the third quarter of 2006 and earned a 28% return on equity before the impact of corporate overhead. Net of corporate overhead and including the excess undeployed capital, Indymac’s average capital of $1.9 billion earned a 18% return on equity.
 
We deployed 27% of our capital, or $509.1 million, into our mortgage production divisions in the third quarter of 2006, an increase of 23% over the third quarter of 2005. Mortgage production earnings grew 6%; however the return on equity declined from 62% to 53% reflecting the narrower mortgage banking revenue margins. The wholesale and correspondent divisions reflected stronger production year-over-year, but a reduction in net income as margins were lower in these two business lines year-over-year. Our conduit division had a particularly strong quarter reflecting earnings growth of 295% and return on equity of 46%, up from 14%. The increase was due to improvement in the revenue margins primarily related to its pay option ARM production. Our reverse mortgage division continued to demonstrate strong returns with earnings and production growth of 133% and 35%, respectively. The strong returns in this business are reflective of the strong growth in demographics for the seniors market and the growing popularity of the reverse mortgage product. We expect this division to continue its strong growth in the future given its industry leadership position in the reverse mortgage market.
 
We deployed 21% of our capital, or $401.5 million, into the MSRs and other retained assets division, up from 13% one year ago. This division experienced a strong increase in ROE from 20% in the third quarter of 2005 to 30% in the third quarter of 2006. This division benefited from strong hedge results and gain on securities. We target our pricing and hedging strategies to earn expected ROE of 18% to 23% for this segment. Given the volatility in this segment, returns in a quarter may substantially exceed or fall below the targeted level.
 
We deployed 37% of our capital, or $688.0 million, to the thrift segment, a 26% increase over last year. Thrift continued to provide a stable return for the Company despite the decline in return on equity from 26% to 20% over the same period. The return on equity in the current quarter returned to forecasted levels due to higher premium amortization and certain non-recurring gains in the third quarter of 2005.

8



Table of Contents

DETAIL CHANNEL SEGMENT RESULTS
 
The following tables summarize the Company’s financial results for the three months ended September 30, 2006 and 2005 by its two primary segments via each of its operating divisions:
 
                                                                         
    Mortgage Banking                                
          MSRs
                                           
          and
                                           
          Other
    Mortgage
                      Total
             
    Production
    Retained
    Banking
                Elimination
    Operating
    Corporate
    Total
 
    Divisions     Assets     Overhead(1)     Total     Thrift     & Other(2)     Results     Overhead     Company  
    (Dollars in thousands)  
 
Three Months Ended September 30, 2006
                                                                       
Operating Results
                                                                       
Net interest income
  $ 41,218     $ 17,429     $ (188 )   $ 58,459     $ 67,185     $ 13,140     $ 138,784     $ (2,073 )   $ 136,711  
Provision for loan losses
                            (4,988 )           (4,988 )           (4,988 )
Gain (loss) on sale of loans
    157,271       9,392             166,663       16,558       (22,996 )     160,225             160,225  
Service fee income
    5,599       15,434             21,033       (397 )     422       21,058             21,058  
Gain (loss) on securities
          21,745             21,745       (4,147 )     1,370       18,968             18,968  
Other income
    303       1,653       846       2,802       10,631       (610 )     12,823       777       13,600  
                                                                         
Net revenues (expense)
    204,391       65,653       658       270,702       84,842       (8,674 )     346,870       (1,296 )     345,574  
Operating expenses
    149,728       17,526       15,367       182,621       31,099       12,937       226,657       42,669       269,326  
Deferred expense under SFAS 91
    (58,860 )     (2,128 )           (60,988 )     (4,492 )     (718 )     (66,198 )           (66,198 )
                                                                         
Pretax income (loss)
    113,523       50,255       (14,709 )     149,069       58,235       (20,893 )     186,411       (43,965 )     142,446  
                                                                         
Net income (loss)
  $ 68,635     $ 30,404     $ (8,899 )   $ 90,140     $ 35,232     $ (12,641 )   $ 112,731     $ (26,551 )   $ 86,180  
                                                                         
Relevant Financial and Performance Data
                                                                       
Average interest-earning assets
  $ 9,152,748     $ 963,760     $ 41     $ 10,116,549     $ 15,181,876     $ (93,621 )   $ 25,204,804     $ 302,213     $ 25,507,017  
Allocated capital
    509,136       401,545       10,677       921,358       687,962       1,939       1,611,259       260,120       1,871,379  
Loans produced
    22,446,264       721,019       N/A       23,167,283       1,271,893       N/A       24,439,176       N/A       24,439,176  
Loans sold
    20,562,308       654,023       N/A       21,216,331       1,281,971       (2,990,126 )     19,508,176       N/A       19,508,176  
MBR margin
    0.97 %     1.44 %     N/A       0.98 %     1.29 %     N/A       N/A       N/A       1.03 %
ROE
    53 %     30 %     N/A       39 %     20 %     N/A       28 %     N/A       18 %
ROA
    2.89 %     4.23 %     N/A       2.88 %     0.91 %     N/A       1.61 %     N/A       1.17 %
Net interest margin, thrift. 
    N/A       N/A       N/A       N/A       1.76 %     N/A       N/A       N/A       2.02 %
Average FTE
    4,652       182       1,074       5,908       650       324       6,882       1,304       8,186  
Three Months Ended September 30, 2005
                                                                       
Operating Results
                                                                       
Net interest income
  $ 34,695     $ 11,242     $ (5 )   $ 45,932     $ 60,076     $ 10,168     $ 116,176     $ (3,357 )   $ 112,819  
Provision for loan losses
                            (3,528 )           (3,528 )           (3,528 )
Gain (loss) on sale of loans
    137,241       7,642             144,883       14,458       (8,255 )     151,086             151,086  
Service fee income
    3,384       5,796             9,180       1,568       (444 )     10,304             10,304  
Gain (loss) on securities
          (390 )           (390 )     412       706       728             728  
Other income
    145       731       622       1,498       8,880       192       10,570       715       11,285  
                                                                         
Net revenues (expense)
    175,465       25,021       617       201,103       81,866       2,367       285,336       (2,642 )     282,694  
Operating expenses
    122,089       9,920       10,730       142,739       27,460       9,711       179,910       35,301       215,211  
Deferred expense under SFAS 91
    (53,878 )     (708 )           (54,586 )     (5,496 )     (707 )     (60,789 )           (60,789 )
                                                                         
Pretax income (loss)
    107,254       15,809       (10,113 )     112,950       59,902       (6,637 )     166,215       (37,943 )     128,272  
                                                                         
Net income (loss)
  $ 64,817     $ 9,564     $ (6,119 )   $ 68,262     $ 36,239     $ (4,015 )   $ 100,486     $ (22,960 )   $ 77,526  
                                                                         
Relevant Financial and Performance Data
                                                                       
Average interest-earning assets
  $ 7,767,105     $ 519,850     $ 51     $ 8,287,006     $ 12,082,104     $ (88,062 )   $ 20,281,048     $ 840,492     $ 21,121,540  
Allocated capital
    415,031       189,744       10,762       615,537       546,094       1,440       1,163,071       252,290       1,415,361  
Loans produced
    15,745,797       330,439             16,076,236       1,412,830             17,489,066             17,489,066  
Loans sold
    16,057,236       321,746             16,378,982       1,120,033       (1,959,806 )     15,539,209       N/A       15,539,209  
MBR margin
    1.07 %     2.81 %     N/A       1.10 %     1.49 %     N/A       N/A       N/A       1.22 %
ROE
    62 %     20 %     N/A       44 %     26 %     N/A       34 %     N/A       22 %
ROA
    3.24 %     2.68 %     N/A       2.86 %     1.19 %     N/A       1.85 %     N/A       1.35 %
Net interest margin, thrift. 
    N/A       N/A       N/A       N/A       1.97 %     N/A       N/A       N/A       2.07 %
Average FTE
    3,593       156       817       4,566       601       247       5,414       962       6,376  
 
 
(1) Included production division overhead and servicing overhead of $6.2 million and $2.7 million, respectively, for the third quarter of 2006. For the third quarter of 2005, the production division overhead and servicing overhead were $4.2 million and $1.9 million, respectively.
 
(2) Included are eliminations, deposits, and treasury items, the details of which are provided on page 12.


9



Table of Contents

The following tables provide additional detail on the results for the production divisions of our mortgage banking segment for the three months ended September 30, 2006 and 2005:
 
                                                         
    Mortgage Banking Production Divisions  
                                  Financial
       
                                  Freedom
    Total
 
    Mortgage Professionals Group     Consumer
    (Reverse
    Production
 
    Wholesale     Correspondent     Conduit     Total     Direct     Mortgage)     Divisions  
    (Dollars in thousands)  
 
Three Months Ended September 30, 2006
                                                       
Operating Results
                                                       
Net interest income
  $ 15,939     $ 3,577     $ 18,327     $ 37,843     $ 507     $ 2,868     $ 41,218  
Provision for loan losses
                                         
Gain (loss) on sale of loans
    79,916       7,897       17,905       105,718       6,005       45,548       157,271  
Service fee income
                                  5,599       5,599  
Gain (loss) on securities
                                         
Other income
                (153 )     (153 )     269       187       303  
                                                         
Net revenues (expense)
    95,855       11,474       36,079       143,408       6,781       54,202       204,391  
Operating expenses
    83,575       11,962       7,557       103,094       11,829       34,805       149,728  
Deferral of expenses under SFAS 91
    (40,282 )     (5,767 )           (46,049 )     (5,219 )     (7,592 )     (58,860 )
                                                         
Pretax income (loss)
    52,562       5,279       28,522       86,363       171       26,989       113,523  
                                                         
Net income (loss)
  $ 31,800     $ 3,194     $ 17,256     $ 52,250     $ 103     $ 16,282     $ 68,635  
                                                         
Relevant Financial and Performance Data
                                                       
Average interest-earning assets
  $ 3,734,539     $ 830,710     $ 3,609,638     $ 8,174,887     $ 176,232     $ 801,629     $ 9,152,748  
Allocated capital
    192,689       42,780       149,894       385,363       8,822       114,951       509,136  
Loans produced
    9,280,817       2,503,012       9,078,589       20,862,418       455,643       1,128,203       22,446,264  
Loans sold
    9,050,759       2,385,091       7,600,746       19,036,596       454,060       1,071,652       20,562,308  
MBR margin
    1.06 %     0.48 %     0.48 %     0.75 %     1.43 %     4.52 %     0.97 %
Pretax income/loan sold
    0.58 %     0.22 %     0.38 %     0.45 %     0.04 %     2.52 %     0.55 %
ROE
    65 %     30 %     46 %     54 %     5 %     56 %     53 %
ROA
    3.37 %     1.52 %     1.87 %     2.52 %     0.22 %     6.42 %     2.89 %
Net interest margin
    1.69 %     1.71 %     2.01 %     1.84 %     1.14 %     1.42 %     1.79 %
Average FTE
    2,507       246       147       2,900       387       1,365       4,652  
Three Months Ended September 30, 2005
                                                       
Operating Results
                                                       
Net interest income
  $ 15,845     $ 3,863     $ 12,719     $ 32,427     $ 1,534     $ 734     $ 34,695  
Provision for loan losses
                                         
Gain (loss) on sale of loans
    86,078       14,309       (552 )     99,835       15,550       21,856       137,241  
Service fee income
                                  3,384       3,384  
Gain (loss) on securities
                                         
Other income
                31       31       88       26       145  
                                                         
Net revenues (expense)
    101,923       18,172       12,198       132,293       17,172       26,000       175,465  
Operating expenses
    64,427       8,562       4,983       77,972       23,393       20,724       122,089  
Deferral of expenses under SFAS 91
    (34,850 )     (5,000 )           (39,850 )     (7,649 )     (6,379 )     (53,878 )
                                                         
Pretax income (loss)
    72,346       14,610       7,215       94,171       1,428       11,655       107,254  
                                                         
Net income (loss)
  $ 43,769     $ 8,839     $ 4,365     $ 56,973     $ 864     $ 6,980     $ 64,817  
                                                         
Relevant Financial and Performance Data
                                                       
Average interest-earning assets
    3,686,819       741,485       2,808,114       7,236,418       377,158       153,529       7,767,105  
Allocated capital
    172,731       33,623       125,371       331,725       18,206       65,100       415,031  
Loans produced
    7,749,550       1,651,558       4,718,369       14,119,477       791,707       834,613       15,745,797  
Loans sold
    7,689,017       1,628,396       5,179,806       14,497,219       780,010       780,007       16,057,236  
MBR margin
    1.33 %     1.12 %     0.23 %     0.91 %     2.19 %     2.90 %     1.07 %
Pretax income/loan sold
    0.94 %     0.90 %     0.14 %     0.65 %     0.18 %     1.49 %     0.67 %
ROE
    101 %     104 %     14 %     68 %     19 %     43 %     62 %
ROA
    4.70 %     4.72 %     0.61 %     3.12 %     0.88 %     9.76 %     3.24 %
Net interest margin
    1.71 %     2.07 %     1.80 %     1.78 %     1.61 %     1.90 %     1.77 %
Average FTE
    1,870       222       116       2,208       561       824       3,593  


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Table of Contents

The following tables provide additional detail on the results for the divisions of our thrift segment for the three months ended September 30, 2006 and 2005:
 
                                                                 
    Thrift  
                      Consumer
                         
    Mortgage-
    Prime SFR
    Home
    Construction
    Builder
                   
    Backed
    Mortgage
    Equity
    and Lot
    Construction
    Warehouse
    Discontinued
       
    Securities     Loans     Division     Loans     Financing     Lending     Products     Total Thrift  
    (Dollars in thousands)  
 
Three Months Ended September 30, 2006
                                                               
Operating Results
                                                               
Net interest income
  $ 7,418     $ 20,430     $ 10,851     $ 10,454     $ 16,488     $ 1,035     $ 509     $ 67,185  
Provision for loan losses
          (2,000 )           (720 )     (2,200 )     (18 )     (50 )     (4,988 )
Gain (loss) on sale of loans
          748       5,788       10,022                         16,558  
Service fee income
                (397 )                             (397 )
Gain (loss) on securities
    (493 )           (3,607 )     (47 )                       (4,147 )
Other income
    (14 )     429       2,392       6,655       703       466             10,631  
                                                                 
Net revenues (expense)
    6,911       19,607       15,027       26,364       14,991       1,483       459       84,842  
Operating expenses
    315       1,365       5,607       17,690       4,911       1,134       77       31,099  
Deferral of expenses under SFAS 91
                (361 )     (2,321 )     (1,810 )                 (4,492 )
                                                                 
Pretax income (loss)
    6,596       18,242       9,781       10,995       11,890       349       382       58,235  
                                                                 
Net income (loss)
  $ 3,991     $ 11,036     $ 5,918     $ 6,652     $ 7,193     $ 211     $ 231     $ 35,232  
                                                                 
Relevant Financial and Performance Data
                                                               
Average interest-earning assets
  $ 3,527,766     $ 5,851,294     $ 1,947,724     $ 2,568,007     $ 1,112,338     $ 135,511     $ 39,236     $ 15,181,876  
Allocated capital
    61,628       220,811       151,013       130,975       108,408       11,583       3,544       687,962  
Loans produced
                29,806       770,937       471,150                   1,271,893  
Loans sold
                635,366       646,605                         1,281,971  
ROE
    26 %     20 %     16 %     20 %     26 %     7 %     26 %     20 %
ROA
    0.44 %     0.74 %     1.17 %     1.03 %     2.58 %     0.62 %     2.67 %     0.91 %
Net interest margin
    0.83 %     1.39 %     2.21 %     1.62 %     5.88 %     3.03 %     5.15 %     1.76 %
Efficiency ratio
    5 %     6 %     35 %     57 %     18 %     76 %     15 %     30 %
Average FTE
    6       14       76       416       111       27             650  
Three Months Ended September 30, 2005
                                                               
Operating Results
                                                               
Net interest income
  $ 8,217     $ 19,559     $ 8,724     $ 10,781     $ 11,779     $ 253     $ 763     $ 60,076  
Provision for loan losses
          (1,800 )           (1,197 )           (31 )     (500 )     (3,528 )
Gain (loss) on sale of loans
          4,023       870       9,565                         14,458  
Service fee income
          344       1,223             1                   1,568  
Gain (loss) on securities
                (654 )     1,066                         412  
Other income
                2,527       5,895       314       145       (1 )     8,880  
                                                                 
Net revenues (expense)
    8,217       22,126       12,690       26,110       12,094       367       262       81,866  
Operating expenses
    279       876       4,059       16,563       4,866       595       222       27,460  
Deferral of expenses under SFAS 91
                (548 )     (3,172 )     (1,776 )                 (5,496 )
                                                                 
Pretax income (loss)
    7,938       21,250       9,179       12,719       9,004       (228 )     40       59,902  
                                                                 
Net income (loss)
  $ 4,802     $ 12,856     $ 5,553     $ 7,695     $ 5,447     $ (138 )   $ 24     $ 36,239  
                                                                 
Relevant Financial and Performance Data
                                                               
Average interest-earning assets
  $ 2,189,352     $ 5,075,925     $ 1,686,216     $ 2,198,570     $ 850,653     $ 33,155     $ 48,233     $ 12,082,104  
Allocated capital
    39,787       208,202       98,744       106,799       84,970       3,301       4,291       546,094  
Loans produced
                57,561       816,358       538,911                   1,412,830  
Loans sold
          298,618       169,791       651,624                         1,120,033  
ROE
    48 %     24 %     22 %     29 %     25 %     (17 )%     2 %     26 %
ROA
    0.87 %     1.00 %     1.28 %     1.38 %     2.57 %     (1.64 )%     0.23 %     1.19 %
Net interest margin
    1.49 %     1.53 %     2.05 %     1.95 %     5.49 %     3.03 %     6.28 %     1.97 %
Efficiency ratio
    3 %     4 %     28 %     49 %     26 %     149 %     29 %     26 %
Average FTE
    6       11       37       421       97       19       10       601  


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Table of Contents

The following tables provide additional detail on deposits, treasury and eliminations for the three months ended September 30, 2006 and 2005:
 
                                                 
                Eliminations        
                Interdivision
    MSR Economic
             
    Deposits     Treasury     Loan Sales     Value     Other     Total  
    (Dollars in thousands)  
 
Three months ended September 30, 2006
                                               
Operating Results
                                               
Net interest income
  $     $ 18     $ 8,290     $     $ 4,832     $ 13,140  
Provision for loan losses
                                   
Gain (loss) on sale of loans
                (22,996 )                 (22,996 )
Service fee income
                422                   422  
Gain (loss) on securities
                1,370                   1,370  
Other income
    896       150                   (1,656 )     (610 )
                                                 
Net revenues (expense)
    896       168       (12,914 )           3,176       (8,674 )
Operating expenses
    7,173       2,227                   3,537       12,937  
Deferral of expenses under SFAS 91
                            (718 )     (718 )
                                                 
Pretax income (loss)
    (6,277 )     (2,059 )     (12,914 )           357       (20,893 )
                                                 
Net income (loss)
  $ (3,798 )   $ (1,246 )   $ (7,813 )   $     $ 216     $ (12,641 )
                                                 
Relevant Financial and Performance Data
                                               
Average interest-earning assets
  $ 172     $     $ (93,793 )   $     $     $ (93,621 )
Allocated capital
    1,939                               1,939  
Loans produced
                                   
Loans sold
    N/A       N/A       (2,990,126 )     N/A       N/A       (2,990,126 )
ROE
    N/A       N/A       N/A       N/A       N/A       N/A  
ROA
    N/A       N/A       N/A       N/A       N/A       N/A  
Net interest margin
    N/A       N/A       N/A       N/A       N/A       N/A  
Efficiency ratio
    N/A       N/A       N/A       N/A       N/A       N/A  
Average FTE
    277       47                         324  
Three months ended September 30, 2005
                                               
Operating Results
                                               
Net interest income
  $     $ 810     $ 5,355     $     $ 4,003     $ 10,168  
Provision for loan losses
                                   
Gain (loss) on sale of loans
                (10,055 )           1,800       (8,255 )
Service fee income
                1,966       (2,410 )           (444 )
Gain (loss) on securities
                706                   706  
Other income
    679       156                   (643 )     192  
                                                 
Net revenues (expense)
    679       966       (2,028 )     (2,410 )     5,160       2,367  
Operating expenses
    3,559       1,687                   4,465       9,711  
Deferral of expenses under SFAS 91
                            (707 )     (707 )
                                                 
Pretax income (loss)
    (2,880 )     (721 )     (2,028 )     (2,410 )     1,402       (6,637 )
                                                 
Net income (loss)
  $ (1,742 )   $ (436 )   $ (1,227 )   $ (1,458 )   $ 848     $ (4,015 )
                                                 
Relevant Financial and Performance Data
                                               
Average interest-earning assets
  $ 175     $     $ (88,237 )   $     $     $ (88,062 )
Allocated capital
    1,440                               1,440  
Loans produced
                                   
Loans sold
    N/A       N/A       (1,959,806 )     N/A       N/A       (1,959,806 )
ROE
    N/A       N/A       N/A       N/A       N/A       N/A  
ROA
    N/A       N/A       N/A       N/A       N/A       N/A  
Net interest margin
    N/A       N/A       N/A       N/A       N/A       N/A  
Efficiency ratio
    N/A       N/A       N/A       N/A       N/A       N/A  
Average FTE
    211       36                         247  


12



Table of Contents

Accounting Methodology for Reporting Segment Financial Results
 
The profitability of each operating channel is measured on a fully-leveraged basis after allocating capital based on regulatory risk-based capital rules. The Company uses a fund transfer pricing (“FTP”) system to allocate interest expense to the operating channels. Each operating channel is allocated funding with maturities and interest rates matched with the expected lives and repricing frequencies of the channel’s assets. The difference between these allocations and the Company’s actual net interest income and capital levels resulting from centralized management of funding costs is reported in the Treasury unit and Corporate Overhead, respectively. Trust preferred securities are allocated to the operating channels which results in higher interest expense at the operating channel level but reduces their capital charge. This is more reflective of our use of trust preferred securities as a component of capital.
 
The mortgage production divisions are credited with gain on sale of loans based on the actual amount realized for loans sold in the period for the divisions. Loans are occasionally transferred (“sold”) from the production divisions to the thrift divisions at a price based on the estimated fair value, which typically resulted in a premium. The premium for the loans is recorded as a gain in the production divisions and a premium on the asset in the thrift divisions and eliminated in consolidation. In subsequent periods, this premium is amortized as part of the thrift divisions’ net interest margin and the amortization is reversed in Eliminations.
 
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” (“SFAS No. 91”), certain fees and related incremental direct costs associated with originating loans are required to be deferred when incurred. SFAS No. 91 fees and expenses are deferred at production and subsequently recognized at sale. This is reflected as a reclassification reducing operating expenses and loan fees with the net deferral reported as a component of the gain on sale. The deferral of direct origination costs is shown separately as a contra to the gross operating expenses in the detail segment tables on pages 9 to 12 to enable the computation of gross cost per funded loan.
 
The Company hedges the MSRs to protect their economic value. The results in the business segment tables above reflect the economic fair value of MSRs. Prior to the adoption of Statement of Financial Accounting Standards No. 156, “Accounting for Servicing of Financial Assets,” (“SFAS No. 156”) on January 1, 2006, the economic fair value may have varied from the generally accepted accounting principles (“GAAP”) value due to the lower of cost or market limitations of GAAP. Differences between the economic value and the GAAP value were eliminated in consolidation. Also during the second quarter of 2006, the Company has revised its capital allocation on MSRs to conform to updated regulatory capital guidelines. Prior period segment data was revised accordingly.
 
The Company’s corporate overhead costs such as corporate salaries and related expenses, and non-recurring corporate items are not allocated to the operating channels. Also, for purposes of calculating average interest-earning assets, the allowance for loan losses is excluded.
 
PRODUCT PROFITABILITY ANALYSIS
 
As part of our process of measuring results and holding managers responsible for specific targets, we evaluate profitability at the product level in addition to our segment results. We currently have four product groups: standard consumer home loans held for sale, specialty consumer home loans held for sale and/or investment, home loans and related investment, and specialty commercial loans held for investment. Please refer to the Company’s 2005 10-K, pages 31 to 37, for further discussion on the products included within each product group.


13



Table of Contents

The following tables summarize the profitability for the four product groups for the three months ended September 30, 2006 and 2005:
 
                                                         
                Home
                         
    Standard
    Specialty
    Loans &
    Specialty
                   
    Consumer
    Consumer
    Related
    Commercial
                Total
 
    Home Loans     Home Loans     Investments     Loans     Treasury     Overhead     Company  
    (Dollars in thousands)  
 
Three Months Ended September 30, 2006
                                                       
Operating Results
                                                       
Net interest income
  $ 30,746     $ 38,672     $ 44,141     $ 20,768     $ 18     $ 2,366     $ 136,711  
Provision for loan losses
          (566 )     (2,000 )     (2,422 )                 (4,988 )
Gain (loss) on sale of loans
    87,979       62,106       10,140                         160,225  
Service fee income
          6,965       13,572                   521       21,058  
Gain (loss) on securities
          (3,945 )     22,913                         18,968  
Other income
          8,379       1,760       2,332       150       979       13,600  
                                                         
Net revenue (expense)
    118,725       111,611       90,526       20,678       168       3,866       345,574  
Variable expenses
    57,213       42,428       4,098       2,225                   105,964  
Deferral of expenses under SFAS 91
    (44,393 )     (18,371 )     (1,538 )     (1,896 )                 (66,198 )
Fixed expenses
    48,004       25,262       14,013       5,110       2,227       68,746       163,362  
                                                         
Pretax income (loss)
    57,901       62,292       73,953       15,239       (2,059 )     (64,880 )     142,446  
                                                         
Net income (loss)
  $ 35,030     $ 37,640     $ 44,742     $ 9,219     $ (1,246 )   $ (39,205 )   $ 86,180  
                                                         
Balance Sheet Data
                                                       
Average interest-earning assets
  $ 7,762,761     $ 5,737,934     $ 10,237,788     $ 1,498,138     $     $ 270,396     $ 25,507,017  
Allocated capital
  $ 346,735     $ 386,649     $ 641,818     $ 138,726     $     $ 357,451     $ 1,871,379  
Performance Ratios
                                                       
ROE
    40 %     39 %     28 %     26 %     N/A       N/A       18 %
Net interest margin
    1.57 %     2.67 %     1.71 %     5.50 %     N/A       N/A       2.13 %
MBR margin
    0.76 %     2.27 %     1.55 %     N/A       N/A       N/A       1.03 %
Efficiency ratio
    51 %     44 %     18 %     24 %     N/A       N/A       58 %
Operating Data
                                                       
Loan production
  $ 19,032,639     $ 4,278,249     $ 606,713     $ 521,575     $     $     $ 24,439,176  
Loans sold
  $ 15,612,563     $ 3,241,590     $ 654,023     $     $     $     $ 19,508,176  


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Table of Contents

                                                         
                Home
                         
    Standard
    Specialty
    Loans &
    Specialty
                   
    Consumer
    Consumer
    Related
    Commercial
                Total
 
    Home Loans     Home Loans     Investments     Loans     Treasury     Overhead     Company  
    (Dollars in thousands)  
 
Three Months Ended September 30, 2005
                                                       
Operating Results
                                                       
Net interest income
  $ 28,211     $ 28,153     $ 40,778     $ 14,905     $ 810     $ (38 )   $ 112,819  
Provision for loan losses
     —       (1,546 )     (1,800 )     (182 )                 (3,528 )
Gain (loss) on sale of loans
    103,657       35,608       11,821                         151,086  
Service fee income
     —       4,607       8,106       1             (2,410 )     10,304  
Gain (loss) on securities
     —       412       316                         728  
Other income
     —       7,819       731       1,087       156       1,492       11,285  
                                                         
Net revenue (expense)
    131,868       75,053       59,952       15,811       966       (956 )     282,694  
Variable expenses
    58,609       33,506       1,019       4,756                   97,890  
Deferral of expenses under SFAS 91
    (43,060 )     (15,033 )     (708 )     (1,988 )                 (60,789 )
Fixed expenses
    35,137       14,684       9,482       2,276       1,687       54,055       117,321  
                                                         
Pretax income (loss)
    81,182       41,896       50,159       10,767       (721 )     (55,011 )     128,272  
                                                         
Net income (loss)
  $ 49,115     $ 25,275     $ 30,345     $ 6,514     $ (436 )   $ (33,287 )   $ 77,526  
                                                         
Balance Sheet Data
                                                       
Average interest-earning assets
  $ 7,201,582     $ 4,277,106     $ 7,762,950     $ 1,077,261     $     $ 802,641     $ 21,121,540  
Allocated capital
  $ 315,106     $ 243,051     $ 436,624     $ 103,738     $     $ 316,842     $ 1,415,361  
Performance Ratios
                                                       
ROE
    62 %     41 %     28 %     25 %     N/A       N/A       22 %
Net interest margin
    1.55 %     2.61 %     2.08 %     5.49 %     N/A       N/A       2.12 %
MBR margin
    1.01 %     2.46 %     2.13 %     N/A       N/A       N/A       1.22 %
Efficiency ratio
    38 %     43 %     16 %     32 %     N/A       N/A       54 %
Operating Data
                                                       
Loan production
  $ 13,283,041     $ 3,295,823     $ 274,372     $ 635,830     $     $     $ 17,489,066  
Loans sold
  $ 13,118,592     $ 1,800,253     $ 620,364     $     $     $     $ 15,539,209  

15



Table of Contents

The following tables provide details on the profitability for the standard consumer home loans held for sale group for the three months ended September 30, 2006 and 2005:
 
                                 
    Standard Consumer Home Loans Held for Sale  
    Agency
                   
    Conforming     Alt-A     Subprime     Total  
    (Dollars in thousands)  
 
Three Months Ended September 30, 2006
                               
Operating Results
                               
Net interest income
  $ 393     $ 21,316     $ 9,037     $ 30,746  
Provision for loan losses
                       
Gain (loss) on sale of loans
    333       82,500       5,146       87,979  
Service fee income
                       
Gain (loss) on securities
                       
Other income
                       
                                 
Net revenues (expense)
    726       103,816       14,183       118,725  
Variable expenses
    1,593       48,241       7,379       57,213  
Deferral of expenses under SFAS 91
    (1,236 )     (37,431 )     (5,726 )     (44,393 )
Fixed expenses
    1,202       42,350       4,452       48,004  
                                 
Pretax income (loss)
    (833 )     50,656       8,078       57,901  
                                 
Net income (loss)
  $ (504 )   $ 30,647     $ 4,887     $ 35,030  
                                 
Balance Sheet Data
                               
Average interest-earning assets
  $ 102,987     $ 6,221,229     $ 1,438,545     $ 7,762,761  
Allocated capital
  $ 4,186     $ 255,304     $ 87,245     $ 346,735  
Performance Ratios
                               
ROE
    (48 )%     48 %     22 %     40 %
Net interest margin
    1.51 %     1.36 %     2.49 %     1.57 %
MBR margin
    0.48 %     0.70 %     2.30 %     0.76 %
Efficiency ratio
    215 %     51 %     43 %     51 %
Operating Data
                               
Loan production
  $ 177,832     $ 18,143,707     $ 711,100     $ 19,032,639  
Loans sold
  $ 150,317     $ 14,846,766     $ 615,480     $ 15,612,563  
Three Months Ended September 30, 2005
                               
Operating Results
                               
Net interest income
  $ 765     $ 20,455     $ 6,991     $ 28,211  
Provision for loan losses
                       
Gain (loss) on sale of loans
    1,572       95,868       6,217       103,657  
Service fee income
                       
Gain (loss) on securities
                       
Other income
                       
                                 
Net revenues (expense)
    2,337       116,323       13,208       131,868  
Variable expenses
    2,957       48,422       7,230       58,609  
Deferral of expenses under SFAS 91
    (2,171 )     (35,638 )     (5,251 )     (43,060 )
Fixed expenses
    1,427       29,827       3,883       35,137  
                                 
Pretax income (loss)
    124       73,712       7,346       81,182  
                                 
Net income (loss)
  $ 75     $ 44,596     $ 4,444     $ 49,115  
                                 


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Table of Contents

                                 
    Standard Consumer Home Loans Held for Sale  
    Agency
                   
    Conforming     Alt-A     Subprime     Total  
    (Dollars in thousands)  
 
Balance Sheet Data
                               
Average interest-earning assets
  $ 149,465     $ 6,175,572     $ 876,545     $ 7,201,582  
Allocated capital
  $ 6,413     $ 263,788     $ 44,905     $ 315,106  
Performance Ratios
                               
ROE
    5 %     67 %     39 %     62 %
Net interest margin
    2.03 %     1.31 %     3.16 %     1.55 %
MBR margin
    0.76 %     0.95 %     2.56 %     1.01 %
Efficiency ratio
    95 %     37 %     44 %     38 %
Operating Data
                               
Loan production
  $ 276,263     $ 12,373,817     $ 632,961     $ 13,283,041  
Loans sold
  $ 308,799     $ 12,294,644     $ 515,149     $ 13,118,592  
 
The following tables provide details on the profitability for the specialty consumer home loans held for sale and/or investment group for the three months ended September 30, 2006 and 2005:
 
                                         
    Specialty Consumer Home Loans Held for Sale and/or Investment  
    HELOCs/
    Reverse
                   
    Seconds     Mortgages     CTP/Lot     Discontinued     Total  
    (Dollars in thousands)  
 
Three Months Ended September 30, 2006
                                       
Operating Results
                                       
Net interest income
  $ 23,771     $ 2,868     $ 11,524     $ 509     $ 38,672  
Provision for loan losses
                (516 )     (50 )     (566 )
Gain (loss) on sale of loans
    3,885       45,548       12,673             62,106  
Service fee income
    1,366       5,599                   6,965  
Gain (loss) on securities
    (3,898 )           (47 )           (3,945 )
Other income
    2,700       187       5,492             8,379  
                                         
Net revenues (expense)
    27,824       54,202       29,126       459       111,611  
Variable expenses
    13,444       20,319       8,665             42,428  
Deferral of expenses under SFAS 91
    (8,544 )     (7,592 )     (2,235 )           (18,371 )
Fixed expenses
    2,964       14,486       7,735       77       25,262  
                                         
Pretax income (loss)
    19,960       26,989       14,961       382       62,292  
                                         
Net income (loss)
  $ 12,076     $ 16,282     $ 9,051     $ 231     $ 37,640  
                                         
Balance Sheet Data
                                       
Average interest-earning assets
  $ 2,589,343     $ 801,629     $ 2,307,726     $ 39,236     $ 5,737,934  
Allocated capital
  $ 237,260     $ 34,404     $ 111,441     $ 3,544     $ 386,649  
Performance Ratios
                                       
ROE
    20 %     188 %     32 %     26 %     39 %
Net interest margin
    3.64 %     1.42 %     1.98 %     5.15 %     2.67 %
MBR margin
    0.83 %     4.52 %     1.96 %     N/A       2.27 %
Efficiency ratio
    28 %     50 %     48 %     15 %     44 %
Operating Data
                                       
Loan production
  $ 1,839,049     $ 1,128,203     $ 1,310,997     $     $ 4,278,249  
Loans sold
  $ 1,523,333     $ 1,071,652     $ 646,605     $     $ 3,241,590  

17



Table of Contents

                                         
    Specialty Consumer Home Loans Held for Sale and/or Investment  
    HELOCs/
    Reverse
                   
    Seconds     Mortgages     CTP/Lot     Discontinued     Total  
    (Dollars in thousands)  
 
Three Months Ended September 30, 2005
                                       
Operating Results
                                       
Net interest income
  $ 15,798     $ 734     $ 10,858     $ 763     $ 28,153  
Provision for loan losses
                (1,046 )     (500 )     (1,546 )
Gain (loss) on sale of loans
    3,597       21,856       10,155             35,608  
Service fee income
    1,223       3,384                   4,607  
Gain (loss) on securities
    (654 )           1,066             412  
Other income
    2,527       26       5,267       (1 )     7,819  
                                         
Net revenues (expense)
    22,491       26,000       26,300       262       75,053  
Variable expenses
    11,244       14,236       8,026             33,506  
Deferral of expenses under SFAS 91
    (5,694 )     (6,379 )     (2,960 )           (15,033 )
Fixed expenses
    1,008       6,488       6,966       222       14,684  
                                         
Pretax income (loss)
    15,933       11,655       14,268       40       41,896  
                                         
Net income (loss)
  $ 9,639     $ 6,980     $ 8,632     $ 24     $ 25,275  
                                         
Balance Sheet Data
                                       
Average interest-earning assets
  $ 2,078,870     $ 153,529     $ 1,996,474     $ 48,233     $ 4,277,106  
Allocated capital
  $ 131,635     $ 16,657     $ 90,468     $ 4,291     $ 243,051  
Performance Ratios
                                       
ROE
    29 %     166 %     38 %     2 %     41 %
Net interest margin
    3.01 %     1.90 %     2.16 %     6.28 %     2.61 %
MBR margin
    2.54 %     2.90 %     1.90 %     N/A       2.46 %
Efficiency ratio
    29 %     55 %     44 %     29 %     43 %
Operating Data
                                       
Loan production
  $ 1,106,109     $ 834,613     $ 1,355,101     $     $ 3,295,823  
Loans sold
  $ 368,622     $ 780,007     $ 651,624     $     $ 1,800,253  

18



Table of Contents

The following tables provide details on the profitability for the home loans and related investments group for the three months ended September 30, 2006 and 2005:
 
                                 
    Home Loans and Related Investments  
    Retained Assets
          SFR Loans
       
    and Retention
          Held for
       
    Activities     MBS     Investment     Total  
    (Dollars in thousands)  
 
Three Months Ended September 30, 2006
                               
Operating Results
                               
Net interest income
  $ 14,803     $ 7,418     $ 21,920     $ 44,141  
Provision for loan losses
                (2,000 )     (2,000 )
Gain (loss) on sale of loans
    9,392             748       10,140  
Service fee income
    13,572                   13,572  
Gain (loss) on securities
    23,406       (493 )           22,913  
Other income
    1,345       (14 )     429       1,760  
                                 
Net revenues (expense)
    62,518       6,911       21,097       90,526  
Variable expenses
    4,098                   4,098  
Deferral of expenses under SFAS 91
    (1,538 )                 (1,538 )
Fixed expenses
    12,333       315       1,365       14,013  
                                 
Pretax income (loss)
    47,625       6,596       19,732       73,953  
                                 
Net income (loss)
  $ 28,813     $ 3,991     $ 11,938     $ 44,742  
                                 
Balance Sheet Data
                               
Average interest-earning assets
  $ 878,038     $ 3,527,766     $ 5,831,984     $ 10,237,788  
Allocated capital
  $ 360,151     $ 61,628     $ 220,039     $ 641,818  
Performance Ratios
                               
ROE
    32 %     26 %     22 %     28 %
Net interest margin
    6.69 %     0.83 %     1.49 %     1.71 %
MBR margin
    1.44 %     N/A       N/A       1.55 %
Efficiency ratio
    24 %     5 %     6 %     18 %
Operating Data
                               
Loan production
  $ 606,713     $     $     $ 606,713  
Loans sold
  $ 654,023     $     $     $ 654,023  


19



Table of Contents

                                 
    Home Loans and Related Investments  
    Retained Assets
          SFR Loans
       
    and Retention
          Held for
       
    Activities     MBS     Investment     Total  
    (Dollars in thousands)  
 
Three Months Ended September 30, 2005
                               
Operating Results
                               
Net interest income
  $ 11,242     $ 8,217     $ 21,319     $ 40,778  
Provision for loan losses
                (1,800 )     (1,800 )
Gain (loss) on sale of loans
    7,604             4,217       11,821  
Service fee income
    7,762             344       8,106  
Gain (loss) on securities
    316                   316  
Other income
    731                   731  
                                 
Net revenues (expense)
    27,655       8,217       24,080       59,952  
Variable expenses
    1,019                   1,019  
Deferral of expenses under SFAS 91
    (708 )                 (708 )
Fixed expenses
    8,327       279       876       9,482  
                                 
Pretax income (loss)
    19,017       7,938       23,204       50,159  
                                 
Net income (loss)
  $ 11,505     $ 4,802     $ 14,038     $ 30,345  
                                 
Balance Sheet Data
                               
Average interest-earning assets
  $ 519,850     $ 2,189,352     $ 5,053,748     $ 7,762,950  
Allocated capital
  $ 189,744     $ 39,787     $ 207,093     $ 436,624  
Performance Ratios
                               
ROE
    24 %     48 %     27 %     28 %
Net interest margin
    8.58 %     1.49 %     1.67 %     2.08 %
MBR margin
    2.79 %     N/A       N/A       2.13 %
Efficiency ratio
    31 %     3 %     3 %     16 %
Operating Data
                               
Loan production
  $ 274,372     $     $     $ 274,372  
Loans sold
  $ 321,746     $     $ 298,618     $ 620,364  

20



Table of Contents

The following table provides details on the profitability for the specialty commercial loans held for investment group for the three months ended September 30, 2006 and 2005:
 
                                 
    Specialty Commercial Loans Held for Investment  
    Single
          Warehouse
       
    Spec     Subdivision     Lending     Total  
    (Dollars in thousands)  
 
Three Months Ended September 30, 2006
                               
Operating Results
                               
Net interest income
  $ 3,245     $ 16,488     $ 1,035     $ 20,768  
Provision for loan losses
    (204 )     (2,200 )     (18 )     (2,422 )
Gain (loss) on sale of loans
                       
Service fee income
                       
Gain (loss) on securities
                       
Other income
    1,163       703       466       2,332  
                                 
Net revenues (expense)
    4,204       14,991       1,483       20,678  
Variable expenses
    709       1,516             2,225  
Deferral of expenses under SFAS 91
    (86 )     (1,810 )           (1,896 )
Fixed expenses
    581       3,395       1,134       5,110  
                                 
Pretax income (loss)
    3,000       11,890       349       15,239  
                                 
Net income (loss)
  $ 1,815     $ 7,193     $ 211     $ 9,219  
                                 
Balance Sheet Data
                               
Average interest-earning assets
  $ 250,289     $ 1,112,338     $ 135,511     $ 1,498,138  
Allocated capital
  $ 18,735     $ 108,408     $ 11,583     $ 138,726  
Performance Ratios
                               
ROE
    38 %     26 %     N/A       26 %
Net interest margin
    5.14 %     5.88 %     N/A       5.50 %
Efficiency ratio
    27 %     18 %     N/A       24 %
Operating Data
                               
Loan production
  $ 50,425     $ 471,150     $     $ 521,575  
Loans sold
  $     $     $     $  
Three Months Ended September 30, 2005
                               
Operating Results
                               
Net interest income
  $ 2,873     $ 11,779     $ 253     $ 14,905  
Provision for loan losses
    (151 )           (31 )     (182 )
Gain (loss) on sale of loans
                       
Service fee income
          1             1  
Gain (loss) on securities
                       
Other income
    628       314       145       1,087  
                                 
Net revenues (expense)
    3,350       12,094       367       15,811  
Variable expenses
    887       3,869             4,756  
Deferral of expenses under SFAS 91
    (212 )     (1,776 )           (1,988 )
Fixed expenses
    684       997       595       2,276  
                                 
Pretax income (loss)
    1,991       9,004       (228 )     10,767  
                                 
Net income (loss)
  $ 1,205     $ 5,447     $ (138 )   $ 6,514  
                                 


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Table of Contents

                                 
    Specialty Commercial Loans Held for Investment  
    Single
          Warehouse
       
    Spec     Subdivision     Lending     Total  
    (Dollars in thousands)  
 
Balance Sheet Data
                               
Average interest-earning assets
  $ 193,453     $ 850,653     $ 33,155     $ 1,077,261  
Allocated capital
  $ 15,467     $ 84,970     $ 3,301     $ 103,738  
Performance Ratios
                               
ROE
    31 %     25 %     N/A       25 %
Net interest margin
    5.89 %     5.49 %     N/A       5.49 %
Efficiency ratio
    39 %     26 %     N/A       32 %
Operating Data
                               
Loan production
  $ 96,919     $ 538,911     $     $ 635,830  
Loans sold
  $     $     $     $  
 
The following table provides details on the overhead costs for the three months ended September 30, 2006 and 2005:
 
                                         
                            Total
 
    Servicing OH     MB OH     Deposit OH     Corporate OH     Overhead  
    (Dollars in thousands)  
 
Three Months Ended September 30, 2006
                                       
Operating Results
                                       
Net interest income
  $ (115 )   $ (73 )   $ 3,954     $ (1,400 )   $ 2,366  
Provision for loan losses
                             
Gain (loss) on sale of loans
                             
Service fee income
                      521       521  
Gain (loss) on securities
                             
Other income
    730       116       896       (763 )     979  
                                         
Net revenues (expense)
    615       43       4,850       (1,642 )     3,866  
Variable expenses
                             
Deferral of expenses under SFAS 91
                             
Fixed expenses
    5,104       10,263       11,127       42,252       68,746  
                                         
Pretax income (loss)
    (4,489 )     (10,220 )     (6,277 )     (43,894 )     (64,880 )
                                         
Net income (loss)
  $ (2,716 )   $ (6,183 )   $ (3,798 )   $ (26,508 )   $ (39,205 )
                                         
Balance Sheet Data
                                       
Average interest-earning assets
  $     $ 41     $ 172     $ 270,183     $ 270,396  
Allocated capital
  $ 177     $ 10,500     $ 1,939     $ 344,835     $ 357,451  
Performance Ratios
                                       
ROE
    N/A       N/A       N/A       N/A       N/A  
Net interest margin
    N/A       N/A       N/A       N/A       N/A  
Efficiency ratio
    N/A       N/A       N/A       N/A       N/A  
Operating Data
                                       
Loan production
  $     $     $     $     $  
Loans sold
  $     $     $     $     $  

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                            Total
 
    Servicing OH     MB OH     Deposit OH     Corporate OH     Overhead  
    (Dollars in thousands)  
 
Three Months Ended September 30, 2005
                                       
Operating Results
                                       
Net interest income
  $ (55 )   $ 50     $ 3,729     $ (3,762 )   $ (38 )
Provision for loan losses
                             
Gain (loss) on sale of loans
                             
Service fee income
                      (2,410 )     (2,410 )
Gain (loss) on securities
                             
Other income
    634       (12 )     679       191       1,492  
                                         
Net revenues (expense)
    579       38       4,408       (5,981 )     (956 )
Variable expenses
                             
Deferral of expenses under SFAS 91
                             
Fixed expenses
    3,760       6,970       7,288       36,037       54,055  
                                         
Pretax income (loss)
    (3,181 )     (6,932 )     (2,880 )     (42,018 )     (55,011 )
                                         
Net income (loss)
  $ (1,925 )   $ (4,194 )   $ (1,742 )   $ (25,426 )   $ (33,287 )
                                         
Balance Sheet Data
                                       
Average interest-earning assets
  $     $ 51     $ 175     $ 802,415     $ 802,641  
Allocated capital
  $ 3,941     $ 6,821     $ 1,440     $ 304,640     $ 316,842  
Performance Ratios
                                       
ROE
    N/A       N/A       N/A       N/A       N/A  
Net interest margin
    N/A       N/A       N/A       N/A       N/A  
Efficiency ratio
    N/A       N/A       N/A       N/A       N/A  
Operating Data
                                       
Loan production
  $     $     $     $     $  
Loans sold
  $     $     $     $     $  
 
LOAN PRODUCTION
 
The Company’s total mortgage production of $24.0 billion for the third quarter of 2006 reflects a record high, up 19% compared to the second quarter of 2006, and up 41% from the third quarter of 2005. The production growth was accomplished through our continued drive to leverage our mortgage banking platform. The mortgage professionals group, including conduit, increased its volume by 48% over the third quarter of 2005, contributing 96% of our production growth. Since the third quarter of 2005, we opened five new operations centers. Our expansion into new regions, the hiring of new salespeople, and the roll-out of new products are expected to drive overall production higher in the future.
 
On October 24, 2006, the MBA issued a forecast of the industry volume for 2006 of $2.5 trillion, which represents a 19% decline from 2005. The third quarter of 2006 estimate of $620 billion represents a 14% decrease from the second quarter of 2006, and a 29% decline from the third quarter of 2005. Based on this forecast, our market share is 3.87% this quarter, up from 2.78% in the second quarter of 2006 and 1.95% in the third quarter of 2005.
 
Total loan production, including subdivision construction, reached $24.4 billion for the third quarter of 2006, a record for the Company.
 
At September 30, 2006, our total pipeline of loans in process was a quarter-end record high of $14.6 billion, up 16% from June 30, 2006 and 41% from September 30, 2005. Total pipeline of loans in process included rate lock

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commitments we have provided on loans that are specifically identified or non-specific bulk packages, and loan applications we have received for which the borrower has not yet locked in the interest rate commitment. Non-specific bulk packages represented pools of loans the Company has committed to purchase, where the pool characteristics are specified but the actual loans are not.
 
The following summarizes our loan production and pipeline by purpose, interest rate type, product type, S&P lifetime loss estimate, geographic distribution, and channels as of and for the quarters ended September 30, 2006 and 2005 and June 30, 2006:
 
                                         
    As of and for the Three Months Ended  
    September 30,
    September 30,
    %
    June 30,
    %
 
    2006     2005     Change     2006     Change  
    (Dollars in millions)  
 
Production and Pipeline by Purpose:
                                       
Mortgage loan production:
                                       
Purchase transactions
  $ 9,682     $ 7,425       30 %   $ 8,284       17 %
Cash-out refinance transactions
    10,656       7,790       37 %     9,373       14 %
Rate/term refinance transactions
    3,630       1,735       109 %     2,403       51 %
                                         
Total mortgage loan production
  $ 23,968     $ 16,950       41 %   $ 20,060       19 %
                                         
% purchase and cash-out refinance transactions
    85 %     90 %             88 %        
Mortgage industry market share
    3.87 %     1.95 %     98 %     2.78 %     39 %
Mortgage pipeline:
                                       
Purchase transactions
  $ 4,595     $ 3,654       26 %   $ 4,459       3 %
Cash-out refinance transactions
    5,210       3,945       32 %     4,062       28 %
Rate/term refinance transactions
    1,930       1,346       43 %     1,492       29 %
                                         
Total specific rate locks
    11,735       8,945       31 %     10,013       17 %
Non-specific rate locks on bulk purchases
    2,821       1,388       103 %     2,514       12 %
                                         
Total pipeline at period end
  $ 14,556     $ 10,333       41 %   $ 12,527       16 %
                                         
 
                         
    Three Months Ended  
    September 30,
    September 30,
    June 30,
 
    2006     2005     2006  
 
Production by Interest Rate Type as a Percentage of Mortgage Production:
                       
Fixed rate mortgages
    20 %     23 %     20 %
Interest-only loans
    39 %     30 %     37 %
ARMs
    11 %     12 %     15 %
Intermediate term fixed rate loans
    7 %     9 %     7 %
Pay option ARMS
    23 %     26 %     21 %
                         
      100 %     100 %     100 %
                         
 


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    Three Months Ended     Nine Months Ended  
    September 30,
    September 30,
    %
    June 30,
    %
    September 30,
    September 30,
    %
 
    2006     2005     Change     2006     Change     2006     2005     Change  
    (Dollars in millions)  
 
Production by Product Type:
                                                               
Standard First Mortgage Products:
                                                               
Alt-A
  $ 19,103     $ 13,016       47 %   $ 15,090       27 %   $ 49,642     $ 33,276       49 %
Agency conforming
    260       315       (17 )%     244       7 %     783       843       (7 )%
Subprime
    729       639       14 %     505       44 %     1,788       1,576       13 %
                                                                 
Total standard first mortgage products (S&P evaluated)(1)
    20,092       13,970       44 %     15,839       27 %     52,213       35,695       46 %
Specialty Consumer Home Mortgage Products:
                                                               
Home equity line of credit(2) /Seconds
    1,840       1,106       66 %     1,860       (1 )%     5,343       2,420       121 %
Reverse mortgages
    1,128       835       35 %     1,337       (16 )%     3,583       1,981       81 %
Consumer construction(2)
    908       1,039       (13 )%     1,024       (11 )%     2,866       2,655       8 %
                                                                 
Subtotal mortgage production
    23,968       16,950       41 %     20,060       19 %     64,005       42,751       50 %
Builder construction commitments(2)
    471       539       (13 )%     531       (11 )%     1,365       1,486       (8 )%
                                                                 
Total production
  $ 24,439     $ 17,489       40 %   $ 20,591       19 %   $ 65,370     $ 44,237       48 %
                                                                 
 
The following summarizes the estimated lifetime losses for mortgage production using the S&P Levels model for the three months ended September 30, 2006 and 2005, and June 30, 2006:
 
                                                 
    Three Months Ended  
    September 30, 2006     September 30, 2005     June 30, 2006  
    Average
          Average
          Average
       
    Lifetime
    % of
    Lifetime
    % of
    Lifetime
    % of
 
    Loss Rate     Total     Loss Rate     Total     Loss Rate     Total  
    (Dollars in millions)  
 
Production by S&P Lifetime Loss Estimate(1):
                                               
Agency conforming equivalent (<48 bps)
    0.23 %     48 %     0.21 %     54 %     0.22 %     48 %
Prime Alt-A equivalent (48-135 bps)
    0.76 %     44 %     0.75 %     40 %     0.76 %     45 %
Subprime equivalent (>135 bps)
    4.82 %     8 %     4.84 %     6 %     4.16 %     7 %
                                                 
Total S&P lifetime loss estimate
    0.82 %     100 %     0.72 %     100 %     0.74 %     100 %
                                                 
Total S&P evaluated production
          $ 20,092             $ 13,970             $ 15,839  
                                                 
 

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Table of Contents

                                                                         
    Three Months Ended  
    September 30, 2006     September 30, 2005     June 30, 2006  
    Production     FICO     CLTV(3)     Production     FICO     CLTV(3)     Production     FICO     CLTV(3)  
 
Total production
  $ 24,439       N/A       N/A     $ 17,489       N/A       N/A     $ 20,591       N/A       N/A  
Less:
                                                                       
Home equity line of credit(2)/Seconds
    1,840       716       87%       1,106       704       88%       1,860       716       86%  
Reverse mortgages
    1,128       N/A       53%       835       N/A       53%       1,337       N/A       53%  
Consumer construction(2)
    908       722       76%       1,039       721       74%       1,024       724       77%  
Builder construction commitments
    471       N/A       74%       539       N/A       71%       531       N/A       82%  
                                                                         
Total S&P evaluated production
  $ 20,092       702       81%     $ 13,970       703       77%     $ 15,839       702       80%  
                                                                         
 
 
(1) While Indymac production is evaluated using the S&P Levels model, the data are not audited or endorsed by S&P. S&P evaluated production excludes second liens, HELOC, reverse mortgages, and construction loans.
 
(2) Amount represents total commitments.
 
(3) Combined loan-to-value ratio for loans in the second lien position is used to calculate weighted average original loan-to-value ratio for the portfolio.
 
In the second quarter of 2006, S&P introduced version 5.7 of the S&P Levels model, which we adopted in the third quarter of 2006. This new version incorporates several enhancements including more severe subordination for loans with subordinate financing and low FICO scores, and updated House Price Index and Housing Volatility Index. All prior periods have been restated utilizing the new model. The loss estimates above are shown to describe the relative level of credit risk in our loan production at time of origination. Because the Company routinely sells the vast majority of loans produced, the above estimates do not reflect the amount of credit risk retained by the Company.
 
Total average lifetime loss rate for the third quarter of 2006 increased eight basis points from 0.74% for the second quarter of 2006 to 0.82%, driven by an increase in loans with subordinate financing and subprime loans originated during the quarter.
 
The following indicates the geographic distribution of our production for the three months ended September 30, 2006 and 2005 and June 30, 2006:
 
                         
    September 30,
    September 30,
    June 30,
 
    2006     2005     2006  
 
Production by Geographic Distribution:
                       
California
    45 %     43 %     44 %
Florida
    8 %     8 %     9 %
New York
    6 %     6 %     6 %
Virginia
    4 %     5 %     4 %
New Jersey
    4 %     4 %     4 %
Other
    33 %     34 %     33 %
                         
Total
    100 %     100 %     100 %
                         
 
The following summarizes our loan production by divisions for the three months ended September 30, 2006 and 2005, and June 30, 2006, and nine months ended September 30, 2006 and 2005.
 

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Table of Contents

                                                                 
    Three Months Ended     Nine Months Ended  
    September 30,
    September 30,
    %
    June 30,
    %
    September 30,
    September 30,
    %
 
    2006     2005     Change     2006     Change     2006     2005     Change  
    (Dollars in millions)  
 
Production by Divisions:
                                                               
Mortgage Loan Production:
                                                               
Mortgage Professionals Group Wholesale(1)
  $ 9,281     $ 7,749       20 %   $ 8,825       5 %   $ 26,887     $ 20,957       28 %
Correspondent
    2,503       1,652       52 %     2,528       (1 )%     7,307       3,965       84 %
Conduit
    9,078       4,718       92 %     5,471       66 %     20,685       10,530       96 %
Consumer Direct
    456       792       (42 )%     552       (17 )%     1,533       2,216       (31 )%
Financial Freedom
    1,128       835       35 %     1,337       (16 )%     3,583       1,981       81 %
Servicing Retention
    721       330       118 %     540       34 %     1,688       726       133 %
Home Equity Division
    30       58       (48 )%     33       (9 )%     93       156       (40 )%
Consumer Construction and Lot
    771       816       (6 )%     774       0 %     2,229       2,220       0 %
                                                                 
Total Mortgage Loan Production
    23,968       16,950       41 %     20,060       19 %     64,005       42,751       50 %
Commercial Loan Production:
                                                               
Builder Construction
    471       539       (13 )%     531       (11 )%     1,365       1,486       (8 )%
                                                                 
Total Production
  $ 24,439     $ 17,489       40 %   $ 20,591       19 %   $ 65,370     $ 44,237       48 %
                                                                 
 
 
(1) Wholesale channel includes $898 million, $378 million, and $709 million of production from emerging bankers/brokers sales for the quarters ended September 30, 2006 and 2005 and June 30, 2006. The emerging bankers/brokers sales force focuses on small and geographically remote mortgage brokers through centralized in-house sales personnel instead of field sales personnel.
 
Key production drivers for the mortgage professionals group’s wholesale and correspondent channels for the three months ended September 30, 2006 and 2005 and June 30, 2006 follow:
 
                                         
    Three Months Ended  
    September 30,
    September 30,
    %
    June 30,
    %
 
    2006     2005     Change     2006     Change  
 
Key Production Drivers:
                                       
Active customers during the quarter(1)
    7,686       6,473       19 %     7,472       3 %
Sales personnel
    992       692       43 %     952       4 %
Number of regional offices
    16       11       45 %     15       7 %
 
 
(1) Active customers are defined as customers who funded at least one loan during the most recent 90-day period.

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LOAN SALES
 
The following table summarizes loans sold and the relevant performance ratios on loan sales during the three and nine months ended September 30, 2006 and 2005 and the three months ended June 30, 2006:
 
                                                                 
    Three Months Ended     Nine Months Ended  
    September 30,
    September 30,
    %
    June 30,
    %
    September 30,
    September 30,
    %
 
    2006     2005     Change     2006     Change     2006     2005     Change  
    (Dollars in millions)  
 
Total loans sold
  $ 19,508     $ 15,539       26 %   $ 19,415       0 %   $ 55,632     $ 36,727       51 %
Ratios:
                                                               
Gross MBR margin before hedging
    1.44 %     0.91 %     57 %     0.99 %     45 %     1.11 %     1.43 %     (22 )%
Net MBR margin after hedging
    1.03 %     1.22 %     (15 )%     1.23 %     (16 )%     1.12 %     1.51 %     (25 )%
 
The MBR margin is calculated using mortgage banking revenue divided by total loans sold. The mortgage banking revenue includes total consolidated gain on sale of loans company-wide and the net interest income earned on mortgage loans held for sale by mortgage banking production divisions. While most of the gain on sale of loans results from the loan sale activities in our mortgage banking segment, we do occasionally sell loans held by our thrift segment, primarily lot loans and home equity products. The gain on sale recognized in the thrift segment is included in the MBR margin calculation.
 
Included in the gain on sale of loans in the second quarter of 2006 were $9.7 million of losses related to the establishment of a reserve for fraud losses on certain lot loans. The Company discovered that 45 lot loans related to two developments in Michigan and Florida were the subject of criminal fraud on the part of the developers, brokers, appraisers and closing agents. These loans had outstanding principal balances of approximately $13.9 million before the reserve for fraud losses. At September 30, 2006, the book value of loans totaling $5.3 million are on non-accrual status. We have since performed a full portfolio review and implemented a series of product guideline changes, operational changes and fraud prevention measures to mitigate future occurrences of this kind. We believe there are no further incidences of fraud in its existing book of lot loans of similar size or scope.
 
The following tables summarize MBR margin by channel and product for the three months ended September 30, 2006 and 2005 and June 30, 2006:
 
                         
    Three Months Ended  
    September 30,
    September 30,
    June 30,
 
    2006     2005     2006  
 
MBR Margin by Channel:
                       
Wholesale
    1.06 %     1.33 %     1.31 %
Correspondent
    0.48 %     1.12 %     0.76 %
Conduit
    0.48 %     0.23 %     0.60 %
Consumer Direct
    1.43 %     2.19 %     1.87 %
Financial Freedom
    4.52 %     2.90 %     3.31 %
Other
    1.29 %     1.49 %     1.34 %
Total MBR margin
    1.03 %     1.22 %     1.23 %
MBR Margin by Product:
                       
Agency Conforming
    0.48 %     0.76 %     0.63 %
Alt-A
    0.70 %     0.95 %     1.17 %
Subprime
    2.30 %     2.56 %     2.36 %
HELOC/Seconds
    0.83 %     2.54 %     0.20 %
Reverse Mortgages
    4.52 %     2.90 %     3.31 %
CTP/Lot
    1.96 %     1.90 %     0.81 %
Other
    1.55 %     2.13 %     1.41 %
Total MBR margin
    1.03 %     1.22 %     1.23 %


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The Company hedges the interest rate risk inherent in its pipeline of mortgage loans held for sale to protect its margin on sale of loans. Indymac focuses on trying to maintain stable profit margins with an emphasis on forecasting expected fallout to more precisely estimate our required hedge coverage ratio and optimize hedge costs. By closely monitoring key factors, such as product type, origination channels, progress or “status” of transactions, as well as changes in market interest rates since Indymac committed a rate to the borrower (“rate lock commitments”), the Company seeks to quantify the optional component of each rate lock, and in turn, the aggregate rate lock pipeline. By accurately evaluating these factors, the Company has been able to minimize the purchase of options and also stabilize gain on sale margins over different rate environments.
 
In addition to mortgage loans held for sale, the hedging activities also include rate lock commitments. Rate lock commitments on mortgage loans that are intended to be sold are considered to be derivatives pursuant to SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” (“SFAS No. 133”). The rate lock commitments are initially valued at zero and continue to be adjusted for changes in value resulting from changes in market interest rates, pursuant to the Staff Accounting Bulletin No. 105, “Application of Accounting Principles to Loan Commitments.” The Company hedges the risk of changes in fair value of rate lock commitments by selling forward contracts on securities of Fannie Mae or Freddie Mac, Euro Dollar futures and other hedge instruments to manage this risk. These forward and futures contracts are also accounted for as derivatives and recorded at fair value.
 
The following shows the various channels through which loans were distributed:
 
                                         
    Three Months Ended     Nine Months Ended  
    September 30,
    September 30,
    June 30,
    September 30,
    September 30,
 
    2006     2005     2006     2006     2005  
          (Dollars in millions)        
 
Distribution of Loan Sales by Channel
                                       
Sales of government-sponsored enterprises (“GSEs”) equivalent loans
    16 %     17 %     18 %     18 %     16 %
Private-label securitizations
    38 %     60 %     46 %     40 %     63 %
Whole loan sales, servicing retained
    38 %     16 %     33 %     36 %     13 %
Whole loan sales, servicing released
    1 %     2 %     2 %     2 %     3 %
                                         
Subtotal sales
    93 %     95 %     99 %     96 %     95 %
Investment portfolio acquisitions
    7 %     5 %     1 %     4 %     5 %
                                         
Total loan distribution percentage
    100 %     100 %     100 %     100 %     100 %
                                         
Total loan distribution
  $ 20,914     $ 16,283     $ 19,631     $ 57,870     $ 38,698  
                                         
 
We maintain multiple channels for loan dispositions to achieve sustainable liquidity and develop a deep and diverse investor base. Also, through multiple channels, Indymac endeavors to consistently sell investment and non-investment grade bonds, AAA-rated and agency interest-only securities, and whole loans for cash.
 
In conjunction with the sale of mortgage loans, the Company generally retains 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, investment and non-investment grade securities, and residual securities. The allocated cost of the retained assets at the time of sale is recorded as an asset with an offsetting increase to the gain on sale of loans (or a reduction in the cost basis of the loans sold). The calculation of the $160.2 million in gain on sale of loans earned during the three months ended September 30, 2006 included the retention of $258.2 million in MSRs and $62.1 million of other retained assets. During the three months ended September 30, 2006, assets previously retained generated cash flows of $185.2 million. More information on the valuation assumptions related to the Company’s retained assets can be found at page 37, under the heading “Valuation of MSRs, Interest-Only, Prepayment Penalty, and Residual Securities.”


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MORTGAGE SERVICING AND OTHER RETAINED ASSETS
 
MORTGAGE SERVICING AND MORTGAGE SERVICING RIGHTS
 
Indymac’s total loans serviced for others reached $124.4 billion (including reverse mortgages and HELOCs) at September 30, 2006, with a weighted average coupon of 6.96%. In comparison, Indymac serviced $110.0 billion of mortgage loans owned by others at June 30, 2006, with a weighted average coupon of 6.70%; and $73.8 billion at September 30, 2005, with a weighted average coupon of 5.98%. The activity in the servicing portfolios for the quarters ended September 30, 2006 and 2005 and June 30, 2006, and for the nine months ended September 30, 2006 and 2005 follows:
 
                                         
    Three Months Ended     Nine Months Ended  
    September 30,
    September 30,
    June 30,
    September 30,
    September 30,
 
    2006     2005     2006     2006     2005  
    (Dollars in millions)  
 
Unpaid principal balance at beginning of period
  $ 109,989     $ 63,676     $ 96,512     $ 84,495     $ 50,219  
Additions
    20,709       15,561       19,422       56,822       36,567  
Clean-up calls exercised
                (31 )     (31 )     (113 )
Loan payments and prepayments
    (6,303 )     (5,450 )     (5,914 )     (16,891 )     (12,886 )
                                         
Unpaid principal balance at end of period
  $ 124,395     $ 73,787     $ 109,989     $ 124,395     $ 73,787  
                                         
 
The following tables provide additional information related to the servicing portfolio:
 
                         
    As of  
    September 30,
    September 30,
    June 30,
 
    2006     2005     2006  
 
By Product Type:
                       
Fixed rate mortgages
    34 %     37 %     35 %
Intermediate term fixed rate loans
    29 %     26 %     28 %
Pay option ARMs
    25 %     25 %     25 %
Reverse mortgages (all ARMs)
    9 %     9 %     9 %
HELOCs
    2 %     2 %     2 %
Other
    1 %     1 %     1 %
                         
Total
    100 %     100 %     100 %
                         
Additional Information, Excluding Reverse Mortgages:
                       
Weighted average FICO
    703       699       703  
Weighted average original LTV(1)
    73 %     73 %     72 %
Average original loan size (in thousands)
    228       210       225  
Percentage of portfolio with prepayment penalty
    42 %     34 %     40 %
By Geographic Distribution:
                       
California
    42 %     42 %     42 %
New York
    8 %     9 %     8 %
Florida
    8 %     7 %     8 %
New Jersey
    4 %     5 %     4 %
Virginia
    4 %     3 %     4 %
Other
    34 %     34 %     34 %
                         
Total
    100 %     100 %     100 %
                         
 
 
(1) Combined loan-to-value ratio for loans in the second lien position is used to calculate weighted average original loan-to-value ratio for the portfolio.
 
(2) Capitalized MSRs totaled $1.63 billion as of September 30, 2006 and $1.60 billion as of June 30, 2006, an increase of $32.5 million. The activities in MSRs follow:


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    Three Months Ended     Nine Months Ended  
    September 30,
    September 30,
    June 30,
    September 30,
    September 30,
 
    2006     2005     2006     2006     2005  
    (Dollars in thousands)  
 
Balance at beginning of period
  $ 1,598,821     $ 738,844     $ 1,354,433     $ 1,094,490     $ 640,794  
Cumulative-effect adjustment due to change in accounting for MSRs
                      17,561        
Additions from loan sale or securitization
    258,249       212,857       268,515       756,821       489,821  
Purchase or assumption
    8,631       (89 )     27       8,658       5,463  
Transfers to prepayment penalty and/or AAA-rated and agency interest-only securities
    (2,601 )                 (2,601 )     (8,491 )
Clean-up calls exercised
          (730 )     (274 )     (274 )     (2,597 )
Change in fair value due to run-off
    (97,714 )     N/A       (88,261 )     (254,133 )     N/A  
Change in fair value due to market changes
    (133,471 )     N/A       76,670       27,253       N/A  
Change in fair value due to application of external benchmarking policies
    (599 )     N/A       (12,289 )     (16,459 )     N/A  
Amortization
          (60,911 )                 (158,786 )
Valuation/impairment
          50,635                   (25,598 )
                                         
Balance at end of period
  $ 1,631,316     $ 940,606     $ 1,598,821     $ 1,631,316     $ 940,606  
                                         
MSRs fair value as a percentage of unpaid principal balance (in bps)
    131       127       145       131       127  
 
The fair value of MSRs is determined using discounted cash flow techniques benchmarked against third party opinions of value. Estimates of fair value involve several assumptions, including assumptions about future prepayment rates, market expectations of future interest rates and discount rates. Prepayment rates are projected using a prepayment model developed by a third party vendor and calibrated for the Company’s collateral. The model considers key factors, such as refinance incentive, housing turnover, seasonality and aging of the pool of loans. Prepayment speeds incorporate expectations of future rates implied by the market forward LIBOR/swap curve, as well as collateral specific current coupon information. Refer to “Valuation of MSRs, Interest-Only, Prepayment Penalty, and Residual Securities” on page 37 for further detail on the valuation assumptions.


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Table of Contents

Effective January 1, 2006, SFAS No. 156 allowed us to elect to measure MSRs using the fair value method instead of the amortization method. Therefore, change in value due to run-off of the portfolio is recorded as valuation adjustment instead of the amortization for periods beginning in 2006. The components of service fee income (expense) are as follows:
 
                                                 
    Three Months Ended  
    September 30,
    BPS
    September 30,
    BPS
    June 30,
    BPS
 
    2006     UPB     2005     UPB     2006     UPB  
    (Dollars in thousands)  
 
Service fee (expense) income:
                                               
Gross service fee income
  $ 133,818       46     $ 75,246       44     $ 117,787       45  
Change in value due to portfolio run offs/Amortization
    (97,714 )     (33 )     (60,912 )     (36 )     (88,261 )     (34 )
                                                 
Service fee income, net of change in value due to portfolio run-off/amortization
    36,104       13       14,334       8       29,526       11  
Change in value due to application of external benchmarking policies
    (599 )                       (12,289 )     (5 )
Valuation adjustment due to market changes
    (133,471 )     (46 )     50,635       30       76,670       30  
Hedge gain (loss) on MSRs
    119,024       41       (54,665 )     (32 )     (66,660 )     (26 )
                                                 
Total service fee income
  $ 21,058       8     $ 10,304       6     $ 27,247       10  
                                                 
 
                                 
    Nine Months Ended  
    September 30,
    BPS
    September 30,
    BPS
 
    2006     UPB     2005     UPB  
    (Dollars in thousands)  
 
Service fee (expense) income:
                               
Gross service fee income
  $ 349,798       45     $ 194,592       43  
Change in value due to portfolio run offs/Amortization
    (254,133 )     (33 )     (158,787 )     (35 )
                                 
Service income, net of change in value due to portfolio run offs/amortization
    95,665       12       35,805       8  
Change in value due to application of external benchmarking policies
    (16,459 )     (2 )            
Valuation adjustment due to market changes
    27,253       4       (25,598 )     (6 )
Hedge (loss) gain on MSRs
    (27,265 )     (4 )     15,314       3  
                                 
Total service fee income
  $ 79,194       10     $ 25,521       5