IndyMac Bancorp, Inc. (NYSE:IMB) (�Indymac�� or the �Company�), the
holding company for IndyMac Bank, F.S.B. (�Indymac Bank��), today
released its annual letter to shareholders from Chairman and CEO
Michael W. Perry that will be contained in the Company�s annual
report, which will be issued as scheduled at the end of March.
Indymac has also filed a Form 8-K containing the annual shareholder
letter, along with other documents related to the Company�s 4th
quarter 2007 earnings, with the Securities and Exchange Commission.
The Form 8-K is available on Indymac�s Website at www.imb.com. The
text of the letter is contained below. Dear Shareholders: 2007 was
a terrible year for our industry, for Indymac and for you, our
owners. The 4th quarter of 2007 marked the eighth quarter of the
current housing downturn (as measured by housing�s contribution to
GDP), making it already the fourth worst housing downturn in modern
times, and many now predict that, before it turns around, it is
going to be the longest and deepest since the Great Depression.
Non-GSE mortgage lending (i.e., loans not sold to Fannie Mae and
Freddie Mac or FHA/VA insured loans) has been devastated by the
collapse of the private secondary market. This collapse in late
summer was caused by significantly worsening mortgage credit
fundamentals and tremendous uncertainty and fear among investors
about declining housing prices and future credit losses. As a
result of the housing bubble bursting, delinquencies and
non-performing home loans increased rapidly in 2007. Importantly,
as I write this note nearly all housing industry participants �
from home builders and home buying and selling consumers, to
lenders, to investors � are pessimistic about the near-term outlook
for the housing and mortgage markets, and, as often happens, market
expectations can become self-fulfilling. 2007 in Review As a
Federal thrift and major USA home lender, with a sector-specific
business model entering this crisis period that was focused
primarily on non-GSE mortgage banking (Alt-A lending,
securitization and servicing) and home construction lending,
Indymac bore the brunt of the crisis as it worsened throughout the
year. The magnitude and rapidity of the deterioration of the
housing and mortgage markets was disturbing and shocking to almost
everyone, including Indymac, other financial institutions and our
government. As objective evidence of this decline�s severity, our
non-performing assets (NPAs), which were only $184 million (or
0.63% of assets) at December 31, 2006 increased eight-fold to $1.51
billion (or 4.61% of assets) at December 31, 2007 and are projected
to peak at between 7.5% and 8.0% of assets in the second half of
2008. Impact of the Credit Crisis on Indymac As a result of this
increase in NPAs, combined with a decline in delinquency �cure
rates� and an increase in expected loss severities on the
disposition of non-performing loans and REO due to the declining
housing market and economy, Indymac, like many financial
institutions, took a major step in bolstering its credit reserves
in the 3rd quarter, taking credit provisions/costs1 of $408 million
pre-tax, roughly four-fold higher than the 2nd quarter, and
increasing our credit reserves 47% in just one quarter to $1.39
billion. As credit trends continued to deteriorate in the 4th
quarter, we undertook another review of all of our loan portfolios,
including our delinquency roll-rates and loss severities �even
hiring a nationally recognized consulting firm to independently
review our subdivision and consumer construction portfolios. It is
somewhat of an oversimplification, but essentially, for our
consumer loan portfolios, we took the last four months of 2007
delinquency roll rates (which were horrible) and assumed these
rates would continue through Q3-08 and then gradually drop to 70%
of these rates by the end of 2009. Additionally, our forecast
models factored in an additional 8-10% house price depreciation
from today�s levels, consistent with the Moody�s Economy.com
forecast. As a result, we more than doubled our credit
provisions/costs again in the 4th quarter to $863 million,
increasing our total credit reserves an additional 71% from the 3rd
quarter to $2.4 billion at December 31, 2007 (with $1.1 billion
related to loans and REO and the other $1.3 billion consisting of
gross credit reserves imbedded in non-investment grade and residual
securities). For the full year of 2007, we took $1.45 billion in
pre-tax credit provisions/costs, by far larger than Indymac has
taken in its entire history. Importantly, of this $1.45 billion,
only $483 million represented losses actually realized in 2007,
consisting of $200 million in loan charge-offs, $46 million in REO
write-downs and $237 million of realized credit losses on
non-investment grade and residual securities. In other words, $970
million pre-tax (or $591 million after-tax) of Indymac�s credit
provisions/costs in 2007 are related to losses that were not
realized in 2007, but which we project to realize in 2008, 2009 and
beyond. Based on the establishment of these unprecedented credit
reserves and, to a lesser extent, on the collapse of our non-GSE
mortgage banking business, Indymac lost $609 million for the year,
the first annual loss in our 23-year history. As a result of this
loss and panic market conditions for anything or anyone involved in
mortgages, Indymac lost $2.8 billion, or 85%, of its market
capitalization in 2007. The only good news is that, even with this
significant loss, we remain in a fundamentally sound financial
position as a result of raising $676 million in equity capital in
2007: $500 million of bank perpetual preferred stock with an 8.5%
coupon in the 2nd quarter, $146 million of common equity (at an
average price of $20 per share in the 3rd and 4th quarters) and $30
million of holding company trust preferred securities. Our capital
levels continue to exceed the levels defined as �well capitalized�
by our regulators. At year end, Indymac�s core capital ratio was
6.24%, and our total risk-based capital ratio was 10.50%, down from
7.39% and 11.72% at December 31, 2006. In addition to maintaining
strong capital, Indymac now has $2.4 billion in credit reserves, or
four times the $619 million it had at December 31, 2006, which puts
us in a strong position to return to profitability sooner than
later. Indeed, based on our new business model (which I discuss
more thoroughly below), we are forecasting a small profit in 2008,
even including the Q1-08 staff reduction and office closing costs,
and we believe we can maintain our �well-capitalized� capital
ratios even under worsening industry conditions. Impact on Other
Mortgage Industry Participants Indymac was not alone in suffering
major operating losses and loss of market value in 2007. As I write
this note, over 225 independent mortgage companies have failed and
over 100,000 jobs have been lost in our industry. Countrywide, the
largest independent home lender in the USA, who had been in
business for nearly 40 years, was forced to sell at a distressed
level to BofA. Fannie Mae and Freddie Mac (the GSEs), who are
predominantly conforming mortgage lenders, have taken significant
losses. GE lost over $2 billion in the mortgage business, CapOne
lost over $1 billion, and both have exited the business. Citigroup
and Merrill Lynch, two of America�s largest financial institutions,
each announced 4th quarter losses, primarily related to mortgage
lending and securitization, of roughly $10 billion after-tax each,
the worst losses in their histories for both �and, unlike Indymac,
these two institutions have substantial business activities other
than USA home mortgage lending. UBS, a large European bank, has
stated that it expects to report a loss of $11 billion for the 4th
quarter and a loss of $4 billion for the full year 2007 because of
$14 billion in losses on positions related to the US residential
mortgage market. Even Wells Fargo, who has long been considered to
be the �gold standard� when it comes to credit risk management,
established billions in additional reserves related to its home
lending activities. Reflecting these issues, the market
capitalization declines (from January 1, 2007 through January 31,
2008) of the top 25 USA home lenders entering 2007 have been
significant, even for diversified financial institutions. The
largely diversified commercial banks in this category are down 18%,
with National City being down the most at 51%. The investment and
money center banks are down 32%, with Citi being down the most at
49%; the three thrifts in this category are down 69%, with
Countrywide being down 84%; and the two mortgage REITs in this
category are down 100% (these two went bankrupt, while the third
REIT in the group was acquired in January 2007). In addition, this
list does not include the GSEs, who are down 49%, and the mortgage
and bond insurers, who are down 81%. Impact on Consumers While
financial institutions like Indymac are suffering, American
homeowners are also suffering and struggling to pay their mortgages
and keep their homes out of foreclosure. Importantly, it is in
Indymac�s and its investors� interest to work with any borrower who
is struggling and try to keep them in their home and avoid
foreclosure. We have embraced and implemented Treasury Secretary
Paulson�s �Hope Now� program and are also a significant participant
with NeighborWorksR America, a national non-profit organization
created by Congress to provide financial support, technical
assistance and training for community-based revitalization efforts.
Clearly, recently declining mortgage rates should help on all
fronts by (1) reducing the payment shock for borrowers on
adjustable rate mortgages; (2) allowing borrowers who qualify to
refinance into lower fixed rate loans; and (3) helping to stabilize
housing prices and the housing market overall. In addition, to
prevent consumers from making the wrong mortgage choice in the
future, Indymac has decided to adopt as our policy that borrowers
without $50,000 in demonstrated liquid assets or $250,000 in
demonstrated net worth are not eligible for the following
products2: 1. ARM loans with initial fixed terms of less than five
years. 2. Loans with negative amortization or prepayment penalties.
3. Limited documentation loans. Limited Documentation Lending I
want to briefly take a minute to discuss limited documentation
lending, a major part of our historical volumes. First, I would
point out that this business has been around for decades, and even
today nearly the entire consumer finance sector (autos, credit
cards and personal loans) is limited documentation/stated income
loans. The core limited documentation mortgage product � a low
loan-to-value (LTV) first mortgage (low 70% average LTV) with a
borrower who has excellent credit (average FICO score of 700) � is
a good loan and continues to perform well, even in the current
environment. This product is needed given the large number of
people who are self-employed, retired, foreign nationals, etc., in
our country/economy. With the benefit of hindsight, the severe
losses that have occurred are largely the result of loans that
layered limited documentation risk with other risks (i.e., negative
amortization ARM loans, investor properties, higher LTVs and lower
FICOs). Given the credit tightening we and other lenders have
implemented, this layering of risk has largely stopped. To put all
of Indymac�s lending into perspective, since 1993 we have made a
total of $345 billion in home loans, and roughly half of those
loans have already paid in full � likely most through refinance
transactions. Less than 2% of these loans have ultimately been
foreclosed on, meaning that 98% have succeeded. And of the $182
billion in our servicing portfolio at December 31, 2007, our
borrowers have built up their home equity, on average, from $97,000
at loan origination to an estimated $121,000, or an aggregate home
equity increase of $14 billion, from $61 billion to $75 billion,
just in the few years since we originally made the loans. Who is to
blame for the mortgage industry�s financial losses and also the
record number of Americans losing their homes? All home lenders,
including Indymac, were a part of the problem, and, as Indymac�s
CEO, I take full responsibility for the mistakes that we made.
However, objective reviewers of this mortgage crisis understand
that home lenders and mortgage brokers were not the only ones
responsible. Systemic problems in our secondary mortgage markets
and credit markets, and our government�s over-stimulation of the
housing market via monetary and tax policies (the capital gains tax
break on home sales encouraged speculation), were all major factors
that contributed to the problem. Indymac and most home lenders were
not �greedy and stupid�. Most of us believed that innovative home
lending served a legitimate economic and social purpose, allowing
many US consumers to be able to achieve the American dream of
homeownership � and we still do. Homeownership is the main way we
Americans accumulate wealth, and, in fact, a recent Federal Reserve
Bank study shows that homeowners on average have 46 times the
personal wealth of renters. As innovative home lending and loan
products became more widespread, the result was more people
succeeding (in homeownership) and more people failing (losing their
home) than ever before. But everyone, including both the government
and consumer advocate groups who encouraged this lending via
enforcement of CRA lending requirements, also bought into the
concept that, if lenders and investors could properly price this
increased risk, the higher number of failures was worth the social
and economic goals of expanded homeownership. And it worked for
many years; the homeownership rate, which had not moved in several
decades, expanded from 64% to 69% from 1994 to 2006, allowing 4
million additional Americans the opportunity to have the American
dream and build wealth. However, in retrospect, like many
innovations (e.g., the Internet, railroads, etc.), innovative home
lending went too far. The housing bubble, caused primarily by the
low interest rates for ARM mortgages fostered by the Fed�s
accommodative monetary policy and even lower rates for
fixed/long-term mortgages due largely to tremendous global
liquidity, combined with strong demand by institutional investors
for assets with higher yields, resulted in a �systemic�
underestimation of credit risk. This systemic underestimation of
credit risk was not just for mortgages but for many forms of
credit. By way of example, Indymac (and many other major financial
institutions) has for years used one of the major credit rating
agencies� models to assess and price credit risk on home loans.
This model estimates expected lifetime losses on a loan level
basis, and we closely monitor these average estimated lifetime
losses for all of our loan production (that can be evaluated) on an
ongoing basis. This particular rating agency revised its model in
November 2007 (from version 6.0 to 6.1). Applying version 6.0 to
our Q4-06 production (the version in place at that time) indicated
an average expected lifetime loss rate of 0.88%, which we felt was
a reasonable level of expected losses at which we could properly
and adequately price the loans. However, now applying the updated
version 6.1 to this same Q4-06 pool of loans results in an average
expected lifetime loss rate of 1.88%, a 114% increase in expected
losses in one year. This clearly indicates the extent to which the
systemic underestimation of credit risk took place in the mortgage
markets. As we began to realize this, we tightened our guidelines
throughout the last year, with the result that our average expected
lifetime loss rate for Q4-07 declined to 0.45% based on version
6.1, a 76% reduction in credit risk as compared to Q4-06, boding
well for the future credit quality and related credit
provisions/costs of our new business model. Why didn�t mortgage
lenders see that things were going too far? Lenders didn�t see that
things were going too far, partly because we were too close to it,
but mostly because objective evidence of this credit risk did not
show up in our delinquencies and financial performance until it was
too late to prevent significant losses. And there were many events
along the way that confirmed for those of us who believed that
innovative home lending was possibly a paradigm shift (similar to
widespread ownership of stocks by consumers) and definitely a
legitimate marketplace: major financial institutions were offering
these products and spending billions to purchase companies who
specialized in these products; Wall Street firms and broker/dealers
of major banks were underwriting our and others� transactions and
also spending billions as recently as 2006 to buy non-GSE lenders
in order to vertically integrate their home lending and
securitization activities; major mortgage and bond insurers were
insuring individual mortgages and pools of mortgages or bonds
created from these mortgages; major credit rating agencies were
providing strong ratings on our and others� transactions; and major
investors around the world were purchasing these mortgage-backed
bonds and even CDOs backed by these bonds (something we home
lenders had no involvement in or awareness of). Very few in the
private sector or in government predicted that the bursting of the
housing bubble would be so severe and would result in the current
wave of delinquencies, foreclosures and credit losses and the
eventual collapse of the non-GSE secondary market � even for high
credit quality, full-documentation, jumbo home loans. It is also
important to understand that the rapid rise in housing prices is
one of the key culprits in this current housing and mortgage
crisis. In modern times, housing prices have declined in certain
regions of the country but never on a nationwide basis. As a result
of this fact and the important social and economic benefits that
are clearly derived from homeownership, the government (first
through FHA/VA programs and then through the GSEs) encouraged a USA
mortgage market built upon very high leverage, with LTV ratios
nearing 100% for first-time homebuyer programs. However, as home
prices decline, either regionally or nationally, the leverage in a
home loan, combined with the leverage of a financial institution or
securitization structure, can result in significant losses for
financial institutions, investors and consumers. Add to this mix a
housing market that has not had a single regional market decline in
over 15 years and, in fact, had a huge boom in prices from 2003 to
2006, and you can begin to understand how home lending was
impacted. Automated risk-based models, on which the entire market
relied, replaced portions of traditional underwriting and credit
evaluation, and only in retrospect is it now clear that these
models did not perform as predicted during a period of severe
economic stress. As events unfolded, this proved to be particularly
the case with respect to programs such as piggyback loans and high
LTV cash-out refinance transactions, including home equity and
second mortgages. The bottom line of the housing crisis for Indymac
and its leadership team As I said earlier, I take full
responsibility for the errors we made at Indymac, but I also
believe that our cumulative results from 2001 through 2007 (our
first seven years as a thrift) would not have been that much better
even if we had operated Indymac�s business model flawlessly. Our
cumulative return on equity for this period is still a positive
7.1%. Indymac earned $1.25 billion from 2001 to 2006 and
essentially lost 49% of that amount in 2007. If we had been blessed
with perfect foresight, we would have pulled back significantly
starting in 2005, and that would have caused us to make
significantly less in both 2005 and 2006 and lose significantly
less in 2007 � but we still would have lost money in 2007, both in
earnings and market cap, because our core business, non-GSE
mortgage banking, would still have cratered due to the broader and
unforeseeable collapse of the private secondary market. While I
said that we made mistakes, we also got some big things right: (1)
we converted our entire business into a Federal thrift structure,
saving us from the liquidity event risk of our previous mortgage
REIT structure and what Countrywide and other mortgage industry
participants experienced; (2) we raised $676 million of equity
capital at better terms than many major banks and investment banks
before the crisis period worsened, and we did not repurchase any
shares despite significant pressure to do so; (3) we bought
Financial Freedom, the largest reverse mortgage lender in the
nation, for $85 million in 2004, and this entity earned a record
$53 million in 2007; and (4) we largely avoided subprime lending
and laid off the bulk of our Alt-A and option ARM credit risk into
the secondary market, including structuring most of our non-GSE
transactions so that we have limited warranty exposure. In
addition, our mortgage backed securities portfolio has no CDOs and
no exposure to bond insurers. And, importantly, to date not one
Indymac AAA Alt-A bond has been downgraded by any of the rating
agencies, and we estimate that less than one-tenth of 1% of all AAA
Alt-A bonds in the industry have been downgraded. With that said, I
believe in accountability, and let me assure you that no one has
been held more accountable, financially, than I have. I did not
sell one share or option in either 2006 or 2007. At December 31,
2006, when our stock was $45 a share, I owned stock and had vested
options worth a total of $70 million, and I purchased an additional
$1 million of stock in March 2007 at $29 per share. At December 31,
2007, with our stock at $5.95, I had lost 98% of this value � value
that I and Indymac�s team had worked 15 years to build. Despite the
mistakes that we made during this period, I am confident that I am
the person most capable of leading Indymac through this crisis
period and rebuilding shareholder value, and I have the support of
the management team, board of directors and our regulators. If you
don�t share this view, I respect and understand this, and you will
have the opportunity to make a leadership change with your vote at
Indymac�s shareholders� meeting on May 1st. If I am not re-elected
to the board, I will respect the shareholders� decision and resign
my positions as Chief Executive Officer of Indymac and Indymac
Bank. With the above said, in a recent New York Times Magazine
article, Federal Reserve Chairman Ben Bernanke discussed the Fed�s
role in fostering the mortgage crisis. He was of the viewpoint that
the mortgage fiasco �had many fathers� and also expressed his
dislike for perfect-hindsight-type judgments. I feel the same way.
It is time to move on and discuss Indymac�s plan for successfully
maneuvering through the rest of this crisis period and rebuilding
shareholder value. Looking Ahead The first part of our 2008 plan is
to continue with the conversion of our production model to the
current realities of a tough housing market and the absence of a
non-GSE secondary market and demonstrate that Indymac can be
profitable with this production model. Second, we plan to achieve a
$1.1 billion reduction in our credit provisions/costs from 2007,
which would be the most significant factor contributing to our
return to profitability in 2008. Third, our goal is to reduce our
operating expenses, excluding REO costs, year over year by 29%
starting in Q2-08. Finally, we are committed to remaining a safe
and sound financial institution with strong levels of capital and
liquidity. With that said, we want to try and avoid raising capital
externally right now given our current stock price relative to book
value per share, as any capital raised would be highly dilutive to
existing shareholders (and we don�t have either the diversified
business model or the �name brand� of major financial institutions
who are raising capital from foreign government funds and others).
As a result, we have to manage our balance sheet very carefully
during this period. Let�s look at each element of our 2008 plan in
greater detail. Mortgage Production Model As most of you know,
throughout 2007, we cut products and production channels that
contributed to our credit losses and, with respect to products,
where there was no longer a secondary market into which to sell
them. In 2007, we permanently discontinued two production channels,
our mortgage banking conduit group and our homebuilder division,
and one product, subprime loans not eligible to be sold to the
GSEs. Entering 2008, we have made the decision to (1) eliminate all
limited documentation lending above a 75% LTV and below a 680 FICO
and all ARM loans with negative amortization as an option and (2)
temporarily halt new consumer construction and lot financing, our
jumbo reverse mortgage product for correspondent and non-core
wholesale customers and virtually all new second and home equity
lending programs (except for a de minimis amount produced in our
deposit branch network). You may ask, �What does that leave you
with in 2008?� It leaves us still with a pretty substantial and
solidly profitable production model that we expect will produce
over $40 billion in home loans (or roughly a 2% share of the USA
market) in 2008. We will be a national lender to mortgage brokers,
bankers and community financial institutions (combined, we call
this our Mortgage Professionals Group) and a national retail home
lender, with both channels offering FHA/VA, GSE and prime jumbo
home loan products. In addition, we will still be one of the
largest reverse mortgage lenders to seniors in the USA (if not the
largest) via Financial Freedom. I have heard it said, �Indymac
can�t be profitable with GSE lending margins, or Indymac doesn�t
have the scale to be a GSE lender�. I believe that these statements
are not based on facts and numbers. Our detailed forecasts provide
strong evidence that we can make a solid profit in this line of
business � we are projecting our new production model to make $85
million after-tax in 2008. Think about it. Would the GSEs exist if
home lenders selling to them can�t make a reasonable profit? Yes,
GSE lending has lower margins, but it also involves lower risk and
we can sell these loans faster, enhancing our ROEs. Indymac is
forecasting $40 billion in annual production, and we have more than
$180 billion in servicing, strong automation and outsourcing � we
absolutely believe we can make this business solidly profitable for
Indymac and its shareholders in 2008 and beyond. And slowly but
surely, as the private secondary market and our stock price
recover, we should be able to expand back into the lowest risk
parts of non-GSE lending. With the above said, every regional
office or branch leader at Indymac understands that they need to be
profitable now with the products we offer today or they risk being
shut down. Credit Costs The next part of our plan to return to
profitability is to greatly reduce our credit provisions/costs in
2008 and beyond. Based on our $2.4 billion of credit reserves at
December 31, 2007, we expect to reduce our credit costs in 2008
substantially. Even assuming a significant worsening of our
non-performing assets, we project our credit provisions/costs in
2008 to be roughly $372 million, down roughly $1.1 billion from the
$1.45 billion we took in 2007. This is the key driver of our
expected return to profitability in 2008, but it is important to
point out that even $372 million would be our second highest year
ever in credit provisions/costs and would be a much higher credit
cost figure than our new, predominantly FHA/VA, GSE and prime jumbo
home lending model warrants. In other words, as these high credit
provisions/costs are expected to abate in 2009 or so, we believe
our underlying new business model�s profitability will be
significantly higher than in 2008 � in the 13% to 15% ROE range
long term. Operating Expenses Another key driver of our return to
profitability is a reduction in our cost structure. As a result of
our well-publicized workforce reductions and other cost reduction
measures, we are forecasting that we will reduce our annualized
operating costs, excluding REO costs, year-over-year by $264
million, from $922 million annualized per year in Q2-07 (the
quarter before we began our right-sizing) to $658 million
annualized in Q2-08 (the quarter after our most recent cost cutting
becomes fully effective). While we expect to report a loss for the
1st quarter of 2008 due largely to the one-time severance and
office closing costs that we will incur in the quarter, we project
that even including these costs we will be profitable for the year.
Clearly, we will be on a mission to continue to drive down our
costs and staff levels until we reach solid profitability for our
shareholders. Capital The next part of our plan is to continue to
maintain our status as a fundamentally safe and sound financial
institution, and the key to that is staying well-capitalized (above
5% core and 10% total risk-based capital). Our capital levels
clearly have declined as a result of the losses we have taken in
establishing significant reserves for future credit losses, but we
still have a solid cushion above the well-capitalized levels. Since
we want to try to avoid diluting our existing shareholders by
issuing new stock at a price well below book value per share, the
key way for us to �raise� additional capital and increase our
capital cushion is to suspend the dividend and shrink our balance
sheet. By suspending our annual dividend of $1 per share, or
roughly $81 million per year, and shrinking our balance sheet by
roughly $4.6 billion, or 14%, from December 31, 2007 via the
production cuts discussed above, some modest AAA MBS sales,
increasing the speed at which we sell loans to the GSEs and normal
portfolio runoff, we project that we can �raise� / �free up�
roughly $400 million of additional capital (an amount that is
substantial in relation to the current market value of the entire
company today), and we believe we can accomplish this without
�fire-selling� either the entire company or our reverse mortgage
business, which should be a tremendous long-term asset for our
shareholders. Based on these strategies and assuming our current
financial projections for 2008, we expect our capital ratios to
grow to over 7.25% core and 12.00% total risk-based by year-end.
Liquidity An equity analyst, who recently published an updated
report on Indymac and who has been consistently right about our
prospects, has a similar earnings forecast to Indymac�s
cumulatively from Q4-07 through all of 2008 (we are taking a
somewhat bigger loss in Q4-07 than this analyst projects, but, as a
result, we are forecasting that we will have a small profit in 2008
versus his projection of a loss), and this analyst has us at a
profit of $1 per share in 2009. Where I respectfully disagree with
this analyst is on liquidity. Others have also gotten this wrong by
comparing us to Countrywide and the liquidity troubles at their
holding company, where Countrywide had more than 200 creditors.
Indymac does not have this same level of liquidity risk or any
dependence on the credit rating agencies for our sources of
funding. All of our assets and operations, except cash, are held
within Indymac Bank, a federally chartered thrift. As a result, we
have only one creditor at our holding company, the investors in our
long-term (30 year original term), trust-preferred securities.
Assuming we receive no dividend payments from our bank and raise no
new capital, we have enough cash at our holding company to pay two
years (2008 and 2009) worth of trust-preferred dividend payments,
and, even then, we have the right (that we hope we never have to
exercise) to defer these payments for an additional five years. And
at our bank, we have over $6 billion in operating liquidity and no
market funding sources (no commercial paper or reverse repurchase
borrowings). We are 100% funded with deposits, FHLB advances,
long-term debt and equity, and over 95% of our deposits are fully
insured by the FDIC. While there isn�t space in this already long
letter to lay out our entire plan for the future, Indymac Bank will
be dedicated to the following key principles: 1. � Ensure that
every loan we make is well understood by each consumer and suitable
for them. � 2. Become the best manager of risk in our industry.
Specifically, our goals will be to: � -- � produce the best (credit
quality) loans in the industry; � -- have a greater focus on the
macroeconomic environment affecting our business activities and
look to curtail or hedge some of our lending at various points in
the cycle; and � -- become more of a thrift and reduce our business
with Wall Street. � 3. Become the low cost provider of mortgages in
the industry. � 4. Deliver industry-leading service to our
customers. Many in our industry do not think it should be a
lender�s responsibility to determine if a loan is suitable for a
consumer. While it is not our legal responsibility, I believe that
determining suitability should be a key part of our
responsibilities and is also �good business�. Suitability goes hand
in glove with reducing our credit costs, as a loan that is not
suitable for a consumer is much more likely to default. This also
means that, going forward, we will not be as sensitive to what our
competitors or Wall Street are doing in terms of the products we
offer. We are aggressively monitoring early delinquencies from
month one of loan funding and eliminating products, customers,
regions, branches and Indymac personnel that fall outside our now
very stringent credit parameters. To reduce our business with Wall
Street and increase our thrift earnings relative to mortgage
banking, we will work toward limiting our total annual loan
production from all sources to a maximum of two times our balance
sheet and limit non-FHA/VA/GSE production to 25% of total
production (down from approximately three times and 75%, or so,
respectively in 2005-2007). In addition, we will attempt to bypass
Wall Street and work directly with private MBS investors to
originate high credit-quality loans they want in simplified MBS
structures they can understand. But our overriding goal for 2008 is
pretty simple: keep Indymac Bank safe and sound with strong capital
and liquidity levels, stem the losses and return to profitability,
and preserve as much of our $16, or so, of book value per share as
we can. If we can do that, our stock should move from its current
levels back up towards book value per share, and, while many
shareholders will still be significantly �underwater�, our stock
could perform well this year. And from there it is back to
rebuilding shareholder value. Remember, our book value per share
was about $11 per share in 1999 (after the global liquidity crisis
of 1998), and in seven years we built that up to nearly $28 of book
value per share and a $45.16 stock price by year end 2006. While
clearly the mortgage market may take a long time to recover and
will likely (and thankfully) not ever return to the frothy levels
of the past few years, I think there is a lot that we can do with a
management team that will have weathered a third severe
risk-related market disruption (the first two being related to
interest rate risk and liquidity risk and this disruption being
tied to credit risk), a Federal thrift with a large national
origination and servicing platform, a tremendous reverse mortgage
business and $16, or so, of book value per share. What happens if
we are wrong and credit costs are higher or profitability is
delayed further? With the above plan, including the dividend cut
and balance sheet shrinkage, we would have a capital cushion above
the well capitalized limits of roughly $671 million in core and
$374 million in total risk-based capital at December 31, 2008. In
other words, instead of our current projection of earning roughly
$13 million in all of 2008 after incurring $372 million in credit
provisions/costs for the year, we could nearly triple these credit
costs and still be well capitalized. And yes, things could get
worse, including our potentially incurring more rightsizing costs,
or selling non-performing assets in bulk at a loss or having to
raise very dilutive capital, but they also could get better as a
result of low interest rates and a refinance boom (which we are
experiencing as I write this note), the Congressional stimulus
package (especially the temporary ability of the GSEs to purchase
jumbo loans and the increased loan limits for FHA/VA loans) and a
potential slow return of the non-GSE secondary market � none of
which is factored into our current earnings forecast. In closing, I
can assure you that we at Indymac are very determined to not only
preserve shareholder value but rebuild it. And I want to personally
thank all of our employees for their tremendous efforts and
strength during these tumultuous times for our industry. As bad as
this period has been for us, this environment has created some
positives that should enhance shareholder value over the long run.
We have been able to acquire/build a substantial retail platform
virtually overnight. We have substantially improved our credit risk
management systems at Indymac, which should result in materially
improved credit quality of new production, an eventual return of
the best performing parts of the non-conforming market and Indymac
being less exposed to future credit cycles. Importantly, our
competition in the mortgage business has been substantially reduced
and should remain so for some time, helping future profitability.
And with the anticipated closing of the BofA/Countrywide
transaction later this year, Indymac will likely become the largest
independent home lender in the nation � a business that is huge and
at the core of our American culture and economy. Michael W. Perry
Chairman and Chief Executive Officer About Indymac Bank IndyMac
Bancorp, Inc. (NYSE:IMB) (Indymac�) is the holding company for
IndyMac Bank, F.S.B. (Indymac Bank�), the 7th largest savings and
loan and the 2nd largest independent mortgage lender in the nation.
Indymac Bank, operating as a hybrid thrift/mortgage banker,
provides cost-efficient financing for the acquisition of
single-family homes. Indymac also provides financing secured by
single-family homes and other banking products to facilitate
consumers� personal financial goals. With an increased focus on
building customer relationships and a valuable consumer franchise,
Indymac is committed to becoming a top five mortgage lender in the
U.S. by 2011, with a long-term goal of providing returns on equity
of approximately 15 percent. The company is dedicated to
continually raising expectations and conducting itself with the
highest level of ethics. For more information about Indymac and its
affiliates, or to subscribe to the company�s Email Alert feature
for notification of company news and events, please visit
http://about.indymacbank.com/investors. To visit Indymac�s
corporate blog, please visit http://www.theimbreport.com.
FORWARD-LOOKING STATEMENTS Certain statements contained
in�this�letter�may be deemed to be forward-looking statements
within the meaning of the federal securities laws. Words such as
"anticipate," "believe," "estimate," "expect," "project," "plan,"
"forecast," "intend," "goal," "target," and similar expressions, as
well as future or conditional verbs, such as "will," "would,"
"should," "could," or�"may,"�identify forward-looking statements
that are inherently subject to risks and uncertainties, many of
which cannot be predicted or quantified. Actual results and the
timing of certain events could differ materially from those
projected in or contemplated by the forward-looking statements due
to a number of factors, including:�the effect of economic and
market conditions�including, but not limited to,�the level of
housing prices,�industry volumes and margins; the level and
volatility of interest rates; Indymac's hedging strategies, hedge
effectiveness and overall asset and liability management; the
accuracy of subjective estimates used in determining the fair value
of financial assets of Indymac; the various credit risks associated
with our loans and other financial assets, including increased
credit losses due to demand trends in the economy and the real
estate market and increased delinquency rates of borrowers;�the
adequacy of credit reserves�and the assumptions underlying them;
the actions undertaken by both current and potential new
competitors; the availability of funds from Indymac's lenders,�loan
sales, securitizations, funds from deposits and all other
sources�used to fund mortgage loan originations and portfolio
investments;�and the execution of Indymac's business and�growth
plans and its ability to gain market share in a significant and
turbulent�market transition. Additional risk factors include the
impact of disruptions triggered by natural disasters; pending or
future legislation,�regulations�and regulatory action,�or
litigation; and�factors described in the reports that Indymac files
with the Securities and Exchange Commission, including its Annual
Report on Form 10-K, Quarterly Reports on Form 10-Q, and its
reports on Form 8-K. Indymac does not undertake to update or revise
forward-looking statements to reflect the impact of circumstances
for events that arise after the date the forward-looking statements
are made. 1 � Credit provisions/costs include provisions for loan
losses, credit marks-to-market for loans held for sale, provisions
to the secondary market reserve (for potential loan repurchases),
credit write-downs of residual and non-investment grade securities
and REO losses. � 2 These amounts are conservatively calculated
after the mortgage loan closes. This policy does not apply to
reverse mortgages, which by their nature are limited documentation,
negative amortization loans.
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