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Executives

Michael Perry - Chairman and CEO

Scott Keys - CFO

Analysts

Robert Lacoursiere - Banc of America Securities

Wayne Smith - Touchstone Investment

Michael Rogers - Accounting Assessment Management

Matthew Howlett - Fox-Pitt Kelton

Jason Arnold - RBC Capital Markets

IndyMac Bancorp, Inc.(IMB) Q4 2007 Earnings Call February 12, 2008 11:00 AM ET

Operator

Good morning and welcome to the IndyMac Bancorp fourth quarter 2007 earnings conference call and webcast. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer period. (Operator Instructions).

Thank you and now here's IndyMac's Chairman and CEO, Mr. Michael Perry.

Michael Perry

Good morning. This morning, we released a number of documents related to the fourth quarter and full year 2007, and our plans going forward, including our outlook for 2008. We have also filed with the SEC an 8-K, similar to the 10-Qs we file each quarter, detailing our fourth quarter results and our 10-K will be filed on February 29.

In addition, we've released our fourth quarter earnings press release, our 2007 shareholders letter and a PowerPoint presentation, which I will review with you this morning.

I don’t intend, due to the time it would take, to discuss in detail what happened in the housing and mortgage markets or to our industry and IndyMac in 2007. But I think it is important for shareholders and other interested parties to understand IndyMac's views. As a result, I completed and re-released early my annual letter to shareholders which reviews these issues in detail as well discusses our plans for 2008.

I would encourage you to take the time to read this rather lengthy letter in its entirety. Before I begin the Powerpoint presentation, I do want to make few general comments regarding our results and financial position.

Clearly, all of us at IndyMac are disappointed with our results, a loss of $615 million for the year. This annual loss is the first in IndyMac’s 23 year’s history. The main driver of this significant loss is that we took credit positions at $1.45 billion in 2007, by far larger than we’ve take in our entire history as a public company.

We’ve increased our reserves for future credit losses, fourfold in just one year, to $2.4 billion at yearend. Importantly, $970 million in pretax or $591 after-tax of our 2007 credit positions, nearly equaled to our entire loss for 2007, are not for credit losses realized in 2007, but are for credit losses we expect to incur in 2008, 2009 and beyond.

Despite our significant loss, we remain a fundamentally sound, financial institution. As a result of raising $676 million of capital in 2007, we remain well capitalized and we plan to increase our capital ratios further in 2008, without diluting shareholders, by suspending the common dividend and shrinking the balance sheet.

As a result of conducting our business activities solely within our thrift, we have near record operating liquidity of over $6 billion, and we have no capital markets borrowings, no commercial paper, no reverse repurchase borrowings, nor any bank liens.

Given the significant credit reserves we have now established in our 2008 operating plan, including our GSE oriented production model, combined with solid profits from Financial Freedom, the largest reverse mortgage lender in the nation and strong servicing profits, we are forecasting return to profitability, sooner and stronger than previously anticipated and expect to make a small profit in 2008, even with significant restructuring cost this quarter.

We are also forecasting earning roughly a 6% ROE in the second half of 2008. And importantly, I believe that you will be able to clearly see from our presentation today, that once we are through this period of higher credit cost, our hybrid thrift/mortgage banking model will result in a rapid return to strong profitability at or near a 15% long-term ROE.

With the above said, I've simplified my presentation today, to focus on safety and soundness in particular capital, liquidity, asset quality, and related credit reserves, and our 2008 plans and current forecast.

Now I'd like to turn to the Powerpoint presentation, and began on page three. As I said in my opening remarks, as a result of raising $676 million of capital, we remain well capitalized despite taking a significant loss in 2007.

Essentially, here on page three, if you're following along with me on the Powerpoint presentation, we started the year with $2.1 billion of bank core capital. We raised $0.5 billion of preferred stock. We raised about $176 million, mostly of common stock, at our holding company that we contributed down to our bank, and the bank suffered a $588 million loss.

There is a little difference between that and the consolidated because the interest on our trust preferred securities as a holding company that occurs at the holding company level. We paid dividends of $102 million, and then there is other various regulatory adjustments.

The bottom-line is our capital at the end of the year is that the bank is only down $89 million after taking that significant loss. So, it's only down 4.2%, and importantly we've increased our credit reserves during this year fourfold, from about $600 million to $2.4 billion. So we have an incredibly strong war chest of credit reserves at the end of '07, and we are going to need that, given the credit environment for housing and the mortgage business out in the market place.

If you look at the bottom of this slide, you can see that our capital ratios at the end of the year did deteriorate. They are at 6.24% core capital, and 10.5% total risked-based capital. If you look at the average of the top three US banks who are better on core, they were at 5 and we are at 6 in the quarter, and they are a little higher on total risked-based.

The top thrift in the country is a little higher on both. But we have a plan, by eliminating our dividend, and shrinking our balance sheet by about $4.6 billion, we can increase our capital ratios by the end of the year, to 7.42% core and total risked base of 12.15%.

If you look at four, essentially, given our stock price trading at such a discount, and given the $16.60 of book value per share that we have at December 31, 2007, the best strategy for IndyMac and its shareholders to bolster capital ratios, is to eliminate the dividend, which saves us $81 million in capital a year, at the current dollar a share dividend level. And also shrink the balance sheet modestly, going from $32.7 billion at December 31, 2007 to $28.1 billion by the end of the year.

That balance sheet shrinkage, which is detailed in summary here on page four, essentially creates the combination of those two. It essentially raises our 7% core capital goal, $403 million of additional capital and you can see that our capital ratio, if all goes as planned, our balance sheet shrinkage and dividend cut, will result in our capital ratio growing from 6.24 to 7.42, by the end of the year.

If you turn to page 5, on the liquidity front. I think this has been a big focus out there, especially given the liquidity issues that Countrywide, the largest independent home lender in the country has had. I think that the big difference between Countrywide and IndyMac is that we haven’t operated any of our business activities outside of our thrift.

As a result, we don’t have any business or operations at our holding company, and we only have one creditor at our holding company, which is 441 million of 30 year trust preferred securities, where you pay a quarterly dividend payment of $7.3 million. The only asset that we have at the holding company is cash, and we essentially have two years of the dividend payments for that debt obligation at the holding company. We can pay all of '08’s and all of '09's dividend, without any dividends from the bank.

In addition, at some point, we believe that we will be able to raise some capital, which will also contribute to paying that dividend. The bottom-line though, is in the worst case event that we ran out of cash at the holding company, or we weren’t able to raise common stock, we have the right to defer those dividends on that trust preferred, for up to five years, and obviously, we don’t expect to exercise that right. But the bottom line is, we feel that our holding company is in pretty good shape to weather this storm from a liquidity standpoint.

At the bank level, we are even stronger. We are funded pretty much solely by fellow home loan bank advances and deposits, long-term debt and equity, and we have almost a record $6.3 billion of operating liquidity, and as I said earlier, no commercial paper, no reverse repurchase borrowings, and no bank liens.

Turning to page 6, you can see more detail on our deposits. You can see that our deposits have grown from $16.8 billion to $17.8 billion. Our Federal Home Loan Bank advances have stayed roughly flat. We paid all of that down in the beginning of the third quarter, before this crisis, and we had about $1.5 billion of repo in commercial paper borrowings, and that's been all paid down. We have some long-term notes, and then you can see just normal other liabilities, the bank perpetual preferred stock and common equities.

The bottom-line is that we have a very stable funding structure. Over 95% of our deposits are FDIC insured. Clearly, we'd like to see our cost of funds come down as interest rates are coming down. And I think you will continue to see it, slowly but surely our costs of funds come down.

Turning to page 7, which is really, what the whole environment for IndyMac was in 2007. It was all about credit, and credit really drove both our quarterly loss in the fourth quarter, and our annual loss. You can see that, on an earnings per share basis in the fourth quarter, we lost $6.43 a share, for the year we lost $8.28. Embedded in those two numbers are our after-tax credit losses of $6.64 in the fourth quarter and $11.91 for the year.

And you can see that the bulk of those were taken in the second half of the year, where we increased our total credit cost, and that's the table on the upper right, to $407 million in the third quarter, and then as delinquencies continued to worsen, we went in and reviewed all of our portfolios again, and the delinquency roll rates that were occurring.

And essentially I believe we used to have very conservative assumption that the roll rates that we were experiencing in the last four months of 2007 were really horrible. And we assume those roll rates would continue for the first three quarters of 2008, and then abate about a 10% a quarter, each quarter through 2009, such that the fourth quarter of 2009 would be 70% of that horrible roll rate we experienced in the fourth quarter of '07.

And as a result of that and in really a desire to try to get these credits cost behind us, you can see we really bolstered our reserves in the fourth quarter, taking $862 million in credit cost. I think importantly, for the year we took a $1.450 billion in total credit cost, only $483 million of that was realized. $970 million pre-tax and $591 million after-tax are for future credit losses.

Essentially our whole loss for the year was for reserves for future credit losses that we expect to incur in '08, '09 and beyond, and you can see at the bottom table, we increased our credit reserves 71% just from the third to the fourth quarter and as I said earlier, four-fold since the beginning of the year.

Turning to page eight and you can get this right out of our segment reporting, you can see that a number of discontinued activities are causing the bulk of our losses. Residual and Non-investment grade securities, which were not creating any new ones because of the fact that we are a GSE lender today and there really isn't a private secondary market, although, the rating agencies are creating some new ones in downgrades of investment-grade securities. So, we are having some downgrades that occur, and creating some new ones in that way. The bottom-line is we lost $140 million after-tax in that area. We lost $109 million in the Conduit division, $91 million after-tax in Builder Construction and $80 million in the Home Equity division.

And then in the Residual Non-investment grade and all other business activities, the bulk of the losses in those two segments are really related to the small amount of subprime we were doing and the home equity lending that we were doing, primarily associated with a first and then a piggyback second. And the bottom line is all of those activities from home equity lending, to the small amount of subprime we were doing, to our Conduit and Builder Construction, have all been permanently discontinued. They were 90% of our after-tax losses in 2007, and really not core to our core retail-wholesale mortgage banking, servicing and thrift business. Not even core to our core all day business.

If you turn to page 9, you can see here, and I don’t propose to go through this in detail, but I think that what we try to do here with this page, is show you our balance sheet in total, and you can see that a significant portion of our balance sheet isn’t subjected to credit risks, cash, Federal Home Loan Bank stock, AAA investments grade mortgage-backed securities, or mortgage servicing rights.

The bulk of our credit risk lies in our loan portfolio, and in particular, a portion of our single-family portfolio, and our construction portfolios, and clearly in the non-performing asset category. And I think you can see that we've substantially bolstered our reserves, going from a $1.380 billion in total credit reserves September 30th, to $2.3 billion December 31, and you can see the credit reserves to NPAs by category, and see that as the NPAs have grown, we've established substantial reserves, and also generally increased our coverage ratio.

The only area that you don’t see an increase in coverage, is on the sub-division construction, which is a portfolio that we are not building, it's going to be winding down and I'll show you a slide on that, and walk you through the details of that in just a minute.

If you turn to page 10, and this kind of falls to order that balance sheet in the Non-investment Grade and Residual Security area. What we wanted to do is go into this portfolio, and make sure that we are not going to have write-downs in 2008 affecting our earnings. We wanted to get back the profitability sooner than later.

And I think from our perspective, the high risk areas for us, are the Subprime, home equity and Closed-End Seconds, Residual and Non-investment Grade Securities. You can see that those are the shaded box. We had $80.8 million of subprime September 30th, 56.4 of HELOC, and 28 million of Closed-End Seconds. As a result of rating agency downgrades, another $47 million of subprime were transferred from Investment Grade to Non-investment Grade.

So essentially we had, if you take the $127 million plus the $56 million and the $28 million at the bottom, that’s $212.3 million of Non-investment Grade and Residual Securities from '05 through '07. And we wrote that down 64% in one quarter to $75.6 million in the upper table, so now we have $37 million of subprime, $24 million of HELOC, and $14 million of Closed-End Seconds.

Overall, you can see that our Non-investment Grade and Residual Securities declined from $416 million to $272 million. We think that this sets this portfolio up to now earn a positive return in 2008 and not be susceptible to the losses that we incurred in 2007.

One of the other things we did, if you turn to page 11, clearly we've got stuck like many non-GSE lenders, with a lot of non-GSE loans that were unsaleable, because of the collapse of the private secondary market. We decided that at September 30th, not to transfer those loans due held for investment, because we wanted to see if that market would recover and obviously it didn't.

But, as a result, within the fourth quarter, what we wanted to do, is clean our Held for Sale bucket up, to adjust the loans that are currently salable. As a result, of the $13.9 billion in loans that we had Held for Sale September 30th, we transferred on November 1st, $10.9 billion of those loans, and took low over cost or market basis adjustments of $581 million on that portfolio, essentially transferring $10.3 billion to our Held for Investment portfolio.

Of that $581 million that we transferred within the quarter, $474 million are essentially credit marks or credit related reserves and you can see at the bottom of that page, the detail of those credit marks. We had $89 million of single-family prime, $57 million on single-family option ARMs and then you can see the big credit reserves that we took on HELOC's and Closed-End Seconds, where the performance of those has been poor and the loss severity rates on those are a 100% when they go to non-performing status.

Turning to page 12, what we try to do here is show you how our Held for Investment portfolio and our Held for Sale portfolio has changed from the third to the fourth quarter. If you look at the top box on the right, that our single family Held for Investment portfolio was $4.9 billion as on September 30th, and we held very little option ARM, subprime, HELOC, and Closed-End Seconds for investment. We were selling all those loans into the secondary market and really a very, a minimum amount of subprime, HELOC and Closed-End Seconds. And as a result of the private secondary market being disrupted, we now have gotten stuck with more option ARM loans, $3.3 billion, $555 million of subprime and $1.05 billion and $600 million of Closed-End-Seconds.

And we've established reserves, as you can see the credit reserves were only $48 million on Held for Investment at September 30. They are now $641 million at December 31, 2007.

The point that I would make on this portfolio is, we've established really strong reserves and this is a finite portfolio. We are not originating any new loans in the HELOCs and secondary, in the subprime area, or in the option ARM area, and our goal, very clearly in loss mitigation and our investment portfolio group, is to refinance as many of these loans as possible, and with rates down, there is lot of opportunity to do that, not only refinance but put some of the subprime loans in the FHA secured program, and we're going to work this portfolio down to keep our credit losses much smaller than hopefully we’ve projected.

The other thing we've done, you can see at the bottom, is we cleaned up our Held for Sale bucket. We had $13.9 billion Held for Sale at September 30. It's now down to $3.4 billion and you can see that it's pretty much in prime loans, either agency or non-agency. We had a little bit of option ARMs that we sold, $280 million that we sold in the first quarter, and then reverse mortgages that we're selling in the secondary market, the FHA ones, the Jumbo reverse mortgages. We may end up with a portfolio in those, because right now there is not even a market for those high credit quality loans.

The bottom-line is, we only have $8 million in non-performing loans today in our Held for Sale bucket. Really we've cleaned up that bucket, and we'll continue to keep it very clean because of the high credit quality of the new production that we're producing.

Another cut, if on the credit reserve side, you take our single-family portfolio, and you break it into first liens and second liens, both HELOCs and seconds, by vintage, you can see the LTVs, the weighted average LTV by vintage, by first lien and second lien, and what you can see is that we've established significant credit reserves focused primarily on the HELOCs and seconds, where because of the piggyback programs, and also the loss severities on seconds, you can see that we are expecting significantly higher losses than the non-performing loans that we have today. You can see that we have reserves on our Seconds of 314% of our non-performing loans. The bottom line is we think we've gone into this portfolio and taken a big whack from a credit reserves standpoint.

If you turn to page 14, what you'll see here is our secondary market warranty reserve. You can see that in the fourth quarter we repurchased $51 million of loans, which is the lowest amount that we've repurchased in all of '07. We repurchased $224 million of loans in the first quarter, $220 million in the second, a $118 million in the third and $51 million in the fourth. Okay? And our repurchases demands between the third and the fourth, that’s the lower bottom box are about flat, a $148 million in the third, a $147 million in the fourth. A lot of the repurchase demands don't end up getting repurchased because you walk through them with your investor, and they'll resend the initial repurchase in many cases.

The point being though that the mix has changed. We are not getting the early payment default repurchases anymore because of the credit quality of the loans that we are originating is very good. What we are now expecting to occur is that we are going to have more of the long-term default credit losses, where a loan that is more severely delinquent is quality control reviewed by the investor, and there is some fraud or other misrepresentation on that loan.

And as a result, even though our repurchases haven’t picked up, in the fourth quarter we tripled our secondary market warranty reserve going from, over tripled that, going from $57.1 million at the end of the third quarter to almost $180 million at the end of the fourth quarter.

Turning to the Home Builder portfolio, first most importantly, is that we are out of this business. It never was our core business. There was a tremendous debate constantly at IndyMac as to whether we should be in this Home Builder business, I think that clearly we haven’t grown it over the years. At one point when we were a mortgagee, it was about 20% of our total assets, it's now about 3.5% of our total assets, and the bottom line is, it’s a business that every ten plus years you are subjected to a tsunami of credit losses that often wipe out the profits that you make for that entire ten year period.

The bottom line is, we are out of this business, and we are diffusing down this portfolio. Builder Construction NPAs rose to $480 million, or 40% of the outstandings from a $106 million at the end of the third quarter, and almost nothing in non-performers at the end of the second. And you can see why here, that basically between the second and the third quarter, our builders in our portfolio were selling about 600 units a quarter and that declined by 73% from the second to the third quarter and that’s the reason that this portfolio has fallen off a cliff, almost precipitously.

We hired a nationally recognized independent consulting firm to also review the portfolio. Frankly, they didn’t find much different than what we had already found, in terms of how we classified and reserved the portfolio, but I think it was important to have that independent review.

As a result of our desire to really get this portfolio behind us, we again put an additional $100 million in reserves in the fourth quarter, and now have $199 million in total reserves. Those reserves represent 17% of the entire portfolio, and 41% of the NPAs. We're going to put away another $40 million or so in our '08 forecast, and we're projecting a loss in the Builder division this year, which I'll review in a little bit. Because of that $40 million we're going to put away, plus the fact that almost half of their assets aren't earnings interest, yet they have a cost to carry for those assets.

So that's the credit side. I think what you can see is that we did a pretty thorough job of substantially bolstering those reserves. The goal really, and the focus for IndyMac, is to try to get those credit costs behind us, as best as we can, so we can get back with our core business to making money.

What I'd like to do now, if you turn to page 17, is go through our new business model and our forecast for 2008. If you turn to page 17, and I'm not going to go through this at line-by-line, but I think you'll get a sense of this that we've significantly changed our production business model to include not only a national retail platform, but we've temporarily suspended some channels and products, some good ones so that we can shrink our balance sheet, and we've permanently closed some higher risk channels and products.

I'll just cite a few of these. For example under the Mortgage Professionals area, you can see that on retail, we were doing $49 million a quarter in the first quarter of '07. As a result of the disruptions at other mortgage lenders, we've now been able to essentially acquire for almost nothing both, New York Mortgage and American homes, West Coast Retail operation. And so nationally we now have a retail sales force with over a 1000 sales people and 125 branches, and will produce about a $1 billion, just under $1.2 billion of retail home loans in the first quarter of '08.

You can see that our Wholesaler Community Financial Institutions group is down from $14 billion a quarter, down to $5.3 billion a quarter. The bottom-line is we're doing business with customers who're going to produce high credit quality loans. The other thing we are doing is, we substantially shrunk our sales force in this area because the bottom-line is in this marketplace it's the 20% or 30% of your sales force who are producing 80% of the volume who are going to survive.

Some of the other things that you can see we've done. We've temporarily restricted Jumbo Production and Financial Freedom, not because it's a bad production, but again to ensure that we shrink the balance sheet to raise our capital ratios.

Same with our Consumer Construction division, that portfolio has performed very nicely, but it's a quick and easy way with that portfolio, as those loans rolled to permanent status, we then sell those loans in the secondary market, and that portfolio winds its way down.

The areas that we permanently shut are ones that are causing high credit losses for us. Conduit, Homebuilder and Home Equity division. The bottom line is even with all these cuts we should produce over $40 billion in production for 2008.

On page 18, it's the same $40 billion in production, but what we've done here for the sake of time, I don't propose to go through this in detail. The bottom-line is you can see that we've turned ourselves into an FHA-VA, GSE, and reverse mortgage lender. FHA-VA and GSE production now will be 87% of our 2008 production, versus 26% of our production in the first quarter of 2007, kind of before this whole crisis period hit.

If you turn to page 19, I think one of the important things to focus on is that we've used Standard and Poor's loan level credit risk model at IndyMac for a number of years, and when we use that model and evaluated the model that was in place back in the fourth quarter of 2006, it was a model called version 6.0. When we evaluated our fourth quarter 2006 production, the lifetime loss assumed in that model was about 88 basis points. The subsequent revision of that model by S&P in late 2007 with version 6.1 and reapplying that back to the fourth quarter of '06, resulted in the same production being 188 basis points of lifetime loss, much riskier production, a 114% higher.

The bottom line is, we all in the industry underestimated the credit risk of production. We've taken the steps at IndyMac to reduce it. So, if we use that 6.1 model which we believe is pretty conservative and apply retroactively to the fourth quarter of '06 into our current production, we are now down, we were down to 45 basis points lifetime loss in the fourth quarter of '07 and down to 36 basis points in January, literally an 80% reduction in the credit risk of the production that we are generating.

The point that I would make is when we put away $1.45 billion of credit costs in 2007, and our projection for 2008 as a result shows $372 million of credit costs, and that’s a key driver of return to profitability. That declined from $1.45 billion to $372 million. You may say, “Gosh, that’s too much of a decline, that doesn’t seem realistic given the housing market”.

And the point that I'd make is, we built up incredibly strong reserves at the end of '07, okay, is one.

And two, our new production model is generating nowhere near of two, $372 million is our second highest credit cost in the history of the company by far for a year, and $372 million is way higher than our new production model. And I would very simply say, if you take the 36 basis points that we are producing, you assume an average four-year life for a mortgage. That’s less than 10 basis points per year of life time loss.

On a $28 billion balance sheet, that’s roughly our balance sheet for the year, that’s 28 million in credit cost. Plus in addition to that, then you have to have the warranty cost. So my guess is, that our new business model, rather than having $372 million in credit cost, is somewhere around $50 million in annualized credit cost plus or minus a little bit. Substantially below the $372 that’s in our 2008 forecast.

If you turn to page 20, one of the other things besides reducing credit cost, is we had to reduce our overall operating expenses, and we are going to continue to be obsessed with this, and become the low cost provider in the mortgage industry. I know our team is very focused on this. We have a lot of advantages to do this, both in terms of the scale of our operation, on both production and servicing, but also on our systems and our ability to outsource certain activities to lower cost regions of the world.

And you can see, what we have already done, and this is not pie in the sky, these are real cuts. We reduced our cost from, if you compare second quarter of 2007, which was just before the rightsizing, we were at about $230.5 million a quarter, we are now down to a $164.6 million by the second quarter of this year.

The bottom line is we implemented a hiring freeze in 2006. We froze our pension plan in the second quarter of 2007. We eliminated 382 positions in July of 2007. We eliminated another, almost 1200 in September 2007. And in the first quarter this year, you all have read that we've eliminated almost over 2500 positions and closed six regional mortgage centers that were not profitable in the first quarter of '08.

We've also done some other very tough moves; we're cutting pay for our higher paid employees, both in terms of base and bonus potential. We've done literally things like suspending our 401-K match, which doesn't sound like a lot but it's saving us $5 million or $6 million a year pretax, and we've eliminated several other costs, and we'll continue to do so to drive our cost model down. We will be obsessed with lowering our cost and becoming the low cost provider in the industry.

If you turn to page 21, and what I would say just before we get into these projections that there is a more detailed financial projection by business segment and channel in the appendices, and we will prepare after the call, for those investors or analysts who want to spend time and go into very detailed items like margins, and both in our mortgage banking revenue margins by product and channel, and our thrift margins, and some of the more details on credit cost. After this call you can arrange with our investor relations department, and Pam Marsh to go through those in detail.

So what I'm going to go through is, I try to distill out of this, the fact that our new business model is actually doing quite well even from the first quarter on. And you can see here that what I'm starting with is a line item called new business model net income before discontinued business activities and restructuring cost. And you can see that new business model makes $46 million in the first quarter, obviously helped a little bit by the fact that we're going to fair value accounting on our pipeline and rate locks.

So as a result we get one-time, $18 million after-tax gain in the first quarter, related to our production segments, and that's why you see a decline from the first quarter to the second, but the bottom-line, as you can see for the year, that our new production model, our new business model, earns a $166 million, and it is projected to earn $166 million and a 14 ROE would drag that down to barely a profit.

First of all as our restructuring cost, you can see that workforce rightsizing, office rightsizing, and writing off the commitment fees related to our commercial paper facilities, totaled $54 million after-tax. That takes about third of the bite out of the profit of our core business. And then you can see what we've done as we've conservatively factored in our forecast that we're going to have some additional warranty cost related to our prior production model of about $22 million for the year after-tax.

We've classified, even though we haven't done it for GAAP purposes, clearly we closed the Homebuilder, Conduit and Home Equity units, and so we've taken those three activities and showing those below the line in this segment reporting here, and those activities combined are generating about $80 million in after-tax losses. Such that we would make $13 million for the year, but I think importantly you'd see net income for the first quarter projecting a $38 million loss and then being profitable in the second quarter. I think we had said we would be profitable in the second half of the year.

And then, in the second half of the year, you can see that it's nothing to write home about. We're earning a 6% ROE in the second half of 2008. If you dig and then go down now into the details and go, well how do you get this new business model and the net income? What we've done here has shown you the detail of this.

And I would caution you that one of the reasons that ROEs are so high is that we allocate the preferred to all of the business units, which helps the ROEs. The other is that all of our business units are not absorbing corporate overhead. And in mortgage production in particular, even though GSE business is lower margin, we turn the assets much faster. So they are suing far less capital than they have historically used in our non-GSE model.

So what you see here is that production for they year of making $85 million at a 40 ROE, servicing and retention earning $132 million at a 49 ROE. They are very much helped by the allocation of that $500 million of preferred stock. And so our total mortgage bank is projected to earn $184 million or 38 ROE.

The thrift earning $120 million at 17 ROE and then you can see we've got corporate overhead, that’s people like me in that $80 million number, but you can see that corporate overhead is substantially reduced between the first quarter and the second quarter from $23 million down to $19 million, and that’s the key driver.

What I would say is, that clearly the thrift ROE is the key question mark because of the credit cost volatility, and I'll walk through the assumptions on that in just a second.

If you turn to page 23, going through our production segment, the mortgage production segment, the $85 million, you can see that we are projecting to make $2 million in consumer direct after tax, $17 million in retail, $36 million in wholesale, $29 million in Financial Freedom for they year, and a $1 million in Commercial. And really the Commercial, and really the commercial is being held back because we've limited them to only $35 million in capital, because again there is no secondary market for even commercial loans, other than what you can sell to Fannie and Freddie in their multi family programs today.

Built into this forecast, is $47 million in warranty cost related to our new production model, and I would tell you that’s a very conservative number. I would say, that we believe that that is probably double what it would warrant, given the 37 basis points of loss that our January production is achieving. The other thing I would point out is, that is the first quarter here, is very much benefited by that rate lock accounting, you can see footnote one below.

The thrift, which inherited all of these non-GSE loans, and those HELOCs and seconds, it clearly has more potential for earnings volatility in the forecast and what we have embedded in there is an assumption that we will have a $184 million in pretax credit cost. You can see that with the write-downs that we took on Non-Investment Grade and Residual Securities and the reserves that we built up, were projecting to earn $36 million on Investment Grade mortgage-backed securities, 27 million in Non-Investment Grade and Residuals, 41 million on our single family portfolio, 16 million on consumer construction.

And I would point out, that those earnings are coming down, because we decided to very deliberately to shrink that portfolio dramatically because we want to reduce our balance sheet by this $4.6 billion throughout the year. So the bottom line is, our thrift, and again, as I would say, this is on the margin, not fully allocating corporate overhead, we are on a 17% ROI assuming a $184 million in credit cost.

The discontinued activities, which you see on page 25, have similar risks to forecast volatility because of credit losses inherent in these activities. In other words, credit losses could be -- no one's going to say they are going to be better, they could be worst than we forecast here. We believe we have a very realistic forecast given the reserves that we built up at December 31, '07. You can see that we're projecting -- we've gone through these already, the losses in each of these units, but we're projecting a $141 million in pretax credit cost are assumed in the above numbers for the year.

So the bottom line is what we wanted to show you on page 26 is, what if we're wrong, what if the thrift and these discontinued operating costs, including our secondary warranty cost for prior production model are higher than we forecast? What would it, how would it impact IndyMac's earnings, our capital ratios and our book value per share?

And so what we did, as I said, the production credit cost for our new production model which were $47 million, I'm already saying that that number is very conservative, I would say almost double what I expected to be. So what we did is, we stressed the thrift credit cost and the discontinued business activity credit cost increasing them 25%, 50%, 100% and 200%. And what you can see is how that would impact the thrift earnings, the discontinued loss, the total company earnings, and our projected capital with the MSR penalty and without. And let me just explain that for just a second.

One of the many issues that we've been dealing with in this market, is given the size of our servicing asset relative to our capital, if our servicing asset equals or exceeds our capital, then we have a dollar-for-dollar deduction of the servicing asset from our capital ratios. So the projected capital with the MSR penalty is the correct one. And what you can see is that in our base case scenario, we're projecting to make $13 million with $372 million in credit cost, and have capital ratios at the end of the year of 7.42% and 12.15%.

And a book value per share of $16.77 at the end of '08. If things were to get 25% worse, you can see what the capital ratios are, it would take 200% worse, which is essentially a tripling of our estimate. For us to not be well capitalized on one of the two ratios, our total risk-based ratio would be just below the 10% well capitalized level but we would still be adequately capitalized and we don't believe that we're going to be anywhere near to tripling of credit losses in 2008.

If you turn to page 27, yes things could get worse, but they also could get better. Clearly, we're in a period where the Fed, I think is going to do what it takes to keep stability in the financial services market and the housing markets. Low interest rates, we're experiencing low interest rates. We are experiencing somewhat of a refinance boom, and clearly Congress is also going to do what it takes in terms of giving the GSE the ability to purchase jumbo loans and increasing loan limits for FHA and VA.

And we are getting better everyday at loss mitigation. We've established a loss mitigation absorbed at IndyMac, this is cutting across all business lines, and I would say that we're getting better and smarter at loss mitigation, and helping borrowers stay in their homes. And I think that that's going to benefit us in terms of our credit loss forecast because our credit loss forecast don’t assume any improvement in our loss mitigation activities.

We also think at some point there is going to be a potential slow return of the non-GSE secondary market, hopefully with the absence of Wall Street in between us and the investor. Our goal is to go more directly to the investor, and work with them just to sell them securities with loans in it that they understand in very simple security structures.

If you turn to page 28, our overriding goal for 2008 is to keep IndyMac safe and sound with strong capital and liquidity and return to profitability, maintain and build on our safety and soundness, rebuild our core and total risk capital ratios. We expect to rebuild in their about 7.25 and 12 by the end of the year as result of returning to some modest profitability, suspending the dividend and shrinking the balance sheet by roughly $4.6 billion.

We will continue to maintain strong liquidity through solid funding sources. We want to get back to profitability, and I think we have covered these items. We are projecting to earn $85 million our mortgage production unit for the year. We are projecting a decline in credit costs of $1.1 billion between 2007 and 2008, a decline of $264 million in operating expenses and we do expect to have a profit, a very modest profit in the second quarter and around $51 million in net income for those last three quarters and a small profit for the year.

And the bottom line is that when this crisis period is all over, it's wiped out pretty much all of our independent competition. We likely with the closing of the country wide BOA transaction, we’ll become the largest independent home-lender in the nation. And if we can achieve most of the above, I believe that our stock should move from its current levels back up towards book value per share and while many shareholders and managers and employees and directors will be significantly under water, our stock could perform well this year.

I just want to close by what we are focused on. We are focused on the long-term fundamentals of our business, and we are dedicated to the following key principles. One, that every loan we make will be well understood by each consumer, and suitable for them. I think this is key, to not only running a great business but ensuring that our credit losses are de minimus.

We will become the best manager of risk in our industry. Specifically, we will produce the best credit quality loans in the industry. Have a greater focus on macroeconomic environment. I think that’s something we were micro focused. And I think you will see us being more conscious of the cycles and look to curtail business activities and hedge them. There are now some great instruments to be able to hedge credit risks.

And we are going to become more thrift like and reduce our business with Wall Street. Everywhere we kind of link the Wall Street, is where we get in trouble every so many years, just like the global liquidity crisis in 1998. We are going to become the low cost provider of mortgages in our industry and we are going to deliver industry leading service to our customers.

So that’s my presentation this morning. I would be happy at this point to take questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Mr. Robert Lacoursiere of Banc of America.

Robert Lacoursiere - Banc of America Securities

Yes. Good morning.

Michael Perry

Hello, Robert.

Robert Lacoursiere - Banc of America Securities

Good morning. How are you doing, Mike? Listen, I just have a couple of questions. One relating to capital. I know you are forecasting your sensitivity analysis on what would happen with regulatory capital based on changes. Somewhat, if you could help me understand why it doesn’t impact it that much, given that and from the third quarter of '07, your surplus of regulatory capital above the well capitalized total risk was about $360 million, and it dropped about a $100 million this quarter, which if we do the adjustments for the capital raised and the dividends, that meant you consumed about $315 million of regulatory capital in the quarter?

And yet, if you have the substantially higher losses, you still are just barely underneath it, barely impacts it. So, it must be that you're forecasting a quick reduction of other assets in order to pick it up. So it's based on reducing your assets to make the capital?

Michael Perry

Yeah, I mean I think if you look at it, it's in the back of our -- I would encourage you to look at in the appendix, the detailed forecast by quarter which shows our balance sheet being reduced quarter-by-quarter and the capital ratios that we project. And so what we did, if you look at page 4, we're projecting a $4.6 billion net shrinkage in our balance sheet, some of which is occurring as soon as the first quarter but most of which is occurring each quarter, okay.

And I think what we're doing is, we're saying we'll 'raise' about $400 billion, through balance sheet shrinkage of core capital and $318 million of risk-based capital, which provides us a cushion if we're wrong in terms of our forecast. If we're not wrong in terms of our forecast then our capital ratios would build to 7.42 core and 12.15 risk-based by the end of the year.

Robert Lacoursiere - Banc of America Securities

All right. So in other words, you need also -- if you happen to be worse in terms of credit outlook than your base line case, it all depends on the ability to shed assets, right?

Michael Perry

It definitely depends on our ability to shed assets, no doubt about that, and we'll be carefully monitoring that throughout the year. And in the worst case scenario where the timing of that, Robert, isn't exactly right, we have to be prepared to raise capital and maybe raise capital at a dilutive level.

Robert Lacoursiere - Banc of America Securities

And if I could --

Michael Perry

I think we feel pretty comfortable with the reserves that we've taken at year-end and the assumptions that we used in terms of the NPA forecast. Our NPAs in the forecast that established the reserves in the fourth quarter, we're projecting our NPAs to continue to grow to -- I think they peek in dollars in the second or third quarter something like $2.1 billion, its in the appendix detailed forecast. And the NPA ratio continues to actually go up throughout the year, primarily because of the balance sheet shrinkage.

I think we peek in NPAs, if you return to page 33 at $2.18 billion in the second quarter, but our NPA ratio to total assets still continues to grow because of the balance sheet shrinkage that's being achieved.

Robert Lacoursiere - Banc of America Securities

If I could follow-up on the different topic on the why you've successfully gotten -- now you're dependent on deposit funding, could you talk a little bit about your money desk funding and your custodial deposits, the sensitivity to either the availability or the cost of these deposits based on rating changes. You did increase it significantly in the third quarter and then a little bit more in the fourth quarter, the money desk deposits. Are they sensitive to the availability in the costs? Are they sensitive to your ratings?

Michael Perry

Yeah, in terms of the custodial balances, you are probably familiar that the bulk of our custodial balances are non-GSE balances because we were primarily a non-GSE lender and servicer, and those balances have never been allowed to be held at any back because you have to be a single A rated entity. So those are always being held in another financial institution and are not part of our deposit base. And so we get an interest credit on those with another depository institution.

So we have a very small amount of custodial balances related to the GSEs, and they’ve changed their policies of late, given the whole mortgage industry crisis, and we did have to move a couple of $100 million of custodial balances out of IndyMac to another financial institution, but that was a pretty de minimis level.

Clearly given our relatively small branch network and the amount and the speed at which we increased deposits, we’re not seeing the decline in our cost of funds the way some larger financial institutions have seen. You can see that on page 6 that our cost to funds only declined from September 30 from 508 to 492.

So, we've had to be a relatively high rate payer, but not as high as some of the other financial institutions out there, and slowly but surely, I think you'll see that number come down, and we've done a good job of making sure that all of our deposits, almost all of our deposits are Federally insured.

Robert Lacoursiere - Banc of America Securities

Could you address, I mean, you have about $6.5 billion of your, $16.8 billion is from the money desk?

Michael Perry

And a 100% of that is FDIC insured, and it's all bundled in amounts under a $100,000. It's all in CDs that are out at various terms and maturities, and so I think we've managed that pretty successfully and I think we expect to continue to manage it, and really we haven't seen any deposit outflows, we've actually seen inflows here at IndyMac.

Robert Lacoursiere - Banc of America Securities

Thank you.

Michael Perry

Thanks Robert. Next question please.

Operator

Our next question comes from Mr. Hock Tay.

Wayne Smith - Touchstone Investment

Hi, this is Wayne Smith for Tay. I have a question regarding the reserve slides that you guys had, I just want to get a little clarity on the transfer for the held for sale and held for investment, are you basically saying that due to the face value of what you guys transferred or was $10.9 billion, but you transferred it over to held for investment at 10.3 face. Is that essentially what occurred, saying that there is already some embedded reserve in there, can you just…

Michael Perry

Yes, essentially the book value of those loans at September 30 was $10.9 billion, we transferred them over with taking up $581 million of lower cost to market adjustment under Generally Accepted Accounting Principles, so the basis in those loans in the held for investment portfolio is now $10.3 billion. Of that $581 million, $474 million are related to credit marks in the lower cost to market adjustment.

Wayne Smith - Touchstone Investment

Is there any reason why I guess, just GAAP reason why you guys didn't transfer it over it face and then add the dollar value to your loan loss reserve?

Michael Perry

Yeah, there is -- I’m a former CPA and former CFO a long time ago, and you're asking the same question that I've asked and it's just different accounting. You're not allowed to essentially reclassify those credit marks to loan loss reserves. I wish you could because it will make our call report, our regulatory report and other reports look better, but what we’ve tried to do in the presentation today is show investors that not only do we have loan loss reserves, but we have this credit marks, and I think a number of other lenders who are in the same boat did a very similar type of presentation in their IR presentation.

Wayne Smith - Touchstone Investment

Got you. So then the loan, the reserve against that $10.9 billion in face, after it is transferred over is 581 plus another 474 or…

Michael Perry

No, 474 is imbedded in the 581, so the raft would be more liquidity or spread, just liquidity or spread marks. And you get in to kind of, is it a credit mark, is it a liquidity mark . And I don’t have it off the tip of my tongue exactly how we determine which piece was credit and which piece was spread widening, but our CFO and IR group could go through that with you after this call.

Wayne Smith - Touchstone Investment

Okay, and just one other question on the other assets and the balance sheet, it is coming about $2.5 billion and it is up about 153% year-over-year and I am just trying to get a sense of what comprises that numbers. Is it mainly tax operating loss carry forwards?

Michael Perry

This is on which page?

Wayne Smith - Touchstone Investment

Just on the balance sheet, you guys…

Michael Perry

I think a better way to look at it would page 9, where we did my version of the balance sheet which ties to the bottom line. Balance sheet, it is on page 9.

Wayne Smith - Touchstone Investment

Okay.

Michael Perry

And you can see that we have got cash of 562, Federal Home Loan Bank stock of 676, Investment Grade MBS, more servicing rights, loans, real estate and other assets are a $1.6 billion, and they are up from $1.3 billion a year ago. So they haven't really changed much at all.

Wayne Smith - Touchstone Investment

And in the other assets, is it mainly net operating loss carry forwards or tax credits?

Michael Perry

No, we still have a net tax liability. It would be things like accrued interest, fixed assets those types of things. That should be laid out; other assets should be in our 8-K filing.

Wayne Smith - Touchstone Investment

In your 8-K.

Michael Perry

And if not, we can walk you though that after this call.

Wayne Smith - Touchstone Investment

Okay. I appreciate it. Thanks.

Operator

Your next question comes from Mr. Michael Rogers from [Accounting Assessment Management].

Michael Perry

Hello.

Michael Rogers - Accounting Assessment Management

Do you see any scenario whereby the bank perpetual preferred stock dividend would be in danger and is passing on the dividend potentially part of one of the more stress case scenarios that you show in your exhibit?

Michael Perry

I mean you can never say never on that, because right now we still can't see bottom in the housing market, but I don’t see any realistic scenario, okay. Including the ones we presented here that we wouldn’t pay the dividend that our bank preferred.

Michael Rogers - Accounting Assessment Management

So, the passing on the dividend I guess is not any of those…

Michael Perry

Not ever been discussed here.

Michael Rogers - Accounting Assessment Management

Okay.

Michael Perry

Or contemplated.

Michael Rogers - Accounting Assessment Management

Good. For a regulatory perspective, do you see that tenure, a regulation and the scrutiny and the potential regulatory actions that your regulator could take, do you see that being maybe more severe going forward? Any sense that they might require some more stressful reserve additions.

Michael Perry

I don’t think so on the more stressful reserve additions. I think that we worked really hard over the years to build a very strong, positive and open relationship with our regulators and throughout this whole crisis period, over the last year or so and even before that, I probably send them a note a day, okay, in terms of -- I send them everything that I send my board and my senior management team, okay.

So, I think they have appreciated that and we sent them the good, the bad and the ugly and certainly there has been a lot more of the bad and the ugly the last year or so. And I think that they appreciate that. I think they have complimented us on our nimbleness in terms of our ability to change our business model, okay.

Certainly they are concerned about the whole industry, what regulator wouldn't be given what's going on in the whole financial services sector, and certainly they are more concerned about entities that are more susceptible to the housing market like IndyMac. And I think that given that that we continue to have a positive relationship with them, they haven't asked us to do anything. We told them what we are doing and I think they appreciate what we are doing.

I think they'll like our strategy of building our capital ratios back up this year by shrinking the balance sheet and we could have probably said, hey, we are going to keep our balance sheet, we are not going to shrink our balance sheet and keep our capital ratios run them little lower during this crisis period.

Why do have capital equations if not for a period like this and we decided that that wasn't the smart and right thing to do on our own. And I think they appreciate that. So, I feel like they think we're doing a pretty good job managing through this crisis period. Certainly in hindsight, we have made some mistakes, who hasn't made mistakes in this environment? I think we've learned from those mistakes, I think we have changed our business model. We have reserved properly, I don’t think they are going to have concerns about our reserves.

And we will monitor our plans this year as we move along, and if we are not achieving our plan and we are off our plan in a material way, there could come a point where we do have to raise dilutive capital; I hope we don’t have to do that. I don’t think we are going to have to do that. But it is not out of the realm of possibility that we wouldn’t have to do that.

Michael Rogers - Accounting Assessment Management

Do you think the increase in the conforming loan limit will potentially help your business model?

Michel Perry

Huge help for us. Right. Because of our balance sheet constraints, we need to be a jumbo lender in our retail and wholesale businesses. We absolutely need to be one, right? Competing in a national market place and we have limited capacity, we basically cut some of the businesses to create capacity on our balance sheet for jumbo loans. That’s really the only thing we were prepared to grow on our balance sheet during this crisis period. And having the GSEs have a bigger jumbo limit is huge for IndyMac.

Michael Rogers - Accounting Assessment Management

Great. One last question. Moody's recently withdrew the rating on your preferred. Could you comment on what they were doing there?

Michel Perry

Well, we had gotten the Moody's rating about a year ago, and I don’t disagree with any of the rating agencies having concerned about any financial institution who have a business model like ours that’s focused solely on housing. I think what I have a concern with is, when you compare our ratings relative to others in the industry that they are propping up their ratings, and I think that creates an unleveled playing field that isn’t really fair, it creates excessive concern about IndyMac relative to others who also should be getting downgraded.

And so I think from our perspective we looked at it and said, we are not relying on these ratings at all to fund our business model. We have only had this rating with Moody's for a short period of time. Why continue to have this bad news keep coming out that only just creates unnecessary fear and so we asked them to withdraw the ratings. In addition to doing that it saved us some money between the rating fees we were paying them along with eliminating one staff person who was managing all of our rating agency efforts.

We saved about 350,000 a year. And we are kind of in that mode, 100,000 here 200,000 here, 350,000 here. That's what we are focused on, and I think you can see that we have been pretty nimble at not only changing our production model, but in cutting our costs and developing a business model to not only survive this period, but prosper in the long run.

Michael Rogers - Accounting Assessment Management

Do you expect to maintain the other rating agency ratings on that security?

Michael Perry

I think so. We have had long-term relationships with Standard & Poor's and Fitch, and what I think at this point in time, expect to maintain those.

Michael Rogers - Accounting Assessment Management

Thank you very much.

Michael Perry

Thank you

Operator

Our last question comes from Matthew Howlett from Fox-Pitt Kelton.

Matthew Howlett - Fox-Pitt Kelton

Residential and any gains today as the market stand here today free from capital?

Michael Perry

I am sorry. There must be something going on with how we connect the questions and it seems like there is a big delay and you got, kind of your question was midstream. Can you start over please?

Matthew Howlett - Fox-Pitt Kelton

Yeah, as you look at the balance sheet today, could you sell anything on the balance sheet at a gain and I am referring to the 6 billion in AAAs along with the 16 billion in single-family and residential loans?

Michael Perry

Yeah, I mean there's a few things that we can sell gains in there, not a lot, but because it's a very liquid marketplace out there, especially for non-GSE loans, but we are planning to sell some of the AAA MBS securities and reduce our balance sheet there. There are some things that we can refinance in our single-family portfolio into FHA loans, and also with the new Fannie Mae jumbo limits, there will be things that we can turn around and sell to them in those portfolios.

The other thing we've done is stopped any new consumer construction loans, that portfolio is going to run down from $2.3 billion to $359 million in just one year, as those roll to perm, and we sell those loans out into the secondary market. The subdivision portfolio is going to roll down from $1.2 billion before loan loss reserves to $660 million by the end of the year. It will largely be by the end of '08, just the work outs that are left in that portfolio.

Matthew Howlett - Fox-Pitt Kelton

Okay. So the capital from coming back will be a combination of just principal paid out in potential sale?

Michael Perry

Yeah, one of the keys is right, and then also turning our assets faster, even though the GSE margins are lower, instead of holding non-GSE loans for months until you have a big enough pool to sell them, I can sell loans to the GSEs and fund them and sell them within a couple of weeks at the most.

Matthew Howlett - Fox-Pitt Kelton

Okay.

Michael Perry

I can really increase my asset turn and you can see that, that was one of the other ways we're shrinking our balance sheet, is increasing our asset turn on loans held for sale.

Matthew Howlett - Fox-Pitt Kelton

Okay, great. And any update on potential suitors for financial freedom?

Michael Perry

Well, I think we said in the shareholders letter, when you have such a small market cap right now, no one is going to come in and pay us fair value for financial freedom. You are just going to have pirates who want to come in and try to steal that from us. And we think that as a tremendous long-term value for IndyMac, tremendous growth prospects, and so from our perspective, that really isn't something that we would prefer to do, I think we decided instead, eliminate the dividend and shrink the balance sheets is the best way to raise capital ratios.

Matthew Howlett - Fox-Pitt Kelton

Okay, great, and just looking to the secondary market warranty reserve. Is there a way just to settle this with the street and some of the potential rep and warrant claims that could come at you, presumably for years?

Michael Perry

If you look at our shelf registrations, and I think one thing to point out is, we did our business a little differently than a lot of other private label securitizers; for one, we made very few reps and warrants on our private label shelves. In our core all day shelf for example, we had to be aware of the fraud, so unless we were aware of it, we're not liable for it. So, we have very little warranty risk on our private label shelf.

I know that some issuers of HELOC securitizations recently had the issue where the delinquencies levels and certain of their HELOC securitizations got to be too significant and their agreement had the right to split the securitization in any new fundings on HELOCs, they are kind of revolvers like a credit card, any new fundings had to go below the securities holder.

Well, we have the same split on the few HELOC securitizations that IndyMac does, but ours don't go below. Ours are equal to the bond holders in the transaction. That saved us from suffering a substantial loss that you saw other HELOCs securities holders issue out there.

Our main warranty costs are two fold, we made some reps and warranties on some seconds and HELOCs that we securitized to bond insurers to AMI Company, excuse me, and so a fair portion of the secondary market reserve is for that, and then for the main rep and warranty areas is related to GSE repurchases, not really private label securitizations, we have very little exposure there.

Matthew Howlett - Fox-Pitt Kelton

Okay, then just normal course of doing businesses, and selling once to the GSE's?

Michael Perry

Yeah, which we expect given delinquencies have risen industry wide. There is going to be more loans that they QC and more repurchases that occur in '08 and '09.

Matthew Howlett - Fox-Pitt Kelton

Okay, and then just to follow-up, last question, you had a pretty good mortgage banking revenue number this quarter, good margin, with potentially higher GSE's and I guess the new loan level pricing from the GSE's do you think, you can maintain those margins going forward?

Michael Perry

I think so, look, whatever the GSE, we're an entity that passes on the price, right. And the great thing about the GSE's unlike the private secondary markets, the private secondary markets just, the spreads widen and you have no notice. With the GSE's, they say we're going to raise guarantee fees in 60 days. That allows us to change our pricing and maintain stable margins, so we are not susceptible to margin compression on GSE production the way you are in the private label market which has no notice immediate repricing.

Matthew Howlett - Fox-Pitt Kelton

Okay, great. Great, thanks, Mike.

Michael Perry

Thanks Matt.

Operator

We have time for one more question from Jason Arnold from RBC Capital Markets.

Jason Arnold - RBC Capital Markets

Hi, good morning Mike, can you hear me okay?

Michael Perry

I can hear you fine you Jason.

Jason Arnold - RBC Capital Markets

Perfect. I just had a couple of questions. I was wondering if you could share with us perhaps some of the cumulative loss assumptions on some of the individual loan categories in your portfolio. Do you have that available?

Michael Perry

What I would suggest, Jason, is that you sit down with Pam Marsh in the IR after this call, and she can facilitate that with our enterprise risk management group and our Chief Credit Officer and walk you through those detailed assumptions.

Jason Arnold - RBC Capital Markets

Okay.

Michael Perry

We have plenty of very detailed models on that.

Jason Arnold - RBC Capital Markets

Very good, I will do that then.

Michael Perry

Okay.

Jason Arnold - RBC Capital Markets

And, I guess another one. I was wondering if you could also offer the average time to maturity on the CDs, on the deposit side?

Michael Perry

I don't have that off the top of my head, but there isn't anything where you're kind of going. I'm worried about the CDs, maturing and I'm going to have a big liquidity issue at some point here. I mean just isn't on our radar screen of being a concern to us, I mean we're monitoring those types of situations and certainly, whenever a financial institution has a loss, you could have a loss of confidence, but I think given the fact that over 95% of our deposits are federally insured, I think we feel we've managed that pretty well.

Jason Arnold - RBC Capital Markets

Okay. Another one, kind of just pertaining to one of the previous questions, it looked like you had mentioned on the transfer from the held for sale to held for investment that kind of amputated a 20% of that credit reserve was maybe related more so to spread widening than credit reserve. And I was wondering, how that would work with respect to the non-investment grade securities and residual securities reserve? How much would be more spread widening than credit reserve?

Michael Perry

I think most of that, you can talk to Pam and Scott, and they can give you more detail and most of that we attributed to credit than spread widening. There isn't really a liquid market for those securities right now, and we use very high discount rates in present valuing the cash flow stream there, 20% plus discount rate. So, what we've driven into those which caused the write down is significant increases in delinquency and credit loss severities and credit loss assumptions built into those.

Jason Arnold - RBC Capital Markets

Okay.

Michael Perry

Okay.

Jason Arnold - RBC Capital Markets

One more final quick one, I was just curious what would really drive you guys to differ interest payments on the drops?

Michael Perry

On which one?

Jason Arnold - RBC Capital Markets

On the trust preferred securities, the trust preferred borrowings at the holding company.

Michael Perry

As I said we have cash at the holding company to pay the interest on that for all of '08 and '09. Okay. And I think we get beyond that either pay a minimal bank dividend to the holding company to pay that or raise a minimal $7.5 million a quarter of common stock to pay that.

So, I don’t realistically see that we would ever differ that payment, but I am just saying we could under the contract of that document differ those interest payments for up to five years.

Jason Arnold - RBC Capital Markets

Okay. Would there be any reason why you really would choose not to. Is there anything?

Michael Perry

Yeah. It would be seen as a negative in the market and limit our future access to the capital market. So, we would do everything to avoid doing that.

Jason Arnold - RBC Capital Markets

Okay. Perfect. Thank you for the color.

Michael Perry

Okay. Thank you very much. I think that's the end of our call. Thank you for listening on our call, and obviously we are going to focus on getting IndyMac back to profitability as soon as we can. Thank you very much. Bye-bye.

Operator

This does conclude today's conference call. You may now disconnect your lines.

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Source: IndyMac Bancorp, Inc. Q4 2007 Earnings Call Transcript
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