IndyMac Bancorp, Inc. Q1 2008 Earnings Call Transcript

May.12.08 | About: IndyMac Bancorp, (IDMCQ)

IndyMac Bancorp, Inc. (IMB) Q1 2008 Earnings Call May 12, 2008 1:00 PM ET

Executives

Michael Perry - Chairman and Chief Executive Officer

Scott Keys – Chief Financial Officer

Analysts

Bob Ramsey - Friedman, Billings, Ramsey & Company

Frederick Cannon - Keefe, Bruyette & Woods

James Fowler - JMP Asset Management

Howard Amster – Raymad

Michael Rogers - Conning Assessment Management

Operator

I would like to welcome everyone to the IndyMac Bancorp’s first quarter 2008 earnings review conference call. (Operator Instructions) I would now like to turn the call over to our host Mr. Michael Perry, CEO and Chairman.

Michael Perry

Good morning. Before I begin our first quarter 2008 presentation, I would like to make a few general remarks. First let me reiterate that our primary focus is on keeping IndyMac Banc safe and sound through this turbulent period for our industry. IndyMac’s been a public company since 1985 and regulated financial institution since 2000 and our management team and board have been running IndyMac safely and profitably up until 2007 for nearly 15 years.

Yet as an equity analyst correctly stated recently, IndyMac has been at ground zero of the credit crunch and given our mortgage banking thorough focus we have had to grapple with all of the following key issues over the past year:

First an abrupt and unprecedented re-pricing, widening of credit spreads for all types of mortgage related securities and assets even those backed by Fannie, Freddie and Jennie.

Two, a total collapse of the private secondary market for MBS securities and whole loans in particular all day, jumbo and jumbo reverse mortgage loans and securities, our core business from 1993 to mid-2000.

Three, an unprecedented and significant decline in national home prices and sales particularly for newly constructed homes and also in our home state of California;

Four, the near total collapse of secured funding and the repo in commercial paper markets for any mortgage related assets and material increases in margin requirements on collateral pledge to the Federal Home Loan Bank system for advances and increase competition for deposits by many financial institutions as a result;

Five, a significant constriction in our lending guidelines and increase in guarantee fees by both GSEs, inhibiting our ability to retool our production model and return it to profitability;

Six, rapidly increasing nonperforming assets and loan repurchase demands from secondary market investors and as a result the need to establish credit reserve for these and forecasted future NPA’s and charge offs.

While clearly with the benefit of high insight, we made mistakes in our lending and mortgage banking activities, so did most major industry players and our losses relative to our loan volumes are one of the lowest in the industry. We strongly believe that since this crises period begin over a year ago we have made a lot of right decisions and as a result IndyMac has survived when nearly the entire mortgage banking industry has not, including larger and more diversified financial institutions such as Countrywide and Bear Sterns. That is why I believe our shareholders despite our poor absolute performance reelected the entire board, a few weeks ago with the 96% plus favorable vote.

With that said, I am confident that as a result of the credit reserves we have established and the business model changes we have implemented we have turned the corner and our business should consistently improve from here. Home lending is a basic business that’s vital to our society and the economy and we will return to prosperity sooner than later with many fewer competitors than there have been in the past. IndyMac is that last remaining major independent home lender and we will be a better and stronger Company for having survived the current crisis period, which should position us well to take advantage to the opportunities that will surely return.

Now, let’s begin the presentation. If you -- we can turn to page three. What we've done on page three, is tried to just in a very straight forward way with kind of green -- if you have a colored version of our PowerPoint presentation, with the green boxes being the positives in the quarter and red boxes being the negatives addressing earnings, capital, liquidity and asset quality and I'll quickly go through these and then go through in more detail some of the issues surrounding these through the presentation.

Bottom line is our overall net loss is a $184 million, is down 64% from the fourth quarter, it's also down 9% from the third quarter of '07. The positive is in addition to it being down 64%, we are forecasting a further decline from the first to the second quarter of 68% and a decline by the end of the year to 89%. So our losses year-over-year I think will be down over 90% from the fourth quarter, where we had our biggest loss of '07 to the fourth quarter of '08. So, the bottom line is the losses are coming down and are manageable from here.

Our net loss from our exited or discontinued activities like our home builder division was $84 million in the first quarter, that’s down 65% from the fourth quarter and if you'd have excluded the restructuring cost, which really is a large one-time cost where we let 2500 people go and closed several offices, the net loss in the first quarter for the discontinued operations would have been down 83% from the fourth quarter.

We also cut our mortgage production loss down to $17.3 million in the first quarter that’s a 66% improvement from the fourth quarter of '07. As I've said earlier, we've also been hurt by the constriction and guidelines across the entire industry, including the GSEs and also there is pretty dramatic spread widening in the first quarter which impacted that profitability. The bottom line is where projecting production to be breakeven in the second quarter and then modestly profitable in the second half of 2008; we will go through the details of that in the presentation.

On the negative side, we do not expect IndyMac to return to overall profitability realistically, until these home price declines start to decelerate. As it clearly is uncertain when that will happen, we are not forecasting conservatively a return to profitability in ’08, as I said the losses will be down substantially and manageable. One of the big issues that really affected our GAAP shareholders equity, our book value per share and even our regulatory capital was the significant fair value marks that we took on our prime jumbo and Alt-A investment grade MBS portfolio which is almost 90% AAA securities.

In my opinion, these fair value marks in no way represent the economic value of these securities and I will go through the objective details on that in a few minutes. The bottom line is we took $443 million of pre tax hits on those securities, $271 million after tax in the first quarter, $39 million after tax went through earnings, they were related to the portion of MBS portfolio that is trading and the remaining $232 million after tax went through available for sale OCI.

If you look at our cumulative temporary or unrealized pretax write downs, they total $668 million or $408 million after tax. $60 million is gone through earnings from the trading portfolio and $348 million after tax has gone through available for sale, directly through OCI and into equity.

The bottom line is, if you add those amounts back, because I think we will get them back over time, our common shareholders equity on an adjusted basis would be a $1.367 billion and our economic book value per share at the end of the quarter would be 15.56. As a relatively large shareholder myself, this is the book value that I really look at in terms of what were trying to preserve at IndyMac through this crisis period, the 15.56.

On the capital front, on the positive side, we remain well capitalized on all three capital ratios; we will walk through the capital ratios in just a minute, pretty extensively. We did contribute $88 million from the holding company to the bank during the first quarter to remain well capitalized and we are forecasting being well capitalized and improving our capital ratios throughout 2008.

On the negative side, because we’re one of the few pure mortgage bankers out there and because of the significant hits, we’ve taken our capital ratios clearly have been depleted and you are limited to one-times your regulatory core tier one capital in capitalized servicing and we hit that cap a little bit in the fourth quarter and a lot more in the first quarter.

The bottom line is as a result it’s causing to deduct the $117 million; essentially if you are over the one time cap one-time cap, you have to deduct the servicing asset, the dollar for dollar from all of your capital ratios. The bottom line is we think that’s a little perverse, given the fact that we have returned strong hedge returns for years in that asset and it’s our best performing asset, but it is what it is and it’s affecting our capital in the first quarter.

Also as a result of our loss the servicing cap penalty and also we have loan loss reserves, general loan loss reserves that are only allowed to be counted to capital equal to 1.25% of your total assets and we have about double that amount. So as a result of that our total risk base capital ratio was relatively close to the well-capitalized minimum; it was 10.26 the ratio there is 10, clearly there are scenarios in this environment where we could not be well capitalized and end being adequately capitalized for a short period of time.

The last issue here, which is not a new issue, ever since we became a thrift back in 2000, we've always informally agree to keep a higher capital ratio than the five and we are working our way back up to that right now; our current plan shows that we will get our capital ratios back up to seven and eleven by the end of the year.

Turning to the second page of the positives and negatives on the liquidity front from a positive standpoint, we have exactly the same operating liquidity we had a year ago, but we are obviously doing three times less the loan volume that we did a year ago and the volume we are doing today GSE/FHA/VA is highly liquid volume and today we don’t have any capital markets funding, a year ago we had between commercial paper and some refill borrowings about $3 million of capital market funding, we paid all of that off, so that’s I think a real positive strong operating liquidity.

The negative side of that is that our cost of funds well, its down, its down only 34 basis points from 1231 to 331 and on a spot basis, it’s down -- periods 1231 spot to 331, it’s down 56 basis points much less in the decline in market interest rates. Clearly that’s starting our thrift, net interest margin; part of that is the normal lag of deposits and part of that is the increased competition for deposits given the lack of liquidity in the capital markets for any other funding source.

On the asset quality side deposited is our pre-tax credit costs, as a result of the big reserve we put in the fourth quarter declined 71% from the fourth quarter and 39% from the third quarter, our total credit reserves are $2.7 billion at March 31 and our actual realize credit losses during the first quarter were $334 million, such that we have 8 times, 8 quarters of reserve on the $2.7 billion.

The negative is that our non-performing assets have continued to rise much like all thrifts. Nonperforming single-family loans take a long time to work through your balance sheet. They don’t become non-performers till 90 days and you often can’t foreclose on those properties for many months later and then we are selling as soon as we get position of the property, we are getting those REOs off our books within 6 months or less, but because of the cycle time that it takes to move through a single-family non-performer, you can see that our non-performers have grown to 6.51% at March 31, but that rate is slowing. That rate of increase from the fourth quarter to the first quarter was 39%, down from an 82% increase from the third to the fourth and we are projecting that NPA growth rate to continue to decline to 21% in the second quarter to 6% in the third and basically be flat in the fourth and then decline from there and I think, we have been pretty accurate at forecasting those NPAs.

Another negative -- and really didn’t happened in the quarter, but happened after the quarter and affected the quarter was on April 23; Moody's down graded 165 of IndyMac’s mortgage-backed securities bonds to non-investment grade. We own 20 of those 165 and S&P down with 251 bonds of which we own 13. The combination of those two down grades resulted in $9.5 million pre-tax loss in the first quarter, so we had to go back and put that into the first quarter and a $17.3 million pre-tax loss in the second and impacted our risk base capital -- $112 million -- it will negatively impacted in the second quarter, all of those have been factored in our detail forecast, which is in the appendices.

If you turn to page five, nothing really big; here the report, this is more of a pie chart version of the loss, you can see that our loss is down 64% quarter-over-quarter. The components of it though are a little different, the components in the first quarter of this year, $44 million after tax is really this onetime restructuring severance cost and what I would consider to be a very unusual and really non-economic, this unrealized fair market firm value mark on our trading portfolio affected us $39 million within the quarter and I think you will see the positive being that our credit costs are coming down because we took a lot of that in those third and fourth quarter of last year; well ahead of other financial institutions.

If you turn to the next page and walking through capital as you know, we raised a lot of capital before this crises period hit in the second and third and fourth quarters of last year. We raised $676 million of capital in 2007; this year, we turned back on our direct stock purchase plan and have raised $97 million to date, so far this year and really that’s been the key to keeping IndyMac well capitalized despite the losses that we have suffered and the loss that we have in the first quarter and despite the fact that we are getting capital charge on our MSRs and you can see that in 2007 we have tier one core capital at the beginning of the 2007 a $2.1 billion, we finished the year at $2 billion and you can see that our capital has come down a little bit more from $2 billion, down to $1.838 billion, but a big part of that change was this change in the MSR Punitive Cap, which is really an artificial deduction from our regulatory capital.

You can see that what we are forecasting in the second quarter is a -- and this loss is slightly smaller than the last consolidated, because this is only the bank loss and then we have the accrual of the trust preferred dividend at the holding company, which increases the loss a little bit. I think the loss for the second quarter is something like $65 million. The bottom-line is this loss of 53, is offset by a capital contribution in the second quarter of $73 million from the holding company to the bank and a positive change in our Punitive effect in the MSR assets in terms of a securitizing some access servicing and selling off a little servicing, so that our total core capital at the end of the second quarter is $1.9 billion and what you will see at the bottom here is our actual capital ratios are tier one cores at 5.74, tier one risk-based is at 9 and our total risk-based is that 10.26’ we’re forecasting those to be 6.34, 9.15 and 10.41 at June 30 and then back up to 7, 10.15 and 11.14 by the end of the year.

You can see here that the top three U.S. Banks have similar capital ratios a little lower on core and tier one risk-based and a little higher on total risk-based and the top Thrift have a little higher ratios on all three. So, the bottom line is we’re continuing to work to raise capital.

If you look at page 7, I think this is an important one to look at here. We take those capital ratios that we finished the quarter at 5.74, 9.00 and 10.26. If we weren’t penalized by this servicing Cap and really this is an asset; we’re probably the only institution in the Country that is being penalized by this Cap because it were a pure mortgage banking thrift and most of the other institutions that have this large of a servicing asset are more diversified banks. If you add that back our capital ratios would be 6, 9.53 and 10.79 and another important point is that for every dollar of capital we have raise we get both that dollar of capital but we also get the servicing Cap down, so essentially we are rising $2 capital.

The other positive here is that the regulatory rules only allow you to have -- cap as total risked based capital up to 1.25% in your assets in general loan loss reserves. We have another $121 million that exceeds that; that would boost our capital ratios to 6.07, 9.47 and 11.36 and that doesn’t count the fact that we have credit discounts of $481 million, $138 of which are in current loans. So the bottom line is our capital ratios really are artificially understated relative to the true economic safety and soundness that we do have in our capital ratios.

As I alluded to you, if you turn to page 8, that because of the both the fair value marks on our MBS portfolio and the servicing GAAP penalty, they both really artificially understate both our shareholder equity and our thrift regulatory capital. If you take our common shareholders equity and I would point out that that shareholder equity excludes the $441 million of trust preferred securities that we do have at the holding company and the $491 million of bank preferred stock, which is shown as a minority interest at the consolidated level, but if you just take that 959 and you add back these cumulative temporary fair value marks are adjusted common equity is a $1.3 billion and our adjusted book value per share is 15.56.

On the regulatory capital front I think this is a real positive; you look at our regulatory capital at the end of the quarter at a $1.838 billion. If you add back -- you do get the add back, the available for sale marks through OCI, but you don’t get the add back, the trading once that we well realized overtime, which is the $60 million. If you add back the servicing cap penalty our adjusted equity -- regulatory equity is really $2.015 billion, which is essentially the same as it was a year and -- at 12/31/06 before this crises period hit and we built up huge credit reserves in addition to that regulatory capital.

Turning to page 9, we made the decision and it was obviously a difficult decision to defer the interest payments on our Bancorp trust preferred securities and to spend the payment of bank preferred dividends we believed that both of these moves are prudent, safety and soundness move in this period. I think clearly you would only do this in extraordinary circumstances, in extraordinary times and the bottom line is if these aren’t extraordinary circumstances and extraordinary times, I don’t know what is. The bottom line is we had a contractual right to do this, that’s why both of these account as regulatory capital.

We have the right on the Bancorp trust preferred securities to differ those interest payments for 20 quarters and when we differ those, those are accrued so we do take a P&L hit for that. The suspension of the bank preferred dividends we have the right to do that indefinitely; those do fall directly to the bottom-line they are not accrued so, that results in us have $10 million plus a quarter of after-tax earnings going right to the banks bottom-line.

This suspension allows us to raise $72 million of capital per year; essentially we say $42.05 million through the bank preferred net improved earnings by that amount and Bancorp as a result of not paying the trust for preferred dividends can pay the bank through and contribute capital of another almost $30 million a year.

The common shareholders clearly or already incurring a dilution as we raise equity through our direct stock purchase plan. I believe it’s time that the preferred holders temporarily share and help in keep IndyMac safe and sound through this period. I just want to emphasis this is temporary; once we return to solid profitability we will pay all the deferred interest on the Bancorp Trust Preferred and resume paying bank preferred dividend.

This next page just goes through the reconciliation; we had this scheduled in last quarter and it shows that we are going to shrink our balance sheet from $331 billion from $32.3 billion to buy the end of the year down to $29.2 billion, that’s going to raise $218 million of core capital, $160 million of risk based capital, we are projecting a conservative $199 million of capital we raised to the direct stock purchase plan, so we will raise about $417 million on a quarter bases, $359 million on a risk base capital basis.

As a result of eliminating the common and preferred dividends, we save $115 million a year, so you can see we raised $532 million of core capital and $474 million of risk based capital in the remaining nine months of the year and that causes our tier one core capital ratio to go from 574 at the end of the quarter to 704 by the end of the year.

If you turn to page 11, in addressing liquidity this is really just the details of our operating liquidities, $700 million of cash on hand, the ability to borrow another $1.5 billion of cash from the Federal Home Loan Bank based on the collateral that we have pledge with them, $1.3 with the Federal Reserve Bank based on the collateral that we have pledged with them and the same -- and $600 million committed repo facility, so those are the components of our liquidity.

Our liquidity has declined from 12/31, really primarily is a fraction of the wider lending margins imposed by the Federal Home Loan Bank. They have been a tremendous business partner during this period of time but clearly to protect our collateral they have had wider lending margins for all financial institutions of borrowing from the Federal Home Loan Banks. As I said earlier our total liquidity is essentially the same as it was a year ago and liquidity needs are much lower today as a result of the production being down in the liquidity of that production.

If you turn to page 12, these are the components of our costs of funds and as I said you can see here that our spot rate of costs of funds is down 56 basis points but really deposits due lag market funding sources and it is competitive out there in the marketplace for CD’s and money market accounts given the fact that there are few other sources for financial institutions to borrow today.

If you turn to page 13, this is the fair value mark on the MBS portfolio. You can see here and what we tried to do here is do -- beginning balance, additions, deletions, ending balance and what you can see at the fair market value of our 12/31/07, non-agency investment grade MBS is $6.78 billion. I’m a big fan of reconciling to the 10-Q and so if you want to reconcile that $6.78 billion or $6 billion at 331, there is an appendices in the back that will take this plus our agency and other securities and reconcile to the 10-Q. The bottom-line is our non-agency investment grade MBS portfolio, had net additions P&I payments of $208 million during the period. $72 million of investment grade securities were downgraded to non-investment grade during the quarter.

We had $12 million of other than temporary impairment and $443 million of temporary unrealized losses, $379 million in the available for sale and $64 million in the trading and what you can see here is that our non-agency portfolio is about 50/50 jumbo and Alt-A and you see the prices that we book that at the end of the quarter, 90.67 for the available for sale, 84.15 for the trading with the blended total of 89.9. The P&L income statement impact for the quarter, was a combination of the other than temporary impairment of $12 million and then the temporary unrealized loss pretax of $64 million, so the after tax impact was $46 million and cost us $0.57 a share in the first quarter.

The change in the book value for the quarter besides to $0.57, the piece that went through OCI essentially was $443 million. Well actually this is a combination of both these; this is a $443 million. It impacted book value per share negatively $3.9 for the quarter. If we turn to the next page, which is 14; this has the securities by rating and it combines both the trading and available for sale portfolios, so you can see the phase value or par value of our securities was $6.7 billion; almost 90% are AAA, 6.8% are AA, 2.5% are A, 1.4 are BBB. This is not our non-investment grade portfolio, which is in the Appendix.

The fair market value, what we have them on our books for at the end of the quarter is $6 billion, as I said the 89.9 is the average price and you can see the price by security and I think what this shows you -- the regulatory risk-based capital requirements for those securities is 2% for the AAA and AA, 5% for the A and 10% for the BBB. Assuming no losses on these securities, and I will show in just a minute why we assuming that. The ROE based on risk-based capital you can see blended for this portfolio is a 162%. I mean that’s the widest strongest ROE’s that I have ever seen being in the business and I think clearly shows you that this whole fair market value accounting well its GAAP really is not properly reflecting the economics of these portfolios.

You can see at the bottom how we reconcile from phase value, take out the permanent impairment of 12 and show you the cumulative of temporary unrealized losses of $668 million, $97 million through our trading portfolio and $571 million through available for sale.

The after tax impact, which flowed through equity of that is $408 million and $464 and so basically that $4.64 is the difference between our GAAP book value per share and the economic book value of the 15 plus I was talking about earlier.

If you turn to page 15, while we are confident that will we get this $668 million of cumulative temporary impairment and that that will reverse over time as we hold these bonds, I think you can look at the facts here. At 3/31, the fair market value of those bonds was $6 billion. These are relatively seasoned securities, the ones that we hold on our balance sheets, they’ve been around for 28 months average. The actual cumulative losses on the underlying collateral are only 12 basis points through 331 up from 10 basis points, the 30 plus delinquencies are 5.84, the foreclosures are 2.24.

We’re expecting cumulative lifetime losses on this pool of lumps backing these securities of 150 basis points. So essentially, we’ve incurred 12 and we’re projecting that we are going to have another 138 basis points of losses, so more than 10 times, the actual losses today we are projecting. The interesting point is while cumulative lifetime losses are 150 bips, the average credit enhancement subordinate to our bonds 785 basis points, so even if that 150 basis points is wrong, we’d have to be wrong by over five times before our bonds would suffer any credit losses.

The bottom-line is -- my line when I looked at this and looked at our fair value accounting, as I said if you took a bunch of really smart PhDs who knew everything about the mortgage backed securities market, but hadn’t been hearing all the information and illiquidity in the marketplace and put them in a room given the fact that our expected cumulative losses of decline from a 158 basis points to 150, there is absolutely no way that they would have ever rationally come up with the idea that we had to write these bonds down $443 million in this quarter, especially giving the fact that interest rates have declined and IndyMac’s funding costs have declined.

I think the other thing to point out is that we don’t have 331 MBA delinquency data, but that 331 -- the 1231 MBA delinquency data for the entire mortgage industry was 6.3 and 2.04 at 1231; our collateral backing these loans was 478 and 142, so compares very favorably to MBA average rates.

Moving on to credit, I think that the biggest and most important thing that we've done is we have realigned our organization to really focus on our high-level of non-performing assets and the repurchase and secondary market warranty risk that’s embedded in our business model and balance sheet.

We've taken our President Richard Wohl and asked him to really step out of some of our business activities and focus his sole time on credit loss mitigation and he's built a really strong team in the last several months to focus on our on balance sheet discontinued portfolios which are our construction portfolios, our on balance sheet higher risk, single-family portfolios which are primarily our non-performing single-family loans, our option ARMs, the small amount of sub-primes and our home equity and second portfolio and also focus on off-balance sheet repurchase and recourse liability, tied in with that is obviously having our legal department and our secondary marketing counsel.

So, the bottom line is we kind of focused him on -- for lack of a better term on the bad bank issues and he is very much focused on working through those issues and I think it's going to make a big difference in the losses that we saw first; that are embedded in our balance sheet in our business.

If you turn to page 17, the bottom line, the negative clearly is that our delinquency and foreclosure trends have worsened at a faster rate than the mortgage industry, but really this is because of the fact that our servicing portfolio is skewed to '05 through '07; 86% of our loans in our servicing portfolio are from that period of time versus industry at about 50% and a lot the industry volume came from that 2003 book, which is the book that is performing obviously the best, but I think the important thing to look at here is that our performance in our core Alt-A business, which is in the table at the bottom left, you can see that our cumulative losses on Alt-A are eights bips, 38% lower than the industry and those Alt-A losses are 95% lower than industry sub-prime losses, which are a 155 basis points.

I think, you have had -- on the right you can see where Alt-A stacks up in terms of its delinquency numbers, you can see prime at 451 and 167 in terms of 90 plus delinquent, HELOC at 594 and 307. HELOC numbers obviously are much lower because of the fact that just after 90 days you charge those off, you don’t go through the fore closure process, which takes a lot more time and increases delinquencies and NPAs. You can see that Alt-A delinquencies for IndyMac are 11 and 505 versus industry Alt-A at 1231 and 644. Those are well below the FHA delinquency and 90 plus delinquent statistics and if you will recall, the average FHA loan is nearly a 100% and the average Alt-A loan is in -- for Indymac is in the low 70s.

If you turn to page 8, you can see here the credit reserves that we established. You can see clearly that what we did between the fourth quarter -- in the fourth quarter is we got all of our loans that were not saleable, many of which -- some of which were delinquent, out of the held for sale bucket and have gotten that bucket very clean. As a result you see us not providing much in the held for sale category because we have very few delinquent loans there.

We continue to provide strongly with our secondary market reserves; we provided almost $25 million for the quarter and then significantly in our held for investment portfolio $131 million in the first quarter, $44 million in our non-investment grade in residual securities portfolio and $47 million in our real estate owned.

The bottom line though is the impact per share has declined from 340 in the third quarter and 664 in the fourth down to $1.87 and while we still have had challenges in forecasting credit losses, our myth is substantially better, that’s the bottom right one; you can laugh all you want about this, but when we forecast the third quarter losses, we missed by 12 times; when we forecast fourth quarter credit losses, we missed by 8 times and in the first quarter this year, when we forecast the first quarter, we missed by 2 times and what I would say is we just went through a regulatory exam and where the examiners would come up with something we put into the first quarter, so that was probably the biggest part of our miss in the first quarter.

Page 19 shows you, by asset class our non performers and the reserves that we have. You can see that we have $1.3 billion in reserves satisfied for future credit losses on loans and $1.4 billion of reserves, credit losses embedded into the value of our $320 million of non-investment grade residual and MBS securities and you can see the detail of that in the appendices security-by-security.

On page 20, what we tried to do here is show you the UPB of our all of our held for investment portfolio, the life time probability of loss that we are assuming, the original LTV and CLTV, the expected principal only loss severity, the lifetime loss percentage and really this should say the remaining lifetime loss and then what we are projecting to be the credit losses in the next four quarters.

So, we are projecting in our held for investment portfolio remaining lifetime losses of the $1.3 billion, $745 million of which will come in the next four quarters and we have total credit reserves of $963 million at $331 million, $483 million in traditional allowance and $481 million in credit marks. So, essentially we have approved for 74% of the estimated remaining lifetime losses of our investment portfolios and 100% of the losses in our credit impaired portfolio, which totals about $2.8 billion.

In addition, I think what I would like to point out here is that in the next three quarters we are forecasting in our financial plan an additional $232 million of provisions related to these portfolios so, we will have accrued by the end of the year 91% of what we believe -- we are estimating are the losses inherent in this portfolio. We did use that kesio or index if you recall; that index the losses to date for the US home price declines have been 12.5% to date. They are projecting a further drop in the US of 9.3%, so a peak to drop in the US of 20.6.

In California that decline has been 19.8% to date. Their kesio is forecasting an additional 13.4% drop, so a peak to trough drop of 30.5%, a off blended rate for our portfolio because it is more California concentrated, the assumption in the loses in this model is about 13% additional home price declines from here, so much more that California percentage than the overall US percentage.

If you turn to page 21, the positive news here is that you can see that our repurchased demands has stabilized, that’s the bottom chart and we’ve been repurchasing about the same amount each quarter. $147 million in the third quarter ’07, same in the fourth and $148 million in the first quarter of this year and those are the demands. The actual repurchase volume has come way down from its peak. It peaked in Q1 ’07 at $224 million and we are down not quite 90%, but pretty close down to $29 million in the first quarter of ’08.

We’ve continue to build our secondary market reserve you can see that we have reserve of $188 million. One of the things that will do a better job of -- there really are two reserves embedded in here; one is the reserve for loan repurchases which you see the tables here and the other is the reserves with disputes with companies like mortgage insurance companies and bond insurers and there is a big accrual as part of that $188 million for those activities and I think you will see us do a better job of breaking those out in future reports.

On page 22, what you can see and I think this -- just skipping back to page 21 for a second we have almost no repurchases as a result of early payment default and one of the keys to that on page 22 is the kind of credit quality of our production that we are doing today. If you look at the upper right box we produced $9.7 billion of loans in the first quarter, $197 million were with FHAVA that doesn’t go through the S&P levels model. The $42 million of home equity lines of credit is just the stuff that we are doing in our branch. You can see that that’s 741 FICO, 74% CLTV, the billion of reverse mortgages we are doing at a 58 CLTV. This was the remainder of the consumer construction business. We stopped doing that business, you will see probably a close to or if not as zero number next quarter and then we have a small multi family business doing $121 million a quarter.

So the production that went through the S&P model was $8.18 billion for the quarter and if you walk through that the average loan size was 285 million, the average S&P lifetime loss is 23 basis points, the average LTV was 70, the average CLTV was 71, the average FICO was 731, it was all prime business and 91% was primarily in homes, 4% second homes and 5% investor properties, 60% was full doc, 23% was Fannie Mae’s fast forward program and 16% was other and you can see the geographic dispersion of that portfolio and you can see in March they continue to improve even from there with our S&P lifetime loss down to 17bip. So year-over-year we’ve decreased the credit risk of our production by over 90%.

Okay, turning to page 24 and what I would just tell you is -- and we’ve made it our policy to continue to -- as our forecast change to get those hard off the press and out to investors. Clearly in this environment forecasting is very challenging, but what we did as we continue to try to reflect the reality that is in the marketplace here and so what you can see here on page 24, is the bottom-line is that our -- we are not forecasting return to profitability, but we are forecasting that our loss will be down to $20 million by the fourth quarter.

The other thing is our new business model. We are not forecasting it to make an enormous amount of money this year; it will just be modestly profitable and really that’s because we are still in the thrift carrying substantially higher credit costs than normal. I think the other positive here as you can see, our discontinued loss continues to come down as the year progresses.

If you turn to page 25, we are forecasting our mortgage bank in the second through the fourth quarters to make between a 14 and then 23 ROE, where you can see that we’re not making a lot of money because the thrift is still carrying really abnormally high credit cost, as the thrift is only making a two to four ROE in the second half of the year and when you combine that with corporate overhead, you end up with even in the new business model a relatively small ROE and clearly we will be working on trying to improve our performance from these numbers, we’re going to cut our corporate overhead during this period of time.

If you look at page 26, this is the details of our mortgage production model and you can see that clearly financial freedom is driving the bulk of our profitability with the rest of our mortgage banks, for the year being near break even, as we change from a non-GSE model to a GSE model. One of the things that’s hurt us up until just about this last week is that we really haven’t had a competitive jumbo product because of the fact that we don’t want to grow our balance sheet. So, we haven’t been able to put jumbo loans on our balance sheet and while we rolled out very promptly both the Fannie and Freddy and FHA/VA jumbo products, up until about a week ago the pricing on those as everybody knows was substantially worse than confirming loans.

Well over a percentage in rate higher the new Fannie and Freddy jumbo pricing is outstanding and we have seen our rate lock volume in the last week shoot up dramatically while we were doing $5 million, $10 million a day of jumbo rate locks. Last week we did $50 million to $75 million a day of jumbo rate locks, so that would be 5 to 10 times the jumbo volume we were seeing and that’s going to be a big help to a lender line IndyMac that has strong operations on both the curves and really jumbo market areas and I think that overtime we will improve our production results from the results that you see here.

On page 27 is the thrift and you can see that the mortgage backed securities portfolio is projected to earn solid ROE’s for the remainder of the year and the whole -- really it’s the single-family portfolio you can see here which is dragging down the earnings of the thrift and that’s because its absorbing very high credit cost; a $187 million in the first quarter, but still even $77 million by the fourth quarter. The normalized credit cost that that portfolio would be absorbing in all but a period where you have -- when you have accelerating home price declines -- if we’re having that our normalized credit costs would be $28 million and our thrift would be earning 19% ROE.

The discontinued activities -- the only good thing here is they are discontinued and the losses are coming down and we are working our way through those and you can see that the loss is going from $40 million in the first quarter down to $23 million in the fourth quarter.

Page 29 is the same schedule that we did before. If you look at the box at the bottom, our production credit cost in the new model were $10 million in the first quarter and what we’re saying that they are going to be for the Q2 through Q4 is $20 million for a total of $30 million for the year. We don’t really see that fluctuating much, we think that’s going to be right on and you can see here that we’re projecting the actual thrift costs for $187 million in the first quarter; they are projected to be $237 million for the remainder of the year second through four. If you increase those by 25%, 50% and a 100% assuming we are wrong they go up to $472 million at the 100%.

On the discontinued side what you can see here, the same thing if you look at the Q2 through Q4 we are forecasting 139. If you increase those up to 100% you can see 277 and those slow up into base case 25%, 50% and a 100% worse and you can see here that we are well capitalized even with the MSR penalty and all but the 100% worse cast scenario and then we are well capitalized on core and just below well capitalized on total risk-based capital.

So, kind of in conclusion clearly our overall goal for 2008 is to keep IndyMac Banks safe and sound and the bottom line is I think you have to have some faith that with significantly reduced competition we have the faith and we are confident in our long-term earnings prospects. Our goals for the year are to re-build our core and risk-based capital ratios backup to 7 and 11, maintain our operating liquidity, commensurate with our new business model and lower our cost of funds overtime, mitigate the credit losses embedded in our balance sheet and related to our secondary market warranty claims and achieve at $809 million reduction in credit costs year-over-year and return on mortgage production model including Financial Freedom to strong and solid profitability.

As we said we are projecting $37 million in after tax profits for the remaining three quarters. We are going to do that through disciplined marketing, automation and standardization and profitability management and that means closing some offices if they are not profitable and continue to grow our servicing earnings and earn strong hedged returns and we are going to keep repeating this and one of the reasons to keep repeating this is to repeat it to our team: we are focused on the fundamentals and the following key principals.

We are going to ensure that every loan we make is well understood by each consumer and suitable for them. We are going to 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 macro environment affecting our business, something I think we could have improved upon during this period become obviously less reliant on Wall Street, which we are not reliant at all today, become the low costs provider of mortgages in our industry and deliver industry leading service to our customers and some of the things we just really don’t have time to talk you, but we put a lot of technology in place.

Hydra – Frank, what are some of the other ones?

Frank

E-fold that are in imaging.

Michael Perry

E-fold that are in imaging – we have a lot of technology that we’re rolling out to our customer base that they are loving here, so with that -- I’ve talked long enough, I’d be happy to answer any questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Paul Miller. Mr. Miller, your line is open.

Bob Ramsey - Friedman, Billings, Ramsey & Company

Thank you. This is actually Bob Ramsey. The question I have got for you, you will talk about $745 million of losses on your loan book over the next four quarters, but I also see at the end you have got your projections, you are looking for a provision expense, even if you sort of repeat that fourth quarter we are closer to $300 million. So there is a pretty significant difference between the two. You are you going to be drawing down the allowance by that amount?

Michael Perry

Yeah, I mean I think, clearly you build-up reserves in advance of having the credit losses, so at some point -- so as we kind of have those losses to run through we won’t need the reserves anymore as our NPAs decline.

Bob Ramsey - Friedman, Billings, Ramsey & Company

And you cut that over the next four quarters?

Michael Perry

Absolutely. I mean we really got those reserves ahead of the actual losses and that’s what they are there for. We don’t normally – wouldn’t normally be carrying $2.7 billion of credit reserves on our balance sheet.

Bob Ramsey - Friedman, Billings, Ramsey & Company

Okay and then if I could ask a quick follow-up question on the DSPP program that you all have, how much of a discount are you issuing those shares out?

Michael Perry

Its 2%

Bob Ramsey - Friedman, Billings, Ramsey & Company

2% okay, and then you said $199 million is that in quarters two through four of this year or did that include the first quarter?

Michael Perry

That excludes the first quarter. That’s a $199 million for the remaining three quarters.

Operator

Your next question comes from Frederick Cannon from KBW, your line is open.

Frederick Cannon - Keefe, Bruyette & Woods

Thanks. I noticed on page 82 of the Q that was about 84% of the mark-to-market assets of level 3 which imply to use internal models and I was wondering Mike you had suggested that the mark-to-market assets were fairly severe marks and different from the your expectation that you are using your own internal models to determine that, I was wondering if you could kind of explain the differences?

Michael Perry

Yes, I mean we’re not that’s one of the things that we’re using. If we were using our own internal models strictly I wouldn’t have taken any of that loss. That was my point on that one page where I showed that they actual performance of that book, which was page 15 right. The key expected cumulative lifetime losses actually decline and interest rates came down. If we were using our internal models we would have written securities up, okay. Why, they are classifieds as level three, is there is not an absorbable market out there. Were you have ARMs-length sale accruing right. If you look at the Alt-A and the Jombo marketplace, what you see largely is distress sales. I haven’t really seen one other then the one that we did on the April 1st, where we sold the AAA super senior to the Federal Home Loan Bank of Seattle at a 99 and three quarters price. I haven’t seen too many ARMs-length sales I think, you little get it and most of the sales have been guys who were forced to sell because of margin causing where they’ve got liquidated out, whether that’s Thornburg or Peloton or Coralville or some of those guys or an entity like UBS to have sold because there, they are basically saying, we want to be able to say to the market environment we are out of U.S. mortgage-backed securities that loss -- that we’ve taken that loss and its behind us. So, I think that’s a distress sale tier. So, I think what we saw in the marketplace out there was in terms of -- and we also looked at footnote disclosures and other disclosures of financial institutions who released. So we use the combination of what other financial instructions disclosed. We used a combination of the Federal Home Loan Bank trade that we did, we use as many of those inputs as we possibly could, but I would say if we were just using our own our internal models we will return those securities up, in my opinion because that would have been in the cash flow model. That would have - that would have come out of that marketplace. We saw prices from anywhere -- distress sale prices from anywhere from like 77 to 96, right and our portfolio I think was 899, as where we came out.

Frederick Cannon - Keefe, Bruyette & Woods

Okay, but since these are level three and you are using a lot of fair amount of judgment. If you’d actually had to price these two distress sale levels you would have to take much more severe markets, is that true?

Michael Perry

Yes, that’s true.

Operator

Your next question comes from Jim Fowler from JMP Asset Management. Your line is opened.

James Fowler - JMP Asset Management

Drawing your attention to page 15 in the presentation this might be a little more detailed when you had it immediately at hand but I just want to ask the questions. On the credit enhancements that you have, that you note of 785 basis points? Is that correct enhancement at origination -- at initial securitization or is that current credit enhancement? I know this is..

Michael Perry

That’s current; the guys are saying that’s current.

James Fowler - JMP Asset Management

Fantastic. Okay and then

Michael Perry

It really wouldn’t matter that much Jim because the total losses have only been 12 basis points.

James Fowler - JMP Asset Management

Right, I just wondered if okay, fair enough. 28 months of seasoning what is the nature of the collateral I mean, what percentage – since it’s the weigh in average. I mean is there are percentage that you can give us the collateral that’s been through some sort of the, payment adjustments process to see what royalty liquidities might be might be after that?

Michael Perry

Yes, there is very little option ARMs in here I think -- guys what’s the option ARM 5%, 4% option ARMs. Okay so, these are either intermediate like 3151 product is the bulk of it, 71s and some fixed rate product and it’s as we said about 45% Jumbo 55% Alt-A., So, 700 FICO, low 70’s LTVs.

James Fowler - JMP Asset Management

So the presumption would be as the 31’s and 51’s it should get close to resetting they might actually be able to refinance?

Michael Perry

Correct.

Operator

Your next question comes from Howard Amster from Raymad. Your line is open.

Howard Amster – Raymad

Thank you for taking the question; how many shares do you now have outstanding?

Michael Perry

Does anybody here know that, I don’t know the answer to that.

Unidentified Company Representative

100 million

Michael Perry

100 million shares outstanding as of 331

Operator

Your next question comes from Jason Arnold from RBC Capital Markets; your line is open.

Jason Arnold - RBC Capital Markets

Hi, good morning. Just a quick question on your non-EPD repurchase demand; they have been relatively high at about $150 million over the past couple of quarters what percentage of these demands would you expect to be required to meet and what would be the expectation for really the going forward if you want to assume?

Michael Perry

Well, the actual occasion as we’ve said for several quarters now that they were going to increase. It was going from kind of this EPD market to now as loans mature and as delinquencies arise you are going to have more than non-EPD warranty repurchases and that’s one of the reasons why we more -- almost quadrupled our secondary market warrant accrual, between -- so like 3.5 times from $50 million at the end of Q1 '07 to $188 million at the end of Q1 '08. You can see that in fourth quarter we had $147 million of demands, almost all of them were Non-EPD. We repurchased in the first quarter because that kind of is our quarterly lag, $29 million and you can -- Q1 '08, they were about the same $148 million, but I do expect them to increase. Clearly it’s one of those environments where you don’t know for certain how that’s all going to work it’s way-out. As delinquencies rise and especially in this environment, you're going to investors trying to ask you to repurchase more loans, I mean that’s just the way it is and I think what we’re -- we set up with our President Richard Wohl, who is a Harvard lawyer, they have got a strong team in that area really looking through each one of these loans making sure that the reason that the loss has been incurred is something we did wrong as opposed to the housing market just declining. That’s one of the things that ensures or is famous for us basically when -- clearly that number one and two reasons why properties are going delinquent is the housing pricing declines and number two is the initial loan-to-value ratio. It's not, whether it was a limited or Full Doc loan or some of the other types of issues that are out there, so I think, we feel like that’s a reserve that we've established, prudently with a strong methodology and worked to increase it, but it's something that we're going to continue to monitor throughout the year and through this crisis period.

Operator

Your next question comes from Michael Rogers, from Conning Assessment Management. Your line is open.

Michael Rogers - Conning Assessment Management

Yes, good afternoon. I wanted to ask a little bit about the regulatory exam that you folks just said you went through and had completed. Could you provide more color as to what the general conclusions where with the regulators and where they a material part of the decision to pass payment on -- of interest on the debt as well as preferred?

Michael Perry

No -- that’s a good question. They're largely out of the field, okay and they're completed with their credit work, which and our auditors as part of our first quarter earnings release had conversations with them, but we have yet to receive, the report from them or any of their specific findings that will come out sometime, we think later this month. They were not involved in the decision to temporarily suspend the trust preferred and preferred dividend payments; we made that decision on our own. I think giving the fact that this has really been a crisis period for industry, given the fact that we're not projecting to return back to profitability this year, we felt that that was a prudent move. We have the contractual right to do it both in the trust preferred and the preferred documents and it does help us to build capital ratios in really the least diluted way possible for our common shareholders.

Michael Rogers - Conning Assessment Management

The up-chart of it will probably be though that your access to those markets will be a materially impaired though for sometime?

Michael Perry

Yeah, I mean I think that our view is that they have been already. That those markets, accessing, preferred debt right now is pretty challenging. The opportunity for us really more lies in accessing common through our direct stock purchase plan and this suspending though should help the common shareholders and the other access potentially for us is to look at selling off some of -- selling of a business like Financial Freedom that has the opportunity to not only take servicing rights off our books and goodwill of our books, but also some assets of our books and build capital ratios for us, so I think those would be the direction that we would be looking as opposed to trying to raise, preferred debt at this time.

Michael Rogers - Conning Assessment Management

Could you tell me, what percentage of overall common senior management is a holder of?

Michael Perry

Well, I publicly own about over 500,000 shares and I believe if I am not the largest individual shareholder, I would probably say I am that second largest individual shareholder. I think that’s in our proxy, I don’t have the details of that right in front of me, but we didn’t do it from the standpoint of saying, “we did because, it’s benefiting the common shareholders.” We felt that it was the prudent and safe and sound decision to make given the environment that we are in right now.

Michael Rogers - Conning Assessment Management

Okay.

Michael Perry

And that it’s in the long-term interest of the trust preferred and preferred holders. I mean I want to make that clear; I believe it’s in the long-term interest of the trust preferred and preferred holders that we temporarily suspended these dividends.

Operator

At this time there no more question. Mr. Perry, you may take over the call.

Michael Perry

I don’t have any more comments to make. I want to thank you and I also want to thank our team, who worked incredibly hard given the environment that we are in and all of the complex issues that we have to deal with and especially given the fact that our Chief Financial Officer, had to take a medical leave of absence right in the middle of us finishing our quarter. Our team did a tremendous job to get this done on time and right and I am incredibly thankful to them and we are just continuing to fight our way through this. As I said earlier, I believe we are over the hump and think and we are going to continue their pair our losses down and work very hard to return our business to profitability. Thank you.

Operator

This concludes today’s conference call. You may disconnect.

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