Mortgage production volumes and profits vary with changing interest rate, economic and competitive conditions. To help stabilize our earnings through a variety of environments, we have built a hybrid thrift/mortgage banking business model. On the mortgage banking side, we generate earnings largely by originating, securitizing and selling loans and securities at a profit and by servicing loans for others. On the thrift side, we generate core spread income from our investment portfolio of prime SFR mortgages, home equity loans, consumer and builder construction loans, warehouse lines of credit and mortgage-backed securities. During periods of low interest rates, our mortgage production increases as borrowers refinance their loans. During periods of rising interest rates, when there is little incentive for borrowers to refinance and fewer borrowers qualify to purchase homes, our mortgage production tends to decline. As it declines, the income streams from our investment and servicing portfolios help stabilize our overall income. With business segments focused on mortgage production, servicing and thrift investing, Indymac can deploy its capital opportunistically in the areas that offer the best returns in varying market conditions.

In deploying capital, we do more than just identify the areas with the best return — we also look for the most economical funding sources and appropriate transaction structures to maximize the efficient use of our capital. In the fourth quarter of 2006, we saw a fairly significant decrease in the ROE in our thrift segment, mostly caused by net interest margin erosion in our whole loan and MBS portfolios. This seems to be part of a broader trend, the continuation of which is inevitable. In light of this trend, our capital deployment and profit growth will be more focused in the future on the two broad segments of our mortgage banking business, mortgage production and mortgage servicing. While we will continue to maintain some level of investments in our whole loan and MBS portfolios, going forward the growth of these portfolios will be based on the extent to which (1) their ROEs exceed our target returns on both core and risk-based capital or (2) they are needed to support our core mortgage banking investments in mortgage servicing rights, if their ROEs are below our cost of capital.

Indymac is leveraging its mortgage banking platform by expanding its sales force and adding new regional centers. In 2006, we increased our Mortgage Professionals business sales force by 44 percent and opened three new regional mortgage centers in Tampa, Fla., Chicago, Ill., and Boston, Mass. We now have a total of 16 regional centers and plan to open nine to 14 additional regional centers for a total of approximately 25 to 30 in the coming years. Our regional centers provide support at the local level for our wholesale customers. Indymac’s regional mortgage centers, and its 24-hour call center, are staffed with knowledgeable mortgage experts dedicated to providing the highest level of customer service.

The Retail Lending Group, a division of the Mortgage Professionals Group, will open retail storefront mortgage offices in areas supported by regional operating centers. The storefront offices will be managed by local leaders with proven expertise in loan production. In February 2007 we made a step in this direction with the acquisition of the retail platform of New York Mortgage Company (NYMC), which has roughly 20 office locations, around 10 satellite loan origination locations and approximately 200 retail loan officers. Additionally, we plan to open 15 to 20 retail mortgage offices in 2007, beginning in the San Francisco Bay Area. One of our goals for this initiative includes becoming a top 15 retail lender over the next 5 years.

With a consumer customer base that now numbers 829,000, we have an excellent opportunity to cross-sell our mortgage and retail banking products. Consumer Direct Lending will leverage our growing customer base and maximize all customer touch points to drive cross-sell and retention opportunities. This will be achieved by offering “best in class” customer service, and by providing proactive, streamlined mortgage offerings. We provide our customers competitive rates and consultative, advice-based lending solutions, supported by a simplified lending process.

In addition, we are focused on becoming the Web’s low-cost provider of financial products/services to price-sensitive and Web-enabled consumers in order to help them meet their personal financial objectives. While the initial emphasis will be on building the sales and fulfillment platform to support home equity loans, this platform will later be used to capitalize on opportunities to cross-sell other retail banking products.

Indymac has leveraged its expertise in Alt-A loans to expand into specialty product areas such as residential construction-to-permanent loans, home equity lines of credit, and, through its 2004 acquisition of Financial Freedom, reverse mortgages. Because these specialty loans are less sensitive to changes in interest rates, they give us the opportunity to grow production during times when volumes of more conventional products are declining. While these specialty markets are smaller than the traditional/first mortgage market, Indymac has built a strong presence in them. The infrastructure we have established will enable us to continue growing our share of these markets, as well as capture more of the overall residential market.

Financial Freedom seeks to maintain its leadership position as the number one lender and servicer of reverse mortgages in the U.S. by expanding and optimizing our sales distribution channels in both the retail and wholesale markets, including Indymac’s MPG sales distribution channels. In addition, we are focused on developing innovative, lower cost products that meet the needs of a larger segment of the untapped senior market. By building and leveraging technology platforms, we can increase efficiencies in originating and servicing reverse mortgages. We believe that given the growing senior population, reverse mortgages represent an excellent growth opportunity for us, and an important tool for providing financial security to seniors.

Indymac is achieving strong growth through “replication and refinement,” the process of expanding an existing business. For example, our Mortgage Professionals Group is opening new regional mortgage centers, adding salespeople and offering more and better products and services. At this point, the division really depends on strong execution and oversight. But we also see opportunities for new businesses that require more entrepreneurial leadership and a different management approach. With this in mind, we have created an Incubator Group to provide both the support and expertise required, as well as the room and flexibility they need to grow. We will also consider acquisitions if they are an appropriate match to our business and culture and can be accretive to earnings. Financial Freedom is an excellent example of this acquisition philosophy.

Grupo Mayorista was created to target and serve brokers and emerging bankers located in markets with a significant Spanish-speaking population. It will leverage the existing processes while providing products and services tailored to the Hispanic market through a bilingual sales force and operations staff. Indymac already has a strong foothold in this market. In 2006, loans to this market constituted 27 percent of all Indymac originations; up from 20 percent in 2005. Presently, the national homeownership rate in this segment is about 47 percent, compared to 69 percent for the overall population. Given the country’s underlying demographic shifts, this initiative offers growth opportunities for Indymac and homeownership opportunities for a growing and underserved population.

Indymac is developing an in-house securities corporation to underwrite the Company’s loans and securities and distribute them directly to institutional investors. This direct interaction with investors will reduce the Company’s dependence on Wall Street intermediaries, increase Indymac’s transparency to the secondary markets, and enhance competitiveness and profitability in its mortgage banking and thrift operations. IMSC will also opportunistically underwrite and trade other issuers’ loans and securities.

Our branch network has tripled since we became a depository in 2000. Currently, we have 29 branches in the Southern California area. Expansion of our branch network is a key strategy for reducing funding costs. It also offers additional opportunities for cross-selling. Our plans call for the opening of four to five branches in 2007. We open branches strategically — as recently opened branches reach scale, we look to open additional branches in areas that provide the best opportunities for capturing deposits and supporting cross-sell initiatives. Deposit funding must be competitive with other sources of funding, and expansion will depend on the extent to which they provide an “all-in” lower cost basis than can be obtained through other funding sources and/or are needed to support asset growth.

Indymac’s branch managers seek to provide a personal touch and deepen customer relationships. They supervise branch lending specialists who call on existing mortgage and deposit customers to drive retention and cross-sell opportunities. Both the branch managers and lending specialists focus on high-quality, personalized customer service to build strong relationships. We have aligned compensation plans and developed accountability systems to ensure that we attract, hire and reward exceptional talent to drive deposit growth and mortgage cross-sell and retention, while meeting the financial needs of our retail customer base.

Delivering for customers and shareholders is largely a function of the quality, creativity and hard work of our people. We believe strongly in the value of a meritocracy — where people are evaluated and rewarded based solely on their performance, without regard to politics. Building our team around a culture of meritocracy results in the greatest level of business success. We advance this culture by holding people account-able and giving them the proper incentives and rewards for superior performance. In keeping with our performance-driven culture, all business segment leaders participate in Management Accountability Week, a quarterly event where their recent performance and results are reviewed in depth and tied to their quarterly bonus payments. This process provides an opportunity for problems to be diagnosed early and for best practices to be identified and shared with other divisions.

We have built a strong management team with the depth, breadth and expertise to support a much larger organization and provide leadership as we grow our operations across the country. This team has strong capabilities in enterprise risk management and is dedicated to upholding the highest ethics in corporate governance.

The current housing industry slowdown has increased loan delinquencies and non-performing assets and driven up credit costs for all mortgage lenders. Accordingly, we must be smart and prudent in adjusting our underwriting guidelines, setting risk-based pricing, making decisions as to what assets go into our investment portfolio and/or distributing our risk into the secondary market, and executing on best in class loss prevention and loss mitigation practices. Importantly, as reported in Indymac’s quarterly reports, Indymac is a prime mortgage lender with less than five percent of our overall loan production being subprime loans. While credit quality is likely to deteriorate during 2007, we believe Indymac’s focus on the origination of prime loans, with average FICO scores exceeding 700 and average combined loan-to-value ratios of 80 percent in 2006 — combined with strong risk management — should provide a significant margin of safety. Examples of additional controls implemented recently include: