IndyMac Posts $200 Million Quarterly Loss

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IndyMac posted a net operating loss of more than $200 million related to credit costs in its 3rd quarter earnings release. The loss is only the 2nd in 15 years for the company since the current management team took over the operation. The losses were greater than expected. Here are some salient points from the earnings report:

Total pre-tax credit costs were $407.7 million (versus $103.5 million in the second quarter of 2007), or a negative impact on earnings per share (?EPS?) of $3.40.

Spread widening in the private-label (non-GSE) mortgage secondary market resulted in a loss of gain on sale and MBS securities revenue estimated at $167.2 million pre-tax for the third quarter, or a negative EPS impact of $1.39.

Hedging out-performance with respect to the mortgage servicing rights (?MSR?) asset resulted in an additional $148.7 million in pre-tax servicing revenue in the third quarter, or a positive EPS impact of $1.24.

Staff reductions and related severance costs in the third quarter (1,547 positions) resulted in a one-time, pre-tax charge to earnings of $27.6 million, or a negative $0.23 EPS impact.

CEO Mike Perry had this to say about the company’s performance:

?We are clearly disappointed with this quarter?s results, which were driven by deteriorating mortgage delinquencies and a declining housing market combined with an unprecedented collapse in the secondary market for non-GSE loans and securities ? Indymac?s primary business,? stated Michael W. Perry, Chairman and CEO. ?While this loss is substantially higher than we had been forecasting, it was clearly not unexpected given the magnitude of the losses being reported by others in our industry and the recent decline in our stock price. No one in the mortgage industry came away unscathed in the quarter, and we took $575 million, or $4.79 per share, in combined credit costs and spread widening charges.

IndyMac also claims that its wise decision to beef up liquidity has kept the company from facing cash concerns that have hamstrung other lenders in recent months. Their decision to not buy back shares, increase capital and credit access during 2006 and ‘07 are key reasons for the company’s healthy liquidity situation. However, this bullish outlook on liquidity did not stop Perry from intimating that a poor 4th quarter could keep the company from issuing a dividend to share holders.

Finally, IndyMac reaffirmed what we have been saying here all along; that banks are going to focus more on retail at the expense of the broker community (h/t Raoul):

We have also built a significant retail lending presence by hiring roughly 1,400 professionals and opening over 100 new offices in just the past quarter. Year-to-date we have greatly restructured our overall workforce and ?sharpened the point of our spear? by increasing our percentage of direct revenue generating staff from 32 percent at the beginning of the year to 48 percent at present.

This is a phrase that has become one of IndyMac’s favorites; appearing on their company blog earlier this year as they highlighted continuing MASSIVE growth in their retail arm.

As for the future here is what Mr. Perry had to say:

?While it is clearly disappointing that our stock is down 72 percent this year ? and all of us at Indymac have been impacted by this along with our shareholders ? we are not down and out, and our company remains intact, where many others have failed,? continued Mr. Perry. ?We have learned some tough lessons, taken some significant steps to address the radically changed environment, and we are executing on an action plan that continues to focus on safety and soundness, maintaining strong liquidity, preserving our capital, implementing our new production model and emphasizing a return to profitability. Nonetheless, it remains extremely difficult to provide an earnings forecast for the fourth quarter and into 2008 given continued uncertainties about the length and depth of the downturn in the housing and mortgage markets and the abrupt and significant change we have made in our production model in becoming a GSE lender.

I believe that IndyMac has made some strong moves, including the acquisition of Financial Freedom, the number one jumbo reverse mortgage lender in the country. That early move should help the company grow profits from that arena as other late arrivers struggle to ramp up reverse mortgage production. The big question is what type of loan buybacks will the company be looking at as push comes to shove; especially when those option ARMs begin recasting in 2009 and beyond. Is IndyMac’s date with destiny just postponded, or have they made enough adjustments to make their way through this mess? What do you think?