IMB Optimistic Amid a Huge Loss

Updated from Feb. 11 with earnings report

IndyMac Bancorp (IMB - commentary - Cramer's Take) reported a net loss of $509 million, or $6.43 per share for the quarter vs. a $1.57 per share loss expectation. That came from $863 million in pretax loss provisioning, while actual charge-offs were $179 million. That brought the reserve to 13.3 times fourth-quarter charge-offs.

With a $676 million raising of mostly preferred equity, the organization stays in the well capitalized area, especially because management intends to shrink the balance sheet by about 12% this year. The dividend was also eliminated.

This would certainly look like a kitchen sink quarter, except that we are in uncharted waters now. Management expects to be profitable in the second quarter of 2008 with its problems largely behind it, but many reasonable analysts could disagree.

Nonperforming assets (NPA) increased from $829 million in the third quarter to $1.51 billion. The biggest increase was in housing construction, which went to $480 million from $106 million. The assets in construction went to from $1.076 million to $993 million.

So 48% of the portfolio is on nonperforming status and 41% of that balance is reserved for (pretty healthy looking to me). The consumer construction balance of $2.3 billion has only $78 million of NPA. SFR mortgages had a NPA jump from $546 million to $756 million or 4.7% of the $16.2 billion in loans. The NPA are 85% reserved because IMB is seeing all of the growth here from the second mortgage portfolio, where exposure is being completely written off at a 180-day delinquency.

In building the reserve, management assumed that the last four months of 2007's roll rate (movement of delinquencies to losses) would continue for three quarters of 2008 and then only decline by 10% per quarter to 70% in the fourth quarter of 2009.

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At the time of publication, Thomas was long IndyMac Bancorp.