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IndyMac Profit Crashes, Stock Soars

The stock rallies, despite results poor enough for CEO Michael Perry to raise the possibility of quitting.

Updated from 9:29 a.m. EST

IndyMac Bancorp's


CEO Michael Perry is willing to give up his job if that's what shareholders vote at the struggling mortgage company's next shareholder meeting.

Perry, in a letter to shareholders discussing the company's 2007 annual performance, said he takes "full responsibility" for the mistakes the Pasadena, Calif.-based lender made that caused it to post a full-year loss for 2007 -- the first in its 23-year history.

"I believe in accountability and let me assure you that no one has been held more accountable, financially, than I have," Perry said in the letter.

"Despite the mistakes that we made during this period, I am confident that I am the person most capable of leading IndyMac through this crisis period and rebuilding shareholder value, and I have the support of the management team, board of directors and our regulators," he said. "If you don't share this view, I respect and understand this, and you will have the opportunity to make a leadership change with your vote at IndyMac's shareholders meeting on May 1. If I am not re-elected to the board, I will respect the shareholders decision and resign my positions as chief executive officer of IndyMac and IndyMac Bank."

IndyMac shares surged as much as 21% on Tuesday, despite plunging earlier in the day after reporting the dismal quarterly and year-end financial results. Investors may have been reacting to a number of variables, ranging from Perry's possible resignation to his comments that he expected the firm to return to profitability this year -- sooner than expected. Analysts expect the company to post a loss of 13 cents a share in 2008.

Analyst Matthew Howlett of Fox Pitt Kelton says the rise in share price also could have to do with the fact that IndyMac's capital ratios improved last quarter.

The housing and mortgage lending environment have steadily worsened over the past year. Borrower delinquencies and defaults have significantly risen compared to a year earlier as home prices sink, while the secondary market remains virtually shut down as a result of investor fear of taking on risky mortgage-backed securities.

IndyMac, once a primarily Alt-A lender, posted a quarterly loss of $509.1 million, or $6.43 a share -- more than four times analysts' estimates.

Analysts on average had expected the company to post a loss of $1.57 a share, according to Thomson Financial.

For the full year, IndyMac posted a net loss of $614.8 million, or $8.28 a share.

The company has also suspended the cash dividend paid on common stock "indefinitely" as a result of the difficult market condition, IndyMac said.

"Consistent with nearly every other large financial institution in the mortgage lending and securitization business, as a result of the rapidly deteriorating housing and mortgage markets, we took major writedowns and established significant credit reserves and recognized a significant loss n the fourth quarter," Perry said in the lender's earnings release.

During the quarter, IndyMac set aside $863 million in the quarter for loan losses, credit marks-to-market for loans held for sale, provisions to the secondary market reserve for potential loan repurchases and writedowns on residual and non-investment grade securities and real estate-owned losses. IndyMac's total credit reserves at the end of the fourth quarter totaled $2.4 billion, up from $619 million a year earlier.

The company expects charge offs to increase substantially in 2008 over 2007, but believes that its credit reserves are sufficient to absorb them. IndyMac anticipates total credit provisions and costs in 2008 to be roughly $372 million, down from $1.45 billion in 2007.

"The goal really and the focus for IndyMac is to try to get those credit costs behind us as best we can so that we can get back with our core business to making money," Perry said on a conference call. "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 .... so that we could shrink our balance sheet and we've permanently closed some higher risks channels and products."

IndyMac's dismal results come as regulators work with the largest banks and lenders to provide more relief for troubled borrowers by avoiding foreclosures.

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, working with the Treasury and Department of Housing and Urban Development, are announced the initiative Tuesday morning.

Last month, Countrywide, the nation's largest lender, posted a fourth-quarter loss of $422 million, or 79 cents a share. For the full year, Countrywide reported a loss of $704 million, or $2.03 a share. The Calabasas, Calif.-based company has been so troubled by the deepening mortgage crisis that it agreed to a sale to BofA in January for $4 billion in stock.

IndyMac says it remains well-capitalized, as it has not repurchased shares since 2002 and it raised $676 million in capital in 2007. Total operating liquidity was "in excess of $6 billion" at the end of the quarter, primarily because a majority of IndyMac's business is through its bank subsidiary, it said.

Loans and securities that were charged off by IndyMac in the quarter totaled $179 million. Excluding non-investment grade and residual securities, total fourth-quarter charge offs were $99 million, and the total credit reserve at the end of the year amounted to $1.1 billion.

This year, IndyMac expects "a small profit of roughly $13 million," which includes first-quarter restructuring charges, Perry added. IndyMac said last month that it is cutting 2,400 jobs or 24% of its overall workforce. The layoffs come in addition to a program begun in September.

"Our goal is to return IndyMac to profitability in

the second quarter and grow our profit each quarter thereafter, and I believe that we have a realistic shot of achieving this goal," Perry said. "If we can do this, we will preserve IndyMac's $16, or so, book value per share in 2008, which I believe is a good foundation from which to being growing shareholder value again.

"Even if we are wrong in our forecast in 2008, and the mortgage and housing markets worsen beyond what we are already forecasting ... we have the capital ... to absorb nearly triple our presently forecasted 2008 credit costs and fight our way through until the housing and mortgage markets do stabilize."

Still some analysts remain skeptical of IndyMac.

Fox Pitt Kelton's Howlett writes in a note that IndyMac's expected $372 million in embedded credit costs for this year "appears too low given the recent trajectory of delinquencies." Howlett has an in-line rating on the company.

"More specifically, the company's model forecasts

non-performing assets to increase from 4.61% to 7.71% by

fourth quarter 2008, which we think is too light," he says.

Shares recently were rising 11.2% to $8.45.