IndyMac Bancorp Inc. posted record loan production of $26 billion in the fourth quarter 2006 — a 44 percent increase from the same quarter a year ago — but said profit margins were down because of increased credit costs, increasing loan loss reserves, and a shift to less-profitable fixed-rate loans.
IndyMac Chief Executive Officer Michael Perry predicted 2007 will be “a very challenging year,” with the company continuing a hiring moratorium on “non-revenue-generating” employees, a freeze on base salaries, and a plan to increase outsourcing from 9 percent of the workforce to 13.5 percent by the end of the year.
“The MBA is forecasting a 5 percent decline in industry mortgage originations to $2.4 trillion, following 2006’s 17 percent decline,” Perry said in a statement. “While we expect to continue to capture market share, we also believe that competition will be fierce and the housing market will be challenging. As a result, we believe that in 2007 our revenue margins will remain under pressure and credit quality will likely worsen to more normalized levels.”
IndyMac’s fourth-quarter earnings totaled $72 million, up 3 percent from the $70 million posted in the fourth quarter of 2005. But earnings per share were down 8 percent to 97 cents per share after adjustments to reflect employee stock options exercised.
The lender doesn’t expect to beat the $4.82-per-share earnings for 2006 this year. IndyMac projects profits of $4.15 per share for 2007, with return on equity of between 12.5 percent and 17.5 percent, compared with 19.1 percent in 2006.
While IndyMac boosted loan production 48 percent for the year to $89.9 billion, it has also shifted production mix from high margin adjustable-rate mortgage (ARM) loans to less profitable fixed-rate loans. Fixed-rate mortgages made up 22 percent of mortgage loan production in the fourth quarter, compared to 20 percent in the third quarter.
Increased credit costs related to marking-to-market delinquent loans held for sale and increased loan repurchase reserves affected margins. IndyMac’s mortgage banking revenue margin declined to 91 basis points during the fourth quarter, down from 103 basis points in the prior quarter and 110 basis points in the fourth quarter of 2005.
The ratio of nonperforming assets to total assets increased to 63 basis points during the fourth quarter, compared with 51 basis points in the third quarter and 34 basis points in the fourth quarter of 2005. Net charge-offs increased to $7.6 million during the quarter, up from $1.9 million in both the third quarter of 2006 and fourth quarter of 2005.
IndyMac Chief Financial Officer Scott Keys said the company has warned in the past that historically low nonperforming assets and charge-offs seen in the last few years “were unsustainable.”
“We expect current credit conditions to worsen further in 2007 in connection with the housing market cycle and therefore are planning for significant increases in loan loss provisions and charge-offs in 2007 versus 2006,” Keys said.
But subprime loans made up a smaller percentage of IndyMac loan’s production — 3.6 percent of first mortgages in 2006, versus 4.5 percent in 2005, the lender reported. First mortgages closed in the fourth quarter had FICO scores of 703 and combined loan-to-value ratio of 81 percent, compared with a 700 FICO score and 78 percent loan-to-value ratio in the same quarter of 2005.
IndyMac posted substantial gains in home equity loan funding (up 97 percent for the year, to $7.2 billion) and reverse mortgages (up 71 percent to $5 billion).