Irwin Financial Corporation Provides Guidance on First Quarter and Full Year Earnings
April 04 2005 - 9:30AM
PR Newswire (US)
Irwin Financial Corporation Provides Guidance on First Quarter and
Full Year Earnings - First Quarter EPS Likely to be Small Loss Due
to Loss in Mortgage Segment; Other Segments on-Plan - Unrecognized
Market Value in Servicing Portfolio Approximately $25 Million Above
GAAP Carrying Value; Plans in Place to Capture a Portion of the
Gain - Management Currently Expects EPS to Return to Plan for
Remainder of 2005 COLUMBUS, Ind., April 4 /PRNewswire-FirstCall/ --
Irwin Financial Corporation (NYSE:IFC), a bank holding company
focusing on mortgage banking, small business and home equity
lending, today announced that it expects to report a small loss in
the first quarter. These results are due principally to losses in
the mortgage segment resulting from the interest rate environment
and the generally accepted accounting principal (GAAP) cap on the
valuation of mortgage servicing rights (MSR). Results for the
Corporation's other segments are on plan. Management currently
expects EPS to return to its original plan for the remainder of the
year. However, without additional increases in interest rates,
profitability in the remaining three quarters is not expected to
offset the loss in the first quarter enough to produce full year
earnings in excess of what was earned in 2004. The Corporation's
capital remains strong. "We are obviously very disappointed by
these short-term results," noted Irwin Financial Chairman Will
Miller. "However, I view them as transitory and not wholly
unanticipated. We have noted for years that the mark-to-market and
lower-of-cost-or-market cap on the carrying value of servicing
rights required under GAAP would likely create this outcome at some
point. Although difficult, I believe we are making the right
decisions in our mortgage banking business to bring it back to
profitability, and I am pleased that we have preserved meaningful
value in the servicing portfolio above its carrying basis." During
the first quarter, the Corporation was negatively affected by four
factors: * Long-term interest rates moved in a wide band during the
first quarter with mortgage rates as low as 4.88 percent in early
February and as high as 5.65 percent near the end of March. While
management was expecting rising rates, this intra-quarter
volatility made the servicing hedge less effective than it has been
in the past because the rate volatility required hedge
repositioning. The costs of hedge repositioning served to offset
the increase in net GAAP value of our MSRs during the second half
of the quarter. * As noted above, reported results will reflect the
lower-of-cost-or-market (LOCOM) cap on the valuation of servicing
rights that is imposed by GAAP. Hedges are used to protect against
falling rates, understanding that if rates rise, at times a hedge
loss will be booked without the corresponding offset of a write-up
in MSR value under GAAP. Management does this because the economic
or market value of the MSRs will increase as rates rise in spite of
the accounting cap, providing the opportunity to sell servicing to
realize this value in future periods. This increase in economic
value occurred during the last weeks of the first quarter. To
realize a portion of this economic value and reduce overall risk to
servicing valuation swings, a small amount of the portfolio was
sold during the quarter. Management expects to have additional
sales over the course of 2005 to reduce MSR risk and to recognize a
portion of the difference between market value of the servicing
asset and its GAAP-based carrying value. * In addition, spread
compression between mortgage and swap rates continued to negatively
affect the company. During the first quarter, spreads between
mortgages and swaps used to hedge the MSR declined another 20 basis
points. This spread compression had a direct, negative effect on
our net hedge effectiveness. At the beginning of the second
quarter, management re-structured its hedge profile to lengthen the
duration of the derivatives, reflecting the relatively better
performance over recent periods of longer-term swaps against
mortgages. * Mortgage loan origination profitability continues to
be challenged by overcapacity in the industry and, more
specifically, at Irwin Mortgage. As announced in mid-March, the
company has taken steps to pare its origination capacity
strategically in order to concentrate on the growth of its most
profitable channels in wholesale, correspondent and consumer direct
lending while sharpening its focus in traditional retail lending to
serve low- to moderate-income homebuyers and emerging market
customers. Management expects the mortgage company to return to
profitability over the course of the year based on the combination
of actions described above. The actual level of profitability will
depend in part on the direction of interest rates. Further
increases in rates will increase MSR values and provide larger
potential gains from planned MSR sales. Chairman Miller continued,
"I am pleased to report that our other segments -- commercial
banking, home equity lending and commercial finance -- are expected
to report results for the first quarter in line with our earlier
expectations. In addition, our capital levels remain very strong.
Our capital strength has been important in this period of
transition for the mortgage bank and positions us well for growth
in the near future. The Corporation will host a conference call to
discuss this guidance at 12:00 EDT on April 4. The call can be
joined at 888.867.5802. About Irwin Financial Irwin(R) Financial
Corporation (http://www.irwinfinancial.com/) is a bank holding
company with a history tracing to 1871. The Corporation, through
its principal lines of business -- Irwin Mortgage Corporation,
Irwin Union Bank, Irwin Home Equity Corporation and Irwin
Commercial Finance -- provides a broad range of financial services
to consumers and small businesses in selected markets in the United
States and Canada. About Forward-Looking Statements This press
release contains forward-looking statements and estimates that are
based on management's expectations, estimates, projections and
assumptions. These statements and estimates include but are not
limited to earnings estimates and projections of financial
performance and profitability, and projections of business
strategies and future activities. These statements involve inherent
risks and uncertainties that are difficult to predict and are not
guarantees of future performance. Words that convey our beliefs,
views, expectations, assumptions, estimates, forecasts, outlook and
projections or similar language, or that indicate events we believe
could, would, should, may or will occur (or might not occur) or are
likely (or unlikely) to occur, and similar expressions are intended
to identify forward-looking statements, which may include, among
other things: * Statements and assumptions relating to projected
growth in our earnings, projected loan originations, portfolio
sales and the relative performance of our lines of business; *
Statements and assumptions relating to projected trends or
potential changes in our asset quality, loan delinquencies,
charge-offs, reserves and asset valuations, including valuations of
our servicing portfolio; and * Any other statements that are not
historical facts. Actual future results may differ materially from
what is projected due to a variety of factors including: potential
changes in, volatility and relative movement (basis risk) of
interest rates, which may affect consumer demand for our products
and the success of our interest rate risk management strategies;
staffing fluctuations in response to product demand; the relative
profitability of our lending operations; the valuation and
management of our servicing and derivatives portfolios, including
assumptions we embed in the valuation and short-term swings in the
valuation of such portfolios due to quarter-end movements in
secondary market interest rates, which are inherently volatile;
borrowers' refinancing opportunities, which may affect the
prepayment assumptions used in our valuation estimates and may
affect loan demand; unanticipated deterioration in the credit
quality of our loan assets; unanticipated deterioration in or
changes in estimates of the carrying value of our other assets;
difficulties in delivering loans to the secondary market or selling
servicing rights as planned; difficulties in expanding our business
and obtaining funding as needed; competition from other financial
service providers for experienced managers as well as for
customers; changes in variable compensation plans related to the
performance and valuation of lines of business where we have
compensation systems tied to line-of-business performance;
unanticipated outcomes in litigation; legislative or regulatory
changes, including changes in tax laws or regulations, changes in
the interpretation of regulatory capital rules, changes in consumer
or commercial lending rules or rules affecting corporate
governance, and the availability of resources to address these
rules; changes in applicable accounting policies or principles or
their application to our businesses or final audit adjustments; or
governmental changes in monetary or fiscal policies. We undertake
no obligation to update publicly any of these statements in light
of future events, except as required in subsequent periodic reports
we file with the Securities and Exchange Commission. Conference
call, 12:00 P.M., EDT, April 4, 2005 888.867.5802 Available
post-call at: 877.213.9653 (passcode 11375260#) through April 7,
2005 and http://www.irwinfinancial.com/ir-set.html DATASOURCE:
Irwin Financial Corporation CONTACT: Suzie Singer, Corporate
Communications, +1-812-376-1917, or Greg Ehlinger, CFO,
+1-812-379-7603, both of Irwin Financial Corporation Web site:
http://www.irwinfinancial.com/
http://www.irwinfinancial.com/ir-set.html
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