Irwin Financial Corporation Provides Second Quarter Guidance on Impairment of Mortgage Servicing Rights
July 06 2005 - 5:05PM
PR Newswire (US)
Irwin Financial Corporation Provides Second Quarter Guidance on
Impairment of Mortgage Servicing Rights COLUMBUS, Ind., July 6
/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 net
impairment of its first mortgage servicing asset (MSR) of
approximately $27 million after-tax during the second quarter. In
addition, the company sold approximately $3.2 billion of MSRs in
the second quarter for a pre-tax gain on sale of approximately $7
million. These are estimates, made prior to final compilation of
financial results for impairment, servicing sale proceeds, or other
components of income. With the exception of first mortgage
origination profitability, management believes the company's other
operations, including commercial and home equity portfolio loan
growth and overall credit quality, met its expectations during the
quarter. Portfolio loan growth was particularly strong in the home
equity segment. This is expected to have the effect of suppressing
current period net income as origination costs and provision
expenses are recognized, but should positively affect subsequent
quarters due to spread income. Reflecting the declining interest
rate environment, first mortgage origination volumes have met
expectations, although profitability remains below long-term
targets. The Corporation's capital remains strong. Full financial
results are expected to be released on or about July 29. The net
impairment of the MSR principally reflected three factors. 1. The
company began the second quarter with the aggregate lower-of-cost-
or-market GAAP cap on the value of the MSR modestly below economic
value. The proximity of the LOCOM cap makes hedging MSRs to protect
GAAP value inherently more difficult and expensive. 2. Indicative
10-year interest rates declined approximately 60 basis points
during the full quarter, with approximately 40 basis points of that
decline occurring in a 17-day period. The rate drop resulted in
below-average hedge effectiveness and significant hedge premium
costs. 3. The continuation of a flat yield curve in the bond market
hampered option-based hedge structuring. The estimated second
quarter MSR impairment of $27 million compares with net impairment
of $14 million and $15 million in the fourth quarter of 2004 and
the first quarter of 2005, respectively. To reduce the risk of
further impairment in subsequent quarters, the Company continued
its MSR risk reduction steps by selling additional servicing in the
quarter. Approximately $3.2 billion of MSRs were sold in bulk
trades and will result in a net pre-tax gain on sale of
approximately $7 million during the second quarter. In addition,
another $1.6 billion of servicing was sold on a flow basis during
the second quarter for consideration similar to the company's
capitalization rate had it retained the servicing. After these
sales, the first mortgage servicing portfolio will be approximately
$20 billion as of June 30, 2005, down 30 percent compared to a
portfolio of $29 billion a year earlier. 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, both of which can be influenced by movements in
secondary market interest rates; 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. 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/
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