* Significant Credit Reserves Taken in Response to Housing and
Mortgage Market Conditions COLUMBUS, Ind., Oct. 31
/PRNewswire-FirstCall/ -- Irwin Financial Corporation (NYSE:IFC), a
bank holding company focusing on small business and consumer
mortgage lending, today announced a loss of $0.8 million from
Continuing Operations for the third quarter of 2007, or $0.05 per
diluted share, after preferred dividends. This compares with
earnings of $5.5 million or $0.17 per diluted share in the second
quarter. Inclusive of a loss of $17.2 million from Discontinued
Operations, the Corporation had a consolidated net loss of $18.0
million or $0.64 per share in the quarter. "This was a very
difficult quarter as the mortgage crisis continued to take a heavy
toll on our results," said Will Miller, Chairman and CEO of Irwin
Financial. "The collapse of liquidity in the secondary mortgage
market during the quarter caused us to make significant changes in
our home equity product set which in turn reduced production and
loan sales. In addition, we saw an increase in delinquencies in our
home equity portfolio which caused us to increase our provision for
future loan losses meaningfully. "In our Discontinued Operations,
we experienced a significant increase in repurchase requests during
July and August. We have assembled an experienced team to respond
to and defend against those requests and to seek recovery of
certain of our losses. In light of the significant departure in
recent months of repurchase requests from historic norms and the
challenging housing market environment, we increased our forecasts
of future repurchase requests and losses. As a result, we added
materially to our reserves for these risks. We have not estimated
any recoveries in those models, but expect to recover some of our
losses over time. "On the commercial side, we are seeing mixed
results. Our commercial finance channel produced record quarterly
income, with strong production and good credit quality. However,
loan growth in our commercial banking segment, while stronger than
earlier in the year, continues to be behind our targets. We also
saw some slippage in credit quality in the commercial banking
segment, although we do not expect our ultimate loss experience
from these loans to be significant. Core deposit growth slowed
during the quarter as we focused on improving margin. "We are in
the midst of taking significant steps, particularly in the home
equity segment but also elsewhere in the Corporation where our
results have been disappointing, to align staffing with the current
environment. We have not completed our plans, but expect future
restructuring charges in the range of $10 to $15 million pre-tax,
with the expectation that the bulk of this will be reflected in the
fourth quarter. Assuming external conditions do not deteriorate
further and prior to the anticipated restructuring charges noted
above, we expect a return to modest Continuing Operations
profitability during the fourth quarter and good earnings in 2008,"
Miller concluded. Financial highlights for Continuing Operations
(commercial bank, commercial finance, and home equity lending) for
the period include: Consolidated Results $ in millions, except EPS
Percent Percent 3Q 2007 2Q 2007 Change 3Q 2006 Change Net Interest
Income $65 $66 (1)% $65 0% Provision for Losses (28) (19) (46) (9)
(212) Non-Interest Income 7 10 (27) 7 (4) Total Consolidated Net
Revenues 44 56 (22) 64 (31) Non-Interest Expense 46 47 (2) 51 (9)
Net Income From Continuing Operations (1) 5 NM 9 NM Earning (Loss)
per Share from Continuing Operations (diluted) (0.05) 0.17 NM 0.30
NM Loans and Leases 5,677 5,512 3 5,101 11 Deposits 3,503 3,318 6
3,790 (8) Shareholders' Equity 489 508 (4) 523 (7) Total Risk-Based
Capital Ratio 12.9 13.3% 13.5% Return on Average Equity (0.06)%
4.30% 6.70% Consolidated net revenues from continuing operations
for the third quarter decreased on a sequential quarter and
year-over-year basis, primarily reflecting increased loan loss
provision for the home equity portfolio. Net interest income of $65
million was down slightly on a sequential quarter and flat on a
year-over-year basis, reflecting modest volume growth, but slightly
narrower margins. Non-interest expenses declined versus both
comparative periods, reflecting expense reductions undertaken to
improve profitability and reduce variable compensation expenses.
The consolidated loan and lease portfolio grew to $5.7 billion as
of September 30, up 13 percent on an annualized basis from the end
of the second quarter. The bulk of this increase came from growth
in our commercial finance portfolio. Liquidity remains strong, with
no reliance on warehouse funding. Deposits totaled $3.5 billion at
September 30, up $0.2 billion from June 30, 2007. Average core
deposits declined modestly during the third quarter and totaled
$2.5 billion at both June and September 30. The consolidated net
interest margin declined to 4.53 percent as compared to 4.58
percent during the second quarter, reflecting increased wholesale
funding costs. In order to increase core deposits, an internet
deposit platform, Element Financial, was launched late in the
second quarter and by September 30, deposits from this channel
totaled $59 million. The Corporation had $489 million or $16.25 per
share in common shareholders' equity as of September 30. At
quarter-end, the Tier 1 Leverage Ratio and Total Risk-based Capital
Ratio were 10.8 percent and 12.9 percent, respectively, compared to
11.1 percent and 13.3 percent as of June 30, 2007. While the
Corporation was inactive in its common stock repurchase program
during the third quarter; 629 thousand shares have been purchased
year-to-date under this program. Given uncertain conditions in the
mortgage markets, the Corporation expects to continue to be less
active in repurchases in the near- term. Nonperforming assets
(including other real estate owned of $19 million) were $82 million
or 1.33 percent of total assets as of September 30, 2007, up from
$61 million or 0.99 percent of total assets at the end of June. The
increase principally reflects a $7 million commercial real estate
credit in a western market which management believes will be
resolved shortly and a $9 million increase in the home equity
segment. The allowance for loan and lease losses for the
Corporation's portfolios totaled $104 million as of September 30,
up $12 million from the end of the second quarter, primarily
reflecting additional provision taken at the home equity segment.
The ratio of allowance for loan and lease losses to nonperforming
loans and leases was 173 percent at September 30, compared to 216
percent at June 30. The consolidated loan and lease loss provision
totaled $28 million in the third quarter, up from $19 million in
the second quarter of 2007. This increase principally reflects a $7
million sequential quarter increase in provision for the home
equity portfolio. Thirty-day and greater delinquencies, the ratio
of charge-offs to average loans and leases, and the allowance for
loan and lease losses to total loans and leases for principal
credit-related portfolios are shown in the next table. Home Equity
Commercial Managed Commercial Banking Portfolio Finance September
30, 2007 Portfolio (in $Billions) $2.94 $1.50 $1.23 30-Day and
Greater Delinquencies - September 30, 2007 0.41% 4.72% 0.79% - June
30, 2007 0.25 3.64 0.68 - March 31, 2007 0.22 2.95 0.64 - December
31, 2006 0.13 3.16 0.60 - September 30, 2006 0.12 3.07 0.57
Annualized Net Charge-offs - September 30, 2007 0.29 3.41 0.56 -
June 30, 2007 0.17 2.18 0.76 - March 31, 2007 0.68 3.01 0.76 -
December 31, 2006 0.09 1.50 0.33 - September 30, 2006 0.19 0.86
0.50 Allowance to Loans and Leases (1) - September 30, 2007 0.93
4.00 1.36 - June 30, 2007 0.92 3.40 1.34 - March 31, 2007 0.93 2.95
1.39 - December 31, 2006 0.93 2.63 1.28 - September 30, 2006 0.93
2.48 1.26 Segment Results Net income (loss) by line of business is
shown below, with additional detail available in the Quarterly
Report on Form 10-Q for the period ending September 30, 2007. Net
Income(loss) Percent Percent ($ in millions) 3Q 2007 2Q 2007 Change
3Q 2006 Change Commercial Banking $5 $6 (26)% $8 (43)% Commercial
Finance 4 3 30 3 16 Home Equity (8) (2) (317) 0 NM Other Segments,
Including Parent (1) (2) 36 (2) 45 Net Income (Loss) From
Continuing Operations (1) 5 NM 9 NM Income (Loss) From Discontinued
Operations - Mortgage Banking (17) (6) (194) (13) (30) Consolidated
Net Income (Loss) (18) 0 NM (4) (329) The commercial banking
segment earned income of $4.7 million, a decrease of $1.6 million
as compared to the second quarter, reflecting increased loss
provision and flat net interest income. The commercial banking
segment's loan portfolio increased $60 million during the quarter,
but the bulk of the growth came late in the quarter and had modest
impact on net income. Net interest margin increased to 3.97 percent
during the quarter, up from 3.86 percent during the second quarter,
reflecting efforts to recover margin which had declined earlier in
the year. Credit quality in the commercial banking portfolio
weakened during the quarter, but remains in a range that management
finds acceptable. Thirty-day and greater delinquencies rose to 0.41
percent, compared to 0.25 percent at June 30. Non-performing assets
increased from $17 million to $29 million as of September 30. As
noted above, the principal driver of the increase was a commercial
real estate loan in a western market. Management continues to see
weakness as well in the Michigan branches where nonperforming
assets increased modestly on a sequential quarter basis. The
commercial banking segment's loan and lease loss provision totaled
$3.1 million during the quarter, compared to net charge-offs of
$2.1 million. The commercial finance line of business earned $3.8
million in the third quarter of 2007, up from $2.9 million in the
second quarter and a record for the segment. The results
principally reflect an increase in net interest income due to
portfolio growth, coupled with good credit quality. The commercial
finance loan and lease portfolio totaled $1.2 billion as of
September 30, reflecting originations of $185 million and modest
loan sales. Net interest margin declined to 4.44 percent from 4.69
percent, reflecting an increased cost of funds. Credit quality in
this portfolio remains good. Thirty-day and greater delinquencies
were 0.79 percent at quarter-end, compared to 0.68 percent at June
30. Non-performing assets totaled $7.5 million, up from $5.8
million at the end of June. Management believes the increase in
non-performing loans is not an indicator of a significant decline
in credit quality. The commercial finance segment's loan and lease
loss provision totaled $2.9 million during the third quarter,
compared to net charge-offs of $1.7 million. The home equity
segment lost $8.1 million during the third quarter, compared to a
loss of $2.0 million during the second quarter. The increased loss
reflects a higher loan loss provision. The segment's portfolio of
loans totaled $1.5 billion as of September 30, unchanged as
compared to the end of the second quarter. Loans held-for-sale
totaled $4 million, down from $27 million at the end of the second
quarter. Mortgage loan originations totaled $104 million, down from
$123 million during the second quarter. The decline in production
reflects unsettled conditions in the secondary market and frequent
changes to underwriting guidelines to address changing market
conditions. Credit costs remain high in this segment. Thirty-day
and greater delinquencies on the managed portfolio increased during
the quarter to 4.72 percent from 3.64 percent as of June 30.
Non-performing assets were $39.2 million compared to $29.9 million
at prior quarter-end and reflect the impact of a continued
disproportionate deterioration in the delinquency of loans that
were moved from held-for-sale to held-for-investment during the
first quarter. Loan loss provision in the segment totaled $23
million, up from $16 million during the second quarter. Net
charge-offs on the segment's managed portfolio totaled $13 million
(3.1 percent annualized), an increase from $9.1 million (2.2
percent annualized) recorded during the second quarter, but
unchanged as compared to the first quarter of 2007. Management is
actively reassessing the operating expense of the segment. Since
July 1, the number of employees in this segment has been reduced by
approximately 130, as compared to staff of approximately 460 as of
June 30. During the third quarter, $1.1 million of severance costs
were incurred. Additional steps will be taken in the fourth
quarter, including the reduction of production and related
staffing. This includes the consolidation and reduction of the east
coast mortgage operations center in Charlotte and certain
additional positions in an effort to align costs with current
market opportunities. Management believes the bulk of these
severance costs, lease termination costs, and fixed-asset disposals
will be recognized in the fourth quarter, although certain actions
may carry over into early 2008. The parent and other consolidating
entities lost $1.2 million during the third quarter, compared to a
loss of $1.9 million in the second quarter of 2007. The third
quarter results include a $0.4 million reversal of tax reserves.
Discontinued Operations - Conventional Mortgage Segment Reflecting
increased provision for potential future loan repurchases of $17
million, this discontinued segment reported a loss during the third
quarter of $17.2 million. The loan repurchase reserve, which
totaled $29 million as of September 30, as compared to $13 million
at June 30, is intended to cover costs for alleged breaches of
representations and warranties made at the time loans were sold to
the secondary market. Risk for repurchase extends through the life
of the loans we originated prior to the sale of the segment in
2006. Historically the emergence period for the majority of these
repurchase requests has been within three to four years after
origination. These reserves represent valuation adjustments due to
current market conditions and our expectation of future losses that
have not yet been incurred. During the third quarter, requests for
these repurchases increased materially. Year-to-date, losses from
repurchases, make-wholes, or indemnifications have totaled $2
million, but this reflects only those accounts which have been
settled. Management expects this figure to rise as additional
requests are settled and, therefore, made the significant addition
to provision during the third quarter. Additionally, the principal
cause of the repurchase requests changed meaningfully during the
third quarter, with now a majority of the requests being based on
the appearance of misrepresentation by borrowers or third-parties
involved in the loan origination. To account for this increase in
frequency and likely severity of loss from repurchased loans,
during the third quarter management modified the method by which it
estimates future loss risk. Management uses a statistical model to
estimate future repurchase obligations. The reserve for repurchase
risk currently does not include an estimate of amounts the
Corporation may be able to recover from third parties on whom it
relied in the origination of these loans it is now at risk of
repurchasing. This recovery effort is expected to produce
meaningful returns. Additional detail on the repurchase loss risk
can be found in our 10-Q. Outside of repurchase defense, other
activities to wind-down the operation are proceeding according to
plan. Assets held for sale totaled $8 million as of September 30,
compared with $27 million as of June 30. Included in the $8 million
are $4 million of loans held for sale. Management believes the bulk
of the remaining disposition activities other than those associated
with repurchase demands will be completed by year-end. 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 provides a broad range of financial services to
small businesses and consumers in selected markets in the United
States and Canada. About Forward-Looking Statements This press
release contains forward-looking statements 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 and
deposits, net interest and margins, 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 portfolios; * statements
about the expected behavior of and our response to secondary market
conditions; * statements about the expected level of activity in
our share repurchase program; * statements about conditions in the
mortgage markets or mortgage industry; * statements about expected
results from the discontinued operations of our conventional
mortgage banking segment; and * any other statements that are not
historical facts. We qualify any forward-looking statements
entirely by these cautionary factors. Actual future results may
differ materially from what is projected due to a variety of
factors including: potential changes in direction, volatility and
relative movement (basis risk) of interest rates, which may affect
consumer demand for our products and the management and success of
our interest rate risk management strategies; staffing fluctuations
in response to product demand or the implementation of corporate
strategies that affect our work force; the relative profitability
of our lending and deposit operations; the valuation and management
of our portfolios, including the use of external and internal
modeling assumptions we embed in the valuation of those portfolios
and short-term swings in the valuation of such portfolios;
borrowers' refinancing opportunities, which may affect the
prepayment assumptions used in our valuation estimates and which
may affect loan demand; unanticipated deterioration in the credit
quality or collectibility of our loan and lease assets, including
deterioration resulting from the effects of natural disasters;
unanticipated deterioration or changes in estimates of the carrying
value of our other assets, including securities; difficulties in
delivering products to the secondary market as planned;
difficulties in expanding our business and obtaining funding
sources as needed; competition from other financial service
providers for experienced managers as well as for customers;
changes in the value of our lines of business, subsidiaries, or
companies in which we invest; changes in variable compensation
plans related to the performance and valuation of lines of business
where we tie compensation systems to line of business performance;
unanticipated outcomes in litigation; legislative or regulatory
changes, including changes in laws, rules or regulations that
affect tax, consumer or commercial lending, corporate governance
and disclosure requirements, regulatory capital, and other laws or
regulations affecting the rights and responsibilities of our
Corporation, bank or thrift; regulatory actions that impact our
Corporation, bank or thrift; regulatory actions that impact our
Corporation, bank or thrift, including the memorandum of
understanding entered into as of March 1, 2007, between our
subsidiary bank and the Federal Reserve Bank of Chicago; changes in
the interpretation of regulatory capital or other rules; the
availability of resources to address changes in laws, rules or
regulations or to respond to regulatory actions; changes in
applicable accounting policies or principles or their application
to our businesses or final audit adjustments, including additional
guidance and interpretation on accounting issues and details of the
implementation of new accounting methods; the effects of general
economic conditions, including fluctuations in housing prices; the
final disposition of our remaining assets and obligations of our
discontinued mortgage banking segment, including the possibility
that repurchase demands by third parties could exceed our current
estimates; 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 reports we file with the Securities and Exchange
Commission. The Corporation will host a conference call to review
results on Wednesday, October 31, at 1:00 p.m. EDT. Greg Ehlinger,
Senior Vice President and CFO, Will Miller, CEO, and Jody Littrell,
First Vice President and Controller, of Irwin Financial
Corporation, will be the speakers on the call. The toll-free number
for the call is (800) 559-9370; please tell the operator you would
like to join the Irwin Financial call, confirmation #19587761. A
replay of the call will be available on the Irwin Financial
Corporation website at.
http://www.irwinfinancial.com/investors/index_ir.htm. DATASOURCE:
Irwin Financial Corporation CONTACT: Suzie Singer, Corporate
Communications, +1-812-376-1917, Greg Ehlinger, Chief Financial
Officer, +1-812-379-7603, both of Irwin Financial Corporation Web
site: http://www.irwinfinancial.com/
http://www.irwinfinancial.com/investors/index_ir.htm
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