Irwin Financial Expects Q1 Loss

The company says results were negatively impacted by losses in its mortgage division due to lower interest rates.

Source: Inside INdiana Business

Irwin Financial Press Release

COLUMBUS, Ind., April 4 -- 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.

Source: Irwin Financial