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Home Equity Impairment Fails to Dampen Irwin Financial's Results

Irwin Financial Corp., Columbus, Ind., a bank holding company focusing on mortgage banking, small business lending, and home equity lending, had a good second quarter, but its losses on home equity widened.

Irwin earned second-quarter net income of $13.2 million or $0.45 per diluted share. This compares with net income of $8 million or $0.28 per diluted share during the same period in 2002, an increase in earnings per share of 61%. Irwin's home equity lending business lost $14.4 million during the second quarter of 2003, compared to its loss in the second quarter of 2002 of $4.5 million. The company said the higher loss was principally the result of credit-related impairment to the carrying value of residual assets it had on the books. But Irwin stressed that it wouldn't be originating those types of loans going forward, since it had updated its underwriting guidelines.

Irwin had previously warned that its earnings would be impacted by a writedown of the value of the residual interests it holds in home equity loans.

Irwin said it took the impairment charge in the second quarter because it was pessimistic about the company's prospects for improving economically in the short term.

"The impairment of the residuals reflects our revised, less robust economic outlook as well as enhancements in modeling techniques for forecasting the level of post-recessionary credit losses," the company said in its earnings release.

The company extended the period it believes the negative effects of the recession will linger until March of 2004. In addition, it revised its "base-loss curves" expected in a non-recessionary environment.

"We anticipate a remaining weighted average life for these loans of approximately one-and-one-half years," the company said. "Due largely to these changes, we increased the assumptions for future losses embedded in the residual models and recognized $33.1 million of residual impairment during the quarter to reflect our modified outlook."

But Irwin said the loans it has originated since tightening its guidelines continue to perform to expectations.

Net chargeoffs for its on-balance sheet home equity portfolio, largely underwritten under new credit guidelines since late 2002, totaled 2.58% on an annualized basis, up from 1.74% during the first quarter. Irwin said this was largely due to seasoning. The 30-day and greater delinquency ratio for the on-balance sheet portfolio increased on a sequential quarter basis to 2.70%, up from 2.66% as of March 31, 2003.

Annualized net chargeoffs in the residual portfolio during the second quarter were 6.14%. Thirty-day and greater delinquencies for loans in the residual portfolio totaled 8.66%, compared with 8.05% as of March 31, 2003.

Despite its credit-related problems, Irwin made up for it in the second quarter thanks largely to the refinancing boom.

"Net income at our mortgage banking line of business totaled $23.2 million in the second quarter of 2003, a new quarterly record. Net income increased $14.1 million or 153% compared with the year earlier period. The year-over- year increase was largely attributable to strong loan originations and sales, the result of favorable interest rate conditions as well as distribution channel expansion."

The company's managed home equity portfolio totaled $1.7 billion at quarter-end, compared with $2.1 billion a year earlier.

"Once again, I believe we have seen the consolidated value of our balanced revenue model. Increases in our consumer credit costs were offset by strong origination volume in our mortgage banking operation, resulting in an increase in net income vs. the same quarter last year," said Will Miller, chairman and CEO of Irwin Financial. "This is the intended result of our balanced revenue strategy."

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