Market Digest

If you're new here, you may want to subscribe to my RSS feed. Thanks for visiting!

LOSS REFLECTS COSTS RELATED TO STRATEGIC RESTRUCTURING

• Results Reflect Significant Mark Down of Assets and Reserves Taken as Part of Strategic Restructuring Announced July 25, 2008

• July Sale of Small Ticket Leasing Assets Enhances Liquidity By $325 Million

• Consolidated Capital Ratios Maintained Above Regulatory Standards for “Well Capitalized” and Expected to Increase in Third Quarter as Asset Sales Close

• Company to Refocus on Small Business and Community Banking

Irwin Financial Corporation, a bank holding company, today announced a loss of $107 million or $3.64 per diluted share during the second quarter of 2008, reflecting charges associated with the strategic restructuring of the company to focus on small business lending and banking services to its local communities. The charges associated with the restructuring announced on July 25 drove the loss. Losses from the leasing and home equity businesses the Corporation is exiting as part of the restructuring totaled approximately $94 million after-tax, while proceeds from the sale of the leasing asset sales generated approximately $325 million in net additional liquidity which the Bank received in late July.

“In these very difficult times for the entire banking industry, we think three things are most important: liquidity, capital, and returning to profitability. The asset transactions we announced two weeks ago brought in substantial liquidity. Removing these assets from our balance sheet in July will provide meaningful support to our capital ratios, keeping us above the regulatory standards for a ‘well-capitalized’ bank. While the losses we will book in 2008 from these asset sales and exit costs are large, the restructuring will allow us to return to profitability in 2009,” said Will Miller, Chairman and CEO of Irwin Financial.

“Through asset sales and significantly reducing our exposure to home equity credit losses, management and the Board are re-focusing the Corporation on our core services to small business and local branch-based customers,” Miller continued. “With the remaining home equity portfolio in run-off mode, we have capped our exposure to the national home equity industry while we exit this business. In addition, we have exited the small-ticket leasing business. On July 30, we successfully closed the sale of our small-ticket leasing assets to Scotia Group in Canada and to Equilease in the U.S. These two transactions alone netted approximately $325 million in additional liquidity for the Bank.

“We believe we can return to profitability in 2009 by simplifying our business, returning to the principles that have driven our success for the past 137 years: serving small businesses and consumers in our branch communities and our franchisee customers nationally,” said Miller.

“With the transactions we announced on July 25, we have begun restructuring the organization. Overall, we expect to incur significant costs to exit and restructure these businesses; approximately $105 million was recognized in the second quarter, and a like amount will be recorded in coming months, mostly in the third quarter. Thus, we expect the bulk of the restructuring costs to be recognized by year end. The restructuring losses will be counter balanced by approximately $415 million in transaction proceeds (inclusive of the $325 million already received) and the reduction of approximately $1.6 billion in our assets from these transactions. The exit from these businesses put us on the road to operating improvement and a return to profitability in 2009.

“Accounting rules required that we take charges in the second quarter for assets we sold in July, without simultaneously removing the assets from the balance sheet. On a pro forma basis, however, capital ratios will increase as assets sold in July and August are removed from the balance sheet in the third quarter. Compared to the applicable regulatory standard of 10.0% for a ‘well capitalized bank,’ total capital to risk weighted assets, which ended the second quarter at 10.7 percent, would have increased to 12.1 percent on that same date if the loans being sold in these transactions were also removed from the balance sheet and the estimated additional exit costs were included,” Miller concluded.

Financial highlights for the period are presented in the table below. Of the $158 million Provision for Loan Losses, $132 million was recorded in the home equity and small ticket segments and was related to the restructuring. The remaining $26 million of Loan Loss Provision relates to the commercial banking line of business (approximately $24 million) and the franchise segment (approximately $2 million).

Net interest income of $62 million decreased modestly on a sequential quarter and year-over-year basis, reflecting a reduced loan and lease portfolio. Non-interest expense decreased from the first quarter of 2008 and the prior year reflecting cost reductions taken in light of operating performance and down-sizing of operations.

The consolidated net interest margin declined modestly to 4.38 percent as compared to 4.44 percent during the first quarter due to competitive conditions and funding mix. Reflecting a strategy to reduce future credit risk, the consolidated loan and lease portfolio declined 10 percent annualized during the quarter, totaling $5.5 billion as of June 30.

The Corporation had $330 million or $10.75 per share in common shareholders’ equity as of June 30. At quarter-end, the Tier 1 Leverage Ratio and Total Risk-based Capital Ratio were 7.2 percent and 10.7 percent, respectively, compared to 9.8 percent and 12.5 percent as of March 31, 2008. The capital ratios of Irwin Union Bank and Trust were 8.8 percent and 11.0 percent, respectively for the Tier 1 Leverage and Total Risk-based Capital ratios at June 30, 2008. On a pro forma basis reflecting the effect of both the removal of assets from the balance sheet and an estimate of additional exit costs to be booked in future quarters related to the transactions announced on July 25, the Corporation’s total capital to risk-weighted assets would have been approximately 12.1 percent.

Reflecting economic conditions, the Corporation’s allowance for loan and lease losses increased substantially during the quarter. The allowance totaled $216 million as of June 30, up from $159 million at the end of March. The ratio of allowance for loan and lease losses to nonperforming loans and leases was 203 percent at June 30, compared to 160 percent at March 31. Other real estate owned, which is carried at lower of cost or fair value, totaled $18 million at June 30, up from $17 million at March 31. Nonperforming loans and leases totaled $106 million or 2.07 percent of total loans and leases as of June 30, 2008, up from $99 million or 1.78 percent of loans and leases at March 31, 2008.

Thirty-day and greater delinquencies (30+DPD) and the ratios of Allowance for Loan and Lease Losses (ALLL) to Loans, ALLL to Nonperforming Loans (NPLs), and Loan Loss Provision (LLP) to charge-offs (C/Os).

The commercial banking segment lost $8.8 million during the second quarter, primarily reflecting increases in loss provisions for commercial real estate related loans in western markets. The segment added $10.5 million to loan loss reserves in excess of quarterly charge-offs of $14.0 million, for a total loan loss provision of $24.5 million. The segment’s allowance for losses grew to 1.75 percent of loans as of June 30, up from 1.36 percent as of March 31. Thirty-day and greater delinquencies decreased from 1.07 percent at March 31 to 0.87 percent at June 30.

The commercial banking segment’s loan portfolio declined modestly during the quarter. Net interest margin was 3.66 percent during the quarter, down from 3.76 percent during the first quarter, reflecting competitive deposit conditions.

The commercial finance line of business lost $23.4 million in the second quarter of 2008, down from earnings of $4.4 million in the first quarter. The loss reflected the required mark-to-market taken on the small-ticket lease portfolio sold in late July. The franchise finance channel, which is unaffected by the strategic restructuring, earned $1.7 million.

The commercial finance loan and lease portfolio totaled $1.2 billion as of June 30. Franchise finance loan sales totaled $12 million, down from $61 million in the first quarter. Net gains on sales of franchise loans were $0.7 million or 5.8 percent of loans sold. Net interest margin was 4.24 percent, down from 4.44 percent in the first quarter, due to funding costs which did not decline in line with variable loan rates.

Credit quality in the franchise finance portfolio was stable as 30 day and greater delinquencies improved (0.27 percent at June 30 compared with 0.55 percent at March 31) while non-performing loans increased (0.78 percent of the portfolio at June 30 versus 0.58 percent as of March 31). For the entire commercial finance portfolio (including the lease portfolio sold subsequent to quarter-end), thirty-day and greater delinquencies decreased to 0.83 percent at quarter-end, compared to 1.06 percent at March 31.

The home equity segment lost $44 million during the second quarter, compared to a loss of $16 million during the first quarter. The increased loss reflects increased loan loss provisions.

As noted above, with the July 25 announcement of the sale and securitization of substantially all the home equity portfolio, the Corporation will be exiting this segment. The segment’s portfolio of loans totaled $1.3 billion as of June 30, compared to $1.4 billion at the end of first quarter. After the sale of certain residual interests which occurred in late July, the segment’s portfolio will total approximately $316 million. Through securitization structures and existing reserves, the Corporation’s loss exposure on this portfolio will be capped at approximately $150 million, pre-tax(1).

Thirty-day and greater delinquencies on the total portfolio increased from 5.66 percent at March 31 to 6.06 percent at June 30. Thirty-day and greater delinquencies on the $316 million of loans being retained after the July asset sales totaled 8.50 percent at June 30. Loan loss reserves on the portfolio to be retained totaled $60 million or 19 percent of the portfolio at June 30.

The other bank and non-bank consolidating entities lost $30 million during the second quarter, compared to a loss of $12 million in the first quarter. The loss was primarily due to a deferred tax valuation allowance of $25 million and other-than-temporary impairment of $4 million net of tax on a portion of the securities portfolio. This deferred tax valuation allowance will reverse over time if sufficient profitability is restored.

Source: Irwin Financial Corporation