The signs were ominous. Profits had turned to losses. Key executives were leaving. Financial statements were being rewritten. In the middle of the turmoil, Columbus, Ind.-based Irwin Financial Corp. pulled an interesting rabbit out of its hat.
After posting a second-quarter loss of $3.4 million, Irwin this month surprised Wall Street with an impressive thirdquarter profit of $18.5 million. The $6.5-billion-in-assets financial services company expects similar results this quarter.
Company leaders are pointing to a somewhat straightforward fix.
"The quarter-over-quarter improvement was fueled by the turnaround in mortgage banking and our improved ... hedge performance," CEO Will Miller told investors in a conference call.
In other words, the company stopped gambling that mortgage rates would shoot higher. If rates had, Irwin would have done fine in the first and second quarters. They didn't, so the company lost money.
In the third quarter, the company abandoned the aggressive bet on rising rates. As a result, Indianapolis-based Irwin Mortgage Corp., the company's mortgage-lending subsidiary, made a $5.9 million profit-a big reversal from the $9 million it lost in each of the first two quarters.
Improved performance in the mortgage business wasn't the only reason for the turnaround. In addition to mortgage banking, Irwin operates commercial banking, home equity lending and commercial-finance subsidiaries.
The commercial bank, Irwin Union Bank, posted a $7.6 million profit, while Irwin Commercial Finance earned $2.5 million. The strong results stemmed from an increase in interest income and a decline in late payments on loans, Chief Financial Officer Greg Ehlinger told investors in the conference call.
The bumpy ride is not over for shareholders, however. Irwin's stock trades at around $23, down $6 since December 2004 and more than $10 since early 2004.
Not to mention that rising rates are finally hitting the mortgage market. As a result, financial institutions are expected to originate 20 percent to 25 percent fewer mortgages in 2006 than this year, said Fred Cummings, an analyst who follows Irwin for KeyBanc Capital Markets.
Irwin is ready for the challenge, Ehlinger said in an e-mail response to IBJ questions.
"We are expanding our product offerings and planning to increase our number of mortgage branches," he wrote.
Despite such efforts, Cummings is ambivalent.
"Our analysis suggests the stock is fairly valued," he said. "Their commercial banking business is good. Their credit quality continues to hold up across commercial banking and home equity lines. But like everybody else, they're struggling with the mortgage business."
Others, however, see more promise. John Reed, president of David A. Noyes & Co.'s Financial Institutions Group, noted that Irwin's strong third quarter puts it on track to earn a larger profit for the year than analysts had expected.
Also bullish is the Louisville-based research firm Hilliard Lyons, which in late August upgraded its rating on the stock from "neutral" to "buy."
Much of the uncertainty surrounding the company stems from the inconsistent performance of its home equity subsidiary. Historically, Irwin Home Equity Corp. posted quarterly profit from $6 million to $8 million. Profit dropped to $1.7 million in the second quarter and $2.2 million in the third.
The company announced Oct. 25 that Elena Delgado, who was hired to start the subsidiary in 1994, had retired. The disclosure came just days before the company said it would change the way it recorded revenue in its home equity business.
Delgado, 49, was the highest-paid female executive of an Indiana public company last year, according to IBJ research. Her salary and other annual compensation topped $3.3 million.
Also stepping down in October was Richard Barbercheck, 47, vice president of corporate credit risk. Irwin had listed both Barbercheck and Delgado among its top 11 executives.