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| IFC > SEC Filings for IFC > Form 10-Q on 11-May-2009 | All Recent SEC Filings |
11-May-2009
Quarterly Report
While having much in common in terms of competitive positioning and credit
culture, these two segments allow us to diversify our revenues, credit risk, and
application of capital across borrower types and across geographic regions as a
key part of our risk management.
We believe that reducing our company to two operating segments from four will
allow us to simplify our management structure, reduce overhead, and improve our
cost structure. We are in the process of identifying areas in which we can
coordinate and consolidate non-customer facing operations between these two
segments.
In both commercial banking and franchise lending, we have historically
competed successfully on the basis of service quality and relationship with our
customers, not on the basis of price. We believe we have achieved this
competitive position primarily due to the quality of our services and people.
There is considerable evidence, both based on research and experience, that
there is a strong market for this type of high-touch customized banking services
among small business customers.
We have long held that strategy needs to evolve in response to changes in
environmental conditions. Our former strategy was not producing acceptable
results in the current environment of severe stress in housing and related
markets and disruptions in the capital markets. We have therefore taken steps to
change our strategy to fit the environment in which we operate today and will
operate in the future. We believe these changes - returning to our roots of
focusing on banking for small businesses and the local communities in which we
have branches, changing our funding model, and raising more capital - will
position us to contribute to the economies of our communities by providing the
highest quality service to individuals and small businesses by continuing to be
an important provider of credit to consumer and small business customers.
Outlook
The purpose of our strategic restructuring is to provide a basis for the
return to profitability. Our ability to achieve this goal is, however,
uncertain. It appears that the banking industry and the economy as a whole are
in the midst of the most significant stress and upheaval in decades. At this
point, we expect continued price pressure in residential and commercial real
estate as well as rising unemployment and lower demand for our commercial
customers' products to continue to cause an elevated failure by our borrowers to
pay their loan obligations. As a result, there will be continued stress , which
combined with the Corporation's specific issues, will likely prevent the
Corporation from becoming profitable at least until some economic recovery
begins to take hold.
Critical Accounting Policies
Accounting estimates are an integral part of our financial statements and are
based upon our current judgments. Certain accounting estimates are particularly
sensitive because of their significance to the financial statements and because
of the possibility that future events affecting them may differ from our current
judgments or that our use of different assumptions could result in materially
different estimates. Our Annual Report on Form 10-K for the year ended 2008
provides a description of the critical accounting policies we apply to material
financial statement items, all of which require the use of accounting estimates
and/or judgment.
Consolidated Overview
For the Three Months Ended
March 31,
2009 2008 % Change
Net loss (in thousands) $ (93,833 ) $ (22,166 ) (265 )%
Basic earnings per share (3.17 ) (0.76 ) (261 )
Diluted earnings per share (3.17 ) (0.77 ) (256 )
Return on average equity (458.5 )% (20.0 )% (1,877 )
Return on average assets (8.0 )% (1.5 )% (360 )
Consolidated Income Statement Analysis
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Net Loss
We recorded a net loss of $94 million for the three months ended March 31,
2009, compared to a net loss of $22 million for the three months ended March 31,
2008. Net loss per share (diluted) was $3.17 for the quarter ended March 31,
2009, compared to net loss per share (diluted) of $0.77 for the first quarter of
2008. The decrease in 2009 earnings relates primarily to significant
provisioning for loan losses, particularly in our home equity and commercial
banking segments and the inability to recognize tax benefits arising from the
losses. In addition, we are experiencing a reduction in our net interest income
due to our smaller loan portfolio and decreased net interest margin.
Net Interest Income
Net interest income for the three months ended March 31, 2009 totaled
$30 million, down 53% from the first quarter 2008 net interest income of
$64 million. This decline is driven by lower portfolio balances and reduced net
interest margins. Net interest margin for the three months ended March 31, 2009
was 2.76% down compared to 4.44% for the same period in 2008. The decline in
margin in the first quarter of 2009 primarily relates to our cost of funds which
has not declined as much as our yield on loans. This principally reflects slower
repricing of liability rates in the declining rate environment and the cost of
securitizing the majority of the remainder of our home equity portfolio in the
third quarter of 2008. The following table shows our daily average consolidated
balance sheet and interest rates at the dates indicated:
For the Three Months Ended March 31,
2009 2008
Annualized Annualized
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
(Dollars in thousands)
Assets
Interest-earning assets:
Interest-bearing deposits with financial
institutions $ 24,187 $ 101 1.69 % $ 42,644 $ 466 4.40 %
Federal funds sold - - - 5,538 38 2.76 %
Residual interests 9,111 23 1.02 % 11,722 275 9.44 %
Investment securities 108,408 1,201 4.49 % 139,215 1,823 5.27 %
Loans held for sale 803,480 21,643 10.92 % 9,112 166 7.33 %
Loans and leases, net of unearned income(1) 3,470,780 55,503 6.49 % 5,624,289 117,322 8.39 %
Total interest earning assets 4,415,966 $ 78,471 7.21 % 5,832,520 $ 120,090 8.28 %
Noninterest-earning assets:
Cash and due from banks 199,656 78,666
Premises and equipment, net 32,172 38,172
Other assets 268,058 254,725
Less allowance for loan and lease losses (136,983 ) (149,299 )
Total assets $ 4,778,869 $ 6,054,784
Liabilities and Shareholders' Equity
Interest-bearing liabilities:
Money market checking $ 360,391 $ 411 0.46 % $ 319,110 $ 1,271 1.60 %
Money market savings 449,298 823 0.74 % 1,042,507 7,593 2.93 %
Regular savings 132,169 653 2.00 % 116,275 526 1.82 %
Time deposits 1,821,483 17,003 3.79 % 1,656,355 19,548 4.75 %
Other borrowings 366,635 4,310 4.77 % 643,544 7,236 4.52 %
Collateralized debt 894,020 21,270 9.65 % 1,213,801 15,170 5.03 %
Other long-term debt 233,868 3,895 6.75 % 233,871 4,311 7.41 %
Total interest-bearing liabilities $ 4,257,864 $ 48,365 4.61 % $ 5,225,463 $ 55,655 4.28 %
Noninterest-bearing liabilities:
Demand deposits 312,585 299,915
Other liabilities 125,415 78,454
Shareholders' equity 83,005 450,952
Total liabilities and shareholders' equity $ 4,778,869 $ 6,054,784
Net interest income $ 30,106 $ 64,435
Net interest income to average interest
earning assets 2.76 % 4.44 %
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(1) For purposes of these computations, nonaccrual loans are included in daily average loan amounts outstanding.
Provision for Loan and Lease Losses
The consolidated provision for loan and lease losses for the three months
ended March 31, 2009 was $64 million, compared to $45 million for the same
period in 2008. The increase in our provision reflects continued deterioration
in the portfolio due to softening in the
economy. The credit quality of commercial loans where the activities of the
borrower are related to housing and other real estate markets has deteriorated.
In addition, the decline in real estate values has increased the loan-to-value
ratios of our home equity customers, thereby weakening collateral coverage and
increasing the expected loss in the event of default. More information on this
subject is contained in the section on "Credit Risk."
Noninterest Income
Noninterest loss during the first quarter of 2009 totaled $10.6 million,
compared to a loss of $4.5 million for the first three months of 2008. The 2009
decline is primarily a result of three factors. First, a $12 million lower of
cost or market adjustment was recorded with respect to our home equity loans
held for sale portfolio. Second, a $7 million loss related to the mortgage
servicing asset sale was recorded by the home equity line of business during the
first quarter of 2009. Lastly, a $13 million other-than-temporary impairment
(OTTI) charge was recorded during the first quarter of 2008. Details related to
these fluctuations are discussed later in the "home equity" and "parent and
other" sections of this report.
Noninterest Expense
Noninterest expenses for the three months ended March 31, 2009 totaled
$44 million, down from $52 million for the same period in 2008 due primarily to
reduction in personnel costs related to our restructuring initiatives.
Income Tax Provision
Income tax expense for the three months ended March 31, 2009 totaled
$4.8 million, compared to a benefit of $14 million during the same period in
2008. The 2009 expense included a $39 million addition to a valuation allowance
to reduce our deferred tax asset to an amount that is likely to be realized. We
evaluate the realizability of our deferred tax asset quarterly. SFAS 109
requires both positive and negative evidence be considered in determining the
need for a valuation allowance. Our recent losses have triggered an increase to
our deferred tax asset balance.
We provided a valuation allowance for all of our deferred tax assets that
could not be realized through carrybacks and reversals of existing temporary
differences. Despite being in a cumulative loss position in light of recent
operations, we believe that as of March 31, 2009 approximately $107 million of
our deferred tax asset was realizable due to the ability to apply net operating
loss carrybacks to recover taxes paid in fiscal years 2005 and 2006 and due to
reversal of existing temporary differences. Our deferred tax assets are recorded
based on management's judgment as to whether realization of these assets is more
likely than not.
Consolidated Balance Sheet Analysis
Total assets at March 31, 2009 were $4.0 billion, down 18% from December 31,
2008. Average assets for the first quarter of 2009 were $4.8 billion, down 14%
from the average assets for the year 2008.
Residual Interests
When we sell certain loans, we retain an interest in the sold loans and
record this retained interest as a residual on our balance sheet. These
transactions include loan sales to the Federal Home Loan Bank and loan
participations through our franchise channel. At March 31, 2009 we held residual
interests with a fair value of $9 million, relatively unchanged from year end
2008. Key assumptions used in valuing these assets at origination and in
subsequent periods include default rates, prepayment speeds and interest rates.
Investment Securities
The following table shows the composition of our investment securities at the
dates indicated:
March 31, December 31,
2009 2008
(Dollars in thousands)
U.S. Treasury and government obligations $ 13,019 $ 13,054
Obligations of states and political subdivisions 3,200 3,320
Mortgage-backed securities 19,832 20,998
Other 11,750 11,781
Total 47,801 49,153
Federal Home Loan Bank and Federal Reserve Bank stock 56,460 61,056
Total $ 104,261 $ 110,209
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Impairment is evaluated considering numerous factors, and their relative
significance varies case to case. Factors considered include the length of time
and extent to which the market value has been less than cost; the financial
condition and near-term prospects of the issuer; and the intent and ability to
retain the security in order to allow for an anticipated recovery in market
value. If, based on the analysis, it is determined that the impairment is
other-than-temporary, the security is written down to fair value, and a loss is
recognized through earnings.
At March 31, 2009, we held four mortgage-backed securities acquired over the
course of 2006 and 2007 at original issuance at their par values. All of the
securities were rated "AA" or "AA+" by S&P at origination. The securities are
backed primarily by Alt-A first mortgages and pay interest at variable rates.
The average FICO scores on the collateral underlying each of the securities were
above 700 at issuance. As home price depreciation accelerated in 2008,
delinquencies and foreclosure rates increased and trading in these securities,
and others like them, halted. All four securities were first downgraded in
April 2008 and have since been downgraded further.
These securities had an original par value of $26 million and now have an
estimated fair value of $3 million at March 31, 2009. The decline in fair value
related to these securities is deemed to be other-than-temporary and related
principally to credit factors. Accordingly, we have recognized
other-than-temporary impairment (OTTI) charges of $23 million since the
beginning of 2008. We recorded $13 million of impairment during the first
quarter of 2008 and we recorded $0.1 million in the first quarter of 2009. These
OTTI adjustments reflect our estimate of fair value for these securities at
March 31, 2009. The estimates of fair value were based on estimates of future
cash flows and based on assumptions related to discount rates that management
believes market participants would use to value similar assets.
Management uses two principal fair value methodologies with respect to our
securities portfolio i) price quotations from dealers in the securities we own
and ii) cash flow modeling using assumptions provided by dealers in the
securities, including estimates of future defaults on the underlying collateral,
assumptions of loss ratios for defaults and appropriate discount rates for the
securities. Management reviews the price information from the dealers on a
monthly basis, comparing that pricing information to actual cash flows received
on the securities.
Management reviews actual trading activity provided by secondary market
participants, including dealers, to determine if a security is illiquid. If the
security is actively traded and price quotes attained from the dealer(s) are
consistent with traded prices, then we utilize the quoted price. When a security
has not traded actively, a condition experienced on many of the company's
securities throughout 2008 and 2009, management utilizes cash flow modeling,
supplemented by collateral performance information as provided by dealers.
Loans Held For Sale
Loans held for sale totaled $149 million at March 31, 2009, a decrease from a
balance of $841 million at December 31, 2008. The decrease relates to the
derecognition of $661 million of home equity loans during the first quarter.
This derecognition was the result of meeting all of the requirements for sale
accounting under SFAS 140.
Loans and Leases
Our commercial loans and leases are originated throughout the United States.
We also extend credit to consumers throughout the United States through
mortgages, installment loans and revolving credit arrangements. Loans by major
category for the periods presented were as follows:
March 31, December 31,
2009 2008
(Dollars in thousands)
Commercial, financial and agricultural $ 1,752,387 $ 1,862,877
Real estate-construction & land development 429,156 466,598
Real estate-mortgage 488,497 523,837
Consumer 21,995 24,022
Commercial financing
Franchise financing 919,657 922,429
Domestic leasing 10,380 11,305
Unearned income
Franchise financing (289,429 ) (297,600 )
Domestic leasing (1,121 ) (1,420 )
Total $ 3,331,522 $ 3,512,048
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Allowance for Loan and Lease Losses
Changes in the allowance for loan and lease losses are summarized below:
March 31, March 31,
2009 2008
And the Three And the Three
Months Then Ended Months Then Ended
(Dollars in thousands)
Balance at beginning of year $ 137,015 $ 144,855
Provision for loan and lease losses 64,002 44,520
Charge-offs (46,453 ) (31,794 )
Recoveries 839 1,607
Reduction due to reclassification to loans and leases held
for sale - (461 )
Foreign currency adjustment - (129 )
Balance at end of period $ 155,403 $ 158,598
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More information on this subject is contained in the section on "Credit Risk"
and in the line of business discussions.
Deposits
Total deposits for the first quarter of 2009 averaged $3.1 billion, down from
average deposits for the year 2008 of $3.4 billion. Irwin Union Bank and Trust
utilizes institutional broker-sourced deposits as funding from time to time to
supplement deposits solicited through branches and other wholesale funding
sources. At March 31, 2009, institutional broker-sourced deposits totaled $0.9
billion, relatively unchanged from December 31, 2008. Due to capital levels,
neither of our depository subsidiaries can issue brokered deposits.
Other Borrowings
Other borrowings during the first quarter of 2009 averaged $367 million
compared to an average of $527 million for the year 2008. Other borrowings
totaled $338 million at March 31, 2009 compared to $512 million at December 31,
2008.
Federal Home Loan Bank borrowings averaged $367 million for the quarter ended
March 31, 2009, with an average rate of 4.75% and the balance at March 31, 2009
was $338 million at an interest rate of 5.03%. The maximum outstanding during
any month end during 2009 was $371 million. Federal Home Loan Bank borrowings
averaged $487 million for the year ended December 31, 2008, with
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