Irwin Soars!

Looking at the 28% jump in Irwin Financial's (NYSE: IFC  ) stock yesterday, I'm sure it wouldn't surprise anybody that there were some positives mixed in with the red ink in the bank's fourth-quarter earnings report.

One big positive was that the company didn't surprise anybody with its $16.4 million loss for the quarter. Earlier in the month, Irwin announced that it anticipated a loss of between $15 million and $20 million because of continued deterioration in its loan portfolios. Thought it may seem small, coming in at the lower end of that range is a big boon in the market that we're in right now.

Similarly positive was the fact that the bank didn't see any further deterioration in its discontinued mortgage lending business. Because of spiking loan repurchase requests during the third quarter, Irwin took a big $17 million loss reserve. Though the fourth quarter didn't bring any improvements in the environment, it also didn't bring further decline, which investors may have anticipated.

The bank also trumpeted the continued growth and stability of its commercial finance segment. This is currently the smallest of Irwin's three lines of business, but it has been on a fairly steady growth trajectory and has maintained solid credit quality in a tough environment.

But let's face it, bad is bad and it's tough to call Irwin's fourth quarter -- or 2007 for that matter -- anything but. Fourth-quarter net interest income fell slightly while loan losses nearly quintupled. On a full-year basis, $1.25 in 2006 per-share earnings from continuing operations turned into a $0.57 loss. Year over year, shareholders' equity ended up taking a 12% hit as well.

At this point we're clearly beyond considering Irwin anything but a bank that is not only in transition, but in distress. Of course it's not thrashing around in this tumultuous banking gale by itself -- a quick scan of financial institutions ranging from comparables like Capitol Bancorp (NYSE: CBC  ) and Citizens Republic Bancorp (Nasdaq: CRBC  ) all the way up to Citigroup (NYSE: C  ) and Merrill Lynch (NYSE: MER  ) shows an entire industry under a storm cloud.

Irwin certainly has a good deal of work ahead of it, not only in shoring up its credit quality and performance, but also in gaining back investor confidence. For those who think that it will be able to pull off what's needed, though, the market has tantalizingly priced the stock -- even after the big 28% jump -- as if it had recovered the ghost of its former self. And while a good outcome is far from a foregone conclusion, the bank's strong capital position, its expectation of a near break-even first quarter, and 125 basis points worth of recent Federal Reserve rate cuts (whether you agree with themor not!), should help shove it in the right direction.

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