SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
--------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-6835
--------
IRWIN FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
INDIANA 35-1286807
- ------------------------------- --------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
500 Washington Street, Columbus, IN 47201
-------------------------------------------
(Address of principal executive offices)
(Zip Code)
812/376-1020
------------------
Registrant's telephone number, including area code)
(Former name, former address and former fiscal year
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Indicate by check mark whether the registrant has filed all
documents and reports required to be filed by Sections 12, 13, or
15(d) of the Securities Exchange Act of 1934 subsequent to the
distribution of securities under a plan confirmed by a court.
Yes No
As of October 31, 1996, there were outstanding 5,682,776 common
shares, no par value, of the Registrant.
XXX PAGE 1 XXX
<TABLE>
<CAPTION>
IRWIN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
September 30, December 31,
ASSETS: 1996 1995
------------- -------------
<S> <C> <C>
Cash and due from banks $41,456,421 $49,256,953
Federal funds sold 0 15,000,000
------------- -------------
Cash and cash equivalents 41,456,421 64,256,953
Interest-bearing deposits with financial
institutions 10,195,652 7,937,740
Investment securities (Market value:
$69,855,676 in 1996 and $61,884,464
in 1995) - Note 2 69,551,512 60,869,413
Mortgage loans held for sale - Note 3 318,282,223 378,658,247
Loans and leases, net of unearned income
- Note 4 575,983,353 412,524,601
Less: Allowance for possible loan and
lease losses - Note 5 (6,110,816) (4,620,167)
-------------- --------------
569,872,537 407,904,434
Mortgage servicing rights - Note 6 66,606,394 48,535,326
Accrued interest receivable 6,654,563 4,239,435
Premises and equipment 18,350,051 16,377,889
Other assets 60,765,528 49,527,138
-------------- --------------
$1,161,734,881 $1,038,306,575
============== ==============
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY:
<S> <C> <C>
Deposits
Noninterest-bearing $220,346,261 $207,379,192
Interest-bearing 317,622,035 302,543,544
Certificates of deposit over $100,000 75,744,338 54,075,911
------------- -------------
613,712,634 563,998,647
Short-term borrowings- Note 7 359,512,839 310,278,659
Long-term debt- Note 8 19,515,293 21,574,792
Other liabilities 56,383,110 43,237,996
------------- -------------
Total liabilities 1,049,123,876 939,090,094
------------- -------------
Shareholders' equity
Preferred stock, no par value - authorized
50,000 shares; none issued 0 0
Common stock; no par value - authorized
40,000,000 shares; issued 5,850,520 shares
in 1996 and 1995; including 169,782 and
185,604 shares in treasury in 1996 and
1995, respectively. 29,965,287 29,965,287
Unrealized loss on investment securities (11,025) (9,657)
Retained earnings 87,881,905 74,647,711
------------- -------------
117,836,167 104,603,341
Less treasury stock, at cost (5,225,162) (5,386,860)
------------- -------------
Total shareholders' equity 112,611,005 99,216,481
------------- -------------
$1,161,734,881 $1,038,306,575
============== ==============
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
XXX PAGE 2 XXX
<TABLE>
<CAPTION>
IRWIN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
Three Months Ended
September 30,
INTEREST INCOME: 1996 1995
---------- ----------
<S> <C> <C>
Loans and leases $14,286,206 $10,188,631
Investment securities:
Taxable 1,071,351 1,085,147
Tax-exempt 88,412 105,914
Loans held for sale 7,497,647 6,244,510
Federal funds sold 61,950 366,232
---------- ----------
Total interest income 23,005,566 17,990,434
---------- ----------
INTEREST EXPENSE:
Deposits 4,649,118 3,798,469
Short-term borrowings 5,437,005 3,850,165
Long-term debt 471,717 371,555
---------- ----------
Total interest expense 10,557,840 8,020,189
---------- ----------
Net interest income 12,447,726 9,970,245
Provision for possible loan and lease
losses - Note 5 989,000 910,000
---------- ----------
Net interest income after provision
for possible loan and lease losses 11,458,726 9,060,245
---------- ----------
OTHER INCOME:
Loan origination fees 10,750,565 10,700,955
Gain from sales of loans 8,650,297 6,524,879
Loan servicing fees 12,263,517 8,011,811
Gain on sale of mortgage servicing 4,411,321 3,798,847
Brokerage fees and commissions 550,681 525,579
Trust fees 512,700 366,503
Service charges on deposit accounts 167,426 337,098
Insurance commissions, fees and premiums 360,734 282,783
Other 748,691 452,875
---------- ----------
38,415,932 31,001,330
OTHER EXPENSE:
Salaries 19,427,821 16,723,527
Pension and other employee benefits 3,367,931 2,528,584
Office Expense 2,481,214 2,083,461
Premises and equipment 3,494,441 3,199,214
Amortization of mortgage servicing rights 4,273,029 1,295,000
Marketing and development 2,373,169 1,873,897
Other 5,282,504 3,020,809
---------- ----------
40,700,109 30,724,492
---------- ----------
Income before income taxes 9,174,549 9,337,083
Federal income taxes 2,894,000 2,631,000
State income taxes 778,000 667,000
---------- ----------
Net income $5,502,549 $6,039,083
========== ==========
Net income per share of common stock:
Net income -Note 1 $0.95 $1.05
========== ==========
Dividends per share of common stock $0.12 $0.11
========== ==========
Weighted average shares of common stock
outstanding 5,817,757 5,759,401
========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
XXX PAGE 3 XXX
<TABLE>
<CAPTION>
IRWIN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME Nine Months Ended
September 30,
INTEREST INCOME: 1996 1995
---------- ----------
<S> <C> <C>
Loans and leases $37,858,483 $27,008,657
Investment securities:
Taxable 3,345,808 3,486,777
Tax-exempt 270,888 333,866
Loans held for sale 22,238,995 12,894,957
Federal funds sold 1,135,064 1,532,665
---------- ----------
Total interest income 64,849,238 45,256,922
---------- ----------
INTEREST EXPENSE:
Deposits 13,469,270 10,417,539
Short-term borrowings 14,574,204 7,086,545
Long-term debt 1,319,441 1,144,414
---------- ----------
Total interest expense 29,362,915 18,648,498
---------- ----------
Net interest income 35,486,323 26,608,424
Provision for possible loan and lease
losses - Note 5 2,774,000 2,140,000
---------- ----------
Net interest income after provision
for possible loan and lease losses 32,712,323 24,468,424
---------- ----------
OTHER INCOME:
Loan origination fees 33,592,084 22,970,337
Gain from sales of loans 25,426,830 11,257,774
Loan servicing fees 35,559,236 25,394,798
Gain on sale of mortgage servicing 8,940,791 13,972,541
Brokerage fees and commissions 1,678,947 2,060,735
Trust fees 1,546,165 1,505,593
Service charges on deposit accounts 954,440 903,463
Insurance commissions, fees and premiums 1,176,864 897,353
Other 1,951,969 1,394,824
----------- -----------
110,827,326 80,357,418
----------- -----------
OTHER EXPENSE:
Salaries 57,872,178 43,395,092
Pension and other employee benefits 9,754,047 7,883,492
Office Expense 7,815,066 5,750,072
Premises and equipment 10,060,585 9,169,235
Amortization of mortgage servicing rights 9,898,502 2,525,000
Marketing and development 7,611,764 4,594,322
Other 14,392,985 8,474,226
----------- -----------
117,405,127 81,791,439
----------- -----------
Income before income taxes 26,134,522 23,034,403
Federal income taxes 8,195,000 6,471,000
State income taxes 2,421,000 1,778,000
----------- -----------
Net income $15,518,522 $14,785,403
=========== ===========
Net income per share of common stock:
Net income -Note 1 $2.67 $2.58
=========== ===========
Dividends per share of common stock $0.36 $0.33
=========== ===========
Weighted average shares of common stock
outstanding 5,812,896 5,731,984
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
XXX PAGE 4 XXX
<TABLE>
<CAPTION>
IRWIN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
September 30, 1996 1995
- ------------------------------------------------------------------------
<S> <C> <C>
Net income $15,518,522 $14,785,403
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization 14,427,734 5,132,727
Provision for possible loan and lease losses 2,774,000 2,140,000
Amortization of premiums, less accretion
of discounts:
Held-to-Maturity 1,202,079 195,911
Available-for-Sale 21,117 115,439
Mortgage loan originations (3,803,631,068) (2,419,012,253)
Sales of mortgage loans 3,864,007,092 2,221,035,735
Gain on sale of mortgage servicing (8,940,791) (12,972,541)
Other, net (2,544,050) 1,797,960
-------------- --------------
Net cash provided (used) by operating
activities 82,834,635 (186,781,619)
-------------- --------------
Lending and investing activities:
Proceeds from maturities/calls of investment
securities:
Held-to-Maturity 2,045,000 44,462,071
Available-for-Sale 29,777,845 7,013,979
Purchase of investment securities:
Held-to-Maturity (13,598,670) (32,822,678)
Available-for-Sale (28,129,470) (5,430,484)
Net decrease (increase) in interest-bearing
deposits with financial institutions (2,257,912) 5,362,609
Net increase in loans (164,742,103) (106,722,664)
Net additions to premises and equipment (4,467,116) (3,590,607)
Purchase of mortgage servicing (66,962,442) (33,238,928)
Proceeds from sale of mortgage servicing 47,933,663 22,957,816
------------- -------------
Net cash used by lending and investing
activities (200,401,205) (102,008,886)
------------- -------------
Financing activities:
Net increase in deposits 49,713,987 111,726,889
Net increase in short-term borrowings 49,234,180 183,075,635
Repayment of long-term debt (2,059,499) (2,504,589)
Purchase of treasury stock (1,039,753) (2,034,598)
Proceeds from sale of stock for stock
purchase plan 961,530 1,273,056
Dividends paid (2,044,407) (1,859,747)
----------- -----------
Net cash provided by financing activities 94,766,038 289,676,646
----------- ------------
Net increase (decrease) in cash and cash
equivalents (22,800,532) 886,141
Cash and cash equivalents at beginning
of year 64,256,953 50,840,452
------------ ------------
Cash and cash equivalents at end of year $41,456,421 $51,726,593
============ ============
Supplemental disclosures of cash flow information:
Cash paid during the period:
Interest $28,739,849 $17,849,806
=========== ===========
Income taxes $3,550,200 $3,829,990
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
XXX PAGE 5 XXX
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE I - SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION: Irwin Financial Corporation and its subsidiaries
(the Corporation) provide financial services throughout the
United States. The Corporation is engaged in the mortgage
banking, commercial banking, home equity lending, and equipment
leasing lines of business. Intercompany balances and
transactions have been eliminated in consolidation. Significant
accounting policies followed by the Corporation are consistent
with those followed for annual financial reporting. The
information furnished reflects all adjustments which are, in the
opinion of management, necessary for a fair presentation of the
results of interim periods.
INCOME PER SHARE: Income per share computations are based on the
weighted average number of common shares outstanding during the
year.
MORTGAGE BANKING: The Corporation adopted SFAS No. 122
"Accounting for Mortgage Servicing Rights" in the second quarter
of 1995. This standard prohibits retroactive application.
Accordingly, the 1995 first quarter financial results were
accounted for under the original SFAS No. 65.
STOCK-BASED COMPENSATION: In 1996 the Corporation adopted
Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation." The Corporation does not
recognize compensation expense for its employee fixed stock
option and employee stock purchase plans. Had the Corporation
recognized stock-based compensation expense based on the fair
value at the grant dates for awards granted subsequent to
December 15, 1994, the Corporation's after-tax income and
earnings per share would have been reduced by the following
amounts:
<TABLE>
<CAPTION>
Three months ended
September 30,
1996 1995
-------- --------
<S> <C> <C>
After-tax reduction in income $20,035 $14,340
After-tax reduction in earnings per share $0.01 0.01
Nine months ended
September 30,
1996 1995
-------- --------
After-tax reduction in income $335,533 $180,379
After-tax reduction in earnings per share $0.05 0.04
</TABLE>
RECLASSIFICATIONS:Certain amounts in the 1995 consolidated
financial statements have been reclassified to conform to the
1996 presentation.
XXX PAGE 6 XXX
NOTE 2 - INVESTMENT SECURITIES
The carrying amounts of investment securities, including net
unrealized losses of $18,375 and $16,093 at September 30, 1996
and December 31, 1995, respectively, on available-for-sale
securites are summarized as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------ ------------
Held-to-Maturity
<S> <C> <C>
US Treasury and Government obligations $42,672,659 26,914,375
Obligations of states and political
subdivisions 4,466,741 6,490,223
Mortgage-backed securities 5,475,218 8,858,431
------------ ------------
Total Held-to-Maturity 52,614,618 42,263,029
Available-for-Sale
US Treasury and Government obligations 16,936,894 15,359,438
Mortgage-backed securities 0 3,246,946
------------ ------------
Total Available-for-Sale 16,936,894 18,606,384
Total Investments $69,551,512 $60,869,413
============ ============
</TABLE>
Securities which the Corporation has the positive intent and
ability to hold until maturity are classified as "held-to-
maturity" and are stated at cost adjusted for amortization of
premium and accretion of discount. Securities that might be sold
prior to maturity are classified as "available-for-sale" and are
stated at fair value. Unrealized gains and losses, net of the
future tax impact, are reported as a separate component of
shareholders' equity until realized.
NOTE 3 - MORTGAGE LOANS HELD FOR SALE
Mortgage loans held for sale are stated at the lower of cost or
market as of the balance sheet date.
NOTE 4 - LOANS AND LEASES
<TABLE>
<CAPTION>
Loans and leases are summarized as follows:
September 30, December 31,
1996 1995
------------ ------------
<S> <C> <C>
Commercial, financial and agricultural $187,174,532 $150,311,871
Real estate-construction 40,244,578 36,125,577
Real estate-mortgage 243,502,170 108,350,683
Consumer 58,045,082 67,755,702
Lease financing 61,194,874 60,979,310
Unearned income (14,177,883) (10,998,542)
------------ ------------
$575,983,353 $412,524,601
============ ============
</TABLE>
XXX PAGE 7 XXX
NOTE 5 - ALLOWANCE FOR POSSEBLE LOAN AND LEASE LOSSES
Changes in the allowance for possible loan and lease losses are
summarized as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------- -------------
<S> <C> <C>
Balance at beginning of year $4,620,167 $3,863,223
Provision for possible loan and lease losses 2,774,000 3,073,000
Reduction due to sale of loans (193,693) (215,833)
Recoveries 352,755 389,674
Charge-offs (1,442,413) (2,489,897)
------------ ------------
Balance at end of period $6,110,816 $4,620,167
============ ============
</TABLE>
NOTE 6- MORTGAGE SERVICING RIGHTS
Included on the consolidated balance sheet at September 30, 1996
and December 31, 1995 are $66,606,394 and $48,535,326,
respectively, of capitalized mortgage servicing rights. These
amounts relate to the principal balances of mortgage loans
serviced by the Corporation for investors which total
$10,875,458,604 and $10,301,914,063 at September 30, 1996 and
December 31, 1995, respectively. Although they are not
generally held for purposes of sale, there is an active
secondary market for mortgage servicing rights.
NOTE 7- SHORT-TERM BORROWING
<TABLE>
<CAPTION>
Short-term borrowings are summarized as follows:
September 30, December 31,
1996 1995
------------- -------------
<S> <C> <C>
Federal funds and Federal Home Loan Bank $106,000,000 $40,000,000
Repurchase agreements 57,982,722 156,476,711
Other warehouse borrowings 133,606,820 69,395,883
Other 61,923,297 44,406,065
------------- -------------
$359,512,839 $310,278,659
============= =============
</TABLE>
Repurchase agreements at September 30, 1996 and December 31,
1995, include $52,195,790 and $151,104,931, respectively, in
mortgage loans sold under agreements to repurchase which are
used to fund mortgage loans sold prior to sale in the secondary
market. These repurchase agreements are collateralized by
mortgage loans held for sale.
The Corporation has warehouse lending facilities to fund
mortgage loans and equipment leases, collateralized by these
loans and leases. Lines of credit are also available to fund
operations.
XXX PAGE 8 XXX
NOTE 8- LONG-TERM DEBT
Long-term debt at September 30, 1996 of $19,515,293 consists of
various notes payable at annual interest rates ranging from
6.30% to 9.6% and maturity dates ranging from January 31, 1997
through September 30, 2001. Long-term debt as of December 31,
1995 was $21,574,792 and consisted of various notes payable at
annual interest rates ranging from 6.0% to 9.6% and maturity
dates ranging from August 5, 1996 through April 30, 2001.
XXX PAGE 9 XXX
PART I
Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Net income for the third quarter ended September 30, 1996,
was $5,502,549 down 8.9% from the third quarter 1995 net income
of $6,039,083. Net income per share was $0.95 for the third
quarter of 1996 as compared to $1.05 for the same period in 1995.
Return on equity for the third quarter of 1996 was 19.78%
compared to 26.50% in 1995.
For the year to date, the Corporation recorded net income of
$15,518,522, up 5.0% from 1995. Net income per share was $2.67,
up from $2.58 a year earlier. Return on equity for the year to
date was 19.47% as compared to 22.92% for the same period in
1995.
LINES OF BUSINESS
Irwin Financial Corporation has five lines of business:
- - Mortgage banking (includes Inland Mortgage Corporation and the
related activities of Irwin Union Bank)
- - Community banking (Irwin Union Bank and Trust and Irwin Union
Advisory Services)
- - Home equity lending (includes Irwin Home Equity and the related
activities of Irwin Union Bank)
- - Equipment leasing (includes Affiliated Capital Corp. and the
related activities of Irwin Union Bank)
- - Credit insurance (Irwin Union Credit Insurance Corporation)
Listed below are the earnings by line of business for the
quarter and year to date, as compared to the same periods in
1995:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Mortgage banking $5,081,710 $6,245,693 $16,373,225 $14,813,072
Community banking 1,032,208 924,504 3,188,149 2,575,542
Home equity lending (942,372) (1,841,159) (5,053,884) (4,362,778)
Equipment leasing 24,873 (22,843) 39,493 (174,687)
Credit insurance 11,644 25,973 53,309 28,912
Parent (including investor
services and consolidating
entries) 294,486 706,915 918,230 1,905,342
----------- ----------- ----------- -----------
$5,502,549 $6,039,083 $15,518,522 $14,785,403
=========== =========== =========== ===========
</TABLE>
XXX PAGE 10 XXX
MORTGAGE BANKING
<TABLE>
<CAPTION>
Selected Financial Data (shown in thousands):
Three Months Nine Months
Ended September 30, Ended September 30,
1996 1995 1996 1995
---- ---- ---- ----
SELECTED INCOME STATEMENT DATA:
<S> <C> <C> <C> <C>
Loan origination fees $10,681 $10,914 $33,354 $23,308
Gain from sales of loans 7,464 6,525 23,818 11,258
Loan servicing fees 11,442 9,012 32,620 26,395
Net interest income 4,002 3,760 12,854 9,494
Gain on sale of servicing 4,411 2,799 8,941 12,973
Other income 277 107 720 456
Operating expense (29,602) (22,925) (84,663) (59,200)
--------- --------- --------- ---------
Income before tax 8,675 10,192 27,644 24,684
Income tax (3,593) (3,946) (11,271) (9,871)
--------- --------- --------- ---------
Net income $5,082 $6,246 $16,373 $14,813
========= ========= ========= =========
Mortgage loan originations $1,216,781 $1,110,803 $3,803,631 $2,419,012
==================== =====================
</TABLE>
<TABLE>
<CAPTION>
SELECTED OPERATING DATA: September 30, December 31,
1996 1995
------------- -------------
<S> <C> <C>
Servicing portfolio $10,875,459 $10,301,914
Mortgage loans held for sale 256,363 309,262
Net capitalized servicing 69,720 51,783
</TABLE>
Net income for the third quarter was $5.1 million, down
18.6% from the same period in 1995. Year to date, net income was
$16.4 million compared to $14.8 million in 1995.
Mortgage loan originations of $1.2 billion (including $80.1
million of brokered loans) were 9.5% above the third quarter of
1995. For the year, originations totaled $3.8 billion, up 57.2%
from 1995. Refinances accounted for 11.0% of loan production in
the third quarter of 1996 and 20.1% year to date. This compares
to 12.4% and 8.27%, respectively, in 1995. Mortgage loan
origination income was down 2.1% in the third quarter to $10.7
million, and year to date was up 43.1% to $33.4 million.
Mortgage loan applications in process totaled $1.5 billion at
September 30, 1996, compared to $1.2 billion a year earlier.
Gains on the sale of loans increased 14.4% in the third
quarter to $7.5 million. Year to date, gains on the sale of
loans totaled $23.8 million compared with $11.3 million in 1995.
The year to date increase is partially due to the adoption of a
new accounting standard in the second quarter of 1995 which
changed the accounting for mortgage loans.
Mortgage servicing fees increased 27.0% in the third
quarter and 23.6% year to date to $11.4 million and $32.6
million, respectively. The increase
XXX PAGE 11 XXX
is reflective of growth in the servicing portfolio which totaled
$10.9 billion at September 30, 1996, up 12.3% from a year earlier
and 5.6% from December 31, 1995. Capitalized mortgage servicing
rights totaled $69.7 million at September 30, 1996, up 34.6% from
December 31, 1995.
Revenues from the sale of mortgage servicing were up 57.6%
from the third quarter of 1995 to $4.4 million. Year to date
servicing sale revenues totaled $8.9 million, down 31.1% from
$13.0 million in 1995.
As a result of the increase in mortgage loan closings from
1995, net interest income was up in the third quarter and year to
date. Net interest income for the three months ended September
30, 1996 was $4.0 million, up 6.4% from the third quarter 1995.
Year to date, net interest income totaled $12.9 million, compared
to $9.5 million in 1995.
Operating expenses were up $7.0 million, or 30.8% from the
third quarter of 1995 and $26.0 million or 44.3% year to date.
Included in third quarter operating expenses is $4.2 million of
amortization expense relating to capitalized mortgage servicing
rights, an increase of $3.0 million over 1995. Year to date
amortization expense totaled $9.8 million, up $7.3 million from
the previous year. The increase in other operating expense
reflects the increased production activity in the mortgage
banking line of business as previously discussed.
XXX PAGE 12 XXX
COMMUNITY BANKING
<TABLE>
<CAPTION>
SELECTED FINANCIAL DATA (shown in thousands):
Three Months Nine Months
Ended September 30, Ended September 30,
1996 1995 1996 1995
---- ---- ---- ----
SELECTED INCOME STATEMENT DATA:
<S> <C> <C> <C> <C>
Net interest revenue $5,091 $4,499 $14,494 $12,996
Provision for loan and lease
losses (556) (655) (1,508) (1,488)
Other income 2,085 1,767 6,564 4,870
Operating expense (4,998) (4,219) (14,518) (12,512)
-------- -------- -------- --------
Income before tax 1,622 1,392 5,032 3,866
Income tax (590) (467) (1,844) (1,290)
-------- -------- -------- --------
Net income $1,032 $925 $3,188 $2,576
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
September 30, December 31,
SELECTED BALANCE SHEET DATA: 1996 1995
------------- -------------
<S> <C> <C>
Cash and investments $88,103 $117,361
Loans and leases 346,116 310,083
Allowance for loan and lease losses (4,420) (3,668)
All other assets 21,429 15,289
---------- ----------
Total assets $451,228 $439,065
========== ==========
Deposits $418,634 $400,149
All other liabilities 0 10,846
---------- ----------
Total liabilities $418,634 $410,995
========== ==========
Shareholder's equity $32,594 $28,070
========== ==========
</TABLE>
Community banking activities are conducted by Irwin Union
Bank through locations in six counties in south-central Indiana.
Results in each period include the income and expenses of trust
operations and investment advisory services which were previously
reported in the investor services line of business and are now
managed and reported by the community bank. Results for 1995
have been restated to reflect this change. Net income was up in
the third quarter to $1.0 million from $924.5 thousand. Year to
date, net income improved $612.6 thousand from 1995, or 23.8%.
The provision for loan and lease losses declined 15.1% to $556.0
thousand in the third quarter compared with a provision of $655.0
thousand a year earlier. Year to date, the provision for loan
and lease losses totaled $1.5 million in both 1996 and 1995.
XXX PAGE 13 XXX
Following is an analysis of net interest income and net
interest margin computed on a tax equivalent basis:
<TABLE>
- ----------------------------------------------------------------------------
For the Three Months
Ended September 30, 1996 1995
----- -----
<CAPTION>
Average Yield/ Average Yield/
(In thousands Balance Interest Rate Balance Interest Rate
------- -------- ------ ------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning
assets $439739 $9,153 8.26% $378,372 $8,305 8.71%
Interest-bearing
liabilities $381,838 $4,039 4.20% $321,329 $3,695 4.56%
-------- --------
Net interest
income $5,114 $4,610
Net interest margin 4.61% 4.83%
</TABLE>
<TABLE>
- -----------------------------------------------------------------------------
For the Nine Months
Ended September 30, 1996 1995
------ ----
<CAPTION>
Average Yield/ Average Yield/
(In thousands) Balance Interest Rate Balance Interest Rate
------- -------- ------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning
assets $414,560 $26,153 8.43% $367,055 $23,608 8.60%
Interest-bearing
liabilities $354,593 $11,659 4.40% $310,429 $10,273 4.42%
-------- --------
Net interest income $14,494 $13,335
Net interest margin 4.67% 4.86%
</TABLE>
Other income in the third quarter was up 18.0% to $2.1
million from $1.8 million in 1995. For the year to date, other
income increased 34.8% to $6.6 million. Loan servicing fees and
gains on loan sales make up the most significant increases in
1996 other income. Other expenses increased 18.5% or $779.3
thousand from the third quarter of 1995 to $5.0 million. For the
year, these expenses were up $2.0 million to $14.5 million. The
increase was due to the continued expansion of operations in new
markets and restructuring costs associated with trust operations.
XXX PAGE 14 XXX
HOME EQUITY LENDING
<TABLE>
<CAPTION>
SELECTED FINANCIAL DATA (shown in thousands):
Three Months Nine Months
Ended September 30, Ended September 30,
1996 1995 1996 1995
---- ---- ---- ----
SELECTED INCOME STATEMENT DATA:
<S> <C> <C> <C> <C>
Net interest revenue $1,278 $170 $2,186 $212
Provision for loan and lease
losses (248) (76) (514) (93)
Loan servicing fees 868 0 1,844 0
Other revenue 25 0 38 0
Operating expense (4,029) (1,623) (7,666) (2,640)
-------- -------- -------- --------
Pre-tax loss ($2,106) ($1,529) ($4,112) ($2,521)
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
OTHER SELECTED FINANCIAL DATA: September 30, December 31,
1996 1995
------------- -------------
<S> <C> <C>
Home equity loans, net of allowance $152,976 $36,225
Servicing portfolio 192,430 86,691
</TABLE>
The home equity lending business was begun in 1994 with the
incorporation of Irwin Home Equity Corporation. It has a single
production and servicing office located in San Ramon, California.
In 1995, the business began marketing home equity lines of credit
by means of direct mail and telemarketing.
The home equity lending business recorded pre-tax losses of
$0.9 million during the third quarter of 1996 and $5.1 million
year to date. These results are compared to 1995 quarterly and
year to date losses of $1.8 million and $4.4 million,
respectively. Net revenues for the quarter totaled $3.5 million,
up from $480.9 thousand a year earlier. Year to date net
revenues increased to $7.0 million from $599.8 thousand in 1995.
Included in 1996 net revenues are loan servicing fees which
totaled $676.3 thousand for the quarter and $2.5 million for the
year to date. Third quarter and year-to-date 1996 net revenues
also include a $1.0 million pre-tax valuation adjustment related
to loans securitized and sold in the fourth quarter of 1995.
This valuation adjustment resulted from the substitution of a
letter of credit for escrowed cash used in that securitization.
Operating expenses were $4.4 million in the third quarter of 1996
compared to $2.3 million in the same period a year earlier. Year
to date, operating expenses were up $7.1 million to $12.1
million. These increases result from the business' continued
expansion of its production capacity.
The owned portfolio of home equity loans totaled $153.0
million at September 30, 1996, up from $53.6 million a year
earlier and $36.2 million at December 31, 1995. Loan volume for
the third quarter of 1996 was $48.0 million, up from $29.7
million in 1995. Year to date volume increased 130.4% to $120.6
million.
XXX PAGE 14 XXX
EQUIPMENT LEASING
The equipment leasing business recorded pre-tax income for
the quarter and for the year of $24.9 thousand and $39.5
thousand, respectively. This compares to a pre-tax loss of $22.8
thousand and $174.7 thousand in the third quarter and year to
date 1995, respectively. Net revenues were up 9.5% for the
quarter to $1.1 million, and 12.0% year to date to $3.2 million.
Operating expenses totaled $1.0 million in the third quarter and
$3.1 million year to date in 1996, up 4.5% and 4.1%,
respectively, from 1995.
In response to changing customer needs, in late 1995 the
business began entering into new private-label financing
agreements with several equipment manufacturers and has launched
a revolving credit product to complement its lease products.
Lease and loan volume of $9.4 million in the third quarter
increased 50.6% from 1995. Year to date, volume increased 39.7%
to $26.3 million.
PARENT COMPANY (INCLUDING INVESTOR SERVICES AND CONSOLIDATING
ENTRIES)
During the third quarter of 1996, the Corporation exited the
brokered certificate of deposit and institutional brokerage
businesses which were the sole businesses operated by the
investor services line of business. A sale of selected assets of
the brokered CD program was completed in the third quarter, and
its impact on the quarter's earnings was not material. Parent
company results in each period include the results of investor
services.
Parent Company net income for the third quarter of 1996 was
$294.5 thousand, compared to $706.9 thousand in 1995. Year to
date, net income of $918.2 thousand was recorded, compared to
$1.9 million a year earlier. Parent company results include the
tax benefits generated at the home equity and leasing lines of
business. Tax benefits totaled $444.1 thousand in the third
quarter of 1996, compared with $1.1 million in 1995. For the
year to date, the parent has recorded $2.4 million of tax
benefits, compared to $3.0 million in 1995.
CONSOLIDATED INCOME STATEMENT ANALYSIS
Net interest income for the third quarter of 1996 totaled
$12.4 million, up 24.8% from the third quarter of 1995. For the
year, it increased 33.4% to $35.5 million. The increases are the
result of growth in the loan and lease portfolio, combined with
higher originations in the mortgage banking business.
The loan and lease loss provision was $989.0 thousand for
the third quarter of 1996, as compared to $910.0 thousand for the
same period in 1995. For the year, it totaled $2.8 million, up
from $2.1 million a year earlier. This increase reflects the
growth in loan and lease portfolio.
Other income was up 23.9% in the third quarter of 1996 to
$38.4 million. Year to date other income increased 37.9% to
$110.8 million. This increase was driven primarily by mortgage
banking activities. Total fees from mortgage loan originations,
sales, servicing, and the sale of servicing were $34.0 million
for the third quarter, up $5.0 million from the third quarter of
1995. For the year, they totaled $98.7 million, an increase of
$25.3 million over 1995.
Other expense also increased in 1996 as the third quarter
was up $9.9 million or 32.1% from 1995. For the year, other
expense increased $35.5 million or 43.4%. Costs associated with
increased production activities in the mortgage banking and home
equity lines of business were the primary reason for the
increases.
The effective income tax rate for the Corporation was 40.0%
in the third quarter of 1996, compared with 35.3% in 1995. The
effective tax rate for the year to date was 40.6%, up from 35.8%
in 1995. The 1995 rates reflect estimates made for certain tax
issues as well as adjustments made to accrue federal income taxes
at the effective rate of 34% rather than the 35% rate which had
been used. Rates in 1996 are more consistent with the
Corporation's normal annual tax rate.
CONSOLIDATED BALANCE SHEET ANALYSIS
Total assets of Irwin Financial Corporation at September 30,
1996, were $1.2 billion, an increase of 11.9% from December 31,
1995 total assets of $1.0 billion. The increase was attributed
to an increase in the loan and lease portfolio of $163.5 million.
The increase in assets was accompanied by an increase in
short term borrowings of $47.7 million or 15.4% and an increase
in deposits of $46.9 million or 8.3%. A portion of noninterest
bearing deposits is associated with escrow accounts held on loans
in the servicing portfolio of Inland Mortgage. These escrow
accounts totaled $156.9 million at September 30, 1996, up from
$143.3 million at December 31, 1995.
Shareholders' equity grew to $112.6 million or $19.82 per
share, a 13.2% increase over the $99.2 million or $17.51 per
share at the end of 1995. The Corporation's equity to assets
ratio ended the quarter at 9.69%, compared to 9.56% at the end of
1995.
Prior to the adoption of new mortgage banking accounting
standards in the third quarter of 1995, mortgage banking
accounting did not allow the full value of mortgage servicing
rights to be reflected on the balance sheet. Since a significant
portion of the Corporation's mortgage servicing portfolio was
generated prior to the adoption of the new accounting standards,
it represents substantial economic value which is not recorded on
the balance sheet. The following table demonstrates the
estimated after-tax value for the current quarter as well as the
past two year ends.
XXX PAGE 15 XXX
<TABLE>
<CAPTION>
(In thousands)
Sept. 30, Dec. 31, Dec. 31,
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Servicing portfolio balance $10,875,459 $10,301,914 $8,818,502
----------- ----------- -----------
Value @1.5% $163,132 $154,529 $132,278
Less: capitalized servicing 69,321 51,783 20,301
Tax liability at 40% 37,524 41,098 44,790
----------- ----------- -----------
Net value not on balance sheet $56,287 $61,648 $67,187
=========== =========== ===========
Per share of common stock $9.91 $10.88 $11.93
=========== =========== ===========
</TABLE>
CREDIT RISK
The assumption of credit risk is a key source of earnings
for the community banking, home equity lending, and equipment
leasing businesses. In addition, the mortgage banking business
assumes some credit risk despite the fact that the mortgages are
typically secured.
The community banking and home equity lending businesses
manage credit risk through the use of lending policies, credit
analysis and approval procedures, and personal contact with the
borrowers. Loans over a certain size are reviewed prior to
approval by a Loan Committee. The equipment leasing business
manages credit risk in a similar manner through the use of
lending policies, credit analysis procedures, and personal
contact with lessees.
Management reviews various ratios as measurements of asset
quality; however, the two most significant areas are delinquent
loan and lease ratios and the adequacy of the allowance for
possible loan and lease losses.
The adequacy of the allowance for possible loan and lease
losses is critical to the fair valuation of net loans and leases
recorded on the Corporation's balance sheet. Management
evaluates the creditworthiness of significant borrowers, past
loan and lease loss experience, and current and anticipated
economic conditions. The allowance for possible loan and lease
losses is reduced by loans and leases which, in the opinion of
management, are deemed to be uncollectible. The allowance is
increased by provisions against income. The ending allowance at
any reporting period reflects management's opinion of the
possible future loss potential of all loans and leases currently
recorded on the Corporation's books.
As of September 30, 1996, the allowance for possible loan
and lease losses as a percentage of total loans and leases was
1.06%, compared to 1.12% at December 31, 1995. For the three
months ended September 30, 1996, the provision for possible loan
and lease losses totaled $989.0 thousand, an 8.7% increase over
the amount recorded in the third quarter of 1995. Year to date,
the provision totaled $2.8 million, up from $2.1 million a year
earlier. The higher 1996 provision was caused by growth in the
loan and lease portfolio. Net charge-offs for the quarter were
$413.5 thousand as compared to $435.3
XXX PAGE 16 XXX
thousand in 1995. Year to date net charge-offs totaled $1.1
million, down from $1.5 million a year earlier.
The Corporation's percentage of nonperforming assets (loans
90 days past due, nonaccrual, and owned real estate) to total
assets increased from levels experienced in 1995. As of
September 30, 1996, this ratio was 0.35% as compared to 0.26% at
December 31, 1995. The Corporation monitors the loans and
property included in this total in evaluating the status of the
current reserve.
<TABLE>
<CAPTION>
NONPERFORMING ASSETS
(In Thousands) September 30, December 31, December 31,
1996 1995 1994
----- ----- -----
<S> <C> <C> <C>
Accruing loans past due
90 days or more:
Commercial $288 $418 $113
Leasing 0 0 0
Real Estate 142 0 0
Consumer 409 202 93
-------- -------- --------
Subtotal 839 620 206
-------- -------- --------
Nonaccrual loans:
Commercial 1,040 670 1,523
Leasing 768 415 363
Real Estate 914 694 689
Consumer 0 0 0
-------- -------- --------
Subtotal 2,722 1,779 2,575
-------- -------- --------
Total nonperforming loans 3,561 2,399 2,781
-------- -------- --------
Other real estate owned 512 295 489
-------- -------- --------
Total nonperforming assets $4,073 $2,694 $3,270
======== ======== ========
Nonperforming assets to
total assets 0.35% 0.26% 0.50%
======== ======== ========
</TABLE>
LIQUIDITY
Liquidity is the availability of funds to meet the daily
requirements of the business. For financial institutions, demand
for funds comes principally from extensions of credit and
withdrawal of deposits. Liquidity is provided by asset
maturities, sales of investment securities, or short-term
borrowings. Seasonal fluctuations in deposit levels and loan
demand require differing levels of liquidity at various times
during the year. Liquidity measures are formally reviewed by
management monthly, and they continue to show adequate liquidity
in all areas of the organization.
XXX PAGE 17 XXX
INTEREST RATE SENSITIVITY
Interest rate sensitivity refers to the potential for
changes in market rates of interest to cause changes in net
interest income. Since net interest income is a major source of
income, it is extremely important that potential changes are
managed prudently. The following table presents the consolidated
interest rate sensitivity, or gap, as of September 30, 1996.
<TABLE>
<CAPTION>
Within Three Months After
Three Months To One Year One Year
------------ ------------ -----------
(In Thousands)
<S> <C> <C> <C>
Interest-earning assets:
Interest-bearing deposits
with banks $2,806 $399 $6,991
Federal funds sold 0 0 0
Taxable investment securities 17,801 4,667 42,618
Tax-exempt investment securities 0 481 3,985
Mortgages held for sale 318,282 0 0
Loans, net of unearned income 349,346 77,054 149,583
---------- ---------- ----------
Total interest-earning assets 688,235 82,601 203,177
Interest-bearing liabilities:
Money Market checking 19,175 0 63,034
Money Market savings 2,265 0 7,986
Regular savings 27,783 2,119 20,029
Time deposits 142,691 67,323 40,961
Short-term borrowings 354,513 5,000 0
Long-term debt 1,967 4,769 12,779
---------- ---------- ----------
Total interest-bearing
liabilities 548,394 79,211 144,789
---------- ---------- ----------
Interest sensitivity gap 139,841 3,390 58,388
Cumulative interest sensitivity
gap $139,841 $143,231 $201,619
========== ========== ==========
</TABLE>
As the above table shows, the consolidated one-year gap at
September 30, 1996 was a positive $143.2 million. This compares
to a positive gap of $153.6 million at December 31, 1995. The
large positive gaps at September 30, 1996 and December 31, 1995
are related to escrow deposits from the servicing portfolio of
Inland Mortgage. These deposits are generally held in
noninterest bearing accounts at Irwin Union Bank. However, they
are invested in earning assets with the rate maturities of less
than one year, including mortgage loans held for sale.
Since the gap was positive at September 30, 1996, it means
that the Corporation was positioned to benefit from rising rates,
or to be harmed by
XXX PAGE 18 XXX
declining rates. While traditional interest rate risk focuses on
the changes in net interest income due to interest rate changes,
the Corporation engages in other activities which are also
affected by interest rate changes. Principal among these are
mortgage loan origination and servicing. For example, if
interest rates decline, management expects an increase in
mortgage loan origination income and a decline in the value of
mortgage servicing rights. Management attempts to monitor this
exposure to traditional interest rate risk as well as interest
rate influences on production and servicing value in a
comprehensive manner.
In addition, the static one-year gap is not a reliable
measure of the actual effects of changes in market interest
rates. Consequently, management uses simulations of the behavior
of net interest revenue to determine exposure and to develop
hedging strategies.
CAPITAL ADEQUACY
Capital is a major focus of regulatory attention, with the
risk-based capital standard being the principal capital adequacy
measure. Based on this standard, financial institutions are
currently required to have a risk-based capital ratio of at least
8.0%. In addition to the minimum requirements for the risk-based
capital ratio, Tier I capital of at least 4.0% of total assets
must be maintained. Equity and risk-based capital ratios for the
Corporation are as follows:
<TABLE>
<CAPTION>
September 30, December 31, December 31,
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Equity to Assets 9.69% 9.56% 12.29%
Risk-Based Capital Ratio 12.90% 14.49% 19.18%
Tier I Capital Ratio 12.16% 13.80% 18.31%
</TABLE>
The Corporation's capital ratios are adequate and above
regulatory minimums.
XXX PAGE 19 XXX
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
IRWIN FINANCIAL CORPORATION
By: Thomas D. Washburn
________________________
Thomas D. Washburn
Chief Financial Officer
By: Marie C. Strack
_________________________
Marie C. Strack
Corporate Controller
(Chief Accounting Officer)
XXX PAGE 20 XXX
PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits to Form 10-Q
Number Assigned
In Regulation S-K
Item 601 Description
(11) Computation of
Earnings per Share
(27) Financial Data Schedule
(b) Reports on Form 8-K
None
XXX PAGE 21 XXX
Exhibit 11
IRWIN FINANCIAL CORPORATION AND SUBSIDIARIES
<TABLE>
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
---- ---- ---- ----
<CAPTION>
PRIMARY
<S> <C> <C> <C> <C>
Average number of shares
outstanding 5,686,509 5,652,839 5,677,413 5,632,890
Assumed exercise of stock
options 131,248 106,562 135,483 99,094
--------- --------- --------- ---------
Total shares 5,817,757 5,759,401 5,812,896 5,731,984
========= ========= ========= =========
Net income $5,502,549 $6,039,083 $15,518,522 $14,785,403
========== ========== =========== ===========
Net income per share $0.95 $1.05 $2.67 $2.58
===== ===== ===== =====
<CAPTION>
FULLY DILUTED
Average number of shares
outstanding 5,686,509 5,652,839 5,677,413 5,632,890
Assumed exercise of stock
options (Note 1) 131,248 115,130 135,483 107,098
------- ------- ------- -------
Total shares 5,817,757 5,767,969 5,812,896 5,739,988
========= ========= ========= =========
Net income $5,502,549 $6,039,083 $15,518,522 $14,785,403
========== ========== =========== ===========
Net income per share $0.95 $1.05 $2.67 $2.58
===== ===== ===== =====
</TABLE>
(1) The dilutive effect of stock options is based on the
treasury stock method using the higher of the average market price for the
period or the period-end market price.
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000052617
<NAME> IRWIN FINANCIAL CORP.
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 41,456
<INT-BEARING-DEPOSITS> 10,196
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 16,937
<INVESTMENTS-CARRYING> 52,616
<INVESTMENTS-MARKET> 52,949
<LOANS> 575,983
<ALLOWANCE> 6,111
<TOTAL-ASSETS> 1,161,735
<DEPOSITS> 613,713
<SHORT-TERM> 359,513
<LIABILITIES-OTHER> 56,383
<LONG-TERM> 19,515
0
0
<COMMON> 29,965
<OTHER-SE> 87,871
<TOTAL-LIABILITIES-AND-EQUITY> 1,161,735
<INTEREST-LOAN> 37,858
<INTEREST-INVEST> 3,617
<INTEREST-OTHER> 23,374
<INTEREST-TOTAL> 64,849
<INTEREST-DEPOSIT> 13,469
<INTEREST-EXPENSE> 15,894
<INTEREST-INCOME-NET> 35,486
<LOAN-LOSSES> 2,774
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 117,405
<INCOME-PRETAX> 26,135
<INCOME-PRE-EXTRAORDINARY> 26,135
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,519
<EPS-PRIMARY> 2.67<F1>
<EPS-DILUTED> 0
<YIELD-ACTUAL> .05<F1>
<LOANS-NON> 2,772
<LOANS-PAST> 793
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 4,620
<CHARGE-OFFS> 1,442
<RECOVERIES> 353
<ALLOWANCE-CLOSE> 6,111
<ALLOWANCE-DOMESTIC> 6,111
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 2,419
<FN>
<F1>information not in 1,000
</FN>
</TABLE>
