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 March 31, 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 April 30, 1996, there were outstanding 5,674,349 common shares,
no par value, of the Registrant.
XXX PAGE 1 XXX
Part I. Financial Information
Item I. Financial Statements
<TABLE>
<CAPTION>
IRWIN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
March 31, December 31,
1996 1995
------------ -------------
ASSETS
<S> <C> <C>
Cash and due from banks $ 42,685,946 $49,256,953
Federal funds sold 10,000,000 15,000,000
------------ -------------
Cash and cash equivalents 52,685,946 64,256,953
Interest-bearing deposits with financial
institutions 10,558,704 7,937,740
Investment securities (Market value:
$62,452,798 in 1996 and $61,884,464
in 1995) - Note 2 61,743,243 60,869,413
Mortgage loans held for sale - Note 3 445,866,302 378,658,247
Loans and leases, net of unearned income -
Note 4 450,659,920 412,524,601
Less: Allowance for possible loan and lease
losses - Note 5 (5,187,617) (4,620,167)
------------- -------------
445,472,303 407,904,434
Mortgage servicing rights - Note 6 51,379,153 48,535,326
Accrued interest receivable 4,393,255 4,239,435
Premises and equipment 17,036,874 16,377,889
Other assets 77,997,780 49,527,138
------------- -------------
$1,167,133,560 $1,038,306,575
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest-bearing $245,699,387 $207,379,192
Interest-bearing 299,759,987 302,543,544
Certificates of deposits over $100,000 79,660,270 54,075,911
------------- -------------
625,119,644 563,998,647
Short-term borrowings - Note 7 359,610,389 310,278,659
Long-term debt - Note 8 19,468,995 21,574,792
Other liabilities 59,137,596 43,237,996
------------- -------------
Total liabilities 1,063,336,624 939,090,094
------------- -------------
Shareholders' equity
Preferred stock, no par value--authorized
50,000 shares; none issued 0 0
Common stock, no par value -- authorized
7,500,000 shares; issued 5,850,520 shares
in 1996 and 1995; including 178,307
and 185,604 shares in treasury in 1996 and
1995 , respectively. 29,965,287 29,965,287
Additional paid in capital 78,200 0
Unrealized loss on investment securities (10,953) (9,657)
Retained earnings 78,956,554 74,647,711
------------- -------------
108,989,088 104,603,341
Less treasury stock, at cost (5,192,152) (5,386,860)
------------- -------------
Total shareholders' equity 103,796,936 99,216,481
------------- -------------
$1,167,133,560 $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 STATEMENTS OF INCOME Three Months Ended
March 31,
1996 1995
Interest income: ----------- -----------
<S> <C> <C>
Loans and Leases $10,877,427 $ 7,853,587
Investment securities:
Taxable 1,097,820 1,224,666
Tax-exempt 93,878 113,134
Loans held for sale 7,125,629 2,744,381
Federal funds sold 620,808 616,782
----------- -----------
Total interest income 19,815,562 12,552,550
----------- -----------
Interest expense:
Deposits 4,368,818 2,951,718
Short-term borrowings 4,136,061 1,354,639
Long-term debt 413,241 395,778
----------- -----------
Total interest expense 8,918,120 4,702,135
----------- -----------
Net interest income 10,897,442 7,850,415
Provision for possible loan and lease losses 944,000 650,000
----------- -----------
Net interest income after provision for possible
loan and lease losses 9,953,442 7,200,415
----------- -----------
Other income:
Loan origination fees 10,968,931 4,769,936
Gain /(loss) from sales of loans 7,611,496 (638,521)
Loan servicing fees 11,855,807 8,765,504
Gain on sale of mortgage servicing 1,187,849 9,275,544
Brokerage fees and commissions 827,362 661,761
Trust fees 559,890 495,546
Service charges on deposit accounts 350,623 230,075
Insurance commissions, fees and premiums 416,806 315,429
Other 521,471 706,557
----------- -----------
34,300,235 24,581,831
----------- -----------
Other expense:
Salaries 18,274,982 12,290,692
Pension and other employee benefits 3,181,098 2,608,793
Office expense 2,642,271 2,146,175
Premises and equipment 3,291,795 2,570,291
Amortization of mortgage servicing rights 2,127,654 555,000
Marketing and development 2,444,940 1,214,704
Other 3,853,701 2,431,716
----------- -----------
35,816,441 23,817,371
----------- -----------
Income before income taxes 8,437,236 7,964,875
Federal income taxes 2,599,000 2,706,000
State income taxes 850,000 765,000
----------- -----------
Net income $ 4,988,236 $ 4,493,875
=========== ===========
Net income per share of Common Stock -Note 1$ 0.86 $ 0.78
=========== ===========
Dividends per share of Common Stock $ 0.12 $ 0.11
=========== ===========
Weighted average shares of Common Stock
outstanding 5,790,800 5,742,372
=========== ===========
</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 CASH FLOWS
March 31, 1996 March 31, 1995
------------ -------------
<S> <C> <C>
Net income $ 4,988,236 $ 4,493,875
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization 3,618,080 1,625,710
Provision for possible loan and lease losses 944,000 650,000
Amortization of premiums, less accretion
of discounts:
Held-to-maturity 445,151 (54,913)
Available-for-sale 13,925 9,251
Mortgage loan originations (1,247,564,138) (476,877,763)
Sales of mortgage loans 1,180,356,083 456,714,383
Gain on sale of mortgage servicing (1,187,849) (9,275,544)
Other, net (13,396,815) (7,476,938)
------------ -------------
Net cash (used) by operating activities (71,783,327) (30,191,939)
Lending and investing activities:
Proceeds from maturities/calls of investment
securities:
Held-to-maturity 610,000 11,523,225
Available-for-sale 25,777,857 7,004,762
Purchase of investment securities:
Held-to maturity (4,445,078) (3,000,000)
Available-for-sale (23,275,685) (5,254,542)
Net decrease (increase) in interest-bearing
deposits with financial institutions (2,620,964) 995,631
Net increase in loans (38,511,869) (28,758,736)
Net additions to premises and equipment (1,478,754) (1,514,032)
Purchase of mortgage servicing (23,636,067) (3,850,035)
Proceeds from sale of mortgage servicing 19,852,435 11,551,247
------------- -------------
Net cash (used) by lending and investing
activities (47,728,125) (11,302,480)
Financing activities:
Net increase in deposits 61,120,997 27,261,896
Net increase in short-term borrowings 49,331,730 3,733,225
Repayment of long-term debt (2,105,797) (2,201,684)
Purchase of treasury stock 0 (474,248)
Proceeds from sale of stock for stock
purchase plan 273,985 202,243
Dividends paid (680,470) (618,061)
------------- -------------
Net cash provided by financing
activities 107,940,445 27,903,371
------------ ------------
Net increase in cash and cash equivalents (11,571,007) (13,591,048)
Cash and cash equivalents at beginning of
year 64,256,953 50,840,452
------------ ------------
Cash and cash equivalents at end of year $52,685,946 $37,249,404
============ ============
Supplemental disclosures of cash flow information:
Cash paid during the period:
Interest $8,653,823 $4,493,671
============ =============
Income taxes 0 $ 619,990
============ =============
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements
XXX PAGE 4 XXX
IRWIN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - 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, equipment leasing, and investor services 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.
SFAS No. 122 requires that a portion of the cost of originating a
mortgage loan be allocated to the mortgage servicing right based on
its fair value relative to the loan as a whole. To determine the
fair value of the servicing rights created since the second quarter
of 1995, the Corporation used the market prices under comparable
servicing sale contracts, when available, or alternatively used a
valuation model that calculates the present value of future cash
flows to determine the fair value of the servicing rights. In using
this valuation method, the Corporation incorporated assumptions that
it is believed market participants would use in estimating future
net servicing income which included estimates of the cost of
servicing per loan, the discount rate, float value, an inflation
rate, ancillary income per loan, prepayment speeds and default
rates. Capitalized servicing rights are amortized over the
estimated lives of the related loans, which are grouped based on
loan characteristics, in proportion to estimated net servicing
income.
In determining servicing value impairment at the end of the quarter,
the post-implementation servicing portfolio was disaggregated into
its predominant risk characteristics. The Corporation has
determined those risk characteristics to be loan type and investor
type. These segments of the portfolio were then valued, using
market prices under comparable servicing sale contracts, when
available, or alternatively, using the same model as was used to
originally determine the fair value at origination, using current
assumptions. The calculated value was then compared with the book
value of each segment to determine if a reserve for impairment was
required. No reasonable estimate can be made of the range of
amounts of loss or gain.
The effect of the change in accounting standards to first quarter
1996 results was an increase to net income of $5,200,000 over what
would have been earned under SFAS No. 65.
STOCK-BASED COMPENSATION:
The Corporation adopted SFAS No. 123 "Accounting for Stock-Based
Compensation" on January 1, 1996. Under the provisions of this
standard, the Corporation must disclose what compensation expense
would have been if the fair value of stock-based compensation had
been included. Because the Corporation issued no stock awards in
the three-month periods ended March 31, 1996 and 1995, there would
be no effect on compensation expense.
RECLASSIFICATIONS:
Certain amounts in the 1995 consolidated financial statements have
been reclassified to conform to the 1996 presentation.
XXX PAGE 5 XXX
NOTE 2 - INVESTMENT SECURITIES
The carrying amounts of investment securities, including net
unrealized losses of $18,253 and $16,093 on available-for-sale
securities at March 31, 1996 and December 31,1995, respectively, are
summarized as follows:
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
----------- ------------
<S> <C> <C>
Held-to-Maturity
U.S. Treasury and Government obligations $33,592,234 $26,914,375
Obligations of states and political
subdivisions 5,895,093 6,490,223
Mortgage-backed securities 6,165,616 8,858,431
----------- ------------
Total Held-to-Maturity 45,652,943 42,263,029
----------- ------------
Available-for-Sale
U.S. Treasury and Government obligations 16,090,300 15,359,438
Mortgage-backed securities 0 3,246,946
----------- -----------
Total Available-for-Sale 16,090,300 18,606,384
----------- -----------
Total Investments $61,743,243 $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:
March 31, December 31,
1996 1995
------------ -------------
<S> <C> <C>
Commercial, financial and agricultural $164,175,665 $150,311,871
Real estate-construction 40,299,628 36,125,577
Real estate-mortgage 143,252,020 108,350,683
Consumer 55,397,770 67,755,702
Lease financing 58,474,168 60,979,310
Unearned income (10,939,331) (10,998,542)
------------- -------------
$450,659,920 $412,524,601
============ ============
</TABLE>
XXX PAGE 6 XXX
IRWIN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 - ALLOWANCE FOR POSSIBLE LOAN AND LEASE LOSSES
<TABLE>
<CAPTION>
Changes in the allowance for possible loan and lease losses are
summarized as follows:
March 31, 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 944,000 3,073,000
Reduction due to sale of loans (193,693) (215,833)
Recoveries 141,802 389,674
Charge-offs (324,659) (2,489,897)
----------- -----------
Balance at end of period $5,187,617 $4,620,167
========== ==========
</TABLE>
NOTE 6 - MORTGAGE SERVICING RIGHTS
Included on the consolidated balance sheet at March 31, 1996 and
December 31, 1995 are $51,379,153 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 $9,970,386,225 and $10,301,914,063 at March
31, 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 BORROWINGS
<TABLE>
<CAPTION>
Short-term borrowings are summarized as follows:
March 31, December 31,
1996 1995
----------- -----------
<S> <C> <C>
Repurchase agreements and drafts payable related
to mortgage loan closings $293,592,892 $225,872,594
Commercial Paper 26,053,497 21,722,935
Federal funds 10,199,000 40,000,000
Other 29,765,000 22,683,130
----------- ------------
$359,610,389 $310,278,659
=========== ===========
</TABLE>
Repurchase agreements at March 31, 1996 and December 31, 1995,
include $193,800,249 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.
XXX PAGE 7 XXX
Drafts payable related to mortgage loan closings totaled $91,661,422
and $69,395,883 at March 31, 1996 and December 31, 1995,
respectively. These borrowings are related to mortgage closings at
the end of March which have not been presented to banks for payment.
When presented for payment these borrowings will be funded
internally or by borrowing from the lines of credit.
The Corporation has lines of credit available to fund mortgage loans
held for sale. Interest on the lines of credit is payable monthly at
variable rates ranging from 6.13% to the lenders' prime rate.
NOTE 8 -- LONG-TERM DEBT
Long-term debt at March 31, 1996 of $19,468,995 consists of various
notes payable at annual interest rates ranging from 6.0% to 9.6% and
maturity dates ranging from August 5, 1996 through August 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 to April 30,
2001.
XXX PAGE 8 XXX
PART I
Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Net income for the first quarter ended March 31, 1996, was $5.0
million, up 11.0% from the first quarter 1995 net income of $4.5
million. Net income per share was $0.86 for the first quarter of 1996
as compared to $0.78 for the same period in 1995. Return on equity
for the first quarter of 1996 was 19.69%, down from 22.35% in 1995.
LINES OF BUSINESS
Irwin Financial Corporation has six lines of business:
- -Mortgage banking (includes Inland Mortgage Corporation and the
related activities of Irwin Union Bank and Trust)
- -Community banking (Irwin Union Bank and Trust)
- -Home equity lending (includes Irwin Home Equity and the related
activities of Irwin Union Bank and Trust)
- -Equipment leasing (includes Affiliated Capital Corp. and the related
activities of Irwin Union Bank and Trust)
- -Investor services (Irwin Union Investor Services)
- -Credit insurance (Irwin Union Credit Insurance Corporation)
Listed below are the earnings by line of business for the three
months ended March 31, 1996, as compared to the similar period in
1995:
<TABLE>
<CAPTION>
Three Months
Ended March 31,
1996 1995
---------- ----------
<S> <C> <C>
Mortgage banking $5,293,593 $4,647,097
Community banking 1,212,231 875,998
Home equity lending (2,005,150) (992,580)
Equipment leasing (28,270) (118,455)
Investor services 62,260 79,800
Credit insurance 41,933 3,354
Parent (including consolidating
entries) 411,639 (1,339)
---------- ----------
$4,988,236 $4,493,875
========== ==========
</TABLE>
XXX PAGE 9 XXX
MORTGAGE BANKING
<TABLE>
<CAPTION>
Selected Financial Data (shown in thousands):
Three Months
Ended March 31,
1996 1995
------- -------
Selected Income Statement Data:
<S> <C> <C>
Loan origination fees $ 10,891 $ 4,730
Gain (loss) from sales of loans 7,296 (639)
Loan servicing fees 10,765 8,766
Net interest income 4,211 2,517
Gain on sale of servicing 1,188 9,275
Other income 196 230
Operating expense 25,667 17,025
---------- --------
Income before tax 8,880 7,854
Income tax 3,586 3,207
---------- --------
Net income $ 5,294 $ 4,647
========== ========
Return on average equity 37.14% 38.71%
Mortgage loan closing $1,247,564 $476,878
========== ========
SELECTED OPERATING DATA: March 31, December 31,
1996 1995
---------- -----------
Servicing portfolio $9,970,386 $10,301,914
Mortgage loans held for sale 354,205 309,262
Mortgage servicing rights 51,904 48,535
</TABLE>
Net income for the first quarter was $5.3 million, up 13.9% from the
same period in 1995. A favorable interest rate environment in the
first quarter of 1996 contributed to an increase in mortgage loan
originations which were up 161.6% to $1.2 billion. A significant
factor in this increase was the rise in refinancing activity.
Refinanced loans originated in the first quarter of 1996 totaled
$427.9 million, an increase of $412.2 million compared with the amount
of refinances originated during the same period in 1995. Loan
origination fees increased $6.2 million or 130.2% from the first
quarter of 1995.
On April 1, 1995, the Corporation adopted Statement of Financial
Accounting Standards No. 122, "Accounting for Mortgage Servicing
Rights" (SFAS 122). Under the new accounting rules, the Corporation
recognizes as assets the fair value of all mortgage servicing rights
either originated or purchased. SFAS 122 does not permit the
restatement of results for prior periods to reflect the new accounting
treatment. Accordingly, the first quarter 1995 mortgage banking
activities were accounted for under the previous accounting method,
which treated originated mortgage servicing rights differently from
those purchased. Therefore, it is difficult to compare 1996 mortgage
banking results with those of 1995.
XXX PAGE 10 XXX
Gains from the sales of mortgage loans were $7.3 million in the
first quarter of 1996, up from a loss of $0.6 million in 1995. This
improvement reflects the new accounting treatment under SFAS 122. It
was partially offset however, by larger marketing losses and pricing
concessions which totaled $2.0 million in 1996, up $1.4 million from a
year earlier.
During the first quarter of 1996, $1.1 billion of mortgage
servicing rights were sold, up from first quarter 1995 servicing sales
of $483.9 million. These servicing rights had been originated since
the adoption of SFAS 122 and were sold, in part, to hedge against
losses in the value of capitalized servicing rights which could result
from declining interest rates. Prior to the adoption of SFAS 122, the
sale of retail-originated servicing rights created GAAP income equal
to the market value of the servicing. This was an important factor in
decisions to sell servicing. The elimination of this factor by SFAS
122 makes it difficult to compare the amount of servicing sold and
income generated by the sale to sales in prior periods.
The mortgage servicing portfolio totaled $10.0 billion as of
March 31, 1996, an increase of 15.4% over March 31, 1995 and a decline
of 2.9% from December 31, 1995. Capitalized mortgage servicing rights
totaled $51.9 million at March 31, 1996, compared to $19.9 million at
March 31, 1995 and $48.5 at December 31, 1995. The increase from
March 31, 1995 reflects the adoption of SFAS 122 in the second quarter
of 1995. Included in first quarter 1996 net income is $2.1 million of
amortization expense relating to the mortgage servicing rights, up
from $0.6 million in the first quarter of 1995.
As a result of the increase in mortgage loan closings from the
same quarter in 1995, net interest income was up in the first quarter
of 1996. Net interest income for the three months ended March 31,
1996 was $4.2 million, up 67.3% from the first quarter 1995.
Operating expenses, excluding amortization expense, were up $7.1
million or 43.0% from the first quarter of 1995. The increase is the
result of the significant expansion of mortgage production activities
which occurred throughout 1995 and continued in the first quarter of
1996.
XXX PAGE 11 XXX
COMMUNITY BANKING
Selected Financial Data (shown in thousands):
<TABLE>
<CAPTION>
Three Months
Ended March 31,
1996 1995
-------- ----------
Selected Income Statement Data:
<S> <C> <C>
Net interest revenue $4,549 $4,181
Provision for loan and lease losses (526) (433)
Other income 2,343 1,410
Operating expense 4,439 3,806
------- -------
Income before tax 1,927 1,352
Income tax 715 476
------- -------
Net income $1,212 $ 876
======= =======
Return on average assets 1.13% 0.89%
March 31, December 31,
Selected Balance Sheet Data: 1996 1995
--------- ---------
Cash and investments $115,791 $117,361
Loans and leases 312,889 310,083
Allowance for loan and lease losse (4,006) (3,668)
All other assets 14,837 15,289
--------- ---------
Total assets $439,511 $439,065
========= =========
Deposits $395,696 $400,149
All other liabilities 13,534 10,846
--------- --------
Total liabilities $409,230 $410,995
========= ========
Shareholder's equity $ 30,281 $ 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 are reported by the community bank effective
January 1, 1996. Net income was up $336.2 thousand from 1995, or
38.4% to $1.2 million. For the first quarter, net interest income
improved $368.0 thousand, or 8.8%, from 1995. The provision for loan
and lease losses was $526.0 thousand, up $93.0 thousand from a year
earlier. The increased net interest income and provision for loan and
lease losses are reflective of a 12.7% increase in the loan and lease
portfolio from the first quarter of 1995. The growth results from the
community bank's continued penetration of new markets in south-central
Indiana.
XXX PAGE 12 XXX
Following is an analysis of the community bank's net interest
income and net interest margin computed on a tax equivalent basis:
<TABLE>
<CAPTION>
For the Three Months
ended March 31
1996 1995
--------------------------- ----------------------------
(In thousands) Average Interest Yield/Rate Average Interest Yield/Rate
Balance Balance
------- ------- --------- ------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Interest -
earning assets $399,179 $ 8,356 8.42% $341,127 $7,134 8.48%
Interest -
bearing
liabilities $336,794 $ 3,807 4.55% $285,401 $2,964 4.21%
-------- --------
Net interest
income - $ 4,549 - - $4,170 -
Net interest
margin - - 4.58% - - 4.96%
</TABLE>
The decline in net interest margin is principally attributed to a
sale of consumer loans. The proceeds from this sale were temporarily
reinvested in lower yield assets, pending the ongoing origination of
new consumer loans.
Other income in the first quarter was up $933.9 thousand or
66.2% from the first quarter of 1995. Included in this increase was
$315.6 thousand from the sale of mortgage and consumer loans, as well
as a $227.6 thousand increase in service charges on deposit accounts.
Other expenses were up $633.2 thousand, or 16.6%. The increase
was principally due to expanded operations in new markets.
<TABLE>
HOME EQUITY LENDING
<CAPTION>
Selected Financial Data (shown in thousands):
Three Months
Ended March 31,
1996 1995
-------- ----------
Selected Income Statement Data:
<S> <C> <C>
Net interest revenue $ 908 $ 42
Provision for loan and lease losses (266) (17)
Loan servicing fees 976 0
Other income 14 0
-------- --------
Total net revenues 1,632 25
Operating expense 3,637 1,018
------- -------
Pre tax loss ($2,005) ($993)
======= =======
</TABLE>
XXX PAGE 13 XXX
<TABLE>
<CAPTION>
March 31, December 31,
Other Selected Financial Data: 1996 1995
--------- ---------
<S> <C> <C>
Home equity loans, net of allowance $ 66,836 $ 36,225
========= =========
Servicing portfolio 113,817 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 a pre-tax loss of $2.0
million in the first quarter of 1996, compared with a pre-tax loss of
$1.0 million a year earlier. Total net revenues of $1.6 million are
up from $25.0 thousand in 1995 and include loan servicing fees of $1.0
million. Operating expenses of $3.6 million are up 257.5% over the
previous year as the business continued to expand its production
capacity.
The business' owned portfolio of home equity loans totaled $66.8
million at March 31, 1996, up from $2.0 million at March 31, 1995 and
$36.2 million at December 31, 1995. Loan volume for the first quarter
of 1996 was $30.9 million compared to $1.9 million a year earlier.
EQUIPMENT LEASING
The equipment leasing business recorded a pre-tax loss of $28.3
thousand compared to a pre-tax loss of $118.5 thousand in the first
quarter 1995. Net interest revenue was up $19.9 thousand, or 2.0%
year-over-year. Total net revenues increased 21.0% to $1.0 million.
Operating expenses were up $88.3 thousand or 9.1% to $1.1 million.
Although lease volume has grown significantly since the
acquisition of the business in 1990, market changes in the industry in
recent years have caused the business' growth to slow. 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 $7.7 million
in the first quarter increased 20.7% from 1995.
INVESTOR SERVICES
Earnings for investor services were $62.3 thousand in the first
quarter of 1996 compared to $79.8 thousand in the same period a year
earlier. CD placements totaled $192.9 million, up 4.5% from 1995.
Brokerage fees were up 8.4% to $643.6 thousand in 1996. Operating
expenses totaled $613.7 thousand in the first quarter of 1996, up
12.7% from $544.3 thousand in 1995.
Consistent with the change in the reporting of trust operations
effective January 1, 1996, results for the investor services line of
business include only institutional brokerage and advisory services.
XXX PAGE 14 XXX
PARENT COMPANY (INCLUDING CONSOLIDATING ENTRIES)
Parent Company net income for the first quarter of 1996 was $408.6
thousand compared to a loss of $1.7 thousand in 1995. The improvement
is due to the income tax benefits generated at the home equity lending
and equipment leasing businesses which are recorded on the parent's
books. These benefits totaled $900.8 thousand in 1996, compared with
$272.9 thousand in 1995. The tax benefits were partially offset by a
21.6% increase in operating expenses which totaled $1.2 million in
1996.
CONSOLIDATED INCOME STATEMENT ANALYSIS
Net interest income for the first quarter of 1996 totaled $10.9
million, up 38.8% from the first quarter of 1995. The increase was
due to a combination of factors throughout the Corporation. The
mortgage banking business recorded increased net interest revenue as
a result of the increased production of mortgage loans during the
first quarter of 1996. Increases at the community banking and home
equity lending businesses correspond to growth in the loan portfolios
in each of those businesses.
The loan and lease loss provision was $944.0 thousand for the
first quarter of 1996, as compared to $650.0 thousand for the same
period in 1995. This increase reflects the growth in the community
bank and home equity loan portfolios.
Other income was up 39.5% in the first quarter of 1996 to $34.3
million. This increase was driven primarily by mortgage banking
activities. Total fees from mortgage loan originations, sales,
servicing, and the sale of servicing were $30.1 million for the first
quarter, up $8.0 million from the first quarter of 1995.
Other expense also increased in 1996 as the first quarter was up
$12.0 million or 50.4% from 1995. This increase is primarily due to
the growth of the Corporation through its continued investment in the
home equity lending business, the expansion of the mortgage production
system, and the community bank's growth in new markets. Also
contributing to the increase was $1.6 million of additional
amortization expense associated with mortgage servicing rights
capitalized as a result of the adoption of SFAS 122 in the second
quarter of 1995.
The effective income tax rate for the Corporation was 40.9% in
the first quarter of 1996 compared to 43.6% in 1995. The 1995 rate
reflects an adjustment made to increase income tax accruals.
CONSOLIDATED BALANCE SHEET ANALYSIS
Total assets of Irwin Financial Corporation at March 31, 1996,
were $1.2 billion, an increase of 12.4% from December 31, 1995 total
assets of $1.0 billion. The increase was attributed to an increase in
mortgage loans held for sale of $67.2 million and an increase in the
loan and lease portfolio of $38.1 million.
XXX PAGE 15 XXX
The increase in assets was accompanied by an increase in short-
term borrowings of $49.3 million or 15.9%. Deposits also increased
$61.1 million or 10.8%. 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 $187.6
million at March 31, 1996, up from $143.3 million at December 31,
1995.
Shareholders' equity grew to $103.8 million, or $18.30 per share,
a 4.6% increase over the $99.2 million, or $17.51 per share at the end
of 1995. Irwin Financial's equity to assets ratio ended the quarter
at 8.89%, compared to 9.56% at the end of 1995.
Prior to the adoption of SFAS 122, 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 SFAS 122, the Corporation's mortgage loan servicing
portfolio 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.
<TABLE>
<CAPTION>
(In thousands) March 31, 1996 Dec. 31, 1995 Dec. 31, 1994
-------------- ------------- -------------
<S> <C> <C> <C>
Servicing portfolio
balance $9,970,386 $10,301,914 $8,818,502
---------- ----------- ----------
Value @1.5% $ 149,556 $ 154,529 $ 132,278
Less: capitalized
servicing 54,685 51,783 20,302
Tax liability at 40% 37,948 41,098 44,791
---------- ----------- ----------
Net value $ 56,923 $ 61,648 $ 67,185
========== =========== ==========
Per share of
common stock $ 10.04 $ 10.88 $ 11.93
========== =========== ==========
</TABLE>
With the implementation of SFAS 122, this off-balance sheet value will
decline over future years and eventually be reduced to zero.
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.
XXX PAGE 16 XXX
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 March 31, 1996, the allowance for possible loan and lease
losses as a percentage of total loans and leases was 1.15%, compared
to 1.12% at December 31, 1995. For the three months ended March 31,
1996, the provision for possible loan and lease losses totaled $944.0
thousand, 45.2% over the amount recorded in the first quarter of 1995.
The higher 1996 provision was caused by growth in the loan and lease
portfolio. Net charge-offs for the quarter were $182.9 thousand as
compared to $589.8 thousand in 1995.
The Corporation's percentage of nonperforming assets (loans 90
days past due, nonaccrual, and owned real estate) to total assets
declined slightly from levels experienced in 1995. As of March 31,
1996, this ratio was 0.25% as compared to 0.26% at December 31, 1995.
The Corporation continues to monitor the loans and property included
in this total in evaluating the status of the current reserve.
<TABLE>
<CAPTION>
Nonperforming Assets
(In Thousands) March 31, December 31, December 31,
1996 1995 1994
-------- --------- ------------
<S> <C> <C> <C>
Accruing loans past due
90 days or more:
Commercial $ 175 $ 418 $ 113
Leasing 0 0 0
Real Estate 27 0 0
Consumer 108 202 93
------ ------ ------
Subtotal 310 620 206
------ ------ ------
Nonaccrual loans:
Commercial 778 670 1,523
Leasing 498 415 363
Real Estate 1,125 694 689
Consumer 0 0 0
------ ------ ------
Subtotal 2,401 1,779 2,575
------ ------ ------
Total nonperforming
loans 2,711 2,399 2,781
------ ------ ------
Other real estate owned 185 295 489
------ ------ ------
Total nonperforming
assets $2,896 $2,694 $3,270
====== ====== ======
Nonperforming assets to
total assets 0.25% 0.26% 0.50%
======= ======= =======
</TABLE>
XXX PAGE 17 XXX
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.
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 the 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 March 31, 1996.
<TABLE>
<CAPTION>
Within Three Months After
Three Months to One Year One Year
------------ ----------- --------
<S> <C> <C> <C>
(In Thousands)
Interest-earning assets:
Interest-bearing deposits
with banks $ 3,070 $ 2,094 $ 5,395
Federal funds sold 10,000 0 0
Taxable investment securities 15,604 5,160 35,084
Tax-exempt investment
securities 0 0 5,895
Mortgages held for sale 445,866 0 0
Loans, net of unearned
income 295,783 28,311 126,566
-------- -------- --------
Total interest-earning
assets 770,323 35,565 172,940
-------- -------- --------
Interest-bearing liabilities:
Money Market checking 15,990 0 50,286
Money Market savings 2,974 0 9,115
Regular savings 29,763 2,259 21,352
Time deposits 134,570 65,876 47,235
Short-term borrowings 354,610 0 5,000
Long-term debt 3,839 11,743 3,887
-------- -------- --------
Total interest-bearing
liabilities 541,746 79,878 136,875
-------- -------- --------
Interest sensitivity gap 228,577 (44,313) 36,065
-------- -------- --------
Cumulative interest sensitivity
gap $228,577 $184,264 $220,329
======== ======== ========
</TABLE>
XXX PAGE 18 XXX
As the above table shows, the consolidated one-year gap at March 31,
1996 was a positive $184.3 million. This compares to a positive gap
of $153.6 million at December 31, 1995. The large positive gaps at
March 31, 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 March 31, 1996, it means that the
Corporation was positioned to benefit from rising rates, or to be
harmed by 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 actual 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>
March 31, December 31, December 31,
1996 1995 1994
----- ----------- -----------
<S> <C> <C> <C>
Equity to Assets 8.89% 9.56% 12.29%
Risk-Based Capital Ratio 12.89% 14.49% 19.18%
Tier I Capital Ratio 12.22% 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
Chief Financial Officer
By: _________________________
Marie C. Strack
Corporate Controller
(Chief Accounting Officer)
XXX PAGE 20 XXX
PART II
Item 6
(a) Exhibits to Form 10-Q
Number Assigned Sequential Numbering
In Regulation S-K System Page Number
Item 601 Description of Exhibit
(2) No Exhibit
(4) No Exhibit
(11) Computation of
Earnings per Share
(15) No Exhibit
(18) No Exhibit
(19) No Exhibit
(20) No Exhibit
(23) No Exhibit
(24) No Exhibit
(25) No Exhibit
(28) No Exhibit
(b) Reports on Form 8-K
None
XXX PAGE 21 XXX
Exhibit 11
IRWIN FINANCIAL CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1996 1995
----- -----
PRIMARY
<S> <C> <C>
Average number of shares
outstanding 5,668,978 5,618,688
Assumed exercise of stock options 121,822 123,684
---------- ----------
Total shares 5,790,800 5,742,372
========== ==========
Net income $4,988,236 $4,493,875
========== ==========
Net income per share $0.86 $0.78
===== =====
FULLY DILUTED
Average number of share
outstanding 5,668,978 5,618,688
Assumed exercise of stock options
(Note 1) 123,988 127,737
---------- -----------
Total shares 5,792,966 5,746,425
========== ===========
Net income $4,988,236 $4,493,875
=========== ===========
Net income per share $0.86 $0.78
===== =====
</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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 42,686
<INT-BEARING-DEPOSITS> 10,559
<FED-FUNDS-SOLD> 10,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 16,090
<INVESTMENTS-CARRYING> 45,653
<INVESTMENTS-MARKET> 46,363
<LOANS> 450,660
<ALLOWANCE> 5,188
<TOTAL-ASSETS> 167,134
<DEPOSITS> 625,120
<SHORT-TERM> 359,610
<LIABILITIES-OTHER> 59,138
<LONG-TERM> 19,469
0
0
<COMMON> 29,965
<OTHER-SE> 73,832
<TOTAL-LIABILITIES-AND-EQUITY> 1,167,134
<INTEREST-LOAN> 10,877
<INTEREST-INVEST> 1,193
<INTEREST-OTHER> 7,746
<INTEREST-TOTAL> 19,816
<INTEREST-DEPOSIT> 4,369
<INTEREST-EXPENSE> 4,549
<INTEREST-INCOME-NET> 10,897
<LOAN-LOSSES> 944
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 35,816
<INCOME-PRETAX> 8,437
<INCOME-PRE-EXTRAORDINARY> 8,437
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,988
<EPS-PRIMARY> .86<F1>
<EPS-DILUTED> 0
<YIELD-ACTUAL> .05<F1>
<LOANS-NON> 2,402
<LOANS-PAST> 310
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 4,620
<CHARGE-OFFS> 325
<RECOVERIES> 142
<ALLOWANCE-CLOSE> 5,188
<ALLOWANCE-DOMESTIC> 3,439
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,749
<FN>
<F1>information not in 1,000
</FN>
</TABLE>
