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, 1997
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, 1997, there were outstanding 11,308,953 common
shares, no par value, of the Registrant.
XXX PAGE 1 XXX
PART I
Item 1
<TABLE>
FINANCIAL STATEMENTS
<CAPTION>
IRWIN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
March 31, December 31,
ASSETS: 1997 1996
------------ ------------
<S> <C> <C>
Cash and due from banks $57,850,875 $71,365,788
Interest-bearing deposits with financial
institutions 12,143,476 11,343,546
Investment securities (Market value:
$80,320,628 in 1997 and $73,819,203
in 1996)-Note 2 79,826,651 73,124,455
Mortgage loans held for sale 342,664,144 445,100,504
Loans and leases, net of unearned income
- Note 4 524,850,129 529,050,970
Less: Allowance for possible loan and lease
losses - Note 5 (7,067,303) (6,593,836)
------------ ------------
517,782,826 522,457,134
Mortgage servicing assets - Note 6 64,692,803 67,450,101
Accounts receivable 53,058,326 41,712,662
Accrued interest receivable 5,043,373 6,724,973
Premises and equipment 19,552,068 18,687,620
Other assets 48,498,134 45,919,328
------------ ------------
$1,201,112,676 $1,303,886,111
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits
Noninterest-bearing $234,941,581 $239,347,589
Interest-bearing 342,569,232 334,301,111
Certificates of deposit over $100,000 69,238,526 66,504,205
------------ ------------
646,749,339 640,152,905
Short-term borrowings- Note 7 308,897,660 461,882,725
Long-term debt- Note 8 11,609,267 17,642,526
Other liabilities 64,374,196 65,305,875
------------ ------------
Total liabilities 1,031,630,462 1,184,984,031
-------------- --------------
Company-obligated mandatorily redeemable
preferred securities of subsidiary trust
- Note 9 47,966,682 0
Shareholders' equity
Preferred stock, no par value - authorized
50,000 shares; none issued 0 0
Common stock; no par value - issued
11,701,040 shares in 1997 and 1996;
including 395,104 and 332,268 shares in
treasury in 1997 and 1996,
respectively. 29,965,288 29,965,287
Additional paid in capital 53,880 0
Unrealized gains 544,462 56,523
Retained earnings 98,488,716 94,083,540
------------ ------------
129,052,346 124,105,350
Less treasury stock, at cost (7,536,814) (5,203,270)
------------ ------------
Total shareholders' equity 121,515,532 118,902,080
------------ ------------
$1,201,112,676 1,303,886,111
============== ==============
</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
March 31,
INTEREST INCOME: 1997 1996
----- -----
<S> <C> <C>
Loans and leases $12,823,509 $10,877,427
Investment securities:
Taxable 1,392,347 1,097,820
Tax-exempt 71,431 93,878
Loans held for sale 6,912,725 7,125,629
Federal funds sold 1,056,963 620,808
------------ ------------
Total interest income 22,256,975 19,815,562
------------ ------------
INTEREST EXPENSE:
Deposits 5,044,457 4,368,818
Short-term borrowings 4,984,170 4,136,061
Long-term debt 304,932 413,241
------------ ------------
Total interest expense 10,333,559 8,918,120
------------ ------------
Net interest income 11,923,416 10,897,442
Provision for possible loan and lease
losses - Note 5 856,000 944,000
------------ ------------
Net interest income after provision
for possible loan and lease losses 11,067,416 9,953,442
------------ ------------
OTHER INCOME:
Loan origination fees 8,588,346 10,968,931
Gain from sales of loans 8,151,502 7,611,496
Loan servicing fees 14,944,696 11,855,807
Gain on sale of mortgage servicing 6,818,812 1,187,849
Brokerage fees and commissions 346,827 827,362
Trust fees 580,145 559,890
Service charges on deposit accounts 395,585 350,623
Insurance commissions, fees and premiums 367,375 416,806
Other 698,629 521,471
------------ ------------
40,891,917 34,300,235
------------ ------------
Other expense:
Salaries 18,717,378 18,274,982
Pension and other employee benefits 3,786,227 3,181,098
Office expense 2,766,110 2,642,271
Premises and equipment 3,878,681 3,291,795
Amortization of capitalized servicing 5,130,989 2,571,816
Marketing and development 3,024,893 2,444,940
Other 5,015,064 3,409,539
------------ ------------
42,319,342 35,816,441
------------ ------------
Income before income taxes 9,639,991 8,437,236
Income taxes 3,490,000 3,449,000
------------ ------------
6,149,991 4,988,236
Distribution on company-obligated
mandatorily redeemable preferred
securities of subsidiary 953,715 0
------------ ------------
Net income available to common
shareholders $5,196,276 $4,988,236
============ ============
Net income per share of common stock:
Net income -Note 1 $0.45 $0.43
===== =====
Dividends per share of common stock $0.07 $0.06
===== =====
Weighted average shares of common
stock outstanding 11,664,633 11,581,600
============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
XXX PAGE 3 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.
RECLASSIFICATIONS: Certain amounts in the 1996 consolidated
financial statements have been reclassified to conform to
the 1997 presentation.
TRANSFER OF ASSETS: On January 1, 1997, the Corporation
adopted Statement of Financial Accounting Standards No. 125,
"Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities" (SFAS No. 125). This
statement establishes the accounting treatment to be used
for the securitization of all financial assets. Under the
provisions of SFAS No. 125, the net carrying values of
assets sold and retained are allocated based on their
relative fair values. The adoption of SFAS No. 125 did not
have a material effect on the Corporation's financial
position or results of operations.
EARNINGS PER SHARE: Earnings per share computations are
based on the weighted average number of common shares
outstanding during the year.
In February 1997 the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" (SFAS No. 128). This statement
specifies the computation, presentation and disclosure
requirements for earnings per share. SFAS No. 128 is
effective for financial statements issued for periods ending
after December 15, 1997. If the Corporation had calculated
earnings per share in accordance with SFAS No. 128, the
following amounts would have been reported:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1997 1996
----- -----
<S> <C> <C>
Basic earnings per share $0.46 $0.44
===== =====
Dilutive earnings per share $0.45 $0.43
===== =====
</TABLE>
XXX PAGE 4 XXX
NOTE 2 - INVESTMENT SECURITIES
The carrying amounts of investment securities, including net
unrealized gains of $134,456 and $51,159 on available-for-sale
securities at March 31, 1997 and December 31, 1996, respectively, are
summarized as follows:
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
------------ ------------
<S> <C> <C>
Held-to-Maturity
US Treasury and Government obligations $40,298,062 38,317,039
Obligations of states and political
subdivisions 4,370,335 4,466,043
Mortgage-backed securities 4,959,880 7,153,865
------------ ------------
Total Held-to-Maturity 49,628,277 49,936,947
Available-for-Sale
US Treasury and Government obligations 26,963,480 19,924,047
Mortgage-backed securities 3,214,873 3,237,633
Other 20,021 25,828
------------ ------------
Total Available for Sale 30,198,374 23,187,508
------------ ------------
Total Investments $79,826,651 $73,124,455
============ ============
</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
Loans and leases are summarized as follows:
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
------------ ------------
<S> <C> <C>
Real estate-mortgage $191,466,517 $210,697,305
Commercial, financial and
agricultural 184,296,906 179,650,053
Real estate-construction 55,557,076 48,990,519
Consumer 42,297,782 38,371,100
Lease financing 62,404,745 62,371,808
Unearned income (11,172,897) (11,029,815)
------------ ------------
$524,850,129 $529,050,970
============ ============
</TABLE>
XXX PAGE 5 XXX
NOTE 5 - ALLOWANCE FOR POSSIBLE LOAN AND LEASE LOSSES
Changes in the allowance for possible loan and lease losses are
summarized as follows:
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
------------ ------------
<S> <C> <C>
Balance at beginning of year $6,593,836 $4,620,167
Provision for possible loan
and lease losses 856,000 4,450,000
Reduction due to sale of loans 0 (696,195)
Recoveries 112,659 593,421
Charge-offs (495,192) (2,373,557)
------------ ------------
</TABLE>
Balance at end of period $7,067,303 $6,593,836
============ ============
NOTE 6- MORTGAGE SERVICING ASSETS
Included on the consolidated balance sheet at March 31, 1997 and
December 31, 1996 are $64,692,803 and $67,450,101 respectively, of
capitalized mortgage servicing assets. These amounts relate to the
principal balances of mortgage loans serviced by the Corporation for
investors which total $10,408,436,587 and $10,810,987,768 at March 31,
1997 and December 31, 1996, respectively. Although they are not
generally held for purposes of sale, there is an active secondary
market for mortgage servicing assets.
NOTE 7- SHORT-TERM BORROWINGS
Short-term borrowings are summarized as follows:
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
------------ ------------
<S> <C> <C>
Repurchase agreements and drafts
payable related to mortgage loan
closings $146,155,305 $264,998,449
Federal funds 106,000,000 74,118,000
Lines of Credit 50,220,562 105,591,525
Commercial paper 6,521,793 17,174,751
------------ ------------
Total $308,897,660 $461,882,725
============ ============
</TABLE>
Repurchase agreements at March 31, 1997 and December 31, 1996, include
$60,618,844 and $183,869,533 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 6 XXX
Drafts payable related to mortgage loan closings totaled
$79,281,227 and $74,042,188 at March 31, 1997 and December
31, 1996. These borrowings are related to mortgage closings
at the end of the period 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 lender's prime rate.
NOTE 8 -- LONG-TERM DEBT
Long-term debt at March 31, 1997 of $11,609,267 consists of
various notes payable at annual interest rates ranging from
6.3% to 9.6% and maturity dates ranging from August 5, 1996
through April 30, 2001. Long -term debt as of December 31,
1996 was $17,642,526 and consisted of various notes payable
at annual interest rates ranging from 6.3% to 9.6% and
maturity dates through April 30, 2002.
NOTE 9 -- COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED
SECURITIES OF SUBSIDIARY TRUST
In January 1997, the Corporation issued $50,000,000 of trust
preferred securities through IFC Capital Trust I, a trust
created and controlled by the Corporation. The securities
were issued at $25 per share with a cumulative dividend rate
of 9.25%, payable quarterly. They have an initial maturity
of 30 years with a 19-year extension option. The securities
are callable at par after five years, or immediately, in the
event of an adverse tax development affecting the Corporation's
classification of the securities for federal income tax
purposes. They are not convertible into common stock of the
Corporation. The securities are shown on the balance sheet
net of capitalized issuance costs.
The sole assets of IFC Capital Trust I are subordinated debentures
of the Corporation with a principal balance of $51,546,400, an
interest rate of 9.25% and an initial maturity of 30 years wtih a
19-year extension option.
XXX PAGE 7 XXX
NOTE 10 -- CONTINGENCIES
In the normal course of business, Irwin Financial Corporation and its
subsidiaries are subject to various claims and other pending and
possible legal actions.
As of March 31, 1997, Inland Mortgage Corporation (Inland) was
a defendant to three separate class action lawsuits relating to
the following: Inland's administration of mortgage escrow accounts,
Inland's right to require its borrowers to pay premiums for private
mortgage insurance, and Inland's right to pay broker fees to
mortgage brokers.
At present, it is not possible for the Corporation to predict the
likelihood of an unfavorable outcome or to establish the possible
extent or amount of liability or potential loss exposure with
respect to the litigation.
Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Net income for the first quarter ended March 31, 1997, was
$5.2 million, up 4.2% from the first quarter 1996 net income of
$5.0 million. Net income per share was $0.45 for the first
quarter of 1997 as compared to $0.43 for the same period in 1996.
Return on equity for the first quarter of 1997 was 17.31%, down
from 19.69% in 1996.
LINES OF BUSINESS
Irwin Financial Corporation is comprised of four 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)
Listed below are the earnings by line of business for the
three months ended March 31, 1997, as compared to the same period
in 1996:
<TABLE>
<CAPTION>
Three Months
Ended March 31,
1997 1996
----- -----
<S> <C> <C>
Mortgage banking $3,919,851 $5,293,593
Community banking 1,350,823 1,254,164
Home equity lending 1,186,411 (2,005,150)
Equipment leasing 5,273 (28,270)
Parent (including consolidating
entries) (1,266,082) 473,899
----------- -----------
</TABLE>
$5,196,276 $4,988,236
========== ==========
XXX PAGE 8 XXX
MORTGAGE BANKING
<TABLE>
Selected Financial Data (shown in thousands):
Three months
ended March 31,
1997 1996
----- -----
<CAPTION>
SELECTED INCOME STATEMENT DATA:
<S> <C> <C>
Loan origination fees $8,479 $10,891
Gain from sales of loans 3,390 7,296
Loan servicing fees 11,973 10,765
Net interest income 3,537 4,211
Gain on sale of servicing 6,819 1,188
Other income 313 196
Operating expense 27,895 25,667
------ ------
Income before tax 6,616 8,880
Income tax 2,696 3,586
------ ------
Net income 3,920 $5,294
====== ======
Return on average equity 23.30% 37.14%
====== ======
Mortgage loan closings $1,098,549 $1,247,564
========== ==========
</TABLE>
<TABLE>
<CAPTION>
SELECTED OPERATING DATA: MARCH 31, DECEMBER 31,
1997 1996
---------- ------------
<S> <C> <C>
Servicing portfolio $10,408,437 $10,810,988
Mortgage loans held for sale 263,383 371,058
Mortgage servicing assets 64,648 67,750
</TABLE>
Net income for the first quarter was $3.9 million, down
26.0% from the same period in 1996. Mortgage banking results
were negatively affected by rising mortgage loan rates during the
quarter. Mortgage loan originations were down 11.9% to $1.1
billion. A significant factor in this decrease was the decline in
refinancing activity. Refinanced loans originated in the first
quarter of 1997 accounted for 23.3% of total originations, down
from 34.3% during the same period in 1996. Loan origination fees
decreased $2.4 million or 22.1% from the first quarter of 1996.
Gains from the sales of mortgage loans were $3.4 million in the
first quarter of 1997, down from $7.8 million in 1996.
During the first quarter of 1997, $1.2 billion of mortgage
servicing rights were sold, compared with first quarter 1996
servicing sales of $1.1 billion. These servicing rights were
sold, in part, to hedge against losses in the value of
capitalized servicing assets which could result from declining
interest rates. Gains on the sale of mortgage servicing totaled
$6.8 million in the first quarter of 1997, up from $1.2 million a
year earlier. The increase reflects an improvement in pricing in 1997.
XXX PAGE 9 XXX
The mortgage servicing portfolio totaled $10.4 billion as
of March 31, 1997 a decrease of 3.7% from December 31, 1996.
Mortgage servicing assets capitalized on the balance sheet
totaled $64.6 million at March 31, 1997, compared to $67.8 at
December 31, 1996. Included in first quarter 1997 expenses is
$3.3 million of amortization expense relating to the mortgage
servicing assets, up from $2.1 million in the first quarter of 1996.
As a result of the decrease in mortgage loan closings from
the same quarter in 1996, net interest income was down in the
first quarter of 1997. Net interest income after the provision
for loans losses was $3.5 million for the three months ended
March 31, 1997, down 16.0% from the first quarter 1996.
Operating expenses, excluding mortgage servicing asset
amortization expense, were up $1.1 million or 4.6% from the first
quarter of 1996. The mortgage banking line of business is making
significant investments in technology in order to remain
competitive in a rapidly changing business environment.
COMMUNITY BANKING
<TABLE>
SELECTED FINANCIAL DATA (SHOWN IN THOUSANDS):
Three months
ended March 31,
1997 1996
----- -----
<CAPTION>
SELECTED INCOME STATEMENT DATA:
<S> <C> <C>
Net interest revenue $5,076 $4,560
Provision for loan and lease losses (441) (526)
Other income 2,427 2,382
Operating expense 4,892 4,440
------ ------
Income before tax 2,170 1,976
Income tax 819 722
------ ------
Net income $1,351 $1,254
====== ======
Return on average equity 15.86% 16.62%
March 31, December 31,
<CAPTION>
SELECTED BALANCE SHEET DATA: 1997 1996
------------ ------------
Securities and short-term investments $154,892 $115,681
Loans and leases 347,641 336,580
Allowance for loan and lease losses (5,043) (4,790)
All other assets 51,319 55,154
--------- ---------
Total assets $548,809 $502,625
========= =========
Deposits $457,755 $453,879
All other liabilities 55,850 15,431
--------- ---------
Total liabilities 513,605 469,310
Shareholder's equity 35,204 33,315
--------- ---------
Total liabilities and
shareholder's equity $548,809 $502,625
========= =========
</TABLE>
XXX PAGE 10 XXX
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
investment advisory services and credit insurance operations
which were previously reported in the investor services and
credit insurance lines of business, respectively. Results for
1996 have been restated to reflect these changes. Net income was
up $96.7 thousand from 1996, or 7.7% to $1.4 million. For the
first quarter, net interest income improved $516.5 thousand, or
11.3%, from 1996. The increased net interest income is reflective
of an 11.1% increase in the loan and lease portfolio from the
first quarter of 1996. The growth results from the community
bank's continued penetration of new markets in south-central
Indiana. The provision for loan and lease losses was $441.3
thousand, down $84.7 thousand from a year earlier. Despite the
lower loan loss provision, the loan loss allowance as a
percentage of loans was 1.45%, up from 1.28% a year earlier.
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,
1997 1996
---- ----
(In thousands) Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
- ---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest -
earning assets $465,985 $9,561 8.32% $399,989 $8,367 8.41%
Interest -
bearing
liabilities $406,032 $4,485 4.48% $336,794 $3,807 4.55%
------ ------
Net interest income 0 $5,076 0 0 $4,560 0
Net interest margin 0 0 4.42% 0 0 4.59%
</TABLE>
The decline in net interest margin reflects decisions to
sell portions of the community bank's higher margin portfolio of
indirect consumer auto loans during the past year.
Other income in the first quarter was up $44.5 thousand or
1.9% from the first quarter of 1996. Loan servicing fees
increased $123.4 thousand or 91.5% from 1996. However, they were
offset by a $213.7 thousand decline in gains from the sale of
loans as the community bank sold a portion of its consumer auto
loan portfolio in the first quarter of 1996 but did not in 1997.
Other expenses were up $451.9 thousand, or 10.2%. The
increase was principally due to expanded operations in new
markets.
XXX PAGE 11 XXX
HOME EQUITY LENDING
Selected Financial Data (shown in thousands):
<TABLE>
<CAPTION>
Three months
ended March 31,
1997 1996
---- ----
SELECTED INCOME STATEMENT DATA:
<S> <C> <C>
Net interest revenue after provision for
loan and lease losses $1,253 $642
Gain from sale of loans 4,659 0
Loan servicing fees 2,729 976
Other income 51 14
------- -------
Total net revenues 8,692 1,632
Amortization of capitalized servicing 1,608 235
Operating expense 5,898 3,402
------- -------
Pre-tax income (loss) $1,186 ($2,005)
======= =======
</TABLE>
<TABLE>
<CAPTION>
March 31, December 31,
OTHER SELECTED FINANCIAL DATA: 1997 1996
------------ ------------
<S> <C> <C>
Home equity loans, net of allowance $99,648 $117,588
Capitalized servicing, net of amortization 21,331 15,228
Servicing portfolio 262,010 230,450
</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 income of
$1.2 million in the first quarter of 1997, compared to a pre-tax
loss of $2.0 million in 1996. Total net revenues of $8.7 million
were up from $1.6 million in 1996 and include a $4.7 million gain
on the securitization of $60.1 million of home equity loans
during the first quarter of 1997. Also included in first quarter
1997 net revenues is $2.7 million of loan servicing income, up
from $1.0 million a year earlier. The home equity lending
business has retained the servicing rights on the loans it has
securitized. Its managed portfolio of home equity loans totaled
$262.0 million as of March 31, 1997, compared with $230.5 million
at December 31, 1996 and $113.8 million a year earlier. Loan
volume for the quarter ended March 31, 1997 totaled $44.8
million, up 45.0% from the same period in 1996.
The business will maintain the flexibility of either holding
the loans it produces or securitizing them. Management will evaluate
these options throughout the year in light of market conditions and
financial objectives.
Operating expenses were $7.5 million in the first quarter
of 1997, up 106.4% from 1996. The increase reflects the
increased production activities of the company. Included in
operating expenses is $1.6 million of amortization of capitalized
servicing which has been created through the securitization of
home equity loans. Capitalized servicing amortization expense
totaled $0.2 million in the previous year.
XXX PAGE 12 XXX
EQUIPMENT LEASING
The equipment leasing business recorded pre-tax income of
$5.3 thousand during the first quarter of 1997 compared to a pre-
tax loss of $28.3 thousand in the first quarter 1996. Net
interest revenue was up $107.6 thousand, or 10.6% year over year.
Total net revenues increased 4.4% to $1.1 million. Operating
expenses were up $12.0 thousand or 1.1% to $1.1 million. Lease
and loan volume totaled $8.3 million during the first quarter of
1997, up 8.7% from 1996.
The challenge for the business is to demonstrate that its
strategy can achieve an attractive rate of return on equity in
the long run.
PARENT COMPANY (INCLUDING CONSOLIDATING ENTRIES)
For the period ended March 31, 1997, the parent company
recorded a net loss of $1.3 million compared with net income of
$473.9 thousand a year earlier. The decline is principally due
to the income tax expense or benefit generated at the home equity
lending and equipment leasing businesses which are recorded on
the parent's books. For the first quarter of 1997, the parent
company recorded $476.7 thousand of income tax expense relating
to these lines of business. During the same period a year
earlier, the parent company recorded a benefit of $813.4
thousand.
Also included in parent company 1997 results is $953.7 thousand
of expense relating to the distribution from trust preferred
securities which were sold in January 1997. See the section on
the consolidated balance sheet for further discussion of these
securities.
CONSOLIDATED INCOME STATEMENT ANALYSIS
Net interest income for the first quarter of 1997 totaled
$11.9 million, up 9.4% from the first quarter of 1996. The
increase was the net effect of a combination of factors
throughout the Corporation. The mortgage banking business
recorded decreased net interest revenue as a result of the
decreased production of mortgage loans during the first quarter
of 1997. The decline was offset by increases at the community
banking and home equity lending businesses which corresponded to
growth in the loan portfolios in each of those businesses.
The loan and lease loss provision was $856.0 thousand for
the first quarter of 1997, compared to $944.0 thousand for the
same period in 1996. See the section on credit risk for further
discussion.
Noninterest income was up 19.2% in the first quarter of 1997
to $40.9 million. This increase was driven primarily by home
equity lending activities. Total income from home equity loan
sales and servicing was $7.4 million during the first quarter of
1997, up from $1.0 million a year earlier.
Operating expenses also increased in 1997 as the first
quarter was up $6.5 million or 18.2% from 1996. This increase is
due in part to the growth of the Corporation through its
continued expansion of the home equity lending business,
investments in new technology at the mortgage banking business
and the community bank's growth in new markets. Also
contributing to the increase was $2.6 million of additional
amortization expense associated with capitalized servicing on the
balance sheets of the mortgage bank and home equity lending
business.
XXX PAGE 13 XXX
The effective income tax rate for the Corporation was 40.2%
in the first quarter of 1997 compared to 40.9% in 1996.
In February 1997 the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 128,
"Earnings per Share" (SFAS No. 128). This statement specifies
the computation, presentation and disclosure requirements for
earnings per share. SFAS No. 128 is effective for financial
statements issued for periods ending after December 15, 1997. If
the Corporation had calculated earnings per share in accordance
with SFAS No. 128, the following amounts would have been
reported:
<TABLE>
<CAPTION>
Three months ended
March 31,
1997 1996
----- -----
<S> <C> <C>
Basic earnings per share 0.46 $0.44
Dilutive earnings per share $0.45 $0.43
</TABLE>
CONSOLIDATED BALANCE SHEET ANALYSIS
Total assets of the Corporation at March 31, 1997, were $1.2
billion, down from December 31, 1996 total assets of $1.3
billion. The decrease was attributed to a decrease in mortgage
loans held for sale of $102.4 million.
The decrease in assets was accompanied by a decrease in
short-term borrowings of $153.5 million or 33.2%. Deposits
increased $6.6 million or 1.0%. 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 $173.6 million at March 31, 1997, up from $171.1 million
at December 31, 1996.
Shareholders' equity grew to $121.5 million, or $10.75 per
share, a 2.7% increase over the $118.9 million, or $10.46 per
share at the end of 1996. The Corporation's equity to assets
ratio ended the quarter at 10.12%, compared to 9.12% at the end
of 1996.
Prior to the adoption of SFAS 122 in the second 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 SFAS
122, the Corporation's mortgage loan servicing portfolio
represents substantial economic value which is not recorded on
the balance current quarter as well as the past two year ends.
XXX PAGE 14 XXX
<TABLE>
<CAPTION>
(In thousands)
March 31, Dec. 31, Dec. 31,
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Servicing portfolio
balance $10,408,437 $10,810,988 $10,301,914
----------- ----------- -----------
Value @1.5% $156,127 $162,165 $154,529
Less: capitalized servicing 66,924 70,551 51,783
tax liability at 40% 35,681 36,646 41,098
----------- ----------- -----------
Net value $53,522 $54,968 $61,648
=========== =========== ===========
Per share of common stock $4.73 $4.84 $5.44
=========== =========== ===========
</TABLE>
With the implementation of SFAS 122, this off-balance sheet value
will decline over future years and eventually be reduced to zero.
In January 1997, the Corporation issued $50.0 million of
trust preferred securities through a trust created and controlled
by the Corporation. The securities, which are publicly traded,
were issued at $25 per share with a cumulative dividend rate of
9.25%, payable quarterly. They have an initial maturity of 30
years with a 19-year extension option which the Corporation can
exercise at any point during the first 30 years. The securities
are callable at par after five years, or immediately, in the
event of an adverse tax development affecting the Corporation's
classification of the securities for federal income tax purposes.
The securities are not convertible into common stock of the
Corporation.
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 credit risk despite the fact that the mortgages are
typically secured. The credit risk in the loan portfolio of the
community bank and home equity lending business has the most
potential to have a significant effect on consolidated financial
performance.
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 loan
and lease losses.
The adequacy of the allowance for loan and lease losses is
critical to the fair valuation of net loans and leases recorded
on the Corporation's
XXX PAGE 15 XXX
balance sheet. Management evaluates the creditworthiness of
significant borrowers, past loan and lease loss experience, and
current and anticipated economic conditions. The allowance for
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 future loss potential of all loans and leases currently
recorded on the Corporation's books.
As of March 31, 1997, the allowance for loan and lease
losses as a percentage of total loans and leases was 1.35%,
compared to 1.25% at December 31, 1996. For the three months
ended March 31, 1997, the provision for loan and lease losses
totaled $856.0 thousand, 9.3% lower than the amount recorded in
the first quarter of 1996. Net charge-offs for the quarter were
$382.8 thousand as compared to $182.9 thousand in 1996.
Nonperforming assets (loans 90 days past due, nonaccrual,
and owned real estate) were $8.7 million or 0.72% of total assets
as of March 31, 1997, up from $7.2 million or 0.55% at December
31, 1996 and $2.7 million or 0.26% at December 31, 1995. The
first quarter 1997 increase was largely attributable to increases
in nonperforming assets of $1.4 million and $1.0 million at the
community bank and mortgage bank, respectively. 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,
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Accruing loans past due
90 days or more:
Commercial $267 $256 $418
Leasing 0 0 0
Real Estate 70 234 0
Consumer 119 205 202
------- ------- -------
Subtotal 456 695 620
------- ------- -------
Nonaccrual loans:
Commercial 3,463 2,739 670
Leasing 1,308 1,261 415
Real Estate 180 260 694
Consumer 94 0 0
------- ------- -------
Subtotal 5,045 4,260 1,779
------- ------- -------
Total nonperforming
loans $5,501 4,955 2,399
------- ------- -------
Other real estate owned 3,159 2,239 295
------- ------- -------
Total nonperforming
assets $8,660 $7,194 $2,694
======= ======= =======
Nonperforming assets to
total assets 0.72% 0.55% 0.26%
======= ======= =======
</TABLE>
XXX PAGE 16 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, 1997.
<TABLE>
<CAPTION>
Within Three Months After
One Year to One Year One Year
------------ ------------ ------------
(In Thousands)
<S> <C> <C> <C>
Interest-earning assets:
Interest-bearing deposits
with banks $2,855 $4,097 $5,191
Taxable investment
securities 19,345 9,803 46,309
Tax-exempt investment
securities 0 485 3,885
Mortgages held for sale 342,664 0 0
Loans, net of unearned
income 258,074 75,716 191,060
--------- --------- ---------
Total interest-earning
assets 622,938 90,101 246,445
Interest-bearing liabilities:
Money Market checking 16,977 0 57,988
Money Market savings 3,099 0 8,858
Regular savings 31,762 2,258 21,350
Time deposits 140,988 65,448 63,080
Short-term borrowings 308,898 0 0
Long-term debt 1,599 3,643 6,367
--------- --------- ---------
Total interest-bearing
liabilities 503,323 71,349 157,643
Trust preferred securities 0 0 50,000
--------- --------- ---------
Interest sensitivity gap 119,615 18,752 38,802
--------- --------- ---------
Cumulative interest
sensitivity gap $119,615 $138,367 $177,169
========= ========= =========
</TABLE>
XXX PAGE 17 XXX
As the above table shows, the consolidated one-year gap at March
31, 1997 was a positive $138.4 million. This compares to a
positive gap of $133.2 million at December 31, 1996. The large
positive gaps at March 31, 1997 and December 31, 1996 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, 1997, 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,
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Equity to Assets 10.12% 9.12% 9.56%
Risk-Based Capital Ratio 19.04% 14.23% 14.49%
Tier I Capital Ratio 18.22% 13.47% 13.80%
</TABLE>
The Corporation's capital ratios are adequate and above
regulatory minimums.
XXX PAGE 18 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: /s/ Thomas D. Washburn
-----------------------
Thomas D. Washburn
Chief Financial Officer
By: /s/ Marie C. Strack
-----------------------
Marie C. Strack
Corporate Controller
(Chief Accounting Officer)
XXX PAGE 19 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 21
Earnings per Share
(15) No Exhibit
(18) No Exhibit
(19) No Exhibit
(20) No Exhibit
(23) No Exhibit
(24) No Exhibit
(25) No Exhibit
(27) Financial Data Schedule 22
(28) No Exhibit
(b) Reports on Form 8-K
None
XXX PAGE 20 XXX
Exhibit 11
IRWIN FINANCIAL CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1997 1996
----- -----
PRIMARY
<S> <C> <C>
Average number of shares outstanding 11,340,789 11,337,956
Assumed exercise of stock options 323,844 243,644
------------ ------------
Total shares 11,664,633 11,581,600
============ ============
Net income $5,196,276 $4,988,236
============ ============
Net income per share $0.45 $0.43
===== =====
FULLY DILUTED
Average number of shares outstanding 11,340,789 11,337,956
Assumed exercise of stock options
(Note 1) 323,844 247,976
------------ ------------
Total shares 11,664,633 11,585,932
============ ============
Net income $5,196,276 $4,988,236
============ ============
Net income per share $0.45 $0.43
===== =====
</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.
XXX Page 21 XXX
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000052617
<NAME> IRWIN FINANCIAL CORP.
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 57,851
<INT-BEARING-DEPOSITS> 12,143
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 30,198
<INVESTMENTS-CARRYING> 49,628
<INVESTMENTS-MARKET> 50,070
<LOANS> 524,850
<ALLOWANCE> 7,067
<TOTAL-ASSETS> 1,201,113
<DEPOSITS> 646,749
<SHORT-TERM> 356,864
<LIABILITIES-OTHER> 64,374
<LONG-TERM> 11,609
0
0
<COMMON> 29,965
<OTHER-SE> 99,033
<TOTAL-LIABILITIES-AND-EQUITY> 1,201,113
<INTEREST-LOAN> 12,823
<INTEREST-INVEST> 1,690
<INTEREST-OTHER> 6,913
<INTEREST-TOTAL> 21,427
<INTEREST-DEPOSIT> 4,538
<INTEREST-EXPENSE> 10,457
<INTEREST-INCOME-NET> 10,970
<LOAN-LOSSES> 856
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 42,269
<INCOME-PRETAX> 8,687
<INCOME-PRE-EXTRAORDINARY> 8,687
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,196
<EPS-PRIMARY> .45<F1>
<EPS-DILUTED> 0
<YIELD-ACTUAL> .05<F1>
<LOANS-NON> 5,046
<LOANS-PAST> 456
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 6,594
<CHARGE-OFFS> 495
<RECOVERIES> 112
<ALLOWANCE-CLOSE> 7,067
<ALLOWANCE-DOMESTIC> 7,067
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 2,138
<FN>
<F1>information not in 1,000
</FN>
</TABLE>
