SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
(Mark One)
x Annual report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended December 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 Incorporation (I.R.S.
or Organization) Employer Identification No.)
Organization)
500 Washington Street
Columbus, Indiana 47201
(Address of Principal Executive Offices) (Zip Code)
(812) 376-1020
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Shares
(Title of Class)
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
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of registrant's knowledge,
in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. x The aggregate market value of the voting stock
held by non-affiliates of the Registrant was $253,131,710.94 as
of March 12, 1998. As of March 12, 1998, there were outstanding
10,903,149 common shares of the Registrant.
DOCUMENTS INCORPORATED BY REFERENCE
Selected Portions of Part of Form 10-K Into Which
the Following Documents Incorporated
Annual Report to Shareholders Part I, Part II
for the year ended December 31, 1997
Definitive Proxy Statement for Part III
Annual Meeting of Shareholders
to be held April 30, 1998
Exhibit Index on Pages 14 through 18 Page 1
Total Pages in This Filing: 124
FORM 10-K TABLE OF CONTENTS
Part I
Item 1 - Business 3
Item 2 - Properties 7
Item 3 - Legal Proceedings 8
Item 4 - Submission of Matters to a Vote of Security
Holders 9
Part II
Item 5 - Market for Registrant's Common Equity and
Related Security Holder Matters 9
Item 6 - Selected Financial Data 10
Item 7 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
Item 8 - Financial Statements and Supplementary Data 12
Item 9 - Changes in and Disagreements with
Accountants on Accounting and Financial Disclosure 13
Part III
Item 10 - Directors and Executive Officers of the
Registrant 13
Item 11 - Executive Compensation 13
Item 12 - Security Ownership of Certain Beneficial
Owners and Management 13
Item 13 - Certain Relationships and Related Transactions 13
Part IV
Item 14 - Exhibits, Financial Statement Schedules
and Reports on Form 8-K 14
Signatures 19
PART I
Item 1 Business
General
Irwin Financial Corporation (the "Registrant") is a diversified
financial services company organized as an Indiana bank holding
company in May, 1972. The Registrant's principal subsidiaries
are Irwin Mortgage Corporation ("Irwin Mortgage", formerly Inland
Mortgage Corporation), a mortgage banking company; Irwin Union
Bank and Trust Company ("Irwin Union Bank"), a commercial bank;
Irwin Equipment Finance Corp. (the new name of the parent company
of Affiliated Capital Corp.) ("Irwin Equipment"), an equipment
leasing company; Irwin Home Equity Corporation ("Home Equity"), a
consumer home equity lending company; White River Capital
Corporation, a small venture capital company; and Irwin Union
Credit Insurance Corporation, a credit insurance company.
Registrant is also the sole equity shareholder of IFC Capital
Trust I ("Capital Trust"), a special purpose trust.
The Registrant's 1997 Annual Report section on "Management's
Discussion and Analysis of Results of Operations and Financial
Condition" is included with this filing as Exhibit13(a). Page 53
of the Report states that Irwin Equipment Finance Corp. was
previously Affiliated Capital Corp., and page 55 of the Report
lists the Irwin Equipment Finance Corp. Senior Officers. This
information is incorrect. Affiliated Capital Corp. did not
change its name to Irwin Equipment Finance Corp.; the parent
company of Affiliated Capital Corp. (formerly Irwin Union Leasing
Corporation) changed its name to Irwin Equipment Finance Corp.
The Officers listed on page 55 are those of Affiliated Capital
Corp.; not Irwin Equipment Finance Corp., with the exception of
Matthew Colasanti, who is President of both Irwin Equipment
Finance Corp. and Affiliated Capital Corp. The Annual Report had
already been published when the error was discovered. When
referring to the leasing line of business, the Registrant now
uses the name "Irwin Equipment Finance Corp." to include the
activities of Affiliated Capital Corp.
Business of Subsidiaries
Irwin Mortgage originates, purchases and services conventional or
government agency backed (i.e., FHA and VA) residential mortgage
loans. Most mortgages are either insured by an agency of the
federal government, or in the case of a conventional mortgage,
meet requirements for resale to the Federal National Mortgage
Association or the Federal Home Loan Mortgage Corporation. Irwin
Mortgage also originates a small amount of commercial mortgages.
Irwin Mortgage sells mortgage loans to institutional and private
investors but may retain servicing rights to mortgage loans that
it originates or purchases from correspondents. Irwin Mortgage
collects and accounts for the monthly payments on each loan
serviced and pays the real estate taxes and insurance necessary
to protect the integrity of the mortgage lien, for which it
receives a servicing fee. Irwin Mortgage operates 95 production
and satellite offices in 28 states. During 1997, Irwin Mortgage
established offices in San Diego, California; Pueblo, Colorado;
Farmington, Connecticut; Columbus, and Macon, Georgia; New
Orleans, Louisiana; Braintree, Massachusetts; Wilmington and
Burlington, North Carolina; and Columbia, South Carolina. During
1997, Irwin Mortgage closed offices in Albuquerque, New Mexico;
Clackamas, Oregon; Denver and Fort Collins, Colorado; Hayes and
Woodbridge, Virginia; Las Vegas, Nevada; LaPorte, Indiana;
Montclair (Oakland), Pasadena, Santa Rosa, and West Lake Village,
California; North Houston and Plano, Texas; Tempe, Arizona;
Seattle/Kirkland and Snohomish, Washington; Crofton and Solomons,
Maryland.
Irwin Mortgage entered the non-prime first mortgage lending
market in 1997. This market is composed of borrowers who do not
qualify under the underwriting guidelines established by the
government-sponsored secondary market agencies for conforming
first mortgages. Irwin Mortgage opened a non-prime lending
office in Richmond, Virginia late in the fourth quarter of 1996
and began originating non-prime first mortgages in 1997.
Irwin Mortgage and the Registrant have, for several years, been
exploring opportunities to test the development of mortgage
banking operations in markets outside the United States. In
December, 1996, Irwin Mortgage began taking applications from U.
S. Borrowers for dollar denominated loans to be secured by
residential real estate located in Mexico. The Registrant will
continue research of international opportunities to which the
Registrant might apply its knowledge and competencies.
Irwin Union Bank, organized in 1871, is a full service commercial
bank offering a wide variety of services to individual, business,
institutional, and governmental customers. Irwin Union Bank's
services include personal and commercial checking accounts,
savings and time deposit accounts, personal and business loans,
credit card services, money transfer, financial counseling,
property and casualty insurance agency services, trust services,
securities brokerage and safe deposit facilities. Irwin Union
Bank is the largest of nine financial institutions operating in
Bartholomew County, Indiana, with eight locations throughout the
county. Irwin Union Bank also has branch facilities in Seymour
(Jackson County - 2), Shelbyville (Shelby County), Bloomington
(Monroe County), Franklin and Greenwood (Johnson County - 2),
Carmel (Hamilton County), and Greensburg (Decatur County),
Indiana. On August 13, 1997, Irwin Union Bank became a member of
the Federal Reserve System. On August 29, 1997 Irwin Union
Securities, formerly the brokerage Subsidiary of Irwin Union
Investor Services, Inc., became a Subsidiary of Irwin Union Bank.
As of February 1, 1998, Irwin Union Insurance, Inc., an insurance
agency subsidiary of Irwin Union Bank, purchased substantially
all the property and casualty assets of Maximum Benefits &
Protection Co. Inc., an Indiana corporation.
Irwin Equipment, located in Northbrook, Illinois, is the parent
company of Affiliated Capital Corp., which is engaged in the
small-ticket equipment leasing and commercial lending business.
Irwin Equipment offers non-recourse, non-operating, full payout
leases and commercial lines of credit to physicians, medical
clinics, veterinarians, dentists and chiropractors.
Home Equity was formed in 1994 and is located in San Ramon,
California. Home Equity originates and services home equity
loans and lines of credit. The loans are marketed through direct
mail and telemarketing in twenty-two states. At year end, Home
Equity began offering a first mortgage refinance program in
selected states.
White River Capital Corporation ("White River"), a venture
capital company, is located in Columbus, Indiana and currently
holds one investment but has suspended making new investments.
Irwin Union Credit Insurance Corporation is located in Columbus,
Indiana and provides credit life insurance to consumer loan
customers of Irwin Union Bank.
IFC Capital Trust I ("Capital Trust"), is a statutory business
trust created under the laws of Delaware. The Company owns all
of the Common Securities of Capital Trust. Capital Trust exists
for the purpose of issuing the Preferred Securities and investing
the proceeds thereof in an equivalent amount of 9.25%
Subordinated Debentures of the Company. The Subordinated
Debentures will mature on March 31, 2027, which date may be (i)
shortened to a date not earlier than March 31, 2002, or (ii)
extended to a date not later than March 31, 2046, in each case if
certain conditions are met (including, in the case of shortening
the Stated Maturity, the Company having received prior approval
of the Board of Governors of the Federal Reserve System ("Federal
Reserve") to do so if then required under applicable capital
guidelines or policies of the Federal Reserve). The Preferred
Securities will have a preference under certain circumstances
with respect to cash distributions and amounts payable on
liquidation, redemption or otherwise over the Common Securities.
Holders of Preferred Securities are entitled to receive
preferential cumulative cash distributions, at the annual rate of
9.25% of the liquidation amount of $25 per Preferred Security
accruing from the date of original issuance and payable quarterly
in arrears on the last day of March, June, September and December
of each year, commencing March 31, 1997.
No single part of the business of the Registrant is dependent
upon a single customer or upon a very few customers and the loss
of any one customer would not have a materially adverse effect
upon the business of the Registrant. Irwin Mortgage is
registered as a Foreign Financial Institution in Mexico.
Competition
Irwin Mortgage originates and services residential first mortgage
loans from 95 production and satellite offices in Arizona,
California, Colorado, Connecticut, Delaware, Florida, Georgia,
Hawaii, Illinois, Indiana, Kentucky, Louisiana, Massachusetts,
Minnesota, Missouri, New Jersey, North Carolina, Ohio, Oklahoma,
Oregon, Pennsylvania, South Carolina, Texas, Utah, Washington,
Wisconsin, and the Washington, D.C. metropolitan area, including
offices in Maryland and Virginia. In each of these locations,
competition for mortgage loans is vigorous, coming from other
national, regional and local mortgage banking companies as well
as commercial banks, savings banks, and savings & loan
associations. Irwin Mortgage purchases mortgage loans from
correspondents in these and other states as well.
The commercial banking business for Irwin Union Bank in the
Bartholomew, Decatur, Hamilton, Jackson, Johnson, Monroe and
Shelby County areas is very competitive. Within these counties,
in addition to the commercial banks, there are a number of
savings banks, savings & loan associations, and credit unions
competing for deposits and loans. Irwin Union Bank also competes
for the provision of banking services with banks located
elsewhere in Indiana, primarily in south central Indiana, and
with a number of nonbank companies located throughout the United
States, including insurance companies, retailers, brokerage
firms, companies offering money market accounts, and national
credit card companies. As of December 31, 1997, Irwin Union Bank
ranked first among commercial banking and savings bank
institutions on the basis of Bartholomew County deposits. In
addition to the above mentioned counties, Irwin Union Bank
derives its business from several other counties in south central
Indiana.
Irwin Equipment provides, primarily, medical equipment leasing
and commercial credit services to medical clinics, small groups
of physicians, individual practitioners, chiropractors, dentists,
and veterinarians. Irwin Equipment's primary competitors include
other equipment leasing companies with operations that are
national in scope, banks, and other financial institutions which
offer commercial credit products. Such competitors may be
headquartered anywhere in the country.
Home Equity originates and services home equity loans and lines
of credit for private home owners in several states. Home
Equity's primary competitors include banks, thrifts, credit
unions and other home equity lenders with operations that are
either national, regional or local in scope. Such competitors
may be headquartered anywhere in the country.
Supervision and Regulation
The Registrant is a bank holding company within the meaning of
the Bank Holding Company Act of 1956, as amended, and is
registered with, regulated and examined by the Board of Governors
of the Federal Reserve System (the "Board of Governors").
Subject to certain exceptions, a bank holding company is
prohibited from acquiring direct or indirect ownership or control
of more than five percent of the voting shares of any company
which is not a bank and from engaging directly or indirectly in
activities unrelated to banking or managing or controlling banks.
One exception to this prohibition permits activities by a bank
holding company or its subsidiary which the Board of Governors
determines to be so closely related to banking or managing or
controlling banks as to be a proper incident thereto. The Board
of Governors has adopted regulations prescribing those activities
it presently regards as permissible which include the activities
engaged in by Registrant and its subsidiaries.
The Bank Holding Company Act, the Federal Reserve Act, and the
Federal Deposit Insurance Act also subject bank holding companies
and their subsidiaries to certain restrictions on extensions of
credit by subsidiary banks to the bank holding company or any of
its subsidiaries, or investments in the securities thereof, and
on the taking of such securities as collateral for loans to any
borrower. Further, the Bank Holding Company Act and the
regulations of the Board of Governors thereunder, prohibit a bank
holding company and its subsidiaries from engaging in certain tie-
in arrangements in connection with any extension of credit, sale
or lease of any property or furnishing of services.
In addition to the regulation of the Registrant, Irwin Union Bank
is subject to extensive regulation and periodic examination,
principally by the Indiana Department of Financial Institutions
and the Federal Reserve Bank of Chicago. Irwin Mortgage is
subject to audit and examination oversight by the federal
department of Housing and Urban Development as well as the
Government National Mortgage Association, the Federal National
Mortgage Association, and the Federal Home Loan Mortgage
Corporation. The insurance subsidiary of the Registrant and the
insurance subsidiary of Irwin Union Bank are dependent upon state
licenses and upon franchise agreements with private corporations
for their continued existence. The home equity subsidiary of the
Registrant is also dependent upon state licenses for its ability
to extend credit in certain states. Finally, the securities
brokerage activities of Irwin Union Bank's registered
broker/dealer are regulated and examined by the Securities and
Exchange Commission, the Indiana Securities Division, the
securities divisions of the various states in which Irwin Union
Securities, Inc. operates, and the National Association of
Securities Dealers.
Employees and Labor Relations
As of December 31, 1997, the Registrant and its subsidiaries had
a total of 1,969 employees, including full-time and part-time
employees. The Registrant continues a commitment of equal
employment opportunity for all job applicants and staff members,
and management regards its relations with its employees as
satisfactory.
Further Information
The following information responsive to Guide 3 promulgated under
the Securities Exchange Act of 1934, is contained in the
"Management's Discussion and Analysis of Financial Conditions and
Results of Operations" section of the Annual Report to
Shareholders for the year ending December 31, 1997 and is
incorporated herein by reference: "Daily Average Consolidated
Balance Sheet, Interest Rates and Interest Differential" (p. 74),
"Investment Securities" (p. 60), "Short-Term Borrowings" (p. 60),
"Summary of Net Interest Income Changes" (p. 57), "Deposits" (p.
60), "Loans and Leases" (p. 59), "Five-Year Selected Financial
Data" (p. 28), and the discussion and tabular information under
the caption "Credit Risk" on pages 64 to 68 of "Management's
Discussion and Analysis of Financial Conditions and Results of
Operations".
Executive Officers of the Registrant
The Executive Officers of the Registrant are elected annually by
the Board of Directors and serve for a term of one year or until
their successors are elected and qualified. There are no
arrangements or understandings between any Executive Officer and
any other person pursuant to which the Officer was or is to be
selected as an Officer.
Robert P. Albert (47) was President of Affiliated Capital Corp.
from February 28, 1990 to March 3, 1998.
Matthew Colasanti (57) is President of Irwin Equipment Finance
Corp. and Affiliated Capital Corp. since March 3, 1998. From
January through March 2, 1998, Mr. Colasanti was a consultant to
Affiliated Capital Corp. From 1992 to 1995, Mr. Colasanti was
President of Concord Commercial Corp. a North American subsidiary
of Hong Kong Shanghai Bank. Mr. Colasanti has more than thirty
years of equipment finance and leasing expertise and leadership,
ranging in firm size from large organizations to start-up
companies, and from work-outs to high growth.
Claude E. Davis (37) is President of Irwin Union Bank since
January 2, 1996. He has been an officer since 1988.
Elena Delgado (42) is President of Irwin Home Equity Corporation
since September 4, 1994. From March through August, 1994, Ms.
Delgado was an independent consultant to Irwin Financial
Corporation. From 1990 to 1993, Ms. Delgado was Vice President,
Second Mortgage Lending of First Deposit Corporation.
Gregory F. Ehlinger (35) is Vice President and Treasurer of the
Registrant since August of 1992.
Jose M. Gonzalez (39) is Vice President and Director of Internal
Audit of the Registrant since October of 1995. From 1993 to
1995, Mr. Gonzalez was Senior Vice President, Audit & Compliance
Services of Premier Bank and Trust. From 1991 to 1993, Mr.
Gonzalez was Vice President and Senior Compliance Officer at
First Empire State Corporation.
Theresa L. Hall (45) is Vice President - Human Resources of the
Registrant, since 1988. She has been an officer since 1980.
Rick L. McGuire, (45) is President of Irwin Mortgage since
January 1, 1996. He has been an officer since 1978.
William I. Miller (41) is Chairman of the Board, since 1990, and
has been a Director of the Registrant since 1985.
Ellen Z. Mufson (49) is Vice President - Legal of the Registrant,
since September, 1997. She was Vice President - Legal Counsel of
Irwin Union Bank and Trust Company from July, 1996 through
August, 1997; Corporate Counsel of Irwin Financial Corporation
from January, 1995 through June, 1996; Deputy Director/General
Counsel of the Indiana Development Finance Authority from March,
1992 through November, 1994.
John A. Nash (60) is Chairman of the Executive Committee, since
1990, and President, since 1985, of the Registrant. He has been
an officer and Director of the Registrant since 1972.
Michael F. Ryan (52) is Vice President - Community Development of
the Registrant since January 2, 1996. He was President of Irwin
Union Bank from 1981 - 1995. He has been an officer since 1976.
Matthew F. Souza (41) is Vice President and Secretary of the
Registrant. He has been an officer since 1985.
Marie C. Strack (35) is Vice President and Controller of the
Registrant since May of 1992.
Thomas D. Washburn (51) is Senior Vice President and Chief
Financial Officer, since 1980, of the Registrant. He has been an
officer since 1976.
Item 2. Properties
The location and general character of the materially important
physical properties of the Registrant and its subsidiaries are as
follows: The main office of Irwin Mortgage, where administrative
and servicing activities are centered, is located at 9265
Counselor's Row, Indianapolis, Indiana and a servicing facility
is located at 11800 Exit Five Parkway, Indianapolis, Indiana.
Irwin Mortgage also has loan production and satellite offices
located in Flagstaff, Phoenix (2), Mesa, Scottsdale, and Tucson,
Arizona; Antioch, Bakersfield, Concord, Covina, Fresno, Laguna
Hills, Morgan Hill, Richmond, Sacramento, Salinas, San Diego,
Temecula, Ventura, Visalia, Walnut Creek, Woodland, Yuba City,
and Yreka, California; Castle Rock, Colorado Springs, Denver,
Englewood, Woodland Park, and Pueblo, Colorado; Farmington,
Connecticut; Newark, Delaware; Clearwater and Orlando/Longwood,
Florida; Atlanta, Columbus, and Macon, Georgia; Aiea, Honolulu,
Kailua, and Maui, Hawaii; Chicago and Decatur, Illinois;
Indianapolis (5), Anderson, Ft. Wayne, Kokomo, Lafayette, South
Bend, and Warsaw, Indiana; Lexington and Louisville, Kentucky;
Baton Rouge and New Orleans, Louisiana; Columbia, Rockville, and
Towson, Maryland; Braintree, Massachusetts; Arden Hills,
Burnsville, and Minneapolis, Minnesota; St. Louis, Missouri;
Marlton, New Jersey; Cary, Charlotte, Greensboro, Raleigh,
Wilmington, and Burlington, North Carolina; Dayton and
Independence/Cleveland, Ohio; Tulsa, Oklahoma; Beaverton and Lake
Oswego, Oregon; Wyomissing, formerly West Chester, Pennsylvania;
Columbia, South Carolina; Austin, Corpus Christi, Dallas, El
Paso, and Houston, Texas; Salt Lake City, Utah; Fredericksburg,
Glen Allen, Richmond, Springfield, and Suffolk, Virginia;
Bellevue, Battleground, Everett, and Mount Lake Terrace,
Washington; and Madison, Wisconsin. All offices occupied by
Irwin Mortgage are leased.
The main office of Irwin Union Bank is located in four connected
buildings all at 500 and 520 Washington Street, Columbus,
Indiana. These buildings and one branch building are owned in
fee by Irwin Union Realty Corporation, a wholly-owned subsidiary
of Irwin Union Bank, and are leased by Irwin Union Bank. Irwin
Union Bank owns in fee three of its other fifteen relatively
small branch banking premises. The other branch offices are
leased. None of the properties owned by Irwin Union Bank are
subject to any major encumbrances.
The main office of Irwin Equipment, where administrative and
lease servicing activities are centered, is located at 707 Skokie
Boulevard, Northbrook, Illinois. This office location is leased.
The main office of Irwin Home Equity is located at 12677 Alcosta
Blvd., Suite 500, San Ramon, California. This office location is
leased.
The main offices of the Registrant, White River Capital
Corporation and Irwin Union Credit Insurance Corporation are
located at 500 Washington Street, Columbus, Indiana in space
leased from Irwin Union Bank.
Item 3. Legal Proceedings
As a part of the ordinary course of business, the Registrant and
its subsidiary companies are parties to litigation involving
claims to the ownership of funds in particular accounts, the
collection of delinquent accounts, challenges to security
interests in collateral, and foreclosure interests, that is
incidental to their regular business activities. In addition to
such claims, the Registrant was involved, as of December 31,
1997, in the following actions:
Basmoen, et al. v. Inland Mortgage Corporation. As of December
31, 1997, Irwin Mortgage was a defendant in a class action
lawsuit initiated in the state of Minnesota in October, 1995.
The case is currently pending before a federal Multidistrict
Litigation Panel in Chicago, Illinois. Plaintiffs allege that
they represent a nationwide class of persons who have or had
mortgage escrow accounts allegedly improperly managed by Irwin
Mortgage. This case is among a series of class action cases
commenced against a number of mortgage servicers in several
states challenging the practices used in connection with the
administration of escrow accounts for single family residential
mortgages. In January, 1997, the court denied a motion by the
plaintiff for class certification; however, in September, 1997,
the court granted a motion by the plaintiff to add a class
representative and denied a motion by Irwin Mortgage for summary
judgment. In December, 1997, Irwin Mortgage filed a supplemental
memorandum in opposition to the plaintiffs' motion for class
certification to which the plaintiffs replied. The court has not
yet ruled on class certification. At this stage of the
litigation, it is impossible to predict the likelihood of an
unfavorable outcome or to establish the possible extent or amount
of liability or potential loss, if any, to which Irwin Mortgage
might be exposed in this or similar escrow individual or class
action cases brought in the future.
Howell, et al. v. Inland Mortgage Corporation. As of December
31, 1997, Irwin Mortgage was a defendant to a class action
lawsuit initiated in the state of Indiana in January, 1995. The
case is currently pending before the Marion County Superior
Court. Plaintiffs allege that lenders do not have the right to
require borrowers to pay premiums for private mortgage insurance.
A decision has not yet been rendered with regard to class
certification. Similar suits have been filed in Indianapolis and
other jurisdictions against mortgage lenders. Irwin Mortgage
filed a motion for summary judgment in this case, which was
denied. Irwin Mortgage is aware that the Indiana court has ruled
against two other lenders on their respective dismissal and
summary judgment motions. One of these lenders has been
permitted to appeal the decision against it to the Indiana Court
of Appeals. Because the issues in the case before the Indiana
Court of Appeals are very much like those in the Irwin Mortgage
case, a decision by the Court of Appeals will have a significant
effect on the Irwin Mortgage case. At present, however, it is
impossible to predict the likelihood of an unfavorable outcome or
to establish the possible extent or amount of liability loss
exposure, if any, to which Irwin Mortgage might be exposed.
Culpepper, et al. v. Inland Mortgage Corporation. As of December
31, 1997, Irwin Mortgage was a defendant to a class action
lawsuit initiated in the state of Alabama in April, 1996. This
action is one of a breed of "RESPA Section 8" class actions that
have been filed against several mortgage lenders challenging the
legality of the payment of broker fees by mortgage lenders to
mortgage brokers. On January 9, 1998, the Court of Appeals for
the Eleventh Circuit reversed the district court's grant of
summary judgment in favor of Irwin Mortgage and vacated the
district court's dismissal of class claims and denial of class
certification. On January 30, 1998, Irwin Mortgage petitioned
the court of appeals for rehearing. On February 4, 1998, the
court of appeals issued an order giving plaintiffs a deadline to
reply to the rehearing petition. The litigation is still at a
stage where it is impossible to predict the likelihood of an
unfavorable outcome or to establish the possible extent or amount
of liability or potential loss exposure, if any, to which Irwin
Mortgage might be exposed.
Except as described above, there is no material pending
litigation in which the Registrant or any of its subsidiaries is
involved or of which any of their property is the subject.
Furthermore, there is no pending legal proceeding that is adverse
to the Registrant in which any director, officer or affiliate of
the Registrant, or any associate of any such director or officer,
is a party, or has a material interest.
The following litigation, previously reported, was no longer
pending as of December 31, 1997:
Providian Bankcorp, Inc. v. Irwin Financial Corporation, et al.
The parties agreed to dismiss the litigation in April, 1997. The
suit, which alleged the misappropriation of trade secrets, was
initiated in the State of California in May, 1995.
Irwin Union Bank and Trust Company v. United States Trust Company
of New York, et al. The parties agreed to dismiss the litigation
in May, 1997. The suit, which arose from a wire transfer, was
initiated in the United States District Court for the Southern
District of New York in August, 1996.
Item 4. Submission of Matters to a Vote of Security Holders
During the fourth quarter of 1997, no matters were submitted to a
vote of security holders of the Registrant, through the
solicitation of proxies or otherwise.
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters
The Common Stock of the Registrant is quoted on the Nasdaq
National Marekt (NASDAQ-NMS - trading symbol, IRWN). The
following table sets forth certain information regarding trading
in, and cash dividends paid with respect to, the shares of the
Registrant's Common Stock in each quarter of the two most recent
calendar years. All data have been adjusted for stock splits.
The approximate number of shareholders of record on March 12,
1998 was 1,590.
Stock Prices and Dividends:
High Low Quarter Cash Total
$ $ End Dividend Dividends
$ $ For Year
1996 (split
adjusted)
First Quarter 22 3/4 19 3/4 22 1/8 0.060
Second Quarter 22 1/4 19 5/8 19 5/8 0.060
Third Quarter 21 5/8 17 7/8 21 1/4 0.060
Fourth Quarter 24 3/4 21 1/4 24 3/4 0.060 0.24
1997
First Quarter 30 1/2 24 1/4 27 1/4 0.070
Second Quarter 29 1/2 24 29 1/2 0.070
Third Quarter 37 1/4 28 3/4 37 1/4 0.070
Fourth Quarter 43 36 1/2 41 7/8 0.070 0.28
The Registrant expects to continue its policy of paying regular
cash dividends, although there is no assurance as to future
dividends because they are dependent on future earnings, capital
requirements, and financial condition. On February 19, 1997, the
Registrant's Board of Directors approved an increase in the
Registrant's quarterly dividend to $.07 per share which dividend
rate was unchanged as of December 31, 1997. Dividends paid by
Irwin Union Bank to the Registrant are restricted by banking law.
See Note 14 of Notes to the Consolidated Financial Statements in
the attached Annual Report to Shareholders.
No sales of unregistered equity securities were made by the
Registrant during the fourth quarter of 1997.
Item 6. Selected Financial Data
The information contained in the Annual Report to Shareholders
for the year ended December 31, 1997, under the caption "Five-
Year Selected Financial Data", is incorporated herein by
reference in response to this item.
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
The information set forth under the caption "Management's
Discussion and Analysis of Results of Operations and Financial
Condition" in the Annual Report to Shareholders for the year
ended December 31, 1997, is incorporated herein by reference in
response to this item.
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk.
Interest Rate Risk:
Interest rate risk 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 important
that potential changes are managed prudently.
The Asset-Liability Management Committee of the commercial bank
monitors the repricing structure of both assets and liabilities
over various time horizons. Exposure to changes in interest
rates is evaluated by modeling the repricing characteristics of
the commercial bank's portfolio under multiple rate scenarios.
Formal policies approved by the commercial bank's Board of
Directors ensure that exposure to changes in net interest
revenues is maintained within acceptable levels.
The mortgage banking business assumes a form of interest rate
risk by entering into commitments to extend loans to borrowers at
a fixed price for a limited period of time. Loans are also held
temporarily until a pool is formed. The home equity and
equipment leasing businesses are exposed to potential interest
rate risk that is similar to the lending operations of the
commercial bank. Once again, formal policies ensure that this
risk is controlled.
Rate risk at the commercial bank can typically be managed by
controlling the maturity of loans, securities, and deposits. The
commercial bank may also use financial futures or interest rate
swaps from time to time, although there were none in place at
December 31, 1997. The mortgage bank buys commitments to deliver
loans at a fixed price to manage risk. The policy at both the
home equity lending business and the equipment leasing business
is to match-fund all assets. In some cases, the Corporation
uses internal hedges between companies to allow for the risk
characteristics of one line of business to offset those of
another line.
The following table shows in summary form the Corporation's
interest rate sensitivity based on expected interest rate
repricing intervals for the balance sheet as of December 31, 1997
(a "gap" analysis). For example, a 30-year adjustable rate
residential mortgage held in the portfolio of Irwin Union Bank is
included in the "4-12 month" category since that is the time
frame over which the asset will reprice. Some items, such as
certain deposit accounts, are non-interest bearing, but will vary
in balance due to interest rate changes. Since the Corporation
relies on such accounts in its operations and would need to
replace them with "at market" liabilities should the non-interest
bearing ones be unavailable, they are included in the gap table
and in simulations as "non-market" items.
As the table shows, the consolidated one-year gap at December 31,
1997 was a positive $143.0 million. This compares to a positive
gap of $133.2 million at December 31, 1996.
Since the gap was positive at December 31, 1997, it means that
the Corporation's net interest income 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. Through the use of simulations using
regression modeling and option-adjusted valuation techniques for
modeling expected customer behavior, the Corporation attempts to
analyze and mitigate the interest rate risks associated with the
negatively correlated activities of 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 assets. 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.
<TABLE>
<CAPTION>
Interest Sensitivity:
(Thousands)
Within 3 4 to 12 1 to 5 Over 5 Non - Fair
Months Months Years Years Market Total Value
<S> <C> <C> <C> <C> <C> <C> <C>
Assets - $3,511 $8,412 $10,211 $0 $0 $22,134 $22,134
Trading:
Taxable
investment
securities
Assets -
Other than
Trading:
Interest- 10,920 4,027 3,293 0 0 18,240 18,240
bearing
deposits with
banks
Taxable 16,682 9,477 18,021 6,213 0 50,393 51,041
investment
securities
Tax-exempt 100 500 962 3,252 0 4,814 4,853
investment
securities
Mortgages 528,739 0 0 0 0 528,739 530,207
held for sale
Loans, 269,988 99,787 146,186 95,132 0 611,093 613,513
net of unearned
income
Total 829,940 122,203 178,673 104,597 01,235,413$1,239,988
interest-
earning
assets
Liabilities -
Other than
Trading
Non-interest 0 0 0 0 287,555 287,555 $287,555
bearing
deposits
Money 32,625 0 47,148 10,169 0 89,942 89,942
market checking
Money 1,758 0 5,487 0 0 7,245 7,245
market savings
Regular 25,565 1,939 10,343 7,992 0 45,839 45,839
savings
Time 166,381 64,683 57,186 764 0 289,014 289,088
deposits
Short- 512,276 0 0 0 0 512,276 512,276
term borrowings
Long- 1,399 2,499 3,197 0 0 7,095 7,138
term debt
Total 740,004 69,121 123,361 18,925 287,555 1,238,966 $1,239,083
interest-
bearing
liabilities
Trust 0 0 0 50,000 0 50,000 $55,038
preferred
securities
Interes 89,936 53,082 55,312 35,672 (287,555) (53,553)
sensitivity
gap
Cumu-
lative $89,936 $143,018 $198,330 $234,002 $(53,553)$(53,553)
interest
sensitivity
gap
</TABLE>
<TABLE>
<CAPTION>
(Thousands) Weighted
Average
Interest
Rate
<S> <C>
Assets - Trading:
Taxable invesnment 8.50%
securities
Assets - Other than
Trading:
Interest-bearing 5.72
deposits with banks
Taxable investment 6.31
securities
Tax-exempt 8.88
Mortgages held for 7.36
sale
Loans, net of 9.04
unearned income
Total interest- 8.15%
earning assets
Liabilities - Other
than Trading
Non-Interest bearing n/a
deposits
Money market 2.07%
checking
Money market 2.39
savings
Regular savings 3.15
Time deposits 5.65
Short-term 4.84
borrowings
Long-term debt 7.67
Total interest- 4.74
bearing liabilities
Trust preferred 9.25%
securities
Interest sensitivity
gap
Cumulitive interest
sensitivity gap
</TABLE>
Note: This analysis is based on certain assumptions, including
relative levels of market interest rates, and should not be
relied upon as indicative of actual results.
Item 8. Financial Statements and Supplementary Data
Consolidated financial statements of the Registrant and its
subsidiaries are contained in the Annual Report to Shareholders
for the year ending December 31, 1997, under the caption "1997
Financial Statements", and are incorporated herein by reference
in response to this item.
Item 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure
In connection with the audits of the Registrant for the two most
recent fiscal years ended December 31, 1997, the Registrant has
not changed its independent certified public accountants nor have
there been any disagreements (as defined in Instruction 4 to Item
304 of Regulation S-K) with such accountants on any matter of
accounting principles or practices, financial statement
disclosure, or auditing scope or procedure.
PART III
Item 10. Directors and Executive Officers of the Registrant
The information contained in the proxy statement of the
Registrant for the 1998 Annual Meeting of Shareholders under the
caption "Election of Directors", on pages 4 through 6, inclusive,
is incorporated herein by reference in response to this item.
Item 11. Executive Compensation
The information contained in the proxy statement of the
Registrant for the 1998 Annual Meeting of Shareholders under the
captions "Election of Directors - Outside Director Compensation
", "Executive Compensation and Other Information" and "Board
Compensation Committee Report on Executive Compensation" on pages
8 through 18, inclusive, is incorporated herein by reference in
response to this item.
Item 12. Security Ownership of Certain Beneficial Owners and
Management
The information contained in the proxy statement of the
Registrant for the 1998 Annual Meeting of Shareholders, under the
captions "Voting Securities and Principal Holders" and "Security
Ownership of Management", on pages 2 and 3, inclusive, is
incorporated herein by reference in response to this item.
Item 13. Certain Relationships and Related Transactions
The information contained in the proxy statement of the
Registrant for the 1998 Annual Meeting of Shareholders under the
caption "Interest of Management in Certain Transactions" on pages
19 and 20, is incorporated herein by reference in response to
this item.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K
Page #
a. Documents filed as a part of this Report: Form Annual
10-K Report
1. Financial Statements:
A. Irwin Financial Corporation and
Subsidiaries:
Report of Coopers & Lybrand L.L.P.,
Independent Accountants 21
Consolidated Statement of Income
for the years ended December 31, 1997,
1996, and 1995 81
Consolidated Balance Sheet as of
December 31, 1997, and 1996 82
Consolidated Statement of Changes in
Shareholders' Equity for the years
ended December 31, 1997, 1996 and
1995 83
Consolidated Statement of Cash Flows
for the years ended December 31, 1997,
1996, and 1995 84
Notes to Consolidated Financial Statements 85
The above listed report, financial statements, and the notes
thereto, set forth on pages 81 through 105 of the Registrant's
1997 Annual Report to Shareholders are incorporated herein by
reference.
2. Financial Statement Schedules
None
Schedules are omitted because they are not required or the
information is included in the Notes to Consolidated Financial
Statements.
3. Exhibits
A. Exhibits to Form 10-K
Sequential
Numbering
Number Assigned System Page
in Regulation Number of
S-K Item 601 Description of Exhibit Exhibit
(2) No exhibit.
(3) (i) 3(a) Amended Articles of
Incorporation, dated
December 29, 1972.
(Incorporated by
reference to Exhibit 3(a)
to Form 10-K Report for
year ended December 31,
1985, File No. 0-6835.)
3(b) Articles of Amendment,
dated March 30, 1973.
(Incorporated by
reference to Exhibit 3(b)
to Form 10-K Report for
year ended December 31,
1985, File No. 0-6835.)
3(c) Articles of Amendment,
dated September 4, 1990.
(Incorporated by
reference to Exhibit 3(d)
to Form 10-K Report for
year ended December 31,
1990, File No. 0-6835.)
3(d) Articles of Amendment,
dated April 30, 1992.
(Incorporated by
reference to Exhibit 3(d)
to Form 10-K Report for
year ended December 31,
1992, File No. 0-6835.)
3(e) Articles of Amendment,
dated April 26, 1994.
(Incorporated by
reference to Exhibit 3(e)
to Form 10-K Report for
year ended December 31,
1994, File No. 0-6835.)
3(f) Articles of Amendment,
dated April 30, 1996.
(Incorporated by
reference to Exhibit 3(f)
to Form 10-K Report for
year ended December 31,
1996, File No. 0-6835.)
(ii) 3(a) Code of By-Laws as 22
amended to date.
(4) 4(a) Specimen stock
certificate.
(Incorporated by
reference to Exhibit 4(a)
to Form 10-K Report for
year ended December 31,
1994, File No. 0-6835.)
4(b) Certain instruments
defining the rights of
the holders of long-term
debt of the Registrant
and certain of its
subsidiaries, none of
which authorize a total
amount of indebtedness in
excess of 10% of the
total assets of the
Registrant and its
subsidiaries on a
consolidated basis, have
not been filed as
Exhibits. The Registrant
hereby agrees to furnish
a copy of any of these
agreements to the
Commission upon request.
(9) No exhibit.
(10) 10(a) Amended 1986 Stock Option
Plan. (Incorporated by
reference to Exhibit
10(b) to Form 10-K Report
for year ended December
31, 1991, File No. 0-
6835.)
10(b) Amended and Restated
Management Bonus Plan.
(Incorporated by
reference to Exhibit
19(a) to Form 10-K Report
for year ended December
31, 1986, File No. 0-
6835.)
10(c) Long-Term Management
Performance Plan.
(Incorporated by
reference to Exhibit
10(d) to Form 10-K Report
for year ended December
31, 1986, File No. 0-
6835.)
10(d) Long-Term Incentive Plan
- Summary of Terms.
(Incorporated by
reference to Exhibit
10(e) to Form 10-K Report
for year ended December
31, 1986, File No. 0-
6835.)
10(e) Irwin Financial
Corporation Employees'
Stock Purchase Plan.
(Incorporated by
reference to Exhibit
10(f) to Form 10-K Report
for year ended December
31, 1991, File No. 0-
6835.)
10(f) Employee Stock Purchase
Plan II. (Incorporated
by reference to Exhibit
10(f) to Form 10-K Report
for year ended December
31, 1994, File No. 0-
6835.)
10(g) Amended Irwin Financial
Corporation Outside
Directors Restricted
Stock Compensation Plan.
(Incorporated by
reference to Exhibit
10(g) to Form 10-K Report
for year ended December
31, 1991, File No. 0-
6835.)
10(h) Irwin Financial
Corporation 1992 Stock
Option Plan.
(Incorporated by
reference to Exhibit
10(h) to Form 10-K report
for year ended December
31, 1992, File No. 0-
6835.)
10(i) Amended Irwin Financial
Corporation Outside
Director Restricted Stock
Compensation Plan.
(Incorporated by
reference to Exhibit
10(i) to Form 10-K report
for year ended December
31, 1995, File No. 0-
6835.)
10(j) Inland Mortgage
Corporation Long Term
Incentive Plan.
(Incorporated by
reference to Exhibit
(10)(j) to Form 10-K
report for year ended
December 31, 1996, File
No. 0-6835.)
10(k) Irwin Financial
Corporation 1997 Stock
Option Plan.
(Incorporated by
reference to Exhibit (10)
to Form 10-Q report for
quarter ended June 30,
1997, File No. 0-6835.)
10(l) Amendment to Irwin 37
Financial Corporation
1997 Stock Option Plan.
(Incorporated by
reference to Exhibit (10)
to Form 10-Q report for
quarter ended June 30,
1997, File No. 0-6835.)
(11) 11(a) Computation of Earnings 39
Per Share.
(12) No exhibit.
(13) 13(a) Registrant's 1997 Annual 40
Report to Shareholders.
This exhibit contains
such portions thereof
that have been
incorporated by reference
into this Report.
(16) No exhibit.
(18) No exhibit.
(21) 21(a) Subsidiaries of the 122
Registrant.
(22) No exhibit.
(23) 23(a) Consent of Independent 123
Accountants.
(24) No exhibit.
(27) Financial Data Schedule. 124
(99) 99(a) Annual Report on Form 11-
K for the Irwin Financial
Corporation Employees'
Savings Plan for the year
ending December 31,
1997.*
99(b) Annual Report on Form 11-
K for the Inland Mortgage
Corporation Retirement
and Profit Sharing Plan
for the year ending
December 31, 1997.*
* To be filed by amendment pursuant to Rule 15d-21.
b. Reports on Form 8-K
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
Date: March 26, 1998 By: /s/ William I. Miller
William I. Miller,
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of
1934, this report on Form 10-K has been signed below by the
following persons on behalf of the Registrant and in the
capacities on the dates indicated.
Capacity with
Signature Registrant Date
/s/ Sally A. Dean Director March 26, 1998
Sally A. Dean
/s/ David W. Goodrich Director March 26, 1998
David W. Goodrich
/s/ John T. Hackett Director March 26, 1998
John T. Hackett
/s/ William H. Kling Director March 26, 1998
William H. Kling
/s/ Brenda J. Lauderback Director March 26, 1998
Brenda J. Lauderback
/s/ John C. McGinty, Jr. Director March 26, 1998
John C. McGinty, Jr.
/s/ Irwin Miller Director March 26, 1998
Irwin Miller
/s/ William I. Miller Director, March 26, 1998
William I. Miller Chairman of the
Board (Principal
Executive
Officer)
/s/ John A. Nash Director, March 26, 1998
John A. Nash Chairman of the
Executive
Committee
/s/ Lance R. Odden Director March 26, 1998
Lance R. Odden
/s/ Theodore M. Solso Director March 26, 1998
Theodore M. Solso
/s/ Thomas D. Washburn Senior Vice March 26, 1998
Thomas D. Washburn President
(Principal
Financial
Officer)
/s/ Marie C. Strack Vice President March 26, 1998
Marie C. Strack and Controller
(Principal
Accounting
Officer)
CODE OF BY-LAWS
IRWIN FINANCIAL CORPORATION
ARTICLE 1
Definitions
8.21.90
1.01. Corporation. As used in this Code of By-Laws, the
term "Corporation" means IRWIN FINANCIAL CORPORATION.
1.02. Act. As used in this Code of By-Laws, the term "Act"
means The Indiana General Corporation Act.
1.03. Articles of Incorporation. As used in this Code of
By-Laws, the term "Articles of Incorporation" means the Articles
of Incorporation of the Corporation, as amended from time to
time.
1.04. By-Laws. As used in this Code of By-Laws, the term
"By-Laws" means the Code of By-Laws of the Corporation, as
amended from time to time.
ARTICLE 2
Identification
8.20.90
2.01. Name. The name of the Corporation is IRWIN FINANCIAL
CORPORATION.
2.02. Principal Office and Resident Agent -- Power to
Change. The post-office address of the principal office of the
Corporation is 500 Washington Street, Columbus, Indiana 47201,
and the post -office address of its Resident Agent in charge of
such office is John A. Nash, 500 Washington Street, Columbus,
Indiana 47201. The location of its principal office, or the
designation of its Resident Agent, or both, may be changed at any
time or from time to time, when authorized by the Board of
Directors, by filling with the Secretary of State of the State of
Indiana, on or before the day any such change is to take effect,
or within five (5) days after the death of the Resident Agent or
other unforeseen termination of his agency, a certificate signed
by the President or a Vice President, and the Secretary or an
Assistant Secretary, of the Corporation, and Verified under oath
by one of such officers signing the same, stating the change to
be made and reciting that such change is made pursuant to
authorization by the Board of Directors.
2.03. Seal. The seal of the Corporation shall be circular
in form and mounted upon a metal die, suitable for impressing the
same upon paper. About the upper periphery of the seal shall
appear the name of the Corporation, and about the lower periphery
thereof the word "Indiana". In the center of the seal shall
appear the words "Seal" or " Corporate Seal".
2.04. Fiscal Year. The fiscal year of the Corporation
shall be the calendar year.
ARTICLE 3
Shares
3.01. Consideration for Shares. The Board of Directors
shall cause the Corporation to issue the Shares of the
Corporation for such consideration as may be fixed by such Board
pursuant to the provisions of the Articles of Incorporation.
3.02. Subscription for Shares. Subscriptions for Shares of
Corporation shall be paid to the Treasurer at such time or times,
in such installments or calls, and upon such terms, as shall be
determined, from time to time, by the board of Directors. Any
call made by the Board of Directors for payment on subscriptions
shall be uniform as to all shares of the same class or to all
Shares of the same series, as the case may be.
3.03. Payment for Shares. Subject to the provisions of the
Articles of Incorporation, the consideration for the issuance of
Shares of the Corporation may be paid, in whole or in part, in
money, in other property, tangible or intangible, or in labor
actually performed for, or services actually rendered to, the
Corporation; provided, however, that the part of the surplus of
the Corporation which is transferred to stated capital upon the
issuance of Shares as a Share dividend shall be deemed to be the
consideration for the issuance of such Shares. When payment of
the consideration for which a Share was authorized to be issued
shall have been received by the Corporation, or when surplus
shall have been transferred to stated capital upon the issuance
of a Share dividend, such Share shall be declared and taken to be
fully paid and not liable to any further call or assessment, and
the holder thereof shall not be liable for any further payments
thereon. In the absence of actual fraud in the transaction, the
judgment of the Board of Directors as to the value of such
property, labor, or services received as consideration, or the
value placed by the Board of Directors upon the corporate assets
in the event of a Share dividend, shall be conclusive.
Promissory notes, uncertified checks, or future services shall
not be accepted in payment or part payment of any of the capital
stock of the Corporation.
3.04. Certificates for Shares. Each Shareholder of the
Corporation shall be entitled to a certificate, signed by the
President or a vice-president, and the Secretary or an Assistant
Secretary of the Corporation stating the name of the registered
holder, the number of Shares represented thereby and the kind and
class thereof, the par value of each Share have been fully paid
and are nonassessable. If such certificate is countersigned by
the written signature of a registrar other than the Corporation
or its employee, the signatures of the transfer agent and the
officers of the Corporation may be facsimiles. In case any
officer, transfer agent, or registrar who has signed or whose
facsimile signature has been placed upon a certificate shall have
ceased to be such officer, transfer agent, or registrar before
such certificate is issued, it may be issued by the Corporation
with the same effect as if he were such officer, transfer agent
or registrar at the date of its issue. Such certificates shall
be in such form as the Board of Directors may, from time to time,
by resolution approve.
3.05. Transfer of Shares. The Shares of the Corporation
shall be transferable only on the books of the Corporation upon
surrender of the certificate or certificates representing the
same, provided:
3.051. Endorsement. The certificate is properly
endorsed by the registered holder or his duly authorized
attorney;
3.052. Witnessing. The endorsement or endorsements
are witnessed by one witness unless this requirement is
waived in writing upon the form of endorsement by the
President, a Vice-President, or the Secretary of the
Corporation;
3.053. Adverse Claims. The Corporation has no notice
of any adverse claims or has discharged any duty to inquire
into any such claims; and
3.054. Collection and Taxes. Any applicable law
related to the collection of taxes has been complied with.
3.06. Lost, Stolen, or Destroyed Certificates. The
Corporation may issue a new certificate for Shares of the
Corporation in the place of any certificate theretofore issued
where the holder of record of the certificate:
3.061. Claim. Makes proof in affidavit form that it
has been lost, destroyed, or wrongfully taken;
3.062. Timely Request. Timely Requests the issue of a
new certificate before the Corporation has notice that the
certificate has been acquired by a purchaser for value in
good faith and without notice of any adverse claim;
3.063. Bond. Gives a bond in such form, and with such
surety or sureties, with fixed or open penalty, as the
Corporation may direct, to indemnify the Corporation against
any claim that may be made on account of the alleged loss,
destruction, or theft of the certificates; and
3.064. Other Requirements. Satisfies any other
reasonable requirements imposed by the Corporation for the
transfer or for a new certificate.
When a certificate has been lost, apparently destroyed, or
wrongfully taken and the holder of record fails to notify the
Corporation within a reasonable time after he has notice of it,
and the Corporation registers a transfer of Shares represented
by the Certificate before receiving such notification, the
holder of record is precluded from making any claim against the
Corporation for the transfer or for a new certificate.
3.07. Closing of Books or Fixing of Record Dates. For the
purpose of determining Shareholders entitled to receive payment
of any dividend or in order to make a determination of
Shareholders for any other proper purpose, except as otherwise
provided in section 4.069 of these By-Laws, the Board of
Directors may provide that the share transfer books shall be
closed for a stated period, but not to exceed, in any case, fifty
(50) days, or may fix in advance a record date for such purpose,
such date in any case not to be more than fifty (50) days prior
to the date in which the action requiring such determination of
Shareholders, is to be taken. If the share transfer books are
not closed and no record date is fixed for the determination of
Shareholders entitled to receive payment of a dividend, the end
of the day on which the resolution of the Board of Directors
declaring such dividend is adopted shall be the record date for
such determination.
ARTICLE 4
Meetings of Shareholders
4.01. Place of Meetings. All meetings of Shareholders of
the Corporation shall be held at such place, within or without
the State of Indiana, as may be specified in the respective
notices or waivers of notice thereof, or proxies to represent
Shareholders thereat.
12.20.94
4.02. Annual Meeting. The annual meeting of the
Shareholders for the election of Directors and for the
transaction of such other business as may properly come before
the meeting, shall be on or before the last day of May of each
year, the date to be set by the Board of Directors of the
Corporation. Failure to hold the annual meeting at the
designated time shall not work any forfeiture or a dissolution of
the Corporation.
12.20.94
4.03. Special Meeting. Special meetings of the
Shareholders may be called by the President, by the Board of
Directors, or by Shareholders holding of record not less than one-
fourth (1/4/) of all of the Shares outstanding and entitled by
the Articles of Incorporation to vote on the business proposed to
be transacted thereat.
4.04. Notice of Meetings. A written or printed notice,
stating the place, day and hour of the meeting, and in case of a
special meeting, or when required by any other provision of the
Act, or the Articles of Incorporation, or By-Laws, the purpose or
purposes for which the meeting is called, shall be delivered or
mailed by the Secretary, or by the officers or persons calling
the meeting, to each Shareholder of record entitled by the
Articles of Incorporation and by the Act to vote atsuch meeting,
at such address as appears upon the records of the Corporation,
at least ten (10) days before the date of the meeting. Notice of
any such meeting may be waived in writing by any Shareholder, if
the waiver sets forth in reasonable detail the purpose or
purposes for which the meeting is called, and the time and place
thereof. Attendance at any meeting in person, or by proxy when
the instrument of proxy sets forth in reasonable detail the
purpose for which the meeting is called, shall constitute a
waiver of notice of such meeting. Each Shareholder, who has in
the manner above provided waived notice of a Shareholders'
meeting, or who personally attends a Shareholders' meeting, or is
represented thereat by a proxy authorized to appear by an
instrument of proxy complying with the requirements above set
forth, shall be conclusively presumed to have been given due
notice of such meeting.
4.05. Addresses of Shareholders. The address of any
Shareholder appearing upon the records of the Corporation shall
be deemed to be (i) the latest address of such Shareholder
appearing on the records maintained by the transfer agent or
registrar, as the case may be, for the class of Shares held by
such Shareholder, if the Corporation has a transfer agent or
registrar for such class of Shares and the Board of Directors has
provided in the resolutions appointing the transfer agent or
registrar that notices of change of address shall be given to one
of such agents by Shareholders of such class; or (ii) the latest
address of such Shareholder appearing on the records maintained
by the Secretary for the class of Shares held by such
Shareholder, if the Corporation has no transfer agent or
registrar for such class of Shares or if it has a transfer agent
or registrar for such class of Shares but the resolutions
appointing the transfer agent or registrar do not provide that
notice of changed of address shall be given to one of such agents
by Shareholders of such class of shares.
4.06. Voting at Meetings.
4.061. Common Shares. Except as otherwise provided by
law or by the provisions of the Articles of the
Incorporation, every holder of Common Shares of the
Corporation shall have the right, at every Shareholders'
meeting, to one vote for each Common Share standing in his
name on the books of the Corporation. Cumulative voting
shall not be permitted.
4.062. Prohibition Against Voting Certain Shares. No
Share shall be voted at any meeting upon which any
installment is due and unpaid or which belongs to the
Corporation.
4.063. Voting of Shares Owned by Other Corporations.
Shares of the Corporation standing in the name of another
corporation may be voted by such officer, agent or proxy as
the board of directors of such other corporation may
appoint, or as the by-laws of such other corporations may
prescribe.
4.064. Voting of Shares owned by Fiduciaries. Shares
held by fiduciaries may be voted by the fiduciaries in such
manner as the instrument or order appointing such
fiduciaries may direct. In the absence of such direction or
the inability of the fiduciaries to act in accordance
therewith, the following provisions shall apply:
4.0641. Joint Fiduciaries. Where Shares are held
jointly by three (3) or more fiduciaries, such Shares
shall be voted in accordance with the majority.
4.0642. Equally Divided Fiduciaries. Where the
fiduciaries, or majority of them, cannot agree, or
where they are equally divided, upon the question of
voting such Shares, any court of general equity
jurisdiction may, upon petition filed by any of such
fiduciaries, or by any party in interest, direct the
voting of such Shares as it may deem for the best
interests of the beneficiaries, and such Shares shall
be voted in accordance with such direction.
4.0643. Proxy of Fiduciary. The general proxy of
a fiduciary shall be given the same weight and effect
as the general proxy of an individual or corporation.
4.065. Voting of Pledged Shares. Shares that are
pledged may, unless otherwise provided in the agreement of
pledge, be voted by the Shareholder pledging the same until
the Shares shall have been transferred to the pledgee on the
books of the Corporation, and thereafter they may be voted
by the pledgee.
4.066. Proxies. A Shareholder may vote, either in
person or by proxy executed in writing by the Shareholder,
or a duly authorized attorney-in-fact. No proxy shall be
valid after eleven (11) months from the date of its
execution, unless a longer time is expressly provided
therein.
4.067. Quorum. At any meeting of the Shareholders, a
majority of the Common Shares outstanding and entitled to
vote, represented in person or by proxy, shall constitute a
quorum.
4.068. Voting Lists. The officer or agent having
charge of the share transfer books shall make, at least five
(5) days before each election of directors, a complete list
of the Shareholders entitled by the Articles of
Incorporation to vote at such election, arranged in
alphabetical order, with the address and number of Shares so
entitled to vote held by each, which list shall be on file
at the principal office of the Corporation and subject to
inspection by any Shareholder. Such list shall be produced
and kept open at the time and place of election and subject
to the inspection of any Shareholder during the holding of
such election. The original share register or transfer book
or duplicate thereof, kept in the State of Indiana, shall be
the only evidence as to who are the Shareholders entitled to
examine such list, or share register or transfer book, or to
vote at any meeting of the Shareholders.
4.069. Fixing of Record Date to Determine Shareholders
Entitled to Vote. For the purpose of determining
Shareholders entitled to vote at any meeting of Shareholders
or any adjournment thereof, the Board of Directors, may fix
in advance a date as the record date for any such
determination of Shareholders, such date in any case to be
not more than fifty (50) days prior to the date of such
meeting. In the absence of such a determination by the
Board of Directors, such date shall be ten (10) days prior
to the date of such meeting. Any person who acquires title
to a Share after the record date shall upon written request
to the Shareholder of record be entitled to receive from the
Shareholder of record a proxy, with power of substitution,
to vote that Share.
4.07. Taking Action by Consent. Any action which may be
taken at a meeting of the Shareholders, may be taken without a
meeting if, prior to such action, a consent in writing, setting
forth the action so taken, shall be signed by all of the
Shareholders entitled to vote with respect to the subject matter
thereof, and such written consent is filed with the minutes of
the proceedings of the Shareholders.
4.08. Order of Business. The order of business at annual
meetings, and so far as practicable, at all other meetings of
Shareholders shall be:
Proof of due notice of meeting;
Reading and disposal of any unapproved minutes;
Annual reports of officers and committees;
Election of directors;
New business;
Adjournment
ARTICLE 5
The Board of Directors
8.19.97
5.01. Election and Qualification. At the first annual
meeting of the Shareholders, and at each annual meeting
thereafter, directors shall be elected by the Shareholders
entitled by the Articles of Incorporation to elect directors, for
a term of one year; and they shall hold office until their
respective successors are chosen and qualified. The Board shall
consist of eleven (11) directors. Directors need not be
Shareholders of the Corporation. At least a majority of the
directors shall be citizens of the United States. The number of
directors may be increased or decreased from time to time by
amendment to the By-Laws, but no decrease shall have the effect
of shortening the term of any incumbent director.
5.02. Vacancies. Any vacancy occurring in the Board of
Directors caused by resignation, death or other incapacity, or
increase in the number of directors may be filled by a majority
vote of the remaining members of the Board of Directors, until
the next annual or special meeting of the Shareholders or, at the
discretion of the Board of Directors, such vacancy may be filled
by vote of the Shareholders at a special meeting called for the
purpose. Until any such vacancy is so filled, the existing
directors shall constitute the Board of Directors. Shareholders
shall be notified of any increase in the number of directors and
the name, address, principle occupation, and other pertinent
information about any director elected by the Board of Directors
to fill any vacancy.
5.03. Annual Meeting. The Board of Directors shall meet
each year after the annual meeting of Shareholders (either within
or without the State of Indiana), for the purpose of
organization, election of officers and consideration of any other
business that may properly be brought before the meeting. The
time of this meeting shall be no later than the first regular or
special meeting of the Board of Directors, at which a quorum
shall be present, held after the annual meeting of Shareholders.
No additional notice of any kind to either old or new members of
the Board of Directors shall be necessary.
5.04. Regular Meetings. Regular meetings of the Board of
Directors may be held with notice by letter, telegram, cable,
radiogram, telephone, or radiophone, or without any notice
whatever, and at such place and times, as may be fixed from time
to time by resolution of the Board of Directors.
5.05. Special Meetings. Special meetings of the Board of
Directors may be called at any time by the Chairman of the Board,
President or any Vice-President, and shall be called on the
written request of one-fourth (1/4) of the directors. Notice of
such a special meeting shall be sent by the Secretary or an
Assistant Secretary to each director at his residence or usual
place of business by letter, telegram, cable or radiogram,
delivered for transmission not later than the second day
immediately preceding the day for the meeting, or by word of
mouth, telephone, or radiophone received not later than during
the day immediately preceding the day for the meeting. In lieu
of such notice, a director may sign a written waiver of notice
either before the time of the meeting, at the time of the
meeting, or after the time of the meeting. Neither the business
to be transacted at, nor the purpose of, any meeting of the Board
of Directors need be specified in the notice or waiver of notice
of the meeting. Any meeting of the Board of Directors for which
notice is required shall be a legal meeting, without notice
thereof having been given, if all the directors, who have not
waived notice thereof in writing, shall be present in person.
5.06. Place of Meetings. The directors may hold their
meetings, have one or more offices, and keep the books of the
Corporation, except as may be provided by law, within or without
the State of Indiana, at any office or offices of the
Corporation, or at any other place, as they may form time to time
by resolution determine. If the resolution of the Board of
Directors calling a regular meeting or the written request
calling a special meeting expressly provides, a meeting of the
Board of Directors may be held by conference telephone call or
any other medium which allows each director to participate in
discussions and to hear the views of the other directors. If a
meeting is held, the directors connected to the conference
telephone call or other medium shall be counted as present for
the purpose of determining a quorum.
5.07. Quorum. One-third (1/3) of the actual number of
directors elected and qualified, from time to time, shall be
necessary to constitute a quorum for the transaction of any
business except the filling of vacancies, and the act of a
majority of the directors present at a meeting, at which a quorum
is present, shall be the act of the Board of Directors, unless
the act of a greater number is required by the Act, by the
Articles of Incorporation, or by the By-Laws. A director who is
present at a meeting of the Board of Directors at which action on
any corporate matter is taken, shall be conclusively presumed to
have assented to the action taken, unless (i) his dissent shall
be affirmatively stated by him at and before the adjournment of
such meeting (in which event the fact of such dissent shall be
entered by the secretary of the meeting in the minutes of the
meeting, or (ii) he shall forward such dissent by registered mail
to the Secretary of the Corporation immediately after the
adjournment of the meeting. The right of dissent provided for by
either clause (i) or clause (ii) of the immediately preceding
sentence shall not be available, in respect of any matter acted
upon at any meeting, to a director who voted at the meeting in
favor of such matter and did not change his vote prior to the
time that the result of the vote on such matter was announced by
the chairman of such meeting.
5.08. Action by Consent. Any action required or permitted
to be taken at any meeting of the Board of Directors or of any
committee thereof may be taken without a meeting, if prior to
such action a written consent to such action is signed by all
members of the Board of such committees as the case may be, and
such written consent is filed with the minutes of proceedings of
the Board or committee.
5.09. Removal. Any or all of the directors may be removed,
with or without cause, at a meeting of the Shareholders called
expressly for that purpose by a vote of the holders of a majority
of the Shares then entitled to vote at an election of directors.
5.10. Powers of Directors. The Board of Directors shall
exercise all the powers of the Corporation, subject to the
restrictions imposed by law, by the Articles of Incorporation, or
by these By-Laws.
5.11. Dividends. The Board of Directors shall have power,
subject to any restrictions contained in the Articles of
Incorporation, to declare and pay dividends upon the outstanding
Shares of the Corporation, out of the unreserved and unrestricted
capital and earned surplus of the Corporation. Dividends may be
paid in cash, in property, or in Shares of the Corporation, but
no dividend payable in cash or property shall be paid out of
surplus due to or arising from unrealized appreciation in value
or from revaluation of assets.
5.12. Compensation of Directors. The Board of Directors is
empowered and authorized to fix and determine the compensation of
directors as directors, and any additional compensation for such
additional services any such directors may perform for the
Corporation.
5.13. Resignation. A director may resign at any time by
filing his written resignation with the Chairman of the Board,
the President or the Secretary of the Corporation, or with the
Board of Directors, and such resignation shall become effective
upon such filing.
5.14. Reliance on Corporation Records. Each Director shall
be fully protected in relying in good faith upon the books of
account and records of the Corporation or upon statements
prepared by any of its officers or employees.
ARTICLE 6
Executive Committee
6.01. Designation of Executive Committee. The Board of
Directors may, by resolution adopted by a majority of the actual
number of directors elected and qualified, from time to time,
designate two (2) or more of its number to constitute an
executive committee which committee to the extent provided in
such resolution, shall have and exercise all of the authority of
the Board of Directors but the designation of such committee and
the delegation thereto of authority shall not operate to relieve
the Board of Directors, or any member thereof, of any
responsibility imposed upon it or him by law. No member of the
executive committee shall continue to be a member thereof after
he ceases to be a director of the Corporation. The Board of
Directors shall have the power at any time to increase or
diminish the number of members of the executive committee, to
fill vacancies thereon, to change any member thereof, and to
change the functions or terminate the existence thereof.
6.02. Powers of the Executive Committee. During the
intervals between meetings of the Board of Directors, and subject
to such limitations as may be required by law or by resolution of
the Board of Directors, the executive committee shall have and
may exercise all of the powers of the Board of Directors in the
management of the business and affairs of the Corporation,
including power to authorize the seal of the Corporation to
affixed to all papers which may require it . The executive
committee may also from time to time formulate and recommend to
the Board of Directors for approval general policies regarding
the management of the business and affairs of the Corporation.
All minutes of the meetings of the executive committee shall be
submitted to the next succeeding meeting of the Board of
Directors for approval; but failure to submit the same or to
receive the approval thereof shall not invalidate any completed
or incompleted action taken by the Corporation upon authorization
by the executive committee prior to the time at which the same
should have been, or were, submitted as above provided. The
executive committee shall not have the authority of the Board of
Directors in reference to amending the Articles of Incorporation,
adopting an agreement or plan of merger or consolidation,
proposing a Special Corporate Transaction as defined in the Act,
recommending to the Shareholders a voluntary dissolution of the
Corporation or a revocation thereof, or amending these By-Laws.
6.03 Procedure; Meetings; Quorum. The chairman of the
executive committee of the Corporation shall, if present, act as
chairman at all meetings of the executive committee, and the
Secretary of the Corporation shall, if present, act as secretary
of the meeting. In case of the absence from any meeting of the
executive committee of the chairman of the executive committee or
the Secretary of the Corporation, the executive committee shall
appoint a chairman or secretary, as the case may be, of the
meeting. The executive committee shall keep a record of its acts
and proceedings. Regular meetings of the executive committee, of
which no notice shall be held on such days and at such places as
shall be fixed by resolution adopted by majority of the executive
committee shall be called at the request of any member of the
executive committee. Written notice of each special meeting of
the executive committee shall be sent by the Secretary or an
Assistant Secretary to each member of the executive committee at
his residence or usual place of business by letter, telegram,
cable or radiogram, delivered for transmission not later than
during the second day immediately preceding the day for the
meeting, or by word of mouth, telephone, or radiophone received
not later than during the day immediately preceding the day for
the meeting, or by word any such meeting need not be given to any
member of the executive committee who has waived such notice
either in writing or by telegram, cable or radiogram arriving
either before or after such meeting, or who shall be present at
the meeting. Any meeting of the executive committee shall be a
legal meeting, without notice thereof having been given, if all
members of the executive committee who have not waived notice
thereof in writing or by telegram, cable or radiogram shall be
present in person. Neither the business to be transacted at, nor
the purpose of, any meeting of the executive committee need be
specified in the notice or waiver of notice of the meeting. The
executive committee may hold its meetings within or without the
State of Indiana, as it may from time to time by resolution
determine. If the resolution of the executive committee calling
a regular meeting or the written request calling a special
meeting expressly provides, a meeting of the executive committee
may be held by the conference telephone call or any other medium
which allows each member to participate in discussion and to hear
the views of the other members. If a meeting is held, the
members connected to the conference telephone call or other
medium shall be counted as present for the purpose of determining
a quorum. A majority of the executive committee, from time to
time, shall be necessary to constitute a quorum for the
transaction of any business, and the act of a majority of the
members present shall be the act of the executive committee. The
members of the executive committee shall act only as a committee,
and the individual member shall have no power as such. The Board
of Directors may vote to the members of the executive committee a
reasonable fee as compensation for attendance at meetings of such
committee.
6.04. Other Committees. From time to time the Board of
Directors, by the affirmative vote of a majority of the actual
number of directors elected and qualified, may appoint, from
among their number, other committees for any purpose or purposes,
and each such committee shall have such powers as shall be
conferred by the resolution of appointment.
6.05. Audit Committee. The Board of Directors shall by
resolution adopted by a majority of the actual number of
directors elected and qualified, from time to time, designate two
or more of its members who are not officers, to constitute an
Audit Committee of the Board of Directors. The Audit Committee
shall have, and may exercise the authority of the Board of
Directors to the extent provided in such resolutions, as to
matters relating to the appointment of independent certified
public accountants, the reliability of financial statements, the
adequacy of financial controls, the conduct of audits and such
investigations of other financial or operational matters related
to the Company as the Board of Directors shall direct. The Audit
related to the Committee shall make appropriate reports and other
related recommendations to the Board, (which reports may be
relied upon by members of the Board of Directors who are not
members of the Audit Committee, as to matters within the Audit
Committee's designated authority, if the director reasonably
feels the Committee merits confidence and has no knowledge
concerning the matter in question that would cause such reliance
to be unwarranted). A member of the Board of Directors who is
not a member of the Audit Committee shall not be liable for any
action taken by the Committee if the member has acted in good
faith and in a manner reasonably believed to be in the best
interests of the Corporation.
ARTICLE 7
The Officers
7.01. Number. The officers of the Corporation shall
consist of the Chairman of the Board of Directors, if elected,
the President, one or more Vice-Presidents, if elected, (to be
classified as determined by the Board of Directors, as Executive
Vice-Presidents, Senior Vice-Presidents, Vice Presidents or
Assistant Vice Presidents), the Treasurer, the Secretary, and
such other officers (including a controller) and assistants as
the Board of Directors may appoint. Any two or more offices may
be held by the same person, except that the duties of the
President and Secretary shall not be performed by the same
person.
7.02. Election, Term of Office and Qualifications. The
officers shall be chosen annually by the Board of Directors.
Each officer shall hold office until his successor is chosen and
qualified, or until his death, or until he shall have resigned,
or shall have been removed in the manner hereinafter provided.
7.03. Removal. Any officer may be removed, either with or
without cause, at any time, by the vote of a majority of the
actual number of directors elected and qualified, from time to
time, at any regular or special meeting of the Board of
Directors.
7.04. Resignations. Any officer may resign at any time by
giving written notice to the Board of Directors, or the President
or the Secretary. Such resignation shall take effect at the time
specified therein, and unless otherwise specified therein, the
acceptance of such resignation shall not be necessary to make it
effective.
7.05. Vacancies. Any vacancy in any office because of
death, resignation, removal or any other cause may be filled for
the unexpired portion of the term in the manner prescribed in the
By-Laws for election or appointment to such office.
7.06. The Chairman of the Board. The Chairman of the
Board, if elected, who shall be chosen from among the directors,
shall preside at all meetings of the Board of Directors and the
Shareholders and shall perform such other duties as the Board of
Directors may from time to time assign to him.
7.07. The President. The President shall be chief
executive and administrative officer of the Corporation. In the
absence of the Chairman of the Board he shall preside at all
meetings o f the Shareholders and at meetings of the Board of
Directors. He shall exercise such duties as customarily pertain
to the office of the President and shall have general and active
supervision over the property, business and affairs of the
Corporation and over its several Officers. He may appoint
officers, agents or employees other than those appointed by the
Board of Directors and shall perform such other duties as may be
prescribed from time to time by the Board of Directors or by the
By-Laws.
7.08. The Vice-Presidents. The Vice-Presidents (including
Executive Vice-Presidents, Senior Vice-Presidents and Assistant
Vice-Presidents) shall have such powers and perform such duties
as the Board of directors may from time to time prescribe or as
the President may from time to time delegate to them. At the
request of the President, one such officer may, in the case of
the absence or inability to act of the President, temporarily act
in his place. In case of the death of the President, or in the
case of his absence or inability to act without having designated
an officer to act temporarily in his place, the officer so to
perform the duties of the President shall be designated by the
Chairman of the Board.
7.09. The Secretary. The Secretary shall have the custody
and care of the Corporate seal, records, minutes and share books
of the Corporation. He shall attend all meetings of the
Shareholders and of the Board of Directors, and shall keep, or
cause to be kept in a book provided for the purpose, a true and
complete record of the proceedings of such meetings, and shall
perform a like duty for all standing committees appointed by the
Board of Directors, when of required. He shall attend to the
giving and serving of all notices of the Corporation, shall file
and take charge of all papers and documents belonging to the
Corporation and shall perform such other duties as these By-Laws
may require or the Board of Directors may prescribe.
7.10. The Treasurer. The Treasurer shall be the financial
officer of the Corporation; shall have charge and custody of, and
be responsible for, all funds of the Corporation, and deposit
all such funds in the name of the Corporation in such banks,
trust companies or other depositaries as shall be selected by the
Board of Directors; shall receive, and give receipts for, moneys
due and payable to the Corporation from any source whatsoever;
and, in general, shall perform all duties as, from time to time,
may be assigned to him by the Board of Directors or by the
President. The Treasurer shall render to the President and the
Board of Directors, whenever the same shall be required, an
account of all of his transactions as Treasurer and of the
financial condition of the Corporation.
7.11. The Controller. The Controller, if a controller is
elected, shall be responsible to the Board of Directors and the
President for all financial control and internal audit of the
Corporation and its subsidiaries. He shall perform such other
duties as may be assigned to him by the Board of Directors or the
President.
7.12. The Assistant Secretaries. The Assistant
Secretaries, as directed by the President or the Board of
Directors, shall perform the duties of the Secretary during the
absence or inability of the Secretary to perform such duties, or
any of them. They shall perform such other duties as the
President or the Board may prescribe.
7.13. The Assistant Treasurers. The Assistant Treasurers
as directed by the President or the Board of Directors, shall
perform the duties of the Treasurer during the absence or
inability of the Treasurer to perform such duties as the
President and the Board may prescribe.
7.14. Other Offices. The Board of Directors may create
such other offices as it may from time to time deem desirable
with such duties as it may determine.
ARTICLE 8
Corporate Acts
8.01. Execution of Deeds, Contracts, etc. All deeds and
mortgages made by the Corporation and all other written contracts
and agreements to which the Corporation shall be a party shall be
(i) executed in its name by the Chairman of the Board, the
President or a Vice President and (ii) attested by any officer of
the Corporation other than the officer executing the document.
8.02. Execution of Checks, Notes, etc. All checks, drafts,
notes, bonds, bills of exchange and orders for the payment of
money by the Corporation shall be signed by such officer or
officers of the Corporation as the Board of Directors from time
to time may authorize and direct.
8.03. Execution of Certain Securities. All assignments or
endorsements of stock certificates, registered bonds, or other
securities owned by the Corporation shall, unless, otherwise
directed by the Board of Directors, or unless otherwise required
by law, be (i) signed by the Chairman of the Board, the President
or a Vice President and (ii) attested by any officer of the
Corporation other than the officer signing the security. The
Board of Directors may, however, authorize any one of such
officers to sign any of such instruments, for and on behalf of
the Corporation, without the necessity of counter-signatures; may
designate officers or employees of the Corporation, other than
those named above, who may, in the name of the Corporation, sign
such instruments; and may authorize the use of facsimile
signatures of any of such persons.
8.04. Voting of Shares Owned by Corporation. Subject
always to the further orders and directions of the Board of
Directors, any share or shares issued by any other corporation
and owned or controlled by the Corporation may be voted at any
shareholders' meeting of such other corporation by the Chairman
of the Board, or in his absence by any Vice-President of the
Corporation who may be present. Whenever, in the judgment of the
Chairman of he Board or, in his absence, the President, it is
desirable for the Corporation to execute a proxy or give a
shareholders' consent in respect to any share or shares issued by
any other corporation and owned by the Corporation, such proxy or
consent shall be executed in the name of the Corporation by the
Chairman of the Board, the President or a Vice-President of the
Corporation and shall be attested by the Secretary or an
Assistant Secretary of the corporate seal. Any person or persons
designated in the manner above stated as the proxy or proxies of
the Corporation shall have full right, power and authority to
vote the share or shares issued by such other corporation and
owned by the Corporation, the same as such share or shares might
be voted by the Corporation.
ARTICLE 9
Amendments
The power to make, alter, amend or repeal these By-Laws is vested
in the Board of Directors, but the affirmative vote of a majority
of the actual number of directors elected and qualified from time
to time, shall be necessary to effect any alteration, amendment
or repeal of these By-Laws.
ARTICLE 10
Miscellaneous
4.26.90
10.02 Control Share Opt-Out. Chapter 42 of the Indiana
Business Corporation Law, as amended (the "IBCL"), shall not
apply to " control share acquisitions" (as defined in the IBCL)
of shares of the Corporation.
Updated 8/20/97
IRWIN FINANCIAL CORPORATION
AMENDMENT NUMBER ONE TO
1997 STOCK OPTION PLAN
The terms and conditions of paragraph 8 of the Irwin
Financial Corporation Stock Option Plan (the "Plan") shall be
amended so as to read as follows, effective February 19, 1998:
8. Limitations on Exercise of Options/SARs.
(a) Except with respect to those options granted under
subparagraph (b) of this paragraph, each option and/or SAR
granted under this Plan shall be exercisable by the grantee only
in accordance with the following schedule:
(i) During the first year following the grant of the
option and/or SAR, up to 25% of the optioned Shares, or
Shares represented by the SAR, may be exercised:
(ii) During the second year following the grant of the
option and/or SAR, up to an additional 25% of the optioned
Shares, or Shares represented by the SAR, may be exercised;
(iii) During the third year following the grant of the
option and/or SAR, up to an additional 25% of the optioned
Shares, or Shares represented by the SAR, may be exercised:
and
(iv) After the end of the third year following the
grant of the option and/or SAR and until the expiration of
the option and/or SAR, any and all remaining Shares under
the option or Shares represented by the SAR, may be
exercised.
The limitations on exercise set forth above shall be cumulative;
for example, during the second year after the grant a combined
total of 50% of the optioned Shares, or Shares represented by the
SAR, may be exercised if none were exercised during the first
year. The limitations set forth in this paragraph 8 shall not
apply in the event of the death of a grantee while serving on the
Board of Directors or in the employ of IFC or its subsidiaries.
(b) Options designated at the time of the grant as "Special
Y2K Series Stock Options" shall be exercisable by the grantee
only in accordance with the following terms, and the provisions
of subparagraph (a) shall not apply thereto:
(i) If the Board of Directors determines, in its sole
discretion, that the Company's Year 2000 computer
programming project has been brought to a successful
conclusion, then the Special Y2K Series Options will be
exercisable in full from and after March 31, 2001.
(ii) If the Board of Directors determines, in its sole
discretion that the Year 2000 project has not been brought
to a successful conclusion, but that the remaining problems
are not significant, then the Special Y2K Series Options
will be exercisable as to one-half the shares subject to
those options from and after March 31, 2001, and the
remaining shares subject to the options will be forfeited.
(iii) If the Board of Directors determines, in its sole
discretion, that the Year 2000 project has not been brought
to a successful conclusion, and that the remaining problems
are significant, then none of the Special Y2K Series Options
will be exercisable and all of the shares subject to the
options will be forfeited.
The determinations of the Board of Directors described in this
subparagraph shall be made by it on or before March 31, 2001.
Exhibit 11 (a)
IRWIN FINANCIAL CORPORATION AND SUBSIDIARIES
EXHIBIT 11(a) - COMPUTATION OF EARNINGS PER SHARE
Year Ended December 31, 1997 1996 1995
[S] [C] [C] [C]
AVERAGE NUMBER OF SHARES 11,163,155 11,358,121 11,279,870
OUTSTANDING
NET INCOME $24,444,150 $22,428,337 $20,083,202
BASIC EARNINGS PER SHARE (Note 2)
$2.19 $1.97 $1.78
DILUTED SHARES OUTSTANDING:
Average number of shares 11,163,155 11,358,121 11,279,870
outstanding
Assumed exercise of stock
options 197,932 156,871 149,949
(Note 1)
Total shares (Note 2) 11,361,087 11,514,992 11,429,819
NET INCOME $24,444,150 $22,428,337 $20,083,202
DILUTED EARNINGS PER SHARE (Note 2)
$2.15 $1.95 $1.76
(1) The dilutive effect of stock options is based on the Treasury Stock
method.
Adjusted for the two-for-one stock split on December 30, 1996
Management's Discussion and Analysis
of Results of Operations
and Financial Condition
Contents
Management's Discussion and Analysis of Results
of Operations and Financial Condition:
28 Five-Year Selected Financial Data and Graphs
31 Consolidated Overview
32 Mortgage Banking
40 Community Banking
46 Home Equity Lending
52 Equipment Leasing
56 Other Irwin Financial Businesses
56 Consolidated Income Statement Analysis
58 Consolidated Balance Sheet Analysis
61 Capital
64 Risk Management
64 Credit Risk
68 Liquidity
69 Interest Rate Risk
Financial Statements:
79 Report of Management
80 Report of Independent Public Accountants
81 Consolidated Statement of Income
82 Consolidated Balance Sheet
83 Consolidated Statement of Changes in
Shareholders' Equity
84 Consolidated Statement of Cash Flows
85 Notes to Financial Statements
<TABLE>
<CAPTION>
Five-Year Selected Financial Data
1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------
Financial Data (in thousands)
For the year:
<S> <C> <C> <C> <C> <C>
Net Revenues $223,185 $195,448 $148,239 $116,908 $119,366
Other Operating Expense 176,534 158,160 115,790 86,844 93,803
Net Income 24,444 22,428 20,083 18,216 15,588
Mortgage Loan Closings 5,397,338 5,085,625 3,559,310 2,812,962 4,273,933
Return on Average Equity 19.80% 20.58% 22.60% 23.91% 24.91%
Return on Average Assets 1.94 1.95 2.28 2.43 2.15
Dividend Payout Ratio 12.74 12.15 12.36 11.38 11.12
Per share:*
Net Income - Basic $2.19 $1.97 $1.78 $1.58 $1.35
Net Income - Diluted 2.15 1.95 1.76 1.57 1.34
Cash Dividends 0.28 0.24 0.22 0.18 0.15
Book Value 11.23 10.46 8.76 7.21 6.03
Market Value at
December 31, 41.88 24.75 19.94 13.38 12.50
At year end:
Assets $1,496,794 $1,300,122 $1,037,541 $659,671 $881,864
Deposits 719,596 640,153 563,999 439,918 500,370
Mortgage Loans Held for Sale 528,739 446,898 378,658 154,964 370,755
Loans and Leases, Net 602,281 526,175 407,904 304,548 252,823
Shareholders' Equity 127,983 118,902 99,216 81,104 70,093
Owned Mortgage Servicing
Portfolio 10,713,549 10,810,988 10,301,914 8,818,502 7,922,299
Equity to Assets Ratio 8.55% 9.15% 9.56% 12.29% 7.95%
Risk-based Capital Ratio 17.54 14.23 14.49 19.18 15.68
Leverage Ratio (Tier 1) 12.06 9.84 10.57 10.82 9.63
Averages:
Assets $1,262,714 $1,151,535 $882,164 $748,981 $725,846
Equity 123,483 108,970 88,867 76,178 62,586
Shares Outstanding* - Basic 11,163 11,358 11,280 11,547 11,545
Shares Outstanding* - Diluted 11,361 11,515 11,430 11,639 11,628
- -----------------------------------------------------------------------------------------------
*Adjusted for stock splits
</TABLE>
Total Net Revenuew $ Millions
1990 43.3
1991 60.0
1992 94.9
1993 119.4
1994 116.9
1995 148.2
1996 195.4
1997 223.2
Net Income $ Millions
1990 4.6
1991 6.7
1992 12.9
1993 15.6
1994 18.2
1995 20.1
1996 22.4
1997 24.4
Return on Avernage Equity Percent
1990 13.50
1991 16.93
1992 26.51
1993 24.91
1994 23.91
1995 22.60
1996 20.58
1997 19.80
Management's Discussion
Management's discussion and analysis should be read in conjunction with the
accompanying consolidated financial statements, footnotes, and tables. Forward-
looking statements contained in the following discussion are based on estimates
and assumptions that are subject to significant business, economic and
competitive uncertainties, many of which are beyond the Corporation's control
and are subject to change. These uncertainties can affect actual results and
could cause actual results to differ materially from those expressed in any
forward-looking statements in this discussion.
Consolidated Overview:
Irwin Financial Corporation earned record net income in 1997 for the eighth
consecutive year. This performance was due to improved results at each of the
Corporation's lines of business. Net income for 1997 totaled $24,444,150, up
9.0% from 1996 and 21.7% from 1995. Basic earnings per share were $2.19 in 1997,
up from $1.97 in 1996 and $1.78 in 1995. Diluted earnings per share in 1997 were
$2.15 compared to $1.95 in 1996 and $1.76 in 1995.
The Corporation has made investments to expand current operations and enter
new segments of the financial services industry. These initiatives are evidenced
by the growth in loan volume throughout the Corporation and the start up of
Irwin Home Equity Corporation in 1995. Because the Corporation does not receive
an immediate return on these long-term investments, the return on average equity
and return on average assets have declined in recent years. However, the
Corporation has achieved its objective of earning a return on average equity
that exceeds its cost of capital, estimated to have been approximately 12.5%
during the last three years. Return on average equity for 1997 was 19.80%
compared to 20.58% in 1996 and 22.60% in 1995. Return on average assets was
1.94% compared to 1.95% in 1996 and 2.28% in 1995.
Earnings By Line of Business:
Irwin Financial Corporation is comprised of four principal lines
of business:
- - Mortgage banking
- - Community banking
- - Home equity lending
- - Equipment leasing
<TABLE>
<CAPTION>
Earnings:
(In thousands) 1997 1996 1995
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
Mortgage Banking $21,300 $20,422 $19,331
Community Banking 5,587 4,254 3,639
Home Equity Lending 1,710 (816) (3,220)
Equipment Leasing 151 (141) (334)
Parent (including consolidating entries) (4,304) (1,291) 667
------- -------- -------
$24,444 $22,428 $20,083
- ----------------------------------------------------------------------------------
</TABLE>
Management's Discussion (continued)
Business Profile: Mortgage Banking
<TABLE>
<CAPTION>
Selected Financial Data
(In thousands) 1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------
Selected Income Statement Data:
<S> <C> <C> <C> <C> <C>
Net interest income $17,577 $17,178 $13,415 $12,942 $15,103
Provision for loan losses (1,383) (455) (125) (240) (36)
Loan origination fees 41,045 43,463 31,871 25,308 37,605
Gain on sale of loans 21,613 25,541 18,020 2,219 14,225
Loan servicing fees 50,194 45,573 36,087 32,426 24,428
Gain on sale of servicing 32,631 16,378 15,271 17,716 2,979
Other income 1,223 891 787 647 550
-------- -------- -------- -------- --------
Total net revenues 162,900 148,569 115,326 91,018 94,854
Operating expense 126,610 114,474 83,344 64,571 72,140
-------- -------- -------- -------- --------
Income before taxes 36,290 34,095 31,982 26,447 22,714
Income taxes 14,990 13,673 12,651 10,719 9,073
-------- -------- -------- -------- --------
Net income $21,300 $20,422 $19,331 $15,728 $13,641
======== ======== ======== ======== ========
Selected Balance Sheet Data
at End of Period:
Mortgage loans held for sale $435,123 $372,855 $309,262 $131,543 $318,453
Mortgage servicing assets 81,610 71,715 51,783 18,834 11,505
Total assets 698,391 555,486 445,129 216,180 452,365
Short-term debt 335,835 265,646 227,021 68,259 215,014
Long-term debt 54 4,914 2,300 2,605 2,934
Shareholders' equity $81,058 $66,182 $55,811 $50,805 $42,355
Selected Operating Data:
Mortgage loan closings $5,397,338 $5,085,625 $3,559,310 $2,812,962 $4,273,933
Servicing portfolio:
Balance at December 31, 10,713,549 10,810,988 10,301,914 8,818,502 7,922,299
Weighted average coupon
rate 7.85% 7.83% 7.83% 7.59% 7.51%
Weighted average servicing
fee 0.40 0.38 0.38 0.38 0.37
Servicing sold as a percent of
production 71.8 6o.9 28.4 49.8 5.6
- -----------------------------------------------------------------------------------------------
</TABLE>
Overview & Strategy:
The mortgage banking line of business consists of Irwin Mortgage
Corporation (as of January 1,1998, Inland Mortgage Corporation changed its name
to Irwin Mortgage Corporation) and the related activities of Irwin Union Bank
and Trust. The business is headquartered in Indianapolis and originates,
packages, sells, and services residential mortgage loans throughout the U.S. It
has offices in 28 states and ranks among the top 30 mortgage loan originators in
the country. The majority of the loans originated and serviced are either
government-insured through the Veterans' Administration (VA) or Federal Housing
Administration (FHA) or conventional loans which conform to the underwriting
guidelines of the two principal government-sponsored agencies which support the
secondary mortgage markets, the Federal National Mortgage Association (FNMA) and
the Federal Home Loan Mortgage Corporation (FHLMC).
Mortgage loans are originated through both direct branches (retail) and third
party sources (wholesale). Potential borrowers are identified principally
through relationships maintained with housing intermediaries including realtors
and home builders.
Loans are funded on a short-term basis through credit facilities provided by
commercial banks including Irwin Union Bank. Financing agreements with
investment banks are also used. Individual loans are pooled, securitized, and
sold into the secondary mortgage market. Servicing rights are periodically sold
for a variety of reasons including cash flow and servicing portfolio management.
Over the past five years, servicing rights have been retained on a total of
54.5% of the loans originated.
1997 Review:
Net income from mortgage banking was $21.3 million in 1997, an increase of
4.3% over 1996 results of $20.4 million and 10.2% over 1995 results of $19.3
million. Return on average equity was 29.6% in 1997 compared to 33.4% in 1996
and 37.4% in 1995.
Mortgage Closings:
(In thousands) 1997 1996 1995
- ------------------------------------------------------------------
Total closings $5,397,338 $5,085,625 $3,559,310
Percent retail loans 36.6% 41.8% 50.3%
Percent wholesale loans 57.2 52.4 42.5
Percent brokered 6.2 5.8 7.2
- ------------------------------------------------------------------
Annual loan originations in 1997 of $5.4 billion were up 6.1% from 1996 and
51.6% from 1995. During 1997 the mortgage bank originated a greater portion of
its loans through wholesale channels than in previous years. Income from
mortgage loan originations totaled $41.0 million which was $2.4 million less
than 1996 and $9.2 million over 1995.
The change in production mix resulted in this decline as lower fees are
collected on wholesale originations. Mortgage loan applications in process and
loans held for sale at the end of 1997 totaled $1.7 billion, compared with $1.8
billion at the end of 1996 and $1.6 billion at the end of 1995. Refinances
accounted for 22.5% of 1997 loan closings, compared to 19.0% in 1996 and 11.6%
in 1995. Gains from the sale of mortgage loans totaled $21.6 million in 1997,
compared to $25.5 million in 1996 and $18.0 million in 1995.
In early 1997 the mortgage bank entered into the nonprime mortgage market which
is comprised of borrowers who do not qualify under the underwriting guidelines
established by the government sponsored secondary market agencies for conforming
first mortgages. Total originations in 1997 include $66.1 million of nonprime
loans. These loans are sold on a non-recourse, service released basis to private
investors.
<TABLE>
<CAPTION>
Mortgage Servicing:
Servicing Portfolio:
(In billions) 1997 1996 1995
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
Beginning portfolio $10.8 $10.3 $8.8
Add:
Loans originated 2.0 2.1 1.8
Loans purchased 3.4 3.0 1.8
Deduct:
Sale of servicing rights (3.9) (3.1) (1.0)
Run-off* (1.6) (1.5) (1.1)
-------- -------- --------
Ending portfolio $10.7 $10.8 $10.3
======== ======== ========
Number of loans 141,737 140,354 129,270
Average loan size $82,902 $83,540 $82,186
Percent GNMA 59% 51% 48%
Percent FHLMC 11 15 21
Percent FNMA 19 16 17
Delinquency ratio: 5.99% 5.12% 4.55%
Capitalized servicing as a percentage of
servicing portfolio 0.76% 0.65% 0.50%
- --------------------------------------------------------------------------------
</TABLE>
*Run-off is the reduction in principal balance of the servicing portfolio due to
regular principal payments made by mortgagees and early repayment of an entire
loan.
The mortgage servicing portfolio was $10.7 billion at December 31, 1997, down
0.9% from the same date in 1996 and up 4.0% from 1995. The 1997 annual portfolio
run-off rate was 12.3%. This is up from the 1996 rate of 10.7% and the 1995 rate
of 10.4%. The following table sets forth certain information regarding the
interest rates of loans in the servicing portfolio at December 31:
Servicing Portfolio by Interest Rate:
1997 1996 1995
- --------------------------------------------------------------
Less than 7% 8.4% 8.9% 10.3%
7.00 - 7.99% 42.5 44.3 39.8
8.00 - 8.99% 42.6 38.7 33.9
9% or greater 6.5 8.1 16.0
----- ----- -----
Total 100% 100% 100%
- --------------------------------------------------------------
The value of mortgage servicing assets must be adjusted for impairment which
could result from interest rate changes. Although impairment write-offs caused
by declining interest rates would be accompanied by increased loan origination
fees, management has implemented hedging alternatives from time to time to avoid
significant impairment provisions. Expenses related to mortgage servicing rights
impairment and hedging totaled $600.0 thousand in 1997 compared to $637.9
thousand in 1996 and $908.8 thousand in 1995. No hedges were in place at
December 31, 1997.
Servicing and Other Fees:
(In thousands) 1997 1996 1995
- --------------------------------------------------------------
Servicing fees $50,194 $45,573 $36,087
Other fees 1,223 891 787
----- ----- -----
Total $51,417 $46,464 $36,874
- --------------------------------------------------------------
Servicing fee income is recognized by collecting fees which normally range
between 25 and 44 basis points annually on the principal amount of the
underlying mortgages. A change in the portfolio mix to a higher percentage of
government loans positively affected servicing income which increased 10.1% from
1996 and 39.1% from 1995.
Sale of Mortgage Servicing:
The mortgage banking business maintains the flexibility to either sell servicing
assets for current cash flow or retain servicing for future cash flow. The
decision to sell or retain servicing is based on current market conditions
balanced with the interest rate risk tolerance of the business.
Servicing assets totaling $3.9 billion were sold in 1997, generating a $32.6
million pre-tax gain on those sales. This compares to servicing sales of $3.1
billion in 1996 that produced $16.4 million pre-tax gain and $1.0 billion in
1995 that produced a $15.3 million pre-tax gain. The 1997 gain reflects improved
market pricing and better margins on wholesale loans. Had all servicing been
retained in 1997, gains on sales of loans would have been higher than what was
recorded, with a corresponding reduction in gains from sales of servicing.
Servicing sales in 1997 represented 71.8% of 1997 originations versus 1996 sales
which were 60.9% of that year's originations and 1995 sales which were 28.4% of
originations.
Net Interest Income:
Net interest income is generated from the interest earned on mortgage loans
before they are sold to investors, less the interest expense incurred on
borrowings to fund the loans. Net interest income totaled $17.6 million in 1997,
compared to $17.2 million in 1996 and $13.4 million in 1995.
<TABLE>
<CAPTION>
Operating Expenses:
(In thousands, except for number of employees) 1997 1996 1995
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Salaries and employee benefits $71,389 $66,153 $51,737
Amortization of mortgage servicing rights 15,243 14,245 4,865
Other expenses 39,978 34,076 26,742
-------- -------- --------
Total operating expenses $126,610 $114,474 $83,344
======== ======== ========
Number of employees at December 31, 1,411 1,474 1,316
- -----------------------------------------------------------------------------------------------
</TABLE>
Total operating expenses increased 10.6% from 1996 and 51.9% from 1995. The
increase reflects the continued expansion of the production system. Also during
1997 the mortgage bank made significant technological improvements with the
conversion to a new loan origination system, the installation of personal
computer-based networks at branch locations, and an initiative to provide loan
originators with laptop computers. The business has adopted a strategy of
leasing all of its systems and related equipment. As a result, 1997 operating
expenses include lease expense related to these technological improvements.
<TABLE>
<CAPTION>
Credit Quality:
(In thousands) 1997 1996 1995
- -----------------------------------------------------------------------------------------------
At December 31,
<S> <C> <C> <C>
Nonperforming loans $3,784 $2,221 $154
Other real estate owned 1,415 1,839 295
-------- -------- --------
Total nonperforming assets $5,199 $4,060 $449
======== ======== ========
Allowance for loan losses $1,606 $633 $413
======== ======== ========
Allowance for loan losses as a
percentage of loans 6.0% 2.7% 2.1%
For the year ended December 31,
Provision for loan losses $1,383 $455 $125
- -----------------------------------------------------------------------------------------------
</TABLE>
Although most mortgages are either government-insured or conform to the
underwriting guidelines of the government-sponsored agencies that support the
secondary mortgage market, the mortgage bank has credit risk on those loans that
do not get government insurance or that must be repurchased from agencies due to
lack of conformity to underwriting guidelines. Over the last two years the
government-sponsored agencies which provide credit enhancement on the loans
underwritten by the mortgage bank have become more stringent in their adherence
to their right to seek recourse from the originator of loans. As such, the
mortgage bank has had an increase in the number of loans it has repurchased from
the agencies. This has resulted in an increase in the nonperforming loans and
other real estate owned at the mortgage bank. The mortgage bank seeks to cure
the underwriting defect in these loans and resell them to the agencies or sell
them to alternative investors.
As a result of the increase in nonperforming loans in 1997, the allowance
for loan losses and the provision for loan losses have increased from previous
years. In providing for the loan loss allowance, management reviews each loan
individually to assess expected future losses based on information about the
borrower and the underlying collateral.
1998 Outlook:
The mortgage bank is developing a strategy which will allow it to
proceed with its expansion efforts in the current environment of consolidation
in the mortgage banking industry. The business is focusing on ways that it can
continue to be both a competitive loan originator and loan servicer.
Production strategies include initiatives to enhance the profitability of both
retail and wholesale channels. New production and underwriting technologies, the
redesign of compensation systems, and new product offerings are anticipated in
1998. As noted earlier, during 1997 the mortgage bank entered the nonprime
mortgage market. Management views this area as a potentially important source of
growth. In addition, last year the mortgage bank began making dollar denominated
mortgage loans to U.S. and Canadian citizens on selected properties in Mexico.
Originations in 1997 totaled $1.1 million. In 1998, the mortgage bank plans to
increase promotion and distribution efforts in Mexico in order to expand its
presence in this new market. However, the ultimate potential for this product
remains unclear, and it is not expected to be material in 1998.
Industry competition for loan servicing combined with the volatility of
servicing assets make the continual evaluation of servicing strategies critical
to the mortgage banking business. The business must evaluate ways to service
loans more efficiently and more profitably. And at the same time, it must
evaluate alternatives to avoid large servicing asset impairment write-offs in
the event of declining interest rates, including servicing sales and interest
rate hedges.
Employees:
As of December 31, 1997, the mortgage banking line of business
employed 1,411 people -- approximately 70% of the Corporation's total employee
base. Total employment expense in 1997 was $71.4 million or 56.4% of operating
expenses.
Irwin Mortgage Corporation
Directors and Senior Officers
Directors: Rick L. McGuire President--Irwin Mortgage Corporation
William I. Miller Chairman--Irwin Financial Corporation
John A. Nash President--Irwin Financial Corporation
Thomas D. Washburn Senior Vice President--Irwin Financial
Corporation
Senior
Officers: Rick L. McGuire President
Herbert B. Tasker Executive Vice President--All Pacific
Region
T. Lester Acree Senior Vice President--Wholesale Loan
Purchasing
Kenneth R. Block Senior Vice President--Loan Production
Katrina J. Crubaugh Senior Vice President--Human Resources
Robert H. Griffith, Jr. Senior Vice President and Legal Counsel
Mark J. Lynch Senior Vice President--Consumer Lending
William M. Meyer Senior Vice President--Loan Servicing
Timothy L. Murphy Senior Vice President--Finance
Erik J. Sorensen Senior Vice President--Secondary
Marketing
Scott G. Beer First Vice President--Secondary
Marketing
Mark E. Braden First Vice President--Information
Technology
Richard C. Cargill First Vice President--Metro Phoenix
Renee M. Gunderson First Vice President--Underwriting/
Closing Post Closing
Darla S. Habig First Vice President--Loan Control
Allan D. Karlander First Vice President--Central Region
John F. Macke First Vice President--Management
Information
Rachelle E. Mikosz First Vice President--Office Services
Kevin M. Murphy First Vice President--Accounting
Diana M. Rossetter First Vice President--Quality Control
Suzanne C. Samson First Vice President--All Pacific
Region
Sherri K. Sanford First Vice President--Customer Service
Debra J. Saviola First Vice President--Wholesale Loan
Purchasing
Lyle E. Shearer First Vice President--All Pacific
Region
Richard E. Skiles First Vice President--Appraisals
Nicholas Vracas First Vice President--Mid-states Region
Management's Discussion (continued)
Business Profile: Community Banking
<TABLE>
<CAPTION>
Selected Financial Data:
(In thousands) 1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------
Selected Income Statement Data:
<S> <C> <C> <C> <C> <C>
Interest income $41,115 $35,645 $31,965 $23,808 $22,238
Interest expense 19,120 15,908 14,048 8,822 8,684
Provision for loan and lease losses 2,201 2,284 2,038 1,344 1,551
-------- -------- -------- -------- --------
Net interest income after provision
for loan and lease losses 19,794 17,453 15,879 13,642 12,003
Noninterest income 9,434 9,384 7,187 5,719 6,192
-------- -------- -------- -------- --------
Total net revenues 29,228 26,837 23,066 19,361 18,195
Operating expenses 20,372 20,311 17,582 14,858 14,264
-------- -------- -------- -------- --------
Income before taxes 8,856 6,526 5,484 4,503 3,931
Income taxes 3,269 2,272 1,845 1,453 1,247
-------- -------- -------- -------- --------
Net income $5,587 $4,254 $3,639 $3,o50 $2,684
======== ======== ======== ======== ========
Selected Balance Sheet Data at
End of Period:
Loans and leases, net $404,747 $331,790 $306,415 $252,226 $210,340
Total assets 539,233 503,507 440,035 370,462 334,148
Deposits 486,481 453,879 400,149 341,459 298,615
Shareholders' equity 38,390 33,967 28,722 24,686 23,882
Daily Averages:
Assets $515,666 $459,893 $405,249 $344,691 $302,692
Deposits 463,851 413,935 358,343 315,229 275,956
Loans and leases, net 364,981 325,291 281,147 228,544 195,304
Shareholders' equity 36,232 31,863 27,661 23,580 20,326
Shareholders' equity to assets 7.03% 6.93% 6.83% 6.84% 6.72%
- -----------------------------------------------------------------------------------------------
</TABLE>
Overview & Strategy:
Community banking is conducted by Irwin Union Bank and Trust Company which
is headquartered in Columbus, Indiana. It operates through 16 offices in seven
counties in Indiana and holds a major share of the market in Bartholomew County
where it has operated since 1871. Expansion into new markets has occurred in
recent years and has been on a de novo basis. The community bank's strategy in
these and other possible new markets is to position itself with local management
and staff that can provide highly personalized, flexible service. The objective
is to deliver services in the way customers would expect from a bank
headquartered in that market. This means that every effort is made to staff the
offices with local people and to give those people the authority to make key
customer decisions. Credit, investment, trust, and insurance services are
provided to individual and corporate customers.
1997 Review:
Community banking net income in 1997 totaled $5.6 million, up
31.3% from 1996 net income of $4.3 million and 53.5% from 1995 net income of
$3.6 million. The return on average equity was 15.42% in 1997 as compared to
13.35% in 1996 and 13.16% in 1995.
Net interest revenue:
(In thousands) 1997 1996 1995
- -------------------------------------------------------------------------------
Net interest revenue on a taxable
equivalent basis* $22,206 $20,095 $18,362
Average interest earning assets 481,707 429,520 373,784
Net interest margin 4.61% 4.67% 4.91%
- --------------------------------------------------------------------------------
*Reflects what net interest revenue would be if all interest income were subject
to federal and state income taxes.
Net interest revenue on a taxable equivalent basis increased 10.5% from 1996
and 20.9% from 1995 to a total of $22.2 million. Net interest revenue is the
product of net interest margin and average earning assets.
Net interest margin was 4.61% in 1997 compared to 4.67% in 1996 and 4.91% in
1995. Asset yields increased 0.16% on average in 1997, but funding costs were up
0.25%. This was due in large part to the fact that deposit growth occurred in
higher cost time deposits.
<TABLE>
<CAPTION>
Noninterest Income:
(In thousands) 1997 1996 1995
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Trust fees $2,178 $2,571 $2,470
Service charges on deposit accounts 1,831 1,820 1,596
Insurance commissions, fees, and premiums 1,044 1,105 1,016
Gain from sale of loans 1,088 909 -
Loan servicing fees 972 690 210
Brokerage fees 757 736 571
Other 1,564 1,553 1,324
-------- -------- --------
Total noninterest income $9,434 $9,384 $7,187
- ----------------------------------------------------------------------------------------
</TABLE>
Noninterest income was up 0.5% from 1996 and 31.3% from 1995. During 1997
the community bank recorded $1.1 million of gains on the sale of consumer,
commercial, and mortgage loans. This compares to $0.9 million in 1996. The
community bank retained the right to service the sold loans, which contributed
to increased loan servicing fees in 1997 and 1996.
<TABLE>
<CAPTION>
Operating Expenses:
(In thousands, except for number of employees) 1997 1996 1995
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Salaries and employee benefits $11,333 $10,916 $9,656
Other expenses 9,039 9,395 7,926
-------- -------- --------
Total operating expenses $20,372 $20,311 $17,582
======== ======== ========
Number of employees at December 31, 339 304 291
- ----------------------------------------------------------------------------------------
</TABLE>
Operating expenses increased 0.3% from 1996 and 15.9% from 1995. Costs
associated with expanding new products and markets contributed to increases over
the past two years. In addition, 1997 and 1996 operating expenses include $0.6
million and $1.5 million, respectively, of non-recurring expenses related to the
restructuring of trust operations.
Balance Sheet:
Total assets averaged $515.7 million in 1997, compared to $459.9 million in 1996
and $405.2 million in 1995. Average earning assets for the year were $481.7
million, up $52.2 million or 12.2% from 1996 and up $107.9 million or 28.9% from
1995. The most significant component of the 1997 increase was loans and leases
which were up $39.7 million on average in 1997 as a result of the community
bank's expansion efforts into new markets. Average deposits were $463.9 million
in 1997, 12.1% higher than 1996 and 29.4% higher than 1995.
<TABLE>
<CAPTION>
Credit Quality:
(In thousands) 1997 1996 1995
- ----------------------------------------------------------------------------------------
At December 31,
<S> <C> <C> <C>
Nonperforming loans $2,856 $3,434 $1,984
Other real estate owned 413 400 -
-------- -------- --------
Total nonperforming assets $3,269 $3,834 $1,984
======== ======== ========
Nonperforming assets as a percentage of
total assets 0.60% 0.76% 0.45%
======== ======== ========
Allowance for loan losses $5,525 $4,790 $3,668
======== ======== ========
Allowance for loan losses as a percentage
of loans 1.35% 1.42% 1.18%
======== ======== ========
For the Year Ended December 31,
Provision for loan losses $2,201 $2,284 $2,038
======== ======== ========
Net charge-offs $1,277 $1,107 $1,598
- ----------------------------------------------------------------------------------------
</TABLE>
The community bank's equity to assets ratio averaged 7.03% for the year,
compared to 6.93% in 1996 and 6.83% in 1995.
1998 Outlook:
The community bank anticipates continued consolidation in the
banking industry in 1998 which will present both opportunities and threats to
the business. Opportunities will be created when other banks become more heavily
centralized and decisions are not made locally. It is in this environment that
the strategy of local management making decisions at the point of customer
contact is the most effective. However, consolidation will enable larger
institutions to become more efficient and increase pricing pressure on bank
products.
The community bank plans to continue its expansion through the opening of new
offices during 1998. In late 1997 the community bank opened two offices with a
focus on small business customers. The plan for 1998 is to evaluate this concept
and consider expansion of small business offices in other markets.
Employees:
As of December 31, 1997 the community bank employed 339 people.
Total employment expense in 1997 was $11.3 million or 55.6% of total operating
expenses.
Irwin Union Bank and Trust Company
Directors
Robert H. Claxton Senior Vice President-Finance,
Knauf Fiber Glass
Claude E. Davis President,
Irwin Union Bank and Trust Company
John T. Hackett Managing General Partner,
CID Equity Partners, L.P.
Robert W. Haddad Chairman and President,
Columbus Container, Inc.
Carolyn A. Lickerman Homemaker
William I. Miller Chairman,
Irwin Financial Corporation
John A. Nash President,
Irwin Financial Corporation
Charles A. Rau, M.D. Physician
Albert H. Shumaker II President,
Coca-Cola Bottling Company of Columbus
John S. Spangler President,
Milestone Contractors, L.P.
Christine M. Vujovich Vice President,
Cummins Engine Company, Inc.
Charles H. Watson President,
Historic Columbus Development, Inc.
Irwin Union Bank and Trust Company
Senior Officers
Claude E. Davis President
Bradley J. Kime Executive Vice President
Kevin P. Barr Senior Vice President and Chief Financial Officer
William P. Guffey Senior Vice President and Senior Lending Officer
Carrie K. Houston Senior Vice President--Human Resources
Albert C. Roszczyk Senior Vice President--Bartholomew County
William S. Beitler President--Shelby County
Karen S. Coldiron President--Decatur County
Brian D. Hall President--Monroe County
J. Kevin Johnson President--Jackson County
Mark C. Kugar President--Hendricks County
Robert L. Phillips President--Johnson County
William R. Redman President--Hamilton County
Donald J. Stuart President--Irwin Union Advisory Services
<TABLE>
<CAPTION>
Selected Financial Data
(In thousands) 1997 1996 1995
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net interest income $7,129 $7,755 $1,828
Provision for loan losses (1,404) (983) (363)
Gain on sale of loans 15,908 7,798 2,985
Loan servicing fees 2,145 710 13
Other income 294 140 10
-------- -------- --------
Total net revenues 24,072 15,420 4,473
Operating expenses 22,362 16,236 7,693
-------- -------- --------
Pre-tax income (loss) $1,710 (816) $(3,220)
======== ======== ========
Selected Balance Sheet Data at End of Period:
Home equity loans net of loan
loss allowance $111,779 $117,588 $36,225
Interest-only strips 22,134 12,661 4,446
Total assets 165,242 145,113 50,845
Short-term debt 146,219 129,627 24,981
Shareholders'equity 10,936 13,221 5,538
Selected Operating Data:
Loan Volume:
Lines of credit $115,274 $80,724 $87,420
Loans 99,244 88,396 -
Servicing portfolio:
Balance at December 31, 358,166 230,450 86,691
Weighted average coupon rate:
Lines of credit 12.96% 12.80% 13.61%
Loans 13.97% 14.08% -
- -------------------------------------------------------------------------------------------
</TABLE>
Overview & Strategy:
The home equity line of business includes Irwin Home Equity Corporation and the
related activities of Irwin Union Bank and Trust. Irwin Home Equity is located
in San Ramon, California, and was incorporated in late 1994. The company began
marketing home equity loans in early 1995 through direct mail and telemarketing
and currently markets in 22 states.
The business has the option to either hold the loans in portfolio or securitize
and service them. If the loans are held in portfolio, many costs incurred during
the period to produce the loans are expensed immediately, whereas the revenue
from the loans accrues over the lives of the loans. Alternatively, if the loans
are securitized and sold on the secondary market to investors, a portion of the
present value of the future net revenues from the loans will be recognized in
the current period, helping to offset the expenses incurred in producing the
loans.
1997 Review:
The home equity lending business recorded pre-tax income of $1.7 million in
1997 compared with pre-tax losses of $816.2 thousand in 1996 and $3.2 million
in 1995.
Loan Originations and Securitizations:
During 1997 the home equity lending business originated $214.5 million of home
equity loans, up 26.8% from 1996 volume of $169.1 million and 145.4% from 1995
volume of $87.4 million.
The business securitized and delivered $210.1 million of loans in 1997 which
generated a pre-tax gain of $15.9 million. This compares to a $7.8 million gain
recognized in 1996 on the sale of $79.9 million of loans and a $3.0 million gain
recognized in 1995 on the sale of $51.6 million of loans. The 1996 gain includes
a one-time adjustment of $1.o million relating to the substitution of a letter
of credit for the cash reserve on the 1995 securitization. In addition to the
loans that were delivered in 1997, another $80.o million were securitized. These
loans were delivered in the first quarter of 1998 and the gain was recognized at
that time.
<TABLE>
<CAPTION>
Servicing Portfolio:
(In thousands) 1997 1996 1995
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at December 31, $358,166 $230,450 $86,691
Delinquency ratio 1.48% 0.67% 0.85%
- ------------------------------------------------------------------------------------------
</TABLE>
The home equity lending business continues to service loans it has securitized.
The servicing portfolio, which includes loans held on the balance sheet as well
as securitized loans, increased 55.4% from 1996 and 313.2% from 1995. The
business earns a servicing fee equal to one percent of the outstanding principal
balance of the securitized loans. Servicing fee income increased to $2.1 million
in 1997 from $0.7 million in 1996 and $12.9 thousand in 1995. The level of fees
in 1995 reflects the fact that loans were not securitized until late in the
year.
When the home equity lending business securitizes loans, the business
recognizes as an asset an interest-only strip equal to the discounted
available cash flows of the interest paid by borrowers netted against
servicing fees, expected losses, and interest remitted to investors. The
interest-only strips had a balance of $22.1 million at December 31, 1997,
compared with $12.7 million at the same date in 1996 and $4.4 million in 1995.
In addition, the business recognizes on its balance sheet a servicing asset
equal to the discounted cash flows of future servicing income. At December 31,
1997 net servicing assets totaled $1.3 million, compared with $0.7 million at
the end of 1996 and $0.3 million at the end of 1995.
Interest-only strips and servicing assets are carried at their market values
which are determined using assumptions about the duration and performance of the
securitized loans. Included in these assumptions are estimates of the lives of
the loans, expected losses, and appropriate discount rates. Management
continually evaluates these assumptions to determine the proper carrying values
of these assets on the balance sheet. During 1997, the home equity lending
business recorded a net adjustment of $1.8 million pre-tax to the carrying
values of its interest-only strips and servicing assets to reflect a change in
management's estimate of future prepayment activity. In light of declining
interest rates and increased competition in this industry, prepayment speeds
were increased to rates ranging from 30% to 40% CPR (conditional prepayment
rate) per year, up from the previous estimate of 26%. Assumed annual loss rates
range from 0.50% to 0.64%, and the discount rate used is 15.0%.
Net Interest Income:
Net interest income before loan loss provision was $7.1 million in 1997,
compared to $7.8 million in 1996 and $1.8 million in 1995. Included in interest
income is income earned on the interest-only strip, net of amortization expense.
This amounted to $1.8 million in 1997, compared to $2.2 million in 1996 and $0.2
million in 1995.
<TABLE>
<CAPTION>
Operating Expenses
(In thousands, except for number of employees) 1997 1996 1995
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Salaries and employee benefits $11,175 $8,663 $3,995
Marketing and development 2,731 2,462 1,337
Unrealized loss on interest-only strips
and servicing assets 1,828 - -
Other 6,628 5,111 2,361
-------- -------- --------
Total operating expenses $22,362 $16,236 $7,693
======== ======== ========
Number of employees at December 31, 189 159 107
- ----------------------------------------------------------------------------------------
</TABLE>
The increase in operating expenses reflects the continued growth of this
business.
Balance Sheet:
The home equity lending business had $112.3 million of loans outstanding at
December 31, 1997. This compares to $118.2 million at the end of 1996 and $36.4
million at the end of 1995. The allowance for loan losses for loans still on the
balance sheet had a balance of $563.5 thousand at December 31, 1997, compared to
$589.4 thousand at the end of 1996 and $146.6 thousand at the end of 1995.
<TABLE>
<CAPTION>
Credit Quality:
(In thousands) 1997 1996 1995
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
At December 31,
Nonperforming loans $535 $260 $-
======== ======== ========
Nonperforming assets as a percentage of
total assets 0.32% 0.18% n/a
======== ======== ========
Allowance for loan losses $564 $589 $147
======== ======== ========
Allowance for loan losses as a percentage
of loans 0.50% 0.50% 0.40%
======== ======== ========
For the year ended December 31,
Provision for loan losses $1,404 $983 $363
======== ======== ========
Net charge-offs $335 $37 $2
- ---------------------------------------------------------------------------------------
</TABLE>
1998 Outlook:
As noted above, competition in the high loan-to-value home equity
business has intensified since Irwin Home Equity was organized. The company
sees competition from three principal sources: (i) hundreds of small, localized
lenders entering the home equity business, (ii) first mortgage loans in
instances where underlying property has appreciated sufficiently such that the
homeowner can combine a second mortgage loan with a newly financed first
mortgage, and (iii) other consumer financial lenders which have entered this
growing market. Taken alone, these factors tend to reduce originations of any
one lender and accelerate the run-off of loans currently under management. The
home equity business believes it is appropriate over the long term to maintain
pricing discipline through this cycle of the market. In order to sustain market
share, the company plans to focus expansion efforts on testing new markets, new
products, and new delivery channels.
The business will maintain the flexibility of either holding the loans it
produces in portfolio or securitizing them. Management will evaluate these
options throughout the year in light of market conditions and financial
objectives.
Employees:
As of December 31, 1997, the home equity business employed 189
people. Total employment expense in 1997 was $11.2 million or 50.0% of total
operating expenses.
Irwin Home Equity Corporation
Directors and Senior Officers
- --------------------------------------------------------------------------------
Directors Elena Delgado President,
Irwin Home Equity Corporation
William I. Miller Chairman,
Irwin Financial Corporation
John A. Nash President,
Irwin Financial Corporation
Thomas D. Washburn Senior Vice President,
Irwin Financial Corporation
Senior Officers Elena Delgado President
Spencer J. Carlsen Vice President--Production
Edwin K. Corbin Vice President--Finance
Kathryn J. Diamond Vice President--Credit Risk Management
J. Christopher Huseby Vice President--Marketing and Business
Development
Sunita Liggin Vice President--Human Resources
Jocelyn Martin-Leano Vice President--Operations Support
Jack Nichols Vice President--Information Services
Fern Prosnitz Vice President--Legal Counsel
Management's Discussion (continued)
Business Profile: Equipment Leasing
<TABLE>
<CAPTION>
Selected Financial Data
(In thousands) 1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net interest income $4,809 $4,413 $4,081 $4,722 $3,914
Provision for loan and lease losses (1,250) (791) (672) (383) (276)
Noninterest income 713 418 300 123 47
-------- -------- -------- -------- --------
Total net revenues 4,272 4,040 3,709 4,462 3,685
Operating expenses 4,121 4,181 4,043 3,589 3,133
-------- -------- -------- -------- --------
Pre-tax income (loss) $151 $(141) $(334) $873 $552
======== ======== ======== ======== ========
Lease and loan volume $42,707 $36,624 $24,951 $23,585 $22,922
Net leases and loans outstanding 63,185 53,632 45,765 42,989 37,401
Number of leases and
loans outstanding 9.350 9.186 7.766 7.209 6.438
Average new lease and loan size $13.303 $9.298 $9.027 $9.152 $8.663
- -----------------------------------------------------------------------------------------------
</TABLE>
Overview & Strategy:
The equipment leasing line of business is made up of Irwin Equipment
Finance Corp. (previously known as Affiliated Capital Corp.) and the related
activities of Irwin Union Bank and Trust. Irwin Equipment Finance is a small-
ticket leasing company headquartered in Northbrook, Illinois, focused on the
medical equipment industry. The company was started by Irwin Financial in 1990
when it hired the staff and acquired the rights to the customers and vendors of
the predecessor company which had been in business since 1983.
The strategy of the equipment leasing business is to establish relationships
with manufacturers and distributors of medical equipment and to place leases
with medical professionals through the sales representatives of these vendors.
The business focuses on relatively low-cost equipment for health care
professionals.
1997 Review:
Equipment leasing recorded pre-tax income of $151.2 thousand in
1997, compared with a pre-tax loss of $140.8 thousand in 1996 and a pre-tax
loss of $333.7 in 1995. Lease and loan volume increased to $42.7 million in
1997, up 16.6% from $36.6 million in 1996 and 71.2% from $25.0 million in 1995.
However, because of increased competition in the equipment leasing industry
which created margin pressures, net interest income did not increase
commensurately. Net interest income totaled $4.8 million in 1997, an increase
of $0.4 million or 9.0% from 1996 and $0.7 million or 17.9% from 1995. The
provision for loan and lease losses totaled $1.3 million in 1997, up from $0.8
million in 1996 and $0.7 million in 1995. Operating expenses were $4.1 million
for the year, 1.4% lower than 1996 and 1.9% higher than 1995.
<TABLE>
<CAPTION>
Credit Quality:
(In thousands) 1997 1996 1995
- -----------------------------------------------------------------------------------------------
At December 31,
<S> <C> <C> <C>
Nonperforming loans $506 $1,261 $415
======== ======== =========
Nonperforming assets as a percentage of
total assets 0.75% 2.18% 0.84%
======== ======== =========
Allowance for loan losses $1,078 $823 $806
======== ======== =========
Allowance for loan losses as a percentage
of loans 1.68% 1.51% 1.73%
======== ======== =========
For the year ended December 31,
Provision for loan losses $1,250 $791 $672
======== ======== =========
Net charge-offs $995 $637 $500
- -----------------------------------------------------------------------------------------------
</TABLE>
1998 Outlook:
In early 1998, Matt Colasanti joined Irwin Equipment Finance as
its new President, bringing to the business over 30 years of asset-based
lending experience. Under his leadership, equipment leasing intends to pursue
opportunities to expand in 1998. Alternatives to be considered will include
becoming more active in the upper end of the medical equipment price range,
hiring additional field sales representatives to cover manufacturing accounts
more effectively, and moving into new lines of equipment.
Employees:
As of December 31, 1997, equipment leasing employed 35 people.Total
employment expense in 1997 was $2.3 million or 55.1% of total operating
expenses.
Irwin Equipment Finance Corp.
Directors and Senior Officers
- -----------------------------------------------------------------------------
Directors Matthew Colasanti President,
Irwin Equipment Finance Corp.
William I. Miller Chairman,
Irwin Financial Corporation
John A. Nash President,
Irwin Financial Corporation
Thomas D. Washburn Senior Vice President,
Irwin Financial Corporation
- ------------------------------------------------------------------------------
Senior Officers Matthew Colasanti President
Robert P. Albert Executive Vice President
David E. Levine Senior Vice President
Vincent F. D'Andrea Vice President and Controller
Stuart A. Simon Vice President--Sales
Other Irwin Financial Businesses:
The results of parent company and other subsidiary operations, net of
consolidating entries, are summarized below:
<TABLE>
<CAPTION>
(In thousands) 1997 1996 1995
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net revenues $20,329 $15,494 $17,986
Operating expenses (6,030) (5,636) (3,891)
Tax credit 632 903 2,275
-------- -------- --------
14,931 10,761 16,370
Eliminations (14,762) (12,052) (15,703)
-------- -------- --------
Income before preferred securities distribution 169 (1,291) $667
-------- -------- --------
Preferred securities distribution (4,473) - -
-------- -------- --------
Net income $(4,304) $(1,291) $667
- -----------------------------------------------------------------------------------------------
</TABLE>
Dividends from subsidiaries are recorded as parent company revenues but are
eliminated in determining consolidated net income. Tax benefits which resulted
from the operating losses generated by the home equity and equipment leasing
businesses were recorded by the parent company in previous years. In 1997,
when these two lines of business recorded operating profits, the parent
company recorded the related income tax expense. The parent company will
continue to do so until all of the losses carried forward have been used.
Each subsidiary pays taxes to the parent company at the statutory rate.
Subsidiaries also pay fees to the parent company to cover direct and indirect
services. In addition, services are provided from one subsidiary to another.
Inter-company income and expenses are calculated on an arm's-length, external
market basis and are eliminated in consolidation.
In January 1997, the Corporation issued $50,000,000 of trust preferred
securities through a trust created and controlled by the Corporation. Distribu-
tions to security holders totaled $4.5 million in 1997. See the section on the
consolidated balance sheet for further discussion of the trust preferred
securities.
Consolidated Income Statement Analysis:
Pre-tax income for 1997 totaled $42.2 million, up 13.1% from 1996 and 30.0%
Statement from 1995. The effective income tax rate was 42.0% in 1997, 39.8% in
1996, and 38.1% in 1995. Please see Note 18 of Notes to the Consolidated
Financial Statements for more information on income taxes.
Net interest revenue for 1997 totaled $54.9 million, up 9.7% from 1996 and
47.0% from 1995. The increase was due to increased lending volume at each of
the lines of business. Net interest margin was 4.95% in 1997 compared to 5.12%
in 1996 and 4.93% in 1995. See page 74 for further analysis of the net
interest margin.
The following table sets forth, for the periods indicated, a summary of the
changes in interest earned and interest paid resulting from changes in volume
and rates for the major components of interest-earning assets and interest-
bearing liabilities on a fully taxable equivalent basis:
<TABLE>
<CAPTION>
1997 Over 1996 1996 Over 1995
(In thousands) Volume Rate Total Volume Rate Total
- -----------------------------------------------------------------------------------------------
Interest Income:
<S> <C> <C> <C> <C> <C> <C>
Loans and leases $7,657 $(3,419) $4,238 $13,248 $779 $14,027
Mortgage loans held
for sale 4,429 (681) 3,748 6,760 3,456 10,216
Taxable investment
securities 921 (885) 36 528 1,741 2,269
Tax-exempt
securities (95) 29 (66) (171) (63) (234)
Interest-bearing
deposits
with financial
institutions 388 10 398 28 78 106
Federal funds sold (631) 15 (616) (619) (127) (746)
-------- -------- -------- -------- -------- --------
Total 12,669 (4,931) 7,738 19,774 5,864 25,638
-------- -------- -------- -------- -------- --------
Interest Expense:
Money market
checking (3) 75 72 254 (233) 21
Money market
savings (58) 10 (48) (88) (49) (137)
Regular savings 7 21 28 (23) (134) (157)
Time deposits 2,148 31 2,179 (268) 3,406 3,138
Short-term
borrowings 2,031 (358) 1,673 6,451 3,685 10,136
Long-term debt (907) (40) (947) 78 (22) 56
-------- -------- -------- -------- -------- --------
Total 3,218 (261) 2,957 6,404 6,653 13,057
-------- -------- -------- -------- -------- --------
Net interest
revenue $9,451 $(4,670) $4,781 $13,370 $(789) $12,581
- -----------------------------------------------------------------------------------------------
</TABLE>
Note: Variance not solely due to rate or volume is allocated on the basis of
the absolute relationship between volume variances and rate variances.
The consolidated provision for loan losses for 1997 was $6.2 million, up 37.0%
from 1996 and 95.1% from 1995. More information on this subject is contained
in the section on credit risk.
Other income increased 16.4% in 1997 to $174.6 million. This compares to
$150.0 million in 1996 and $114.1million in 1995. The most significant
increases came in the categories related to mortgage banking and home equity
lending activities which were previously discussed on pages 32 and 46.
Other expenses in 1997 totaled $176.5 million, up 11.6% from 1996 and 52.5%
from 1995. The 1997 increase in consolidated other expense of $18.4 million
was mostly due to operating expenses associated with expanded mortgage and
home equity loan production.
The trust preferred securities issued in 1997 had a negative impact on 1997
earnings as the fixed 9.25% coupon on the securities is above the
Corporation's marginal borrowing rate. The securities have, however,
strengthened the Corporation's capital base to enable continued expansion in
the coming years.
Consolidated Balance Analysis:
Total assets at year-end 1997 were $1.5 billion, up 15.1% from 1996 and 44.3%
Sheet from 1995. However, changes in the average balance sheet are a more
accurate reflection of the actual changes in the level of activity on the
balance sheet. Average assets were $1.3 billion in 1997, up 9.7% from 1996 and
43.1% from 1995. Mortgage loans held for sale increased by $51.2 million,
while loans and leases increased by $72.6 million on average in 1997. These
increases are the result of the expansion of operations throughout the
Corporation.
The Corporation's commercial loans are extended primarily to local regional
businesses and to local farming operations in the market area of Irwin Union
Bank. The Corporation also extends credit to consumers through installment
loans and revolving credit arrangements. The majority of the remaining
portfolio consists of residential mortgage loans (1-4 family dwellings),
mortgage loans on commercial property, and medical equipment leases. Loans by
major category at the end of the last five years were as follows:
<TABLE>
<CAPTION>
Loans by Category:
At December 31, (In thousands) 1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial, financial,
and agricultural $212,095 $179,650 $150,312 $136,083 $121,024
Real estate construction 73,279 48,991 36,126 21,960 21,258
Real estate mortgage 222,818 214,696 108,351 47,423 30,805
Consumer 39,985 38,371 67,756 55,323 41,101
Direct lease financing 78,079 62,372 60,979 58,348 52,555
Unearned income (15,163) (11,030) (10,999) (10,726) (10,627)
-------- -------- --------- ---------- ---------
Total $611,093 $533,050 $412,525 $308,411 $256,116
- -----------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Maturity Distribution of Loans: After
One But
Within Within After
At December 31, 1997 (In thousands) One Year Five Years Five Years Total
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial, financial, and agricultural $116,394 $83,059 $12,642 $212,095
Real estate construction 73,279 - - 73,279
Real estate mortgage 95,821 14,167 112,830 222,818
Consumer loans 8,120 26,458 5,407 39,985
Direct lease financing 58,510 19,374 195 78,079
--------
Total $626,256
========
Loans due after one year with:
Fixed interest rates $187,076
Variable interest rates 87,056
--------
Total $274,132
- -----------------------------------------------------------------------------------------------
</TABLE>
On average, investment securities increased $8.9 million in 1997 to $81.9
million. The carrying value of investments at December 31, 1997 includes
$76.7 thousand of unrealized gains on available-for-sale securities.
<TABLE>
<CAPTION>
Maturity Distribution of Investment Securities:
After
After Five
One But But
Within Within Within After
One Five Ten Ten
At December 31, 1997 (In thousands) Year Years Years Years
- ----------------------------------------------------------------------------------------
U.S. Treasury and Government
<S> <C> <C> <C> <C>
obligations $9,361 $12,259 $6,950 $13,216
Obligations of states and political
subdivisions 600 1,454 955 1,805
Mortgage-backed securities - 2,029 1,863 4,694
Interest-only strips and other 22,155 -- -- --
-------- -------- -------- --------
Total $32,116 $15,742 $9,768 $19,715
======== ======== ======== ========
Weighted Average Yield:
Held-to-maturity 6.18% 6.86% 7.89% 6.64%
Available-for-sale 8.50% 5.91% 6.70% 6.78%
- ----------------------------------------------------------------------------------------
</TABLE>
The yield on state and municipal obligations has been calculated on fully
taxable equivalent basis, assuming a 35% tax rate.
Deposits averaged $691.8 million during 1997, compared to $632.2 million in
1996 and $526.1 million in 1995. Demand deposits were up 9.9% on average, or
$23.5 million from 1996. A significant portion of demand deposits is related
to deposits at Irwin Union Bank which are associated with escrow accounts held
on loans in the servicing portfolio of Irwin Mortgage. These escrow accounts
averaged $200.8 million in 1997.
Maturities of certificates of deposit of $100 thousand or more are set forth
in the following table:
<TABLE>
<CAPTION>
At December 31, (In thousands) 1997 1996 1995
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
Under 3 months $60,379 $47,907 $27,131
3 to 6 months 10,123 5,127 6,299
6 to 12 months 10,115 7,493 14,378
After 12 months 5,411 5,977 6,268
-------- -------- --------
Total $86,028 $66,504 $54,076
- --------------------------------------------------------------------------------------
</TABLE>
Short-term borrowings averaged $365.0 million in 1997, compared to $334.3
million in 1996 and $217.3 million in 1995. The increase in 1997 is due to
the increase in mortgage loan closings in 1997.
The following table shows the distribution of the Corporation's short-term
borrowings and the weighted average rates at the end of each of the last
three years. Also provided are the maximum amount of borrowings and the
average amounts of borrowings as well as weighted average interest rates for
the last three years.
<TABLE>
<CAPTION>
Repurchase
Agreements
& Drafts Federal
Payable Home
Related to Loan Bank
Mortgage Borrowings Lines
Loan Commercial & Federal of
(In thousands) Closings Paper Funds Credit
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year Ended 1997 $240,659 $16,375 $142,650 $112,591
December 31: 1996 264,998 17,175 74,118 105,575
1995 225,873 21,723 40,000 22,683
Weighted average 1997 3.60% 6.00% 6.18% 6.87%
interest rates at 1996 4.65 5.95 5.80 6.68
year-end: 1995 4.32 6.32 6.02 7.35
Maximum amount 1997 $274,363 $16,375 $142,650 $151,111
outstanding at any 1996 270,516 27,214 121,000 135,442
month's end: 1995 271,694 21,723 52,448 38,596
Average amount 1997 $237,953 $12,738 $48,823 $65,490
outstanding during 1996 218,810 23,794 44,139 47,561
the year: 1995 155,726 19,125 20,497 6,109
Weighted average 1997 3.55% 6.01% 6.00% 6.65%
interest rate during 1996 3.78 6.02 5.80 6.80
the year: 1995 4.12 6.41 6.03 8.06
- ---------------------------------------------------------------------------------------------
</TABLE>
Capital:
Shareholders' equity averaged $123.5 million in 1997 up 13.3% from 1996 and
39.0% from 1995. Year-end shareholders' equity of $128.0 million represented
book value per share of $11.23, compared to $10.46 and $8.76 at December 31,
1996 and 1995, respectively.
Prior to the adoption of a new mortgage banking accounting standard 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 the new accounting standard, it represents
substantial economic value which is not recorded on the balance sheet. The
following table demonstrates the estimated after-tax value of the servicing
portfolio at December 31:
<TABLE>
<CAPTION>
(In thousands) 1997 1996 1995
- ------------------------------------------------------------------------
<S> <C> <C> <C>
Total loans serviced $10,713,549 $10,810,988 $10,301,914
----------- ----------- -----------
Value (@ 1.5%) $160,703 $162,165 $154,529
Less capitalized servicing 81,610 71,715 51,783
Tax liability (@ 40%) 31,637 36,180 41,098
----------- ----------- -----------
Net value $47,456 $54,270 $61,648
=========== =========== ===========
Per share of common stock $4.31 $4.77 $5.44
- ------------------------------------------------------------------------
</TABLE>
With the implementation of the new accounting standard in 1995, this off-
balance sheet value will decline over future years and eventually be reduced
to zero.
Total book value per share including the value of the servicing portfolio
was $15.54 at December 31, 1997, up from $15.23 and $14.20 at December 31,
1996 and 1995, respectively.
Capital is a major focus of regulatory attention, with both book and risk-
based capital standards used as capital adequacy measures. Unless an
institution has adequate capital in the opinion of the regulators, they may
withhold approval for new activities or force additions to capital.
Therefore, the Corporation considers both the regulators' viewpoint and its
own analysis of the capital structure and leverage amounts that are
consistent with underlying business risks.
<TABLE>
<CAPTION>
(In thousands) 1997 1996 1995
- -----------------------------------------------------------------------
<S> <C> <C> <C>
Tier 1 capital $169,366 $117,416 $92,554
Tier 2 capital 16,170 6,594 4,620
----------- ----------- -----------
Total risk-based capital $185,536 $124,010 $97,174
=========== =========== ===========
Risk-weighted assets $1,057,497 $871,460 $670,675
=========== =========== ===========
Risk-based ratios:
Tier 1 capital 16.02% 13.47% 13.80%
Total capital 17.54 14.23 14.49
Tier 1 leverage ratio 12.06 9.84 10.57
Ending shareholders' equity
to assets 8.55 9.15 9.56
Average shareholders' equity
to assets 9.78 9.46 10.07
- ----------------------------------------------------------------------
</TABLE>
At year-end 1997 the Corporation's total risk-adjusted capital ratio was
17.54% compared to 10.0 % which is required in order to be considered well
capitalized by the regulators. The Corporation's ending equity to assets ratio
for 1997 was 8.55%. However, as previously discussed, temporary conditions
which existed at year-end make the average balance sheet ratio a more accurate
measure of capital. The Corporation's average equity to assets for 1997 was
9.78%.
In January 1997, the Corporation issued $50,000,000 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.
Stock Prices Dividends:
The common stock of Irwin Financial is quoted on the National Association of
and Securities Dealers Automated Quotation System National Market System
(NASDAQ-NMS- trading symbol, IRWN). The following table sets forth certain
information regarding trading in, and cash dividends paid with respect to, the
shares of the Corporation's common stock in each quarter of the three most
recent calendar years.
<TABLE>
<CAPTION>
Total
Quarter Cash Dividends
1995 *High *Low *End *Dividends *For Year
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
First quarter $15-7/8 $13-3/4 $15-1/2 $0.055
Second quarter 17-5/8 15-1/2 17-1/4 0.055
Third quarter 18-1/4 17-1/4 17-3/4 0.055
Fourth quarter 20-1/8 17-5/8 20 0.055 $0.22
1996
- -----------------------------------------------------------------------------------------
First quarter $22-3/4 $19-3/4 $22-1/8 $0.060
Second quarter 22-1/4 19-5/8 19-5/8 0.060
Third quarter 21-5/8 17-7/8 21-1/4 0.060
Fourth quarter 24-3/4 21-1/4 24-3/4 0.060 $0.24
1997
- -----------------------------------------------------------------------------------------
First quarter $30-1/2 $24-1/4 $27-1/4 $0.070
Second quarter 29-1/2 24-5/8 29-1/2 0.070
Third quarter 37-1/4 28-3/4 37-1/4 0.070
Fourth quarter 43-3/4 36-1/2 41-7/8 0.070 $0.28
- -----------------------------------------------------------------------------------------
</TABLE>
*Adjusted for December 30, 1996 two-for-one stock split.
The Corporation expects to continue its policy of paying regular cash
dividends, although there is no assurance as to future dividends because they
are dependent on future earnings, capital requirements, and financial
condition. On February 19, 1998, the Corporation's Board of Directors approved
an increase in the first quarter dividend to $0.08 per share, payable in
March, 1998.
Risk Management:
As a financial intermediary, Irwin Financial Corporation is engaged in
businesses which involve the assumption of financial risks including:
Credit risk
Liquidity risk
Interest rate risk
Each line of business that assumes financial risk uses a formal process to
manage this risk. In all cases, the objectives are to ensure that risk is
contained within prudent levels and that we are adequately compensated for the
level of risk assumed. The Chairman, the President, and the Chief Financial
Officer of the parent company participate in each subsidiary's risk management
process.
Credit Risk:
The assumption of credit risk is a key source of earnings for the community
bank, home equity lending, and equipment leasing businesses. In addition, the
mortgage banking business assumes some credit risk despite the fact that its
mortgages are typically insured. The credit risk in the loan portfolios of the
community bank and the home equity lending business has the most potential to
have a significant effect on consolidated financial performance.
The community bank and home equity lending business manage credit risk through
the use of lending policies, credit analysis and approval procedures, periodic
loan reviews, and personal contact with borrowers. Loans over a certain size
are reviewed by a loan committee prior to approval.
The equipment leasing business manages credit risk in a manner similar to that
used by the community bank and the home equity business. It uses lending
policies, credit analysis procedures, and personal contact with lessees.
An allowance for loan and lease losses is established as an estimate of the
potential credit risk of the loans and leases held by the Corporation. In
determining the adequacy of this allowance, management evaluates the
creditworthiness of significant borrowers, past loan and lease loss
experience, and current and anticipated economic conditions. The allowance is
increased by provisions against income and recoveries of loans and leases
previously charged off.
Loans and leases that are determined by management to be uncollectible are
charged against the allowance. The table on page 66 analyzes the consolidated
allowance for loan and lease losses over the past five years.
Net charge-offs in 1997 were $2.6 million, up 46.4% from 1996, and up 24.1%
from 1995. Net charge-offs to average loans and leases was 0.46% compared to
0.36% in 1996 and 0.57% in 1995.
The provision for loan and lease losses was $6.2 million, 239.3% of net charge-
offs. The coverage ratio was 255.6% in 1996 and 152.3% in 1995.
At year end, the allowance for loan and lease losses was 1.44% of loans and
leases, compared to 1.29% in 1996 and 1.22% in 1995.
Total nonperforming loans and leases at year end were $7.7 million, compared
to $7.2 million at the end of 1996 and $2.6 million at the end of 1995.
Nonperforming loans and leases as a percent of total loans and leases were
1.26% at year-end 1997 compared to 1.35% in 1996 and 0.62% in 1995. Other real
estate owned totaled $1.8 million at December 31, 1997, up from $2.2 million
in 1996 and $0.3 in 1995. Total nonperforming assets were $9.5 million, or
0.64% of total assets at December 31, 1997, as compared to $9.4 million, or
0.72%, at year-end 1996 and $2.8 million, or 0.27% at the end of 1995.
Analysis of Allowance for Loan and Lease Losses
<TABLE>
<CAPTION>
(In Thousands) 1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------------------------
Loans and leases outstanding at
end of period, net of unearned
<S> <C> <C> <C> <C> <C>
income $611,093 $533,050 $412,525 $308,411 $256,116
======== ======== ======== ======== ========
Average loans and leases for the
period, net of unearned income $569,325 $496,729 $369,220 $279,389 $232,898
======== ======== ======== ======== ========
Allowance Balance beginning of period $6,875 $5,033 $4,174 $3,293 $3,220
for loan
and lease
losses:
Charge-offs: Commercial, financial, and
agricultural loans 800 495 845 266 1,074
Real estate mortgage loans 356 37 2 - -
Consumer loans 734 959 953 543 387
Lease financing 1,255 883 690 757 323
-------- -------- -------- -------- --------
Total charge-offs 3,145 2,374 2,490 1,566 1,784
-------- -------- -------- -------- --------
Recoveries: Commercial, financial, and
agricultural loans 32 133 2 34 82
Real estate mortgage loans 1 - - - -
Consumer loans 246 214 197 180 94
Lease financing 259 246 191 195 104
-------- -------- -------- -------- --------
Total recoveries 538 593 390 409 280
-------- -------- -------- -------- --------
Net charge-offs (2,607) (1,781) (2,100) (1,157) (1,504)
Reduction due to sale of loans (1,694) (930) (239) - -
Provision charged to expense 6,238 4,553 3,198 2,038 1,577
-------- -------- -------- -------- --------
Balance end of period $8,812 $6,875 $5,033 $4,174 $3,293
======== ======== ======== ======== ========
Allowance for By category of loans and leases
loan and Commercial, financial, and
lease losses: agricultural loans $5,118 $3,676 $2,349 $2,586 $2,031
Real estate mortgage loans 2,170 281 413 311 -
Consumer loans 446 1,974 1,420 767 650
Lease financing 1,078 944 851 510 612
-------- -------- -------- -------- --------
Total $8,812 $6,875 $5,033 $4,174 $3,293
======== ======== ======== ======== ========
Ratios: Net charge-offs to average loans
and leases 0.46% 0.36% 0.57% 0.41% 0.65%
Allowance for loan losses
to average loans and leases 1.55% 1.38% 1.36% 1.38% 1.41%
Allowance for loan losses to loans
and leases outstanding 1.44% 1.29% 1.22% 1.25% 1.29%
- ----------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Nonperforming Assets
(In thousands) 1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------
Accruing loans past due Commercial, financial, and
<S> <S> <C> <C> <C> <C> <C>
90 days or more: agricultural loans $382 $256 $418 $113 $800
Real estate mortgages 534 234 - - 141
Consumer loans 86 205 202 93 88
------ ------ ------ ------ ------
1,002 695 620 206 1,029
------ ------ ------ ------ ------
Nonaccrual loans and Commercial, financial, and
leases: agricultural loans 777 2,739 670 1,523 1,373
Real estate mortgages 5,333 2,481 848 947 848
Consumer loans 63 - - - 39
Lease financing receivables 506 1,261 415 363 242
------ ------ ------ ------ ------
6,679 6,481 1,933 2,833 2,502
------ ------ ------ ------ ------
Total nonperforming loans and
leases 7,681 7,176 2,553 3,039 3,531
Other real estate owned 1,828 2,239 295 489 623
------ ------ ------ ------ ------
Total nonperforming assets $9,509 $9,415 $2,848 $3,528 $4,154
======= ====== ====== ====== ======
Nonperforming loans and leases
to total loans and leases 1.26% 1.35% 0.62% 0.90% 1.38%
======= ====== ====== ====== ======
Nonperforming assets to total
assets 0.64% 0.72% 0.27% 0.50% 0.47%
- -----------------------------------------------------------------------------------------------
</TABLE>
Loans which are past due 90 days or more are placed on nonaccrual status
unless, in management's opinion, there is sufficient collateral value to
offset both principal and interest.
<TABLE>
<CAPTION>
Renegotiated and Nonaccrual Loans
(In thousands) 1997 1996 1995
- -----------------------------------------------------------------------------------
Interest which would have been recorded under
original terms
<S> <C> <C> <C>
Renegotiated $- $- $-
Nonaccrual 302 356 194
------ ------ ------
302 356 194
------ ------ ------
Interest income actually recorded
Renegotiated - - -
Nonaccrual 36 150 55
------ ------ ------
36 150 55
------ ------ ------
Reduction in interest income $266 $206 $139
- -----------------------------------------------------------------------------------
</TABLE>
No loan concentrations existed of more than 10% of total loans to borrowers
engaged in similar activities that would be similarly affected by economic or
other conditions.
Generally, the accrual of income is discontinued when the full collection of
principal or interest is in doubt, or when the payment of principal or
interest has become contractually 90 days past due unless the obligation is
both well secured and in the process of collection.
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 or sales and through short-term borrowings.
The objectives of liquidity management are to ensure that funds will be
available to meet demands and that funds are available at a reasonable cost.
As with other forms of financial risk, liquidity is managed separately at
each of the lines of business. In the case of Irwin Union Bank, this occurs
at the monthly meeting of the Asset-Liability Management Committee.
Since loans and leases are less marketable than securities, the ratio of
total loans to total deposits is the traditional measure of liquidity for
banks and bank holding companies. At year-end 1997 this ratio stood at 83.7%.
The Corporation is able to maintain this position of high liquidity without a
substantial sacrifice in the form of a lower net interest margin due to the
position in mortgage loans held for sale. These loans carry an interest rate
equal to the current market rate for mortgage loans. However, liquidity is
significantly improved since all mortgage loans held for sale are in the
process of being securitized and sold. The holding period for an individual
loan typically does not exceed 90 days.
Interest Rate Risk:
Interest rate risk 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 important that potential changes are
managed prudently.
The Asset-Liability Management Committee of the community bank monitors the
repricing structure of both assets and liabilities over various time
horizons. Exposure to changes in interest rates is evaluated by modeling the
repricing characteristics of the community bank's portfolio under multiple
rate scenarios. Formal policies approved by the community bank's Board of
Directors ensure that exposure to changes in net interest revenues is
maintained within acceptable levels.
The mortgage banking business assumes a form of interest rate risk by
entering into commitments to extend loans to borrowers at a fixed price for a
limited period of time. Loans are also held temporarily until a pool is
formed. Once again, a formal policy ensures that this risk is controlled. The
home equity and equipment leasing businesses are exposed to potential
interest rate risk that is similar to the lending operations of the community
bank.
Rate risk at the community bank can typically be managed by controlling the
maturity of loans, securities, and deposits. The community bank may also use
financial futures or interest rate swaps from time to time, although there
were none in place at December 31, 1997. The mortgage bank buys commitments
to deliver loans at a fixed price to manage risk. The policy at both the home
equity lending business and the equipment leasing business is to match-fund
all assets. In some cases, the Corporation uses internal hedges between
companies to allow for the risk characteristics of one line of business to
offset those of another line.
The following table shows in summary form the Corporation's interest rate
sensitivity based on expected interest rate repricing intervals for the
balance sheet as of December 31, 1997 (a "gap" analysis). For example, a 30-
year adjustable rate residential mortgage held in the portfolio of Irwin
Union Bank is included in the "4-12 month" category since that is the time
frame over which the asset will reprice. Some items, such as certain deposit
accounts, are non-interest bearing, but will vary in balance due to interest
rate changes. Since the Corporation relies on such accounts in its operations
and would need to replace them with "at market" liabilities should the non-
interest bearing ones be unavailable, they are included in the gap table and
in simulations as "non-market" items.
As the table shows, the consolidated one-year gap at December 31, 1997 was a
positive $143.0 million. This compares to a positive gap of $133.2 million at
December 31, 1996.
Since the gap was positive at December 31, 1997, it means that the
Corporation's net interest income 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. Through the use of simulations using regression modeling and
option-adjusted valuation techniques for modeling expected customer behavior,
the Corporation attempts to analyze and mitigate the interest rate risks
associated with the negatively correlated activities of 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 assets. 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.
<TABLE>
<CAPTION>
Interest Sensitivity:
Within 4 to 12 1 to 5 Over 5 Non-
(In thousands) 3 Months Months Years Years Market Total
- -----------------------------------------------------------------------------------------------
Assets:
Interest-bearing deposits
<S> <C> <C> <C> <C> <C> <C>
with banks $10,920 $4,027 $3,293 $- $- $18,240
Taxable investment
securities 20,193 17,889 28,232 6,213 - 72,527
Tax-exempt investment
securities 100 500 962 3,252 - 4,814
Mortgages held for sale 528,739 - - - - 528,739
Loans, net of unearned
income 269,988 99,787 146,186 95,132 - 611,093
-------- -------- --------- --------- -------- --------
Total interest- earning
assets 829,940 122,203 178,673 104,597 - 1,235,413
-------- -------- --------- --------- -------- --------
Liabilities:
Non-interest bearing
deposits - - - - 287,555 287,555
Money market checking 32,625 - 47,148 10,169 - 89,942
Money market savings 1,758 - 5,487 - - 7,245
Regular savings 25,565 1,939 10,343 7,992 - 45,839
Time deposits 166,381 64,683 57,186 764 - 289,014
Short-term borrowings 512,276 - - - - 512,276
Long-term debt 1,399 2,499 3,197 - - 7,095
-------- -------- --------- --------- -------- --------
Total interest- bearing
liabilities 740,004 69,121 123,361 18,925 287,555 $1,238,966
Trust preferred securities - - - 50,000 - 50,000
-------- -------- --------- --------- -------- --------
Interest sensitivity gap 89,936 53,082 55,312 35,672 (287,555) (53,553)
-------- -------- --------- --------- -------- --------
Cumulative interest
sensitivity gap $89,936 $143,018 $198,330 $234,002 $(53,553) $(53,553)
- ------------------------------------------------------------------------------------------------
</TABLE>
Note: This analysis is based on certain assumptions, including relative levels
of market interest rates, and should not be relied upon as indicative of actual
results.
Year 2000:
The year 2000 issue is the result of practices within the information
technology industry to program software and computer chips to store dates
in a six digit, shortcut format. For example, January 15, 1998, may be
written as 01/15/98 and the computer is programmed to assume that the first
two digits of the year are ''19''. As a result, certain computer systems
will not accurately interpret dates beyond December 31, 1999, and will
consider dates beginning January 1, 2000 to represent January 1, 1900. This
could result in a computer failure or miscalculations, causing operating
disruptions, including an inability to process transactions, send invoices
or engage in similar normal business activities. The Year 2000 issue exists
across all industries and could affect all businesses that use computers,
but is particularly relevant in the financial services industry served by
the Corporation.
The Company's Year 2000 Strategy:
The Corporation is actively addressing its exposure to the Year 2000
issue and has five teams (one at each of its four operating entities
and at the parent company) focusing on the issue. The Corporation has
developed a six-stage project plan that is expected to culminate in final
testing and implementation by mid-1999. The six stages include: (i) an
awareness campaign throughout the Corporation to raise the level of
importance and attention beyond that of a typical ''information
technology'' issue; (ii) assessment of the Corporation's Year 2000 problem,
including contract review, a technical audit and an estimation of
remediation costs; (iii) remediation of non-compliant systems through
repairs, upgrades or replacements of computer programs and chips; (iv)
testing of the Corporation's systems for Year 2000 compliance; (v)
implementation of the remediated systems and (vi) auditing of the completed
processes and remediation for post-year 2000 compliance. The Corporation has
engaged a leading technology-consulting firm to increase its level of
confidence that the methods and standards it employs to address the Year
2000 issue are appropriate and comprehensive.
The Corporation, together with its consultants, is currently in varying
stages of the assessment, remediation and testing steps of its plan and
cannot definitively estimate the extent of the problem for the Corporation
or the cost to remedy it. However, the Corporation does not currently
believe that the costs of the remediation will have a material impact on the
Corporation's results of operations, liquidity and capital.
The Corporation has developed a technology strategy that primarily uses
systems developed by third parties and has very few internally developed
applications. Consequently, the Corporation's principal focus is on assuring
Year 2000 compliance from its commercial application vendors. In those
instances where the Corporation believes a vendor may not be compliant in a
timely manner, the Corporation is taking additional steps to address its
needs with alternative systems.
The Risks of Unsuccessful Year 2000 Remediation:
Financial services require exact calculations and prompt delivery. If
the Corporation's products are not accurate and timely, it increases its
exposure to risks such as client service failure, regulatory compliance
problems and disruption of third party operations when it interacts with
third parties.
The Corporation currently expects to implement the necessary changes to
ensure that its internal operations are Year 2000 compliant prior to
December 31, 1999. To achieve this goal, the Corporation is reliant upon
its information system vendors to provide Year 2000 compliant systems
sufficiently before December 31, 1999 to allow ample time to test the
systems. There can be no assurance that all of the Corporation's key
suppliers will achieve Year 2000 compliance in a timely manner. The failure
of the Corporation's vendors to successfully address the Year 2000 issue in
a timely manner would have a materially adverse effect on the Corporation's
ability to successfully address the Year 2000 issue. In addition, if the
Year 2000 issue adversely affects the Corporation's customers, this in turn
could have a material adverse effect on the Corporation's ability to collect
and service outstanding loans. Finally, even if the Corporation's internal
operations and customers are Year 2000 compliant, the Corporation's
operations can be materially adversely affected if agencies and third
parties with whom the Corporation interacts fail to address the Year 2000
issue successfully.
Any of the failures mentioned above could have a material adverse effect on
the financial condition and results of operations of the Corporation.
<TABLE>
<CAPTION>
Daily Average Consolidated Balance Sheet,
Interest Rates and Interest Differential
For the year ended December 31, 1997
- ------------------------------------------------------------------------------------------------------------
Average Yield/
(In thousands) Balance Interest Rate
- ------------------------------------------------------------------------------------------------------------
Assets:
<S> <C> <C> <C>
Interest-earning assets: Interest-bearing deposits with banks $16,887 $1,001 5.93%
Federal funds sold 12,454 674 5.41
Taxable investment securities 77,590 6,309 8.13
Tax-exempt investment securities (1) 4,336 438 10.10
Mortgage loans held for sale 433,275 34,691 8.01
Loans and leases, net of unearned income (1) (2) 569,325 56,629 9.95
--------- -------- ------
Total interest-earning assets 1,113,867 99,742 8.95
--------- -------- ======
Noninterest-earning assets: Cash and due from banks 34,347
Premises and equipment, net 18,568
Other assets 103,682
Less allowance for possible loan and lease losses (7,750)
---------
Total assets $1,262,714
=========
Liabilities and Shareholders'
Equity:
Interest-bearing liabilities: Money market checking $79,549 1,643 2.07%
Money market savings 10,267 280 2.73
Regular savings 52,843 1,889 3.57
Time deposits 286,934 16,151 5.63
Short-term borrowings 365,005 23,788 6.52
Long-term debt 10,698 831 7.77
--------- -------- ------
Total interest-bearing liabilities 805,296 44,582 5.54
--------- -------- ======
Noninterest-bearing Demand deposits 262,190
liabilities: Other liabilities 71,745
Shareholders' equity 123,483
---------
Total liabilities and shareholders' equity $1,262,714
=========
Net interest income $55,160
=========
Net interest income to average interest-earning
assets 4.95%
- --------------------------------------------------------------------------------------------------------------
</TABLE>
Notes:
(1) Interest is reported on a fully taxable equivalent basis. The
prevailing federal income tax rate was 35% in 1997, 34.5% in 1996, and 34%
in 1995.
(2) For purposes of these computations, nonaccrual loans are included
in daily average loan amounts outstanding.
<TABLE>
<CAPTION>
1996 1995
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
- -------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C>
$10,282 $603 5.87% $9,737 $497 5.10%
24,370 1,290 5.29 35,006 2,036 5.82
67,654 6,273 9.27 59,765 4,004 6.70
5,348 504 9.43 6,961 738 10.60
379,027 30,943 8.16 285,808 20,727 7.25
496,729 52,391 10.55 369,220 38,364 10.39
--------- -------- -------- -------- -------- --------
983,410 92,004 9.36 766,497 66,366 8.66
--------- -------- -------- -------- -------- ========
38,309 36,263
17,425 15,011
118,115 68,677
(5,724) (4,284)
--------- --------
$1,151,535 $882,164
======== ========
$79,704 1,571 1.97% $68,491 1,552 2.27%
12,455 328 2.63 15,376 465 3.02
52,657 1,861 3.53 53,255 2,016 3.79
248,694 13,972 5.62 255,004 10,834 4.25
334,304 22,115 6.62 217,289 11,979 5.51
21,840 1,778 8.14 20,896 1,722 8.24
--------- -------- -------- -------- -------- --------
749,654 41,625 5.55 630,311 28,568 4.53
--------- -------- ======== -------- -------- ========
238,673 133,936
54,238 29,050
108,970 88,867
--------- --------
$1,151,535 $882,164
======== ========
$50,379 $37,798
======== ========
5.12% 4.93%
- -----------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Summary of Quarterly Financial Information 1997
Fourth Third Second First
Summary Income Information Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income $27,596,711 $26,237,031 $23,126,857 $22,480,656
Interest expense 12,988,884 11,705,079 10,031,950 9,856,575
Provision for loan and lease losses 1,374,000 2,042,000 2,019,000 803,000
Noninterest income 46,231,066 46,438,620 43,299,845 38,594,795
Noninterest expense 46,718,928 45,453,560 43,585,192 40,775,885
Income taxes 5,404,000 4,989,000 3,851,000 3,490,000
Distribution on company-obligated mandatorily
redeemable preferred securities of subsidiary trust 1,174,250 1,174,250 1,171,163 953,715
----------- ----------- ---------- ----------
Net income available to common shareholders $6,167,715 $7,311,762 $5,768,397 $5,196,276
=========== =========== ========== ==========
Earnings per share of common stock: Basic $0.56 $0.66 $0.52 $0.46
Diluted $0.55 $0.65 $0.40 $0.45
- --------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
1996
Fourth Third Second First
Summary Income Information Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income $26,764,136 $23,062,016 $22,003,722 $19,815,562
Interest expense 12,230,332 10,591,010 9,885,847 8,918,120
Provision for loan and lease losses 1,199,000 1,126,000 1,227,000 1,001,000
Noninterest income 38,970,187 38,175,755 38,338,607 34,496,076
Noninterest expense 41,152,175 40,346,212 40,706,745 35,955,282
Income taxes 4,243,000 3,672,000 3,495,000 3,449,000
----------- ----------- ---------- ----------
Net income $6,909,816 $5,502,549 $5,027,737 $4,988,236
=========== =========== ========== ==========
Earnings per share of common stock: Basic $0.61 $0.48 $0.44 $0.44
Diluted $0.60 $0.48 $0.43 $0.33
- -------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
1995
Fourth Third Second First
Summary Income Information Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income $20,631,271 $17,990,434 $14,713,938 $12,552,550
Interest expense 9,919,789 8,020,339 5,926,174 4,701,985
Provision for loan and lease losses 1,016,000 962,000 571,000 649,000
Noninterest income 33,761,560 30,861,480 24,774,257 24,719,834
Noninterest expense 34,040,371 30,532,492 27,258,576 23,958,396
Income taxes 4,117,000 3,298,000 1,480,000 3,471,000
----------- ----------- ---------- ----------
Net income $5,299,671 $6,039,083 $4,252,445 $4,492,003
=========== =========== ========== ==========
Earnings per share of common stock: Basic $0.47 $0.53 $0.38 $0.40
Diluted $0.46 $0.53 $0.37 $0.40
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
1997 Financial Statements
Irwin Financial Corporation
and Subsidiaries
Management Report on Responsibility for Financial Reporting
The management of Irwin Financial Corporation and its subsidiaries has the
responsibility of preparing the accompanying financial statements and for
their integrity and objectivity. The statements were prepared in conformity
with generally accepted accounting principles and are not misstated due to
material fraud or error. The financial statements include amounts that are
based on management's best estimates and judgments. Management also prepared
the other information in the annual report and is responsible for its
accuracy and consistency with the financial statements.
The Corporation's financial statements have been audited by Coopers & Lybrand
L.L.P., independent certified public accountants elected by the shareholders.
Management has made available to Coopers & Lybrand all the Corporation's
financial records and related data, as well as the minutes of stockholders'
and directors' meetings. Furthermore, management believes that all
representations made to Coopers & Lybrand during its audit were valid and
appropriate.
Management of the Corporation has established and maintains a system of
internal control that provides reasonable assurance as to the integrity and
reliability of the financial statements, the protection of assets from
unauthorized use or disposition, and the prevention and detection of
fraudulent financial reporting. Assessments of the system of internal control
are based on criteria for effective internal control over financial reporting
described in ''Internal Control-Integrated Framework'' issued by the
Committee of Sponsoring Organizations of the Treadway Commission. Management
continually monitors the system of internal control for compliance. The
Corporation maintains a strong internal auditing program that independently
assesses the effectiveness of the internal controls and recommends possible
improvements thereto. In addition, as part of its audit of the Corporation's
financial statements, Coopers & Lybrand completed an assessment of selected
internal accounting controls to establish a basis for reliance thereon in
determining the nature, timing, and extent of audit tests to be applied.
Management has considered the internal auditor's and Coopers & Lybrand's
recommendations concerning the Corporation's system of internal control and
has taken actions to respond appropriately to these recommendations that we
believe are cost effective in the circumstances. Management believes that the
Corporation's system of internal control is adequate to accomplish the
objectives discussed herein.
Management also recognizes its responsibility for fostering a strong ethical
climate so that the Corporation's affairs are conducted according to the
highest standards of personal and corporate conduct. This responsibility is
characterized and reflected in the Corporation's Guiding Philosopy, which is
publicized throughout the Corporation. This responsibility is also reflected
in the individual Codes of Conduct of each major operating subsidiary of the
Corporation, which are publicized throughout each respective subsidiary.
These Codes of Conduct address, among other things, the necessity of ensuring
open communication within the Corporation; potential conflicts of interests;
compliance with all domestic and foreign laws, including those related to
financial disclosures; and a confidentiality of proprietary information. The
Corporation maintains a systematic program to assess compliance with these
policies.
John A. Nash, President
Thomas D. Washburn, Chief Financial Officer
Report of Coopers & Lybrand L.L.P. Independent Accountants
To the Shareholders and Board of Directors
Irwin Financial Corporation
Columbus, Indiana
We have audited the accompanying consolidated balance sheet of Irwin
Financial Corporation and subsidiaries as of December 31, 1997 and 1996, and
the related consolidated statements of income, changes in shareholders'
equity and cash flows for each of the three years in the period ended
December 31, 1997. These financial statements are the responsibility of the
Corporation's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement.
An audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Irwin Financial
Corporation and subsidiaries as of December 31, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles.
Indianapolis, Indiana
January 21, 1998
<TABLE>
<CAPTION>
Consolidated Statements of Income:
For the year ended December 31, 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income: Loans and leases $56,490,102 $52,202,866 $38,176,878
Investment securities:
Taxable 7,310,668 6,876,348 4,501,359
Tax-exempt 275,351 332,866 447,353
Loans held for sale 34,690,675 30,943,144 20,726,833
Federal funds sold 674,459 1,290,212 2,035,770
----------- ----------- -----------
Total interest income 99,441,255 91,645,436 65,888,193
----------- ----------- -----------
Interest expense: Deposits 19,962,887 17,732,481 14,868,026
Short-term borrowings 23,788,247 22,115,307 11,978,591
Long-term debt 831,354 1,777,521 1,721,670
----------- ----------- -----------
Total interest expense 44,582,488 41,625,309 28,568,287
----------- ----------- -----------
Net interest income 54,858,767 50,020,127 37,319,906
Provision for loan and lease losses -
Note 5 6,238,000 4,553,000 3,198,000
----------- ----------- -----------
Net interest income after provision for possible
loan and lease losses 48,620,767 45,467,127 34,121,906
----------- ----------- -----------
Other income: Loan origination income 41,370,257 43,779,433 32,133,179
Gain on sale of loans 38,609,567 34,247,800 21,005,875
Loan servicing fees 53,257,304 46,876,741 36,155,560
Gain on sale of mortgage servicing 32,630,789 16,378,230 15,271,081
Brokerage fees and commissions 703,218 1,219,310 2,792,436
Trust fees 2,109,001 1,995,153 2,009,864
Service charges on deposit accounts 1,490,806 1,444,669 1,238,731
Insurance commissions, fees and premiums 1,615,311 1,544,053 1,304,625
Other 2,778,073 2,495,236 2,205,780
----------- ----------- -----------
174,564,326 149,980,625 114,117,131
----------- ----------- -----------
Other expense: Salaries 86,532,643 79,016,893 61,082,725
Pension and other employee benefits 13,723,509 12,579,018 10,638,338
Office expense 10,582,520 10,387,037 7,859,511
Premises and equipment 16,621,449 13,902,901 12,307,288
Amortization of servicing assets 15,754,963 14,331,423 4,865,340
Marketing and development 7,697,141 7,364,604 6,845,335
Other 25,621,340 20,578,538 12,191,298
----------- ----------- -----------
176,533,565 158,160,414 115,789,835
----------- ----------- -----------
Income before income taxes 46,651,528 37,287,338 32,449,202
Income taxes 17,734,000 14,859,000 12,366,000
28,917,528 22,428,338 20,083,202
----------- ----------- -----------
Distribution on company-obligated
mandatorily redeemable preferred
securities of subsidiary trust - Note 15 4,473,378 - -
----------- ----------- -----------
Net income available to common shareholders $24,444,150 $22,428,338 $20,083,202
=========== =========== ===========
Earnings per Basic - Note 17 $2.19 $1.97 $1.78
=========== =========== ===========
share of common Diluted - Note 17 $2.15 $1.95 $1.76
=========== =========== ===========
stock: Dividends per share of common stock $0.28 $0.24 $0.22
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<TABLE>
<CAPTION>
Consolidated Balance Sheet:
December 31, 1997 1996
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets: Cash and due from banks $56,523,723 $71,365,788
Interest-bearing deposits with financial institutions 18,240,229 11,343,546
Investment securities - Note 3 77,341,443 85,785,764
Mortgage loans held for sale - Note 9 528,738,820 446,897,525
Loans and leases, net of unearned income - Note 4 611,092,809 533,050,282
Less: Allowance for loan and
lease losses - Note 5 (8,811,645) (6,874,944)
-------------- ------------
602,281,164 526,175,338
Servicing assets - Note 6 83,043,939 72,121,663
Accounts receivable 54,260,792 37,941,660
Accrued interest receivable 14,778,885 6,724,973
Premises and equipment - Note 7 21,040,206 18,687,620
Other assets 40,544,715 23,078,227
-------------- ------------
$1,496,793,916 $1,300,122,104
============== ============
Liabilities and
Shareholders' Equity: Deposits
Noninterest-bearing $287,555,280 $371,911,039
Interest-bearing 346,012,401 201,737,661
Certificates of deposit over $100,000 86,027,844 66,504,205
-------------- ------------
719,595,525 640,152,905
Short-term borrowings - Note 9 512,275,185 461,866,326
Long-term debt - Note 10 7,095,718 17,658,925
Other liabilities 81,917,591 61,541,868
-------------- ------------
Total liabilities 1,320,884,019 1,181,220,024
-------------- ------------
Company-obligated mandatorily redeemable preferred
securities of subsidiary trust - Note 15 47,926,556 -
Shareholders' equity
Preferred stock, no par value -
authorized 50,000 shares; none issued - -
Common stock; no par value -
authorized 40,000,000 shares; issued
11,701,040 shares in 1997 and 1996; including
700,640 and 332,268 shares in treasury in
1997 and 1996, respectively 29,965,287 29,965,287
Additional paid-in capital 779,976 -
Net unrealized gain on investment securities
net of deferred income taxes of $30,683 in 1997
and $20,463 in 1996. 54,895 56,523
Retained earnings 115,413,986 94,083,540
-------------- ------------
146,214,144 124,105,350
Less treasury stock, at cost (18,230,803) (5,203,270)
-------------- ------------
Total shareholders' equity 127,983,341 118,902,080
-------------- ------------
$1,496,793,916 $1,300,122,104
============== ==============
</TABLE>
<TABLE>
<CAPTION>
Net Unrealized
Additional Gain (Loss)
Common Paid-In on Investment Retained Treasury
Stock Capital Securities Earnings Stock
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1995 $29,965,287 $- $(279,063) $57,080,536 $5,662,814
Net income - - - 20,083,202 -
Cash dividends - $.022 per share* - - - (2,482,705) -
Unrealized losses on investment
securities - - 269,406 - -
Tax benefit on exercise of stock options 704,394
Purchase of 177,570 shares of
treasury stock* - - - - 2,887,611
Sale of 247,826 shares of treasury stock* - (704,394) - (33,322) (3,163,565)
------------ ----------- ----------- ------------ -----------
Balance at December 31, 1995 29,965,287 - (9,657) 74,647,711 5,386,860
Net income - - - 22,428,338 -
Cash dividends - $0.24 per share* - - - (2,725,921) -
Unrealized gains on investment
securities - - 66,180 - -
Tax benefit on exercise of stock options 516,431
Purchase of 89,428 shares of
treasury stock* - - - - 1,930,831
Sale of 128,368 shares of treasury stock* - (516,431) - (266,588) (2,114,421)
------------ ----------- ----------- ------------ -----------
Balance at December 31, 1996 29,965,287 - 56,523 94,083,540 5,203,270
Net income - - - 24,444,150 -
Cash dividends - $0.28 per share - - - (3,113,704) -
Unrealized loss on investment
securites - - (1,628) - -
Tax benefit on exercise of stock options - 575,702 - - -
Purchase of 470,491 shares of
treasury stock - - - - 14,411,445
Sale of 102,119 shares of treasury stock - 204,274 - - (1,383,912)
------------ ----------- ----------- ------------ -----------
Balance at December 31, 1997 $29,965,287 $779,976 $54,895 $115,413,986 $18,230,803
============ =========== =========== ============ ===========
</TABLE>
*Adjusted for the two-for-one stock split on December 30,1996.
The accompanying notes are an integral part of the consolidated financial
statements.
<TABLE>
<CAPTION>
For the year ended December 31, 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Income $24,444,150 $22,428,338 $20,083,202
Adjustment to Depreciation and amortization 20,265,379 20,367,079 9,605,234
reconcile net Provision for loan and lease losses 6,238,000 4,553,000 3,198,000
income to cash Amortization of premiums, less accretion
used by operating of discounts 1,715,575 1,588,570 574,956
activities: Mortgage loan originations (5,397,338,225) (5,085,625,446) (3,559,310,152)
Sale of mortgage loans 5,315,496,930 5,019,183,189 3,335,616,389
Gain on sale of mortgage servicing (32,630,789) (16,378,230) (15,271,081)
Other, net (31,294,699) (22,240,852) (5,906,443)
--------------- --------------- ---------------
Net cash used by operating
activities (93,103,679) (56,124,352) (211,409,895)
Lending and Proceeds from maturities/calls of
investing activities: investment securities:
Held-to-maturity 6,541,560 5,045,000 53,491,466
Available-for-sale 7,534,330 29,740,946 9,507,979
Proceeds from sales of investment
securities:
Available-for-sale 26,309,090 2,028,462 3,008,031
Purchase of investment securities:
Held-to-maturity (3,868,050) (14,286,470) (35,814,475)
Available-for-sale (20,315,675) (36,371,550) (14,280,795)
Net (increase) decrease in interest-bearing
deposits with financial institutions (6,896,683) (3,405,806) 4,226,466
Net increase in loans, excluding sales (414,204,601) (258,412,078) (158,013,297)
Sale of loans 331,860,775 139,409,589 51,583,722
Additions to mortgage servicing assets (63,175,866) (81,044,704) (49,486,423)
Proceeds from sale of mortgage
servicing assets 69,129,416 65,163,338 30,190,930
Other, net (5,930,547) (5,650,679) (5,270,777)
--------------- --------------- ---------------
Net cash used by lending
and investing activities (73,016,251) (157,783,952) (110,857,173)
Financing activities: Net increase in deposits 79,442,620 76,154,258 124,080,673
Net increase in short-term
borrowings 50,408,859 151,604,066 216,297,587
Repayment of long-term debt (10,563,207) (12,771,802) (7,747,676)
Proceeds from long-term debt - 8,839,536 5,293,058
Sale of company-obligated manditorily
redeemable preferred securities of
` subsidiary trust 47,926,556 - -
Purchase of treasury stock (14,411,445) (1,930,831) (2,887,611)
Proceeds from sale of stock for employee
benefit plans 1,588,186 1,847,833 3,130,243
Dividends paid (3,113,704) (2,725,921) (2,482,705)
--------------- --------------- ---------------
Net cash provided by
financing activities 151,277,865 221,017,139 335,683,569
--------------- --------------- ---------------
Net increase (decrease) in cash and
cash equivalents (14,842,065) 7,108,835 13,416,501
Cash and cash equivalents at beginning
of year 71,365,788 64,256,953 50,840,452
--------------- --------------- ---------------
Cash and cash equivalents at end of year $56,523,723 $71,365,788 $64,256,953
=============== =============== ===============
Supplemental
disclosures of cash
flow information:
Cash paid during the year:
Interest $45,554,266 $41,248,019 $27,551,606
=============== =============== ===============
Income taxes $9,912,325 $26,230,350 $23,829,990
=============== =============== ===============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
Notes to Consolidated Financial Statements
Note 1: Summary of 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.
Use of Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires the Corporation to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Securities: Those 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. Securities that are bought and held for the purpose of
selling them in the near term are classified as ''trading'' and are stated at
fair value. Unrealized gains and losses are included in earnings. Investment
gains and losses are based on the adjusted cost of the specific security.
Mortgage Loans Held for Sale: Mortgage loans held for sale are carried at the
lower of cost or market, determined on an aggregate basis.
Loans: Loan origination fees and costs are deferred and the net amounts are
amortized as adjustments of the loans' yields. When loans are sold, deferred
fees and costs are included with outstanding principal balances and the
resulting gain or loss is recognized in income. Interest income on loans is
computed daily based on the principal amount of loans outstanding. The accrual
of interest income is discontinued when a loan becomes 90 days past due as to
principal or interest. Management may elect to continue the accrual of
interest when the estimated net realizable value of collateral is sufficient
to cover the principal balance and accrued interest.
Direct Financing Leases: Interest and service charges, net of initial direct
costs, are deferred and reported as income in decreasing amounts over the life
of the lease, which averages three to four years, so as to provide an
approximate constant yield on the outstanding principal balance.
Allowance for Loan and Lease Losses: The allowance for loan and lease losses
is maintained at a level considered adequate to provide for future loan and
lease losses and is based on management's evaluation of expected losses in the
portfolios, as well as prevailing and anticipated economic conditions. Loans
are considered impaired if it is probable that the Corporation will be unable
to collect the scheduled payments of principal or interest when due according
to the contractual terms of the loan agreement. The measurement of impaired
loans is generally based on the present value of expected future cash flows
discounted at the historical effective interest rate, except that all
collateral-dependent loans are measured for impairment based on the fair value
of the collateral.
Servicing Assets: On May 12, 1995, the Financial Accounting Standards Board
issued SFAS No. 122, "Accounting for Mortgage Servicing Rights" (SFAS No.
122), an amendment to SFAS No. 65. The Corporation elected to adopt this
standard for its financial statement reporting in the second quarter of 1995.
SFAS No. 122 prohibits retroactive application. Accordingly, the Corporation's
first quarter 1995 mortgage banking activities reported in the financial
statements were accounted for under the original SFAS No. 65. The effect of
the change in accounting standards to 1995 results was an increase to net
income of approximately $11,800,000 for the last three quarters of 1995 over
what would have been earned under SFAS 65.
In 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 standard established the
accounting treatment to be used for the securitization of all financial assets
and superseded SFAS No. 122. The adoption of this standard did not have a
material effect on the Corporation's financial position or results of
operations in 1997.
SFAS No. 125 requires that when a loan is sold and servicing is retained a
portion of the cost of originating a loan be allocated to the servicing asset
based on its fair value relative to the loan as a whole. To determine the fair
value of the servicing assets 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 assets. 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. Servicing assets 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 year, the
servicing portfolio was disaggregated into its predominant risk
characteristics. The Corporation has determined those risk characteristics to
be interest rate, loan type and investor type. These segments of the portfolio
were 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 the required reserve for impairment. It is reasonably possible that
a change in the impairment reserve will occur in the near term. No reasonable
estimate can be made of the range of amounts of loss or gain.
Premises and Equipment: Premises and equipment are recorded at cost.
Depreciation is determined by the straight-line method.
Earnings Per Share: In 1997 the Corporation adopted Statement of Financial
Accounting Standards No. 128, "Earnings Per Share" (SFAS No. 128). Under this
standard, earnings per share are calculated as "basic" and "diluted" based on
the weighted average number of common shares outstanding during the year.
Previous years earnings per share calculations have been restated to reflect
the adoption of SFAS No. 128.
Income Taxes: A consolidated tax return is filed for all eligible entities.
Deferred income taxes are provided for temporary differences between the
financial statement carrying amounts and the tax bases of assets and
liabilities. Rehabilitation tax credits and low-income housing tax credits are
recorded as a reduction to the provision for federal income taxes in the year
the eligible buildings are placed in service.
Postretirement Benefits: The Corporation provides health insurance benefits to
its retirees and accrues the costs as incurred.
Cash and Cash Equivalents Defined: For purposes of the statement of cash
flows, the Corporation considers cash and due from banks to be cash
equivalents.
Forward Commitments: The Corporation uses forward contracts to reduce its
interest rate exposure associated with mortgage banking activities.
Reclassifications: Certain amounts in the 1996 and 1995 consolidated financial
statements have been reclassified to conform to the 1997 presentation.
Note 2: Restrictions on Cash And Due From Banks
Irwin Union Bank and Trust Company is required to maintain a reserve balance
with the Federal Reserve Bank. The amount of the reserve balance at
December 31, 1997 was approximately $5,271,000.
Note 3: Investment Securities
The amortized cost, fair value, and carrying value of investments held at
December 31, 1997 are as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair Carrying
December 31, 1997 Cost Gains Losses Value Value
- ---------------------------------------------------------------------------------------------------------------
Held-to-Maturity:
U.S. Treasury and
<S> <C> <C> <C> <C> <C>
Government obligations $35,732,672 $204,004 $- $35,936,676 $35,732,672
Obligations of states and
political subdivisions 4,813,919 286,725 (5,650) 5,094,994 4,813,919
Mortgage-backed
securities 5,968,340 202,150 - 6,170,490 5,968,340
----------- --------- ------------ ------------ ------------
Total held-to-maturity 46,514,931 692,879 (5,650) 47,202,160 46,514,931
----------- --------- ------------ ------------ ----------
Trading:
Interest-only strips 23,961,793 - (1,828,000) 22,133,793 22,133,793
----------- --------- ------------ ------------ ----------
Available-for-Sale:
U.S. Treasury and
Government obligations 6,010,129 42,823 - 6,052,952 6,052,952
Mortgage-backed
securities 2,605,882 12,748 (826) 2,617,804 2,617,804
Other - 21,963 - 21,963 21,963
----------- --------- ------------ ------------ ------------
Total available-for-sale 8,616,011 77,534 (826) 8,692,719 8,692,719
----------- --------- ------------ ------------ -----------
Total investments $79,092,735 $770,413 $(1,834,476) $78,028,672 $77,341,443
============ ========= ============ ============ ============
</TABLE>
The amortized cost, fair value, and carrying value of investments held at
December 31, 1996 are as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair Carrying
December 31, 1996 Cost Gains Losses Value Value
- -------------------------------------------------------------------------------------------------------------
Held-to-Maturity:
U.S. Treasury and
<S> <C> <C> <C> <C> <C>
Government obligations $38,317,039 $249,615 $(47,039) $38,519,615 $38,317,039
Obligations of states and
political subdivisions 4,466,043 299,937 (1,106) 4,764,874 4,466,043
Mortgage-backed
securities 7,153,865 193,341 - 7,347,206 7,153,865
----------- --------- ------------ ------------ ----------
Total held-to-maturity 49,936,947 742,893 (48,145) 50,631,695 49,936,947
----------- --------- ------------ ------------ -----------
Trading:
Interest-only strips 12,661,284 - - 12,661,284 12,661,284
----------- --------- ------------ ------------ ----------
Available-for-Sale:
U.S. Treasury and
Government obligations 19,886,179 64,280 (26,412) 19,924,047 19,924,047
Mortgage-backed
securities 3,224,342 15,418 (2,127) 3,237,533 3,237,533
Other 25 25,828 - 25,853 25,853
----------- --------- ------------ ------------ -----------
Total available-for-sale 23,110,546 105,526 (28,539) 23,187,533 23,187,533
----------- --------- ------------ ------------ -----------
Total investments $85,708,777 $848,419 $(76,684) $86,480,512 $85,785,764
============ ========= ============ ============ ============
</TABLE>
The amortized cost and fair value of debt securities at December 31, 1997,
by contractual maturity, are shown below. Expected maturities will differ
from contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
- -------------------------------------------------------------------------
Held-to-Maturity:
<S> <C> <C>
Due in one year or less $9,908,721 $9,929,714
Due after one year through five years 12,673,252 12,875,206
Due after five years through ten years 2,943,468 3,052,247
Due after ten years 1,805,000 1,958,353
------------ ------------
27,330,441 27,815,520
Mortgage-backed securities 5,968,340 6,170,490
Federal Reserve Bank stock 1,030,550 1,030,550
Federal Home Loan Bank stock 12,185,600 12,185,600
------------ ------------
46,514,931 47,202,160
Trading:
Interest-only strips 23,961,793 22,133,793
------------ ------------
Available-for-Sale:
Due in one year or less 51,921 73,884
Due after one year through five years 3,031,872 3,053,532
Due after five years through ten years 2,926,336 2,947,499
------------ ------------
6,010,129 6,074,915
Mortgage-backed securities 2,605,882 2,617,804
------------ ------------
8,616,011 8,692,719
------------ ------------
Total investments $79,092,735 $78,028,672
============ ============
</TABLE>
Investment securities amounting to $14,381,699 were pledged as collateral for
borrowings and for other purposes on December 31, 1997. During 1997, 1996,
and 1995, sales of "available for sale" investments with proceeds of
$26,253,000, $2,028,462, and $3,008,031 resulted in a gross gain of $56,090
and gross losses of $8,899 and $15,786, respectively. Additionally in 1997,
1996, and 1995, "held-to-maturity" investments totaling $7,020,000,
$1,499,000 and $4,446,100, respectively, were called at their par value.
As permitted by the November 1995 FASB Special Report on the accounting for
investments, the Corporation transferred $8,850,000 of investment securities
from the ''held-to-maturity'' category to the ''available-for-sale''category
in 1995. These investments had a market value of $8,862,955 at the time of
transfer.
Note 4: Loans and Leases
Loans and leases are summarized as follows:
<TABLE>
<CAPTION>
December 31, 1997 1996
- ------------------------------------------------------------------------
<S> <C> <C>
Commercial, financial, and agricultural $212,094,742 $179,650,053
Real estate-construction 73,279,176 48,990,519
Real estate-mortgage 222,817,979 214,696,617
Consumer 39,984,692 38,371,100
Direct financing leases 78,079,206 62,371,808
Unearned income (15,162,986) (11,029,815)
------------ ------------
Total $611,092,809 $533,050,282
============ ============
</TABLE>
Commercial loans are extended primarily to local regional businesses and to
local farming operations in the market area of Irwin Union Bank. The
Corporation also provides consumer loans to the customers in that market. Real
estate loans and direct financing leases are extended throughout the United
States.
The Bank, in the normal course of business, makes loans to directors,
officers, and organizations and individuals with which they are associated.
These transactions are consistent with sound banking practices and are within
applicable bank regulatory guidelines and limitations. Such loans amounted to
approximately $1,862,000 and $4,277,000 at December 31, 1997 and 1996,
respectively. During 1997, $17,244,000 of
new loans were made and repayments totaled $19,448,000.
The Corporation leases small-ticket medical and other equipment under direct
financing leases generally with terms from one to five years. At December 31,
1997, information pertaining to the Corporation's investment in direct
financing leases is as follows:
Future minimum lease payments receivable $70,975,564
Estimated unguaranteed residual value of leased assets 7,103,642
------------
Investment in direct financing leases 78,079,206
Unearned income (15,162,986)
------------
Net investment in direct financing leases $62,916,220
============
Future minimum lease payments receivable during the next five years are as
follows:
1998 $26,615,003
1999 20,588,909
2000 14,464,985
2001 7,623,507
2002 1,683,160
------------
Total $70,975,564
============
Note 5: Allowance for Loan and Lease Losses:
Changes in the allowance for loan and lease losses are summarized below:
<TABLE>
<CAPTION>
December 31, 1997 1996 1995
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year $6,874,944 $5,033,181 $4,174,323
Provision for loan and lease losses 6,238,000 4,553,000 3,198,000
Reduction due to sale of loans (1,694,316) (931,101) (238,919)
Recoveries 538,213 593,421 389,674
Charge-offs (3,145,196) (2,373,557) (2,489,897)
------------ ------------ ------------
Balance at end of year $8,811,645 $6,874,944 $5,033,181
============ ============ ============
</TABLE>
At December 31, 1997, 1996 and 1995, the recorded investment in loans for
which impairment has been recognized in accordance with SFAS No. 114 and
SFAS No. 118 totaled $2,714,098, $4,334,968, and $6,543,932, respectively.
These loans had a corresponding valuation allowance of $726,614, $1,167,184,
and $742,901 determined based on the fair value of the loans' collateral.
The Corporation recognized $155,414, $356,917, and $260,886 of interest
income on these loans in 1997, 1996 and 1995, respectively.
Note 6: Servicing Assets
Included on the consolidated balance sheet at December 31, 1997 and 1996 are
$83,043,939 and $72,121,663, respectively, of servicing assets. These
amounts relate to the principal balances of loans serviced by the
Corporation for investors. Although they are not generally held for purposes
of sale, there is an active secondary market for servicing assets.
The Corporation has established a valuation allowance to record servicing
assets at their fair market value. Changes in the allowance are summarized
below:
<TABLE>
<CAPTION>
December 31, 1997 1996 1995
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year $- $908,778 $-
Valuation changes during the period 600,000 (254,427) 908,778
Reductions due to sales of servicing assets - (654,351) -
------------ ------------ ------------
Balance at end of year $600,000 $- $908,778
============ ============ ============
</TABLE>
Note 7: Premises and Equipment
Premises and equipment are summarized as follows:
<TABLE>
<CAPTION>
December 31, 1997 1997 Useful lives
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <S><C>
Land $1,651,149 $1,221,918 n/a
Building and leasehold improvements 13,375,410 10,824,250 7-40 years
Furniture and equipment 27,367,664 24,524,817 3-10 years
------------ ------------ ------------
42,394,223 36,570,985
Less accumulated depreciation (21,354,017) (17,883,365)
------------ ------------
Total $21,040,206 $18,687,620
============ ============
</TABLE>
Note 8: Lease Obligations
At December 31, 1997, the Corporation and its subsidiaries leased certain
branch locations and office equipment used in its operations.
Operating lease rental expense was $11,214,770 in 1997, $8,699,930 in 1996,
and $7,754,388 in 1995.
The future minimum rental payments required under noncancellable operating
leases with initial or remaining terms of one year or more are summarized as
follows:
Year ended December 31:
1998 $6,044,815
1999 4,615,412
2000 3,624,629
2001 2,897,314
2002 1,819,979
Thereafter 322,705
------------
Total minimum rental payments $19,324,854
============
Note 9: Short-Term Borrowings
Short-term borrowings are summarized as follows:
<TABLE>
<CAPTION>
December 31, 1997 1996
- -------------------------------------------------------------------------------------
Repurchase agreements and drafts payable related to
<S> <C> <C>
mortgage loan closings $240,659,463 $264,998,449
Commercial paper 16,375,238 17,174,751
Federal funds 142,650,000 74,118,000
Lines of credit 112,590,484 105,575,126
------------ ------------
Total $512,275,185 $461,866,326
============ ============
Weighted average interest rate 4.84% 5.34%
</TABLE>
Repurchase agreements at December 31, 1997 and 1996 include $141,919,483 and
$183,869,533 in mortgages sold under agreements to repurchase, which are used
to fund mortgages prior to sale in the secondary market. These repurchase
agreements are collateralized by mortgage loans held for sale.
Drafts payable related to mortgage loan closings totaled $93,615,694 and
$74,042,188 at December 31, 1997 and 1996, respectively. These borrowings are
related to mortgage closings at the end of December which have not been
presented to the banks for payment. When presented for payment, these
borrowings will be funded internally or by borrowing from available lines of
credit.
Commercial paper includes $10,755,019 and $14,963,694 at December 31, 1997
and 1996, respectively, payable to a company owned by a significant
shareholder and director of the Corporation.
The Corporation also has lines of credit available of $254,000,000 to fund
loan originations and other operations. Interest on the lines of credit is
payable monthly or quarterly with rates ranging from 6.35% to 7.65%.
Note 10: Long-Term Debt
Long-term debt at December 31, 1997 of $7,095,718 consists of various notes
payable at annual interest rates ranging from 6.3% to 9.6% and maturity dates
through April 30, 2002. Long-term debt as of December 31, 1996 of $17,658,925
consisted of various notes payable at annual interest rates ranging from 6.3%
to 9.6% and maturity dates through April 3o, 2002.
Maturities of long-term debt at December 31, 1997 are as follows:
1998 $3,952,103
1999 2,029,467
2000 938,522
2001 175,229
2002 397
-----------
Total $7,095,718
===========
Note 11 : 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 December 31, 1997, Irwin Mortgage Corporation (IMC) was a
defendant to three separate class action lawsuits relating to the following:
IMC's administration of mortgage escrow accounts, IMC's right to require its
borrowers to pay premiums for private mortgage insurance, and IMC'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.
Note 12: Financial Instruments with Off-Balance Risk
The Corporation is party to certain financial instruments with off-balance
sheet risk in the normal course of business to meet the financial needs of
its customers and to Sheet reduce its own exposure to fluctuations in
interest rates. These financial instruments include loan commitments, standby
letters of credit, and forward commitments relating to mortgage banking
activities. Those instruments involve, to varying degrees, elements of credit
and interest rate risk in excess of the amounts recognized in the
consolidated balance sheet.
The Corporation's exposure to credit loss, in the event of nonperformance by
the other party to the financial instrument for commitments to extend credit
and standby letters of credit, is represented by the contractual amount of
those instruments. The collateral pledged for standby letters of credit and
commitments varies but may include accounts receivable, inventory, property,
plant, and equipment, and residential real estate. Total outstanding
commitments to extend credit at December 31, 1997, were $267,830,000. These
loan commitments include $114,235,000 of floating rate loan commitments and
$153,595,000 of fixed rate loan commitments related to commercial and
mortgage banking activities. The Corporation had approximately $15,125,000
and $14,710,000 in irrevocable standby letters of credit outstanding at
December 31, 1997 and 1996, respectively.
Forward commitments are used in mortgage banking activities to hedge the
interest rate risk associated with mortgage loan commitments and loans held
for sale. The contract amount for forward contracts does not represent
exposure to credit loss. Forward commitments related to mortgage banking
activities were $407,907,000 and $364,876,000 at December 31, 1997 and 1996,
respectively.
Note 13: Regulatory Matters
The Corporation and its bank subsidiary, Irwin Union Bank, are subject to
various regulatory capital requirements administered by federal banking
agencies. Quantitative measures established by regulation to ensure capital
adequacy require the Corporation to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier 1 capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier 1 capital to
average assets (as defined). Management believes, as of December 31, 1997,
that the Corporation meets all capital adequacy requirements to which it is
subject.
As of December 31, 1997 the Corporation was categorized as well capitalized
under the regulatory framework for prompt corrective action. To be
categorized as well capitalized the Corporation must significantly exceed
minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios.
There have been no conditions or events that management believes have changed
this category.
The Corporation's actual capital amounts and ratios are presented in the
following table:
<TABLE>
<CAPTION>
Adequately Well
Actual Capitalized Capitalized
- ---------------------------------------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
- ---------------------------------------------------------------------------------------------------------
As of December 31, 1997:
Total Capital (to Risk-
<S> <C> <C> <C> <C> <C> <C>
Weighted Assets) $185,536 17.5% $84,163 8.0% $105,204 10.0%
Tier 1 Capital (to Risk-
Weighted Assets) 169,366 16.0 42,082 4.0 63,123 6.0
Tier 1 Capital (to
Average Assets) 169,366 12.1 56,192 4.0 70,240 5.0
As of December 31, 1996:
Total Capital (to Risk-
Weighted Assets) $124,010 14.3% $69,716 8.0% $87,146 10.0%
Tier 1 Capital (to Risk-
Weighted Assets) 117,416 13.5 34,858 4.0 52,288 6.0
Tier 1 Capital (to
Average Assets) 117,416 9.8 47,730 4.0 59,663 5.0
As of December 31, 1995:
Total Capital (to Risk-
Weighted Assets) $97,174 14.5% $53,654 8.0% $67,068 10.0%
Tier 1 Capital (to Risk-
Weighted Assets) 92,554 13.8 26,827 4.0 40,241 6.0
Tier 1 Capital (to
Average Assets) 92,554 10.6 35,025 4.0 43,781 5.0
</TABLE>
At December 31, 1997 and 1996 Irwin Union Bank's ratio of total capital
to risk-weighted assets was 10.3% and 11.0%, respectively. The ratio of Tier 1
capital to risk-weighted assets was 9.4% and 10.0%, and the ratio of Tier 1
capital to average assets was 6.7% and 6.9% at December 31, 1997 and 1996,
respectively.
Note 14: Fair Value of Financial Instruments
Fair value estimates, methods and assumptions are set forth below for the
Corporation's financial instruments:
Cash and cash equivalents: The carrying amounts reported in the balance sheet
for cash and cash equivalents approximate those assets' fair values.
Interest-bearing deposits with financial institutions: Fair values were
estimated by discounting future cash flows using the current rates offered on
similar deposits.
Investment securities: Fair values for investment securities were based on
quoted market prices when available. For securities which had no quoted market
prices, fair values were estimated by discounting future cash flows using
current rates on similar securities.
Mortgage loans held for sale: The current market price of similar loans sold
was used to estimate the fair value of mortgage loans held for sale.
Loans: For variable rate loans that reprice frequently and with no significant
change in credit risk, fair values were based on carrying values. The fair
values of commercial, consumer, real estate-mortgage, and real estate-
construction loans were estimated using discounted cash flow analyses, using
interest rates currently being offered for loans with similar terms to
borrowers with similar credit quality and for the same remaining maturities.
Deposit liabilities: The fair value of demand deposits, including interest and
non-interest checking, passbook savings, and certain types of money market
accounts, are assumed to be equal to the amount payable on demand at the
reporting date. The carrying amounts for variable-rate money market accounts
and certificates of deposit approximate their fair values at the reporting
date. Fair values for fixed-rate certificates of deposit are estimated using a
discounted cash flow calculation that applies interest rates currently being
offered on certificates with similar remaining maturities.
Short-term borrowings: For variable-rate short-term borrowings that reprice
frequently, fair values were based on carrying values. Fair values for fixed-
rate short-term borrowings were estimated using a discounted cash flow
calculation that applies interest rates currently being offered on borrowings
with similar remaining terms.
Long-term debt: The fair values of variable-rate long-term debt, which
reprices frequently, were based on carrying values. For fixed-rate long-term
debt, fair values were estimated using discounted cash flow analyses, based on
current incremental borrowing rates for similar types of borrowing
arrangements.
Company-obligated mandatorily redeemable preferred securities of subsidiary
trust: Fair values were estimated by discounting future cash flows using the
current rate offered on similar securities.
Commitments to extend credit and standby letters of credit: The carrying
values of these financial instruments are based on fees charged to enter into
the agreements and approximate their fair values. The carrying values are
insignificant to the Corporation's balance sheet and have been included in the
carrying values of loans.
The estimated fair values of the Corporation's financial instruments at
December 31 are as follows:
<TABLE>
<CAPTION>
1997 1996
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
- -----------------------------------------------------------------------------------------------
Financial assets:
<S> <C> <C> <C> <C>
Cash and cash equivalents $56,523,723 $56,524,000 $71,365,788 $71,366,000
Interest-bearing deposits with
financial institutions 18,240,229 18,240,000 11,343,546 11,344,000
Investment securities 77,341,443 78,029,000 85,785,764 86,481,000
Mortgage loans held for sale 528,738,820 530,207,000 446,897,525 446,898,000
Loans, net of allowance for
loan losses 539,930,807 540,785,000 472,058,689 470,208,000
Financial liabilities:
Deposits 719,595,525 719,669,000 640,152,905 640,505,000
Short-term borrowings 512,275,185 512,275,000 461,866,326 461,935,000
Long-term debt 7,095,718 7,138,000 17,658,925 17,711,000
Company-obligated mandatorily
redeemable preferred securities
of subsidiary trust $50,000,000 $55,038,000 $- $-
</TABLE>
The fair value estimates consider relevant market information when available.
Because no market exists for a significant portion of the Corporation's
financial instruments, fair value estimates are determined judgmentally and
consider various factors, including current economic conditions and risk
characteristics of certain financial instruments. Changes in factors, or the
weight assumed for the various factors, could significantly affect the
estimated values.
The fair value estimates are presented for existing on- and off-balance sheet
financial instruments without attempting to estimate the value of the
Corporation's long-term relationships with depositors and the benefit that
results from the low cost funding provided by deposit liabilities. In
addition, significant assets which were not considered financial instruments
and were therefore not a part of the fair value estimates include lease
receivables, servicing assets, and premises and equipment.
Note 15: 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 securitie 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 with a 19-year extension option.
Note 16: Shareholders' Equity
The shareholders of the Corporation approved an increase in common shares
authorized from 7,500,000 to 40,000,000 as of April 30, 1996.
The Corporation has a stock plan to compensate directors of the Corporation
with the Corporation's common stock, if so elected, in lieu of cash for their
annual retainer fee and meeting fees. The number of shares issued under the
plan is based on the current market value of the Corporation's common stock.
The Corporation also has an employee stock purchase plan for all qualified
employees. The plan provides for employees to purchase common stock through
payroll deduction at approximately 85% of the current market value.
The Corporation has three stock option plans (established in 1997, 1992, and
1986) which provide for the issuance of 2,140,000 shares of non-qualified and
incentive stock options. The exercise price of each option, which has a ten
year life and a vesting period of four years beginning the year granted, is
equal to the market price of the Corporation's stock on the grant date. The
1986 plan also provides for stock appreciation rights (SARs) that may be
granted with respect to options issued. The holder of an SAR has the right to
surrender the related option at any time the option could be exercised
(subject to limitations described in the plan) and to receive its value at
that date in cash or common stock. Vested outstanding stock options have been
considered as common stock equivalents in the computation of diluted earnings
per share.
Activity in the above plans for 1997, 1996 and 1995 is summarized as follows
adjusted for the 1996 two-for-one stock split:
<TABLE>
<CAPTION>
1997 1996 1995
- ----------------------------------------------------------------------------------------------
Weighted Weighted Weighted
average average average
Number exercise Number exercise Number exercise
of shares price of shares price of shares price
- ------------------------------------------------------------------------------------------------
Outstanding at the
beginning of
<S> <C> <C> <C> <C> <C> <C>
the year 623,300 $9.19 618,800 $9.19 650,804 $6.51
Granted 89,110 27.38 104,700 21.31 120,700 15.69
Exercised (93,700) 5.77 (87,948) 5.01 (151,754) 2.85
Cancelled (3,100) 19.23 (12,252) 17.85 (950) 11.21
--------- --------- --------
Outstanding at the
end of year 615,610 14.79 623,300 11.65 618,800 9.19
========= ========= ========
Exercisable at the
end of year 474,253 $12.31 461,300 $9.63 429,426 $7.34
========= ========= ========
Available for
future grants 847,294 236,404 341,104
========= ========= ========
</TABLE>
The Corporation has not recognized compensation cost for the three non-
qualified and incentive stock option plans or the employee stock purchase
plan. Had compensation cost been determined based on the fair value at the
grant dates the Corporation's net income and earnings per share would have
been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1997 1996 1995
- -----------------------------------------------------------------------------------
Net income
<S> <C> <C> <C>
As reported $24,444,150 $22,428,338 $20,083,202
Pro forma 23,912,522 22,071,004 19,885,813
Basic earnings per share
As reported $2.19 $1.97 $1.78
Pro forma 2.14 1.94 1.77
Diluted earnings per share
As reported $2.15 $1.95 $1.76
Pro forma 2.11 1.93 1.75
- -----------------------------------------------------------------------------------
</TABLE>
The fair value of each option was estimated to be $12.69, $9.13 and $7.41 on
the date of the grant using the binomial option-pricing model with the
following assumptions for 1997, 1996 and 1995, respectively: risk free
interest rates of 6.89%, 6.75% and 7.25%; dividend yield of 1.00% for 1997
and 1.25% for both previous years; and volatility of 0.250, 0.228, and 0.275.
As of December 31, 1997, 613,610 options were outstanding under these plans
with exercise prices that range between $2.52 and $27.38 and a remaining
weighted average contractual life of 7.3 years.
Note 17 : Earnings Per Share
Earnings per share calculations are summarized as follows:
<TABLE>
<CAPTION>
Basic Earnings Effects of Diluted Earnings
Per Share Stock Options Per Share
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
1997:
Net income $24,444,150 $- $24,444,150
Shares 11,163,155 197,932 11,361,087
----------- ---------- ------------
Per-Share Amount $2.19 $(0.04) $2.15
=========== ========== ============
1996:
Net income $22,428,337 $- $22,428,337
Shares 11,358,121 156,871 11,514,992
----------- ---------- ------------
Per-Share Amount $1.97 $(0.02) $1.95
=========== ========== ============
1995:
Net income $20,083,202 $- $20,083,202
Shares 11,279,870 149,949 11,429,819
----------- ---------- ------------
Per-Share Amount $1.78 $(0.02) $1.76
=========== ========== ============
</TABLE>
The Board of Directors of the Corporation approved a two-for-one stock split
effective December 30, 1996. Previously reported per share data have been
adjusted to reflect this split.
Note 18 : Income Taxes
Income tax expense is summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $8,086,000 $4,980,000 $(773,000)
State 2,268,000 1,574,000 286,000
----------- ----------- -----------
10,354,000 6,554,000 (487,000)
----------- ----------- -----------
Deferred:
Federal 6,162,000 6,750,000 10,645,000
State 1,218,000 1,555,000 2,208,000
----------- ----------- -----------
7,380,000 8,305,000 12,853,000
----------- ----------- -----------
Income tax expense:
Federal 14,248,000 11,730,000 9,872,000
State 3,486,000 3,129,000 2,494,000
----------- ----------- -----------
$17,734,000 $14,859,000 $12,366,000
=========== =========== ============
</TABLE>
The Corporation's net deferred tax liability, which is included in other
liabilities on the consolidated balance sheet, consisted of the following:
<TABLE>
<CAPTION>
December 31, 1997 1996
- ---------------------------------------------------------------------------------
<S> <C> <C>
Mortgage servicing $(31,025,090) $(25,965,001)
Deferred compensation 2,625,791 2,763,430
Loan and lease loss allowance 6,312,690 4,047,304
Deferred origination fees and costs (1,454,131) 709,498
Lease financing income (5,653,674) (4,639,948)
Fixed assets (1,084,652) (1,017,670)
Other, net (1,532,867) (135,813)
-------------- -------------
Net deferred tax liability $(31,811,933) $(24,238,200)
============== =============
</TABLE>
A reconciliation of income tax expense to the amount computed by applying
the statutory income tax rate to income before income taxes is summarized as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income taxes computed at the statutory rate $14,762,353 $12,864,133 $11,032,729
Increase (decrease) resulting from:
Nontaxable interest from investment
securities and loans (198,677) (230,942) (308,157)
State franchise tax, net of federal benefit 2,330,343 2,075,973 1,820,400
Change in deferred tax asset or liability
resulting from tax rate change 291,655 (191,335) (131,180)
Other items - net 548,326 (41,499) (310,152)
------------ ----------- -----------
$17,734,000 $14,859,000 $12,366,000
============ =========== ===========
</TABLE>
Note 19: Employee Retirement Plans
The Corporation has a defined benefit plan covering eligible employees of
adopting subsidiaries. The benefits are based on years of service and the
employees' compensation during their employment. The Corporation's funding
policy is consistent with the funding requirements of federal laws and
regulations. Contributions are intended to provide not only for benefits
attributed to service to date but also for those expected to be earned in
the future.
Plan assets are primarily invested in corporate and U.S. bonds, mutual
funds, and cash equivalents. The mutual funds are invested primarily in
common stocks and bonds.
The following table sets forth the plan's funded status and amounts
recognized in the Corporation's consolidated balance sheet:
<TABLE>
<CAPTION>
December 31, 1997 1996
- -----------------------------------------------------------------------------------------------
Actuarial present value of benefits based on service to date
and present pay levels:
Accumulated benefit obligation
<S> <C> <C>
Vested $7,153,298 $6,090,545
Non-vested 277,468 251,938
----------- -----------
7,430,766 6,342,483
Additional amounts related to projected pay increases 1,614,808 1,405,887
----------- -----------
Projected benefit obligation 9,045,574 7,748,370
Plan assets at fair value 9,113,575 8,160,620
----------- -----------
Excess of assets over projected benefit obligation 68,001 412,250
Prior service cost not yet recognized in net periodic pension cost 155,407 175,224
Unrecognized net loss from past experience different from
that assumed 454,659 191,707
Unrecognized net transition asset -- (83,298)
----------- -----------
Prepaid pension costs included in other assets $678,067 $695,883
=========== ===========
</TABLE>
The net pension cost for 1997, 1996, and 1995 included the following components:
<TABLE>
<CAPTION>
1997 1996 1995
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost -- benefits earned during the period $474,547 $443,865 $344,825
Interest cost on projected benefit obligation 566,059 519,358 483,011
Actual (return) loss on plan assets (833,227) (926,681) (916,317)
Net amortization and deferral 25,360 205,364 249,940
---------- ---------- ----------
Net pension cost $232,739 $241,906 $161,459
========== ========== ==========
</TABLE>
The weighted average discount rate used in determining the actuarial present
value of the projected benefit obligation was 7.0% and 7.5% at December 31,
1997 and 1996, respectively. The expected rate of increase in future
compensation levels was 4.00% and 4.25% at December 31, 1997 and 1996,
respectively. The expected long-term rate of return on plan assets was 9.0% at
December 31, 1997 and 1996.
In addition to the defined benefit plan, the Corporation also provides certain
health care and life insurance benefits to eligible retirees and their
dependents. The plan is contributory, with retirees' contributions determined
based on their years of service with the Corporation.
The following sets forth the plan's funded status reconciled with amounts
reported in the Corporation's consolidated balance sheet at December 31, 1997
and 1996.
<TABLE>
<CAPTION>
1997 1996
- -----------------------------------------------------------------------------------------------
Accumulated postretirement benefit obligation (APBO):
<S> <C> <C>
Retirees $1,046,950 $1,099,334
Fully eligible active plan participants 143,230 112,913
Other active plan participants 198,733 172,610
----------- -----------
Total APBO 1,388,913 1,384,857
Plan assets at fair value - -
----------- -----------
Accumulated postretirement benefit obligation in excess
of plan assets 1,388,913 1,384,857
Less: Unrecognized transition obligation 947,269 1,002,018
Unrecognized net gain (82,687) (53,847)
----------- -----------
Accrued postretirement benefit liability $524,331 $436,686
=========== ===========
Net periodic postretirement benefit cost for 1997 and 1996
included the following components:
Service cost $21,506 $24,217
Interest cost 100,521 96,323
Amortization of transition obligation 54,749 54,749
----------- -----------
Net periodic postretirement benefit cost $176,776 $175,289
=========== ===========
</TABLE>
For 1997, an 11.0% and 9.5% annual rate of increase in the per capita costs of
covered health care benefits was assumed for participants under 65 and over
65, respectively. It was assumed that those rates would gradually decrease to
5.0% by the year 2011. Increasing the assumed health care cost trend rate by
one percentage point in each year would increase the accumulated postretirement
benefit obligation as of December 31, 1997 by $65,453 and increase the aggregate
of the service cost and interest cost components of net periodic postretirement
benefit cost for 1997 by $6,129. The rate of increase in future compensation
levels used in determining the accumulated postretirement benefit obligation was
5.0% at December 31, 1997 and 1996. The weighted average discount rate was 7.0%
and 7.5% at December 31, 1997 and 1996, respectively.
Note 20: Irwin Financial Corporation (Parent Only) Financial Information
The condensed financial statements of the parent company as of December 31,
1997 and 1996, and for the three years ended December 31, 1997 are presented
below:
<TABLE>
<CAPTION>
Condensed Balance Sheet
- -----------------------------------------------------------------------------------------------
December 31, 1997 1996
-----------------------------------------------------------------------
<S> <C> <C>
Assets: Cash and short-term investments $743,738 $618,516
Investment in bank subsidiary 65,673,404 56,672,845
Investments in non-bank subsidiaries 69,901,441 60,866,068
Loans to non-bank subsidiaries 97,687,873 46,117,124
Other assets 2,614,878 2,167,152
------------- -------------
$236,621,334 $166,441,705
============= =============
Liabilities: Short-term borrowings $103,721,638 $41,174,751
Other liabilities 4,916,355 6,364,874
------------- -------------
108,637,993 47,539,625
Shareholders' equity: Common stock 29,965,287 29,965,287
Other shareholders' equity 98,018,054 88,936,793
------------- -------------
127,983,341 118,902,080
------------- -------------
$236,621,334 $166,441,705
============= =============
</TABLE>
<TABLE>
<CAPTION>
Condensed Statement of Income
- --------------------------------------------------------------------------------------------------------------
For the year ended December 31, 1997 1996 1995
---------------------------------------------------------------------------------------
<S> <S> <C> <C> <C>
Income: Cash dividends from non-bank
subsidiaries $10,062,287 $10,053,000 $14,431,000
Cash dividends from bank subsidiary 4,750,000 2,000,000 1,200,000
Interest income 5,665,636 2,376,154 1,806,896
Other 2,218,885 2,507,041 2,000,573
------------ ------------ ------------
22,696,808 16,936,195 19,438,469
------------ ------------ ------------
Expenses: Interest expense 7,210,379 2,064,651 1,491,873
Salaries 3,101,539 2,549,195 2,163,509
Deferred compensation and employee
benefits 907,158 879,616 875,533
Other 1,798,234 1,963,287 1,028,813
------------ ------------ ------------
13,017,310 7,456,749 5,559,728
------------ ------------ ------------
Income before income taxes and equity in
undistributed income of subsidiaries 9,679,498 9,479,446 13,878,741
Income taxes (credits), less amounts
charged to subsidiaries (2,590,000) (2,665,745) (2,844,056)
------------ ------------ ------------
12,269,498 12,145,191 16,722,797
Equity in undistributed income of
subsidiaries 12,174,652 10,283,147 3,360,405
------------ ------------ ------------
Net income $24,444,150 $22,428,338 $20,083,202
============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Condensed Statement of Cash Flows
- ----------------------------------------------------------------------------------------------------------------------------
For the year ended December 31, 1997 1996 1995
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income $24,444,150 $22,428,338 $20,083,202
Adjustments to reconcile Equity in undistributed income of subsidiaries (12,174,652) (10,283,147) (3,360,405)
net income to cash provided Depreciation and amortization 159,704 88,571 80,077
Increase (decrease) in taxes payable 1,046,126 314,595 (1,159,924)
Increase in interest receivable (314,011) (39,301) (75,606)
Increase in interest payable 146,526 164,279 41,276
Net change in other assets and other liabilities (2,321,136) 1,393,636 (27,117)
------------- ------------- -------------
Net cash provided by operating activities 10,986,707 14,066,971 15,581,503
------------- ------------- -------------
Lending and investing Net increase in loans to subsidiaries (51,570,749) (8,603,320) (19,640,805)
activities: Net increase in investments in subsidiaries (5,858,624) (11,500,000) (7,260,000)
Net (additions) disposals to premises
and equipment (42,036) (21,548) 192,206
------------- ------------- -------------
Net cash used by lending and
investing activities (57,471,409) (20,124,868) (26,708,599)
------------- ------------- -------------
Financing activities: Net increase in borrowings 62,546,887 9,731,816 13,434,195
Payments to acquire treasury stock (14,411,445) (1,930,831) (2,887,611)
Proceeds from sale of treasury stock 1,588,186 1,331,402 3,130,243
Dividends paid (3,113,704) (2,725,921) (2,482,705)
------------- ------------- -------------
Net cash provided by financing
activities 46,609,924 6,406,466 11,194,122
------------- ------------- -------------
Net increase in cash and cash equivalents
equivalents 125,222 348,569 67,026
Cash and cash equivalents at beginning of year 618,516 269,947 202,921
------------- ------------- -------------
Cash and cash equivalents at end of year $743,738 $618,516 $269,947
============= ============= =============
Supplemental disclosures Cash paid during the year:
of cash flow information: Interest $7,063,853 $1,900,372 $1,450,597
============= ============= =============
Income taxes $9,912,325 $6,230,350 $3,829,990
============= ============= =============
</TABLE>
Irwin Financial Corporation
Directors
Sally Abrams Dean Consultant,
Retired Senior Vice President,
Dillon, Read & Co. Inc.
David W. Goodrich Executive Vice President,
F. C. Tucker Company, Inc.
John T. Hackett Managing General Partner,
CID Equity Partners, L.P.
William H. Kling President,
Minnesota Public Radio
Brenda J. Lauderback President,
Footwear Wholesale Group,
Nine West Group
John C. McGinty, Jr. President,
Peregrine Associates, Inc.
Irwin Miller Former Chairman,
Cummins Engine Company, Inc.
William I. Miller Chairman,
Irwin Financial Corporation
John A. Nash President,
Irwin Financial Corporation
Lance R. Odden President and Headmaster,
The Taft School
Theodore M. Solso President and Chief Operating Officer,
Cummins Engine Company, Inc.
Irwin Financial Corporation
Senior Officers
William I. Miller Chairman
John A. Nash President
Thomas D. Washburn Senior Vice President and Chief Financial Officer
Gregory F. Ehlinger Vice President and Treasurer
Jose M. Gonzalez Vice President--Internal Audit
Theresa L. Hall Vice President--Human Resources
Ellen Z. Mufson Vice President--Legal
Michael F. Ryan Vice President--Community Development
Matthew F. Souza Vice President and Secretary
Marie C. Strack Vice President and Controller
EXHIBIT 21(a). SUBSIDIARIES OF THE REGISTRANT
State of
Name Organization
Irwin Union Bank and Trust Company Indiana
Irwin Union Collateral, Inc. Indiana
Irwin Union Realty Corporation Indiana
Irwin Union Insurance, Inc. Indiana
Irwin Union Securities, Inc. Indiana
IFC Mortgage Corporation Indiana
Irwin Mortgage Corporation Indiana
Irwin Union Investor Services, Inc. Indiana
Irwin Union Advisory Services, Inc. Indiana
Irwin Home Equity Corporation Indiana
IHE Funding Corp. Delaware
Irwin Equipment Finance Corp. Indiana
Affiliated Capital Corp.(1) Illinois
Irwin Union Credit Insurance Corporation Arizona
White River Capital Corporation Indiana
IFC Capital Trust I Delaware
(1)80% owned by Registrant
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We consent to the incorporation by reference in Registration
Statement No. 33-8506 on Form S-8 effective September 25,
1986 in Registration Statement No. 33-25931 on Form S-8
effective December 28, 1988 in Registration Statement No. 33-
29493 on Form S-8 as amended by Post-Effective Amendment No.
1 effective December 22, 1989; in Registration Statement No.
33-32783 on Form S-8 effective January 11, 1990; in
Registration Statement No. 2-72249 on Form S-3 as amended by
Post-Effective Amendment No. 3 to Form S-16 effective
January 17, 1990; in Post-Effective Amendment No. 2 to
Registration Statement No. 33-6880 on Form S-8 effective
April 9, 1990; in Registration Statement No. 33-32783 on
Form S-8 as amended by Post-Effective Amendment No. I
effective April 9, 1990; in Registration Statement No. 33-
47680 on Form S-8 effective May 5, 1992 in Registration
Statement 2-72249 on Form S-3 as amended by Post-Effective
Amendment No. 4 to Form S-16 effective April 7, 1994; in
Registration Statement No. 33-80800 on Form S-8 effective
June 28, 1994; in Registration Statement No. 33-29493 on
Form S-8 as amended by Post-Effective Amendment No. 2
effective September 27, 1994; in Registration Statement No.
33-62671 on Form S-8 effective September 15, 1995; in
Registration Statement No. 33-62669 on Form S-8 effective
September 15, 1995; and in Registration Statement No. 333-
26197 on Form S-8 effective April 30, 1997 by Irwin
Financial Corporation of our report, dated January 21, 1998
on our audits of the consolidated financial statements and
financial statement schedule of Irwin Financial Corporation
as of December 31, 1997 and 1996 and for each of the three
years in the period ended December 31, 1997, which report is
included in this Annual Report on Form 10-K.
/s/ Coopers & Lybrand L.L.P.
Indianapolis, Indiana
March 26, 1998
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000052617
<NAME> IRWIN FINANCIAL CORPORATION
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 56,524
<INT-BEARING-DEPOSITS> 18,240
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 22,134
<INVESTMENTS-HELD-FOR-SALE> 8,693
<INVESTMENTS-CARRYING> 46,515
<INVESTMENTS-MARKET> 47,202
<LOANS> 611,093
<ALLOWANCE> 8,812
<TOTAL-ASSETS> 1,496,794
<DEPOSITS> 719,596
<SHORT-TERM> 512,275
<LIABILITIES-OTHER> 81,918
<LONG-TERM> 7,096
47,927
0
<COMMON> 29,965
<OTHER-SE> 98,018
<TOTAL-LIABILITIES-AND-EQUITY> 1,496,794
<INTEREST-LOAN> 56,490
<INTEREST-INVEST> 7,586
<INTEREST-OTHER> 35,365
<INTEREST-TOTAL> 99,441
<INTEREST-DEPOSIT> 19,963
<INTEREST-EXPENSE> 44,582
<INTEREST-INCOME-NET> 54,859
<LOAN-LOSSES> 6,238
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 176,533
<INCOME-PRETAX> 42,179
<INCOME-PRE-EXTRAORDINARY> 42,179
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 24,444
<EPS-PRIMARY> 2.19<F1>
<EPS-DILUTED> 2.15<F2>
<YIELD-ACTUAL> .05<F2>
<LOANS-NON> 7,681
<LOANS-PAST> 1,002
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 6,875
<CHARGE-OFFS> 3,145
<RECOVERIES> 538
<ALLOWANCE-CLOSE> 8,812
<ALLOWANCE-DOMESTIC> 8,812
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 3,755
<FN>
<F1>INFORMATION NOT IN 1,000
<F2>EARNINGS PER SHARE REPORTED IN BASIC AND DILUTED.
<F1>INFORMTAION NOT IN 1,000
</FN>
</TABLE>
