UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-6835
IRWIN FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
INDIANA 35-1286807
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
500 Washington Street, Columbus, IN 47201
(Address of principal executive offices)
(Zip Code)
812/376-1020
__________________________________________
Registrant's telephone number, including area code)
(Former name, former address and former fiscal year
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Indicate by check mark whether the registrant has filed all
documents and reports required to be filed by Sections 12, 13, or
15(d) of the Securities Exchange Act of 1934 subsequent to the
distribution of securities under a plan confirmed by a court.
Yes No
As of October 31, 1998, there were outstanding 21,660,043 common
shares, no par value, of the Registrant.
Part I
Item 1
IRWIN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
Assets: 1998 1997
<S> <C> <C>
Cash and due from banks $67,153,003 $56,523,723
Federal funds sold 5,250,000 0
Cash and cash equivalents 72,403,003 56,523,723
Interest-bearing deposits with financial institutions 31,439,501 18,240,229
Investment securities (Market value:$90,045,464
in 1998 and $78,028,672 in 1997)-Note 2 89,445,850 77,341,443
Loans held for sale - Note 3 688,615,078 528,738,820
Loans and leases, net of unearned income - Note 4 526,083,536 611,092,809
Less: Allowance for loan and lease losses - Note 5 (9,086,947) (8,811,645)
516,996,589 602,281,164
Servicing assets - Note 6 97,713,070 83,043,939
Accounts receivable 74,007,730 54,260,792
Accrued interest receivable 13,623,294 14,778,885
Premises and equipment 19,322,802 21,040,206
Other assets 53,873,884 40,544,715
$1,657,440,801 $1,496,793,916
Liabilities and Shareholders' Equity:
Deposits
Noninterest-bearing $418,603,138 $287,555,280
Interest-bearing 380,975,237 346,012,401
Certificates of deposit over $100,000 139,660,971 86,027,844
939,239,346 719,595,525
Short-term borrowings- Note 7 435,352,098 512,275,185
Long-term debt- Note 8 9,973,627 7,095,718
Other liabilities 86,553,137 81,917,591
Total liabilities 1,471,118,208 1,320,884,019
Company-obligated mandatorily redeemable
preferred securities of subsidiary trust- Note 9 47,980,556 47,926,556
Shareholders' equity
Preferred stock, no par value - authorized
50,000 shares; none issued 0 0
Common stock; no par value - authorized 40,000,000 shares;
issued 23,402,080 shares in 1998 and 1997; including
1,754,966 and 1,401,280 shares in treasury in 1998 and 1997,
respectively 29,965,287 29,965,287
Additional paid-in capital 1,301,476 779,976
Unrealized gains on investment securities 85,639 54,895
Retained earnings 136,760,367 115,413,986
168,112,769 146,214,144
Less treasury stock, at cost (29,770,732) (18,230,803)
Total shareholders' equity 138,342,037 127,983,341
$1,657,440,801 $1,496,793,916
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
IRWIN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
1998 1997
<S> <C> <C>
Interest income:
Loans and leases $16,924,594 $14,111,212
Investment securities:
Taxable 79,708 2,322,992
Tax-exempt 71,990 55,986
Loans held for sale 20,572,208 9,931,981
Federal funds sold 78,380 156,177
Total interest income 37,726,880 26,578,348
Interest expense:
Deposits 6,211,822 4,682,464
Short-term borrowings 11,591,724 7,166,524
Long-term debt 3,422,646 197,408
Total interest expense 21,226,192 12,046,396
Net interest income 16,500,688 14,531,952
Provision for loan and lease losses - Note 5 1,886,651 2,183,470
Net interest income after provision for
loan and lease losses 14,614,037 12,348,482
Other income:
Loan origination fees 14,933,049 11,395,906
Gain from sales of loans 8,068,205 8,862,209
Loan servicing fees 14,316,308 13,890,760
Gain on sale of mortgage servicing 9,591,432 10,397,328
Securities gains (losses) 9,077,350 20,536
Gain from sale of leasing assets 5,240,531 0
Brokerage fees and commissions 248,534 132,158
Trust fees 479,248 400,085
Service charges on deposit accounts 449,543 397,974
Insurance commissions, fees and premiums 534,056 407,533
Other 1,268,908 875,525
64,207,164 46,780,014
Other expense:
Salaries 29,969,632 23,194,142
Pension and other employee benefits 3,683,047 3,429,260
Office expense 3,078,764 2,716,410
Premises and equipment 5,443,946 4,301,799
Amortization of mortgage servicing asset 6,478,990 4,098,151
Marketing and development 3,507,038 1,760,834
Other 8,708,720 6,152,489
60,870,137 45,653,085
Income before income taxes 17,951,064 13,475,411
Provision for income taxes 6,684,512 4,989,400
11,266,552 8,486,011
Distribution on company-obligated mandatorily
redeemable preferred securities of subsidiary trust 1,174,250 1,174,250
Net income available to common shareholders 10,092,302 7,311,761
Earnings per share of common stock available to shareholders:
Basic - Note 10 $0.47 $0.33
Diluted - Note 10 $0.46 $0.32
Dividends per share of common stock $0.040 $0.035
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
<TABLE>
<CAPTION>
IRWIN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME (Unaudited)
Nine Months Ended
September 30,
1998 1997
<S> <C> <C>
Interest income:
Loans and leases $42,134,882 $41,718,226
Investment secu
Investment Securities:
Taxable 3,424,572 4,811,134
Tax-exempt 226,978 198,249
Loans held for sale 52,784,782 24,512,230
Federal funds sold 492,481 521,595
Total interest income 99,063,695 71,761,434
Interest expense:
Deposits 17,043,071 13,569,704
Short-term borrowings 30,902,080 17,213,355
Long-term debt 3,835,279 729,440
Total interest expense 51,780,430 31,512,499
Net interest income 47,283,265 40,248,935
Provision for loan and lease losses - Note 5 4,560,364 5,055,236
Net interest income after provision for
loan and lease losses 42,722,901 35,193,699
Other income:
Loan origination fees 41,970,030 30,667,951
Gain from sales of loans 39,080,789 27,257,139
Loan servicing fees 41,817,064 39,786,082
Gain on sale of mortgage servicing 29,604,753 24,065,463
Securities gains (losses) 9,397,328 10,404
Gain from sale of leasing assets 5,240,531 0
Brokerage fees and commissions 759,061 510,877
Trust fees 1,585,508 1,467,519
Service charges on deposit accounts 1,286,928 1,199,636
Insurance commissions, fees and premiums 1,362,087 1,150,182
Other 3,200,580 2,218,086
175,304,659 128,333,339
Other expense:
Salaries 84,265,863 63,376,421
Pension and other employee benefits 12,375,546 10,655,573
Office expense 9,194,438 7,942,807
Premises and equipment 14,884,700 12,487,001
Amortization of mortgage servicing asset 17,508,682 11,239,072
Marketing and development 9,973,233 6,506,690
Other 25,907,997 17,413,383
174,110,459 129,620,947
Income before income taxes 43,917,101 33,906,091
Provision for income taxes 16,191,563 12,330,530
27,725,538 21,575,561
Distribution on company-obligated mandatorily
redeemable preferred securities of subsidiary trust 3,522,750 3,299,128
Net income available to common shareholders $24,202,788 $18,276,433
Earnings per share of common stock available to shareholders:
Basic - Note 10 $1.11 $0.82
Diluted - Note 10 $1.09 $0.80
Dividends per share of common stock $0.120 $0.105
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
IRWIN FINANCIAL CORPORATION AND SUBSIDIARIES
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(Unaudited)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Accumulated
Other Additional
Retained Comprehensive Common Paid-in Treasury
Total Earnings Income Stock Capital Stock
Balance at July 1, 1998 $131,863,380 $127,783,809 $61,717 $29,965,287 $1,194,541 ($27,141,974)
Comprehensive Income: Note 1
Net Income 10,092,428
Other Comprehensive Income 23,922
Total 10,116,350
Cash dividends (865,870) (865,870)
Purchase of treasury stock (3,005,048) (3,005,048)
Sales of treasury stock 233,225 (250,000) 106,935 376,290
Balance September 30, 1998 $138,342,037 $136,760,367 $85,639 $29,965,287 $1,301,476 ($29,770,732)
Balance at July 1, 1997 $122,227,757 $103,476,937 $1,442,385 $29,965,287 $0 ($12,656,852)
Comprehensive Income: Note 1
Net Income 7,311,762
Other Comprehensive Income (1,385,621)
Total 5,926,141
Cash dividends (775,658) (775,658)
Purchase of treasury stock (2,606,738) (2,606,738)
Sales of treasury stock 988,681 647,311 341,370
Balance September 30, 1997 $125,760,183 $110,013,041 $56,764 $29,965,287 $647,311 ($14,922,220)
</TABLE>
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
<TABLE>
<CAPTION>
Accumulated
Other Additional
Retained Comprehensive Common Paid-in Treasury
Total Earnings Income Stock Capital Stock
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1998 $127,983,341 $115,413,986 $54,895 $29,965,287 $779,976 ($18,230,803)
Comprehensive Income: Note 1
Net Income 24,202,788
Other Comprehensive Income 30,744
Total 24,233,532
Cash dividends (2,605,821) (2,605,821)
Purchase of treasury stock (12,493,236) (12,493,236)
Sales of treasury stock 1,224,221 (250,586) 521,500 953,307
Balance September 30, 1998 $138,342,037 $136,760,367 $85,639 $29,965,287 $1,301,476 ($29,770,732)
Balance at January 1, 1997 $118,902,080 $94,083,540 $56,523 $29,965,287 $0 ($5,203,270)
Comprehensive Income: Note 1
Net Income 18,276,433
Other Comprehensive Income 241
Total 18,276,674
Cash dividends (2,346,932) (2,346,932)
Purchase of treasury stock (10,798,110) (10,798,110)
Sales of treasury stock 1,726,471 647,311 1,079,160
Balance September 30, 1997 $125,760,183 $110,013,041 $56,764 $29,965,287 $647,311 ($14,922,220)
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
IRWIN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)
<TABLE>
<CAPTION>
For the nine months ended September 30, 1998 1997
<S> <C> <C>
Net income $24,202,788 $18,276,432
Adjustments to reconcile net income to cash provided
by operating activities:
Depreciation and amortization 39,205,149 20,773,707
Provision for loan and lease losses 4,560,364 5,055,236
Amortization of premiums, less accretion of discounts 1,919,738 891,064
Increase in loans held for sale (159,876,258) (29,332,573)
Gain on sale of mortgage servicing (29,604,753) (24,065,463)
Other, net (28,628,653) (12,776,366)
Net cash used by operating activities (148,221,625) (21,177,963)
Lending and investing activities:
Proceeds from maturities/calls of investment securities:
Held-to-Maturity 10,245,000 6,485,470
Available-for-Sale 3,792,543 26,827,505
Proceeds from sales of investment securities:
Available-for-Sale 1,000,000 0
Purchase of investment securities:
Held-to-Maturity (3,640,000) (3,069,972)
Available-for-Sale (4,170,274) (18,322,487)
Net increase in trading securities (21,251,414) (13,766,993)
Net (increase) decrease in interest-bearing
deposits with financial institutions (13,199,272) 10,090
Net increase in loans, excluding sales (127,216,043) (250,763,079)
Sale of loans 202,699,723 192,204,420
Sale of leasing assets 5,240,531 0
Additions to mortgage servicing assets (50,641,349) (51,669,826)
Proceeds from sale of mortgage servicing assets 30,635,466 52,146,332
Other, net (1,117,813) (3,153,932)
Net cash used by lending and investing activities (32,377,098) (63,072,472)
Financing activities:
Net increase in deposits 219,643,821 69,345,961
Net decrease in short-term borrowings (76,923,087) (25,271,209)
Proceeds (repayment) of long-term debt 2,877,909 (9,452,821)
Sale of company-obligated manditorily redeemable
preferred securities of subsidiary trust 0 47,908,556
Purchase of treasury stock (12,493,236) (10,798,110)
Proceeds from sale of stock for employee benefit plans 1,224,221 1,726,472
Dividends paid (2,605,821) (2,346,932)
Net cash provided by financing activities 131,723,807 71,111,917
Net increase (decrease) in cash and cash equivalents 15,879,280 (13,138,518)
Cash and cash equivalents at beginning of year 56,523,723 71,365,788
Cash and cash equivalents at end of year $72,403,003 $58,227,270
Supplemental disclosures of cash flow information:
Cash paid during the period:
Interest $51,286,927 $31,999,339
Income taxes $8,275,352 $6,337,225
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
NOTES TO THE FINANCIAL STATEMENTS (Unaudited)
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation: The unaudited financial statements included herein have
been prepared by the Corporation pursuant to the rules and regulations of the
Securities and Exchange Commission but do not include all information and
footnotes required by generally accepted accounting principles. In the opinion
of management, the financial statements reflect all material adjustments
necessary for a fair presentation. The accompanying financial statements
should be read in conjunction with the financial statements and related notes
included with the Corporation's Annual Report on Form 10-K for the year ended
December 31, 1997.
Reclassifications: Certain amounts in the 1997 consolidated financial
statements have been reclassified to conform to the 1998 presentation.
Comprehensive Income: On January 1, 1998, the Corporation adopted Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive Income."
This statement established standards for reporting comprehensive income in
financial statements. Comprehensive income is defined as the change in equity
duringa period from transactions and other events from nonowner sources.
Derivatives: On June 15, 1998, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (FAS 133). The Corporation will
adopt FAS 133 on January 1, 2000. FAS 133 requires that all derivative
instruments be recorded on the balance sheet at their fair value. Changes in
the fair value of derivatives are recorded each period in current earnings or
other comprehensive income, depending on whether a derivative is designated as
part of a hedge transaction and, if it is, the type of hedge transaction. The
Corporation is evaluating what impact the adoption of FAS 133 will have on its
earnings or statement of financial position.
Derivative instruments on the Corporation's balance sheet are classified as
trading securities and carried at market value. Changes in market value are
recorded as securities gains or losses on the income statement.
NOTE 2 - INVESTMENT SECURITIES
The carrying amounts of investment securities, including net unrealized gains
of $142,732 and $76,708 on available-for-sale securities at September 30, 1998
and December 31, 1997, respectively, are summarized as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
<S> <C> <C>
Held-to-Maturity
US Treasury and Government obligations $17,727,765 $35,732,672
Obligations of states and political subdivisions 5,207,739 4,813,919
Mortgage-backed securities 3,319,344 5,968,340
Total Held-to-Maturity 26,254,848 46,514,931
Trading:
Interest -only strips 30,335,182 22,133,793
Options on US Treasury futures and other 13,050,000 0
Total Trading 43,385,182 22,133,793
Available-for-Sale
US Treasury and Government obligations 14,624,209 6,052,952
Mortgage-backed securities 4,697,932 2,617,804
Other 483,679 21,963
Total Available for Sale 19,805,820 8,692,719
Total Investments $89,445,850 $77,341,443
</TABLE>
Securities which the Corporation has the positive intent and ability to hold
until maturity are classified as "held-to-maturity" and are stated at cost
adjusted for amortization of premium and accretion of discount. Securities
that might be sold prior to maturity are classified as "available-for-sale"
and are stated at fair value. Unrealized gains and losses on
available-for-sale securities, net of the future tax impact, are reported as a
separate component of shareholders' equity until realized.
Trading securities are stated at fair value. Unrealized gains and losses on
trading securities are included in earnings.
NOTE 3 - LOANS HELD FOR SALE
Loans held for sale are stated at the lower of cost or market as of the balance
sheet date.
NOTE 4 - LOANS AND LEASES
<TABLE>
Loans and leases are summarized as follows:
<S> <C> <C>
September 30, December 31,
1998 1997
Real estate-mortgage $115,642,589 $110,475,095
Commercial, financial and agricultural 275,037,438 212,094,742
Real estate-construction 82,663,708 73,279,176
Consumer 46,829,025 39,984,692
Lease financing 7,335,509 78,079,206
Unearned income (1,424,733) (15,162,986)
$526,083,536 $498,749,925
</TABLE>
NOTE 5 - ALLOWANCE FOR LOAN AND LEASE LOSSES
Changes in the allowance for loan and lease losses are summarized as follows:
<TABLE>
<S> <C> <C>
September 30, December 31,
1998 1997
Balance at beginning of year $8,811,645 $6,874,944
Provision for loan and lease losses 4,560,364 6,238,000
Reduction due to sale of loans (2,719,016) (1,694,316)
Recoveries 338,445 538,213
Charge-offs (1,904,491) (3,145,196)
Balance at end of period $9,086,947 $8,811,645
</TABLE>
NOTE 6- SERVICING ASSETS
Included on the consolidated balance sheet at September 30, 1998 and
December 31, 1997 are $97,713,070 and $83,043,939, 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 periodically sold servicing assets.
NOTE 7- SHORT-TERM BORROWINGS
<TABLE>
Short-term borrowings are summarized as follows:
<S> <C> <C>
September 30, December 31,
1998 1997
Repurchase agreements and drafts payable related to
mortgage loan closings $209,204,116 $240,659,463
Lines of Credit 116,542,894 112,590,484
Federal funds 80,000,000 142,650,000
Commercial paper 29,605,088 16,375,238
Total $435,352,098 $512,275,185
</TABLE>
Repurchase agreements at September 30, 1998 and December 31, 1997, include
$46,716,714 and $141,919,483 respectively, in mortgage loans sold under
agreements to repurchase which are used to fund mortgage loans sold prior
to sale in the secondary market. These repurchase agreements are
collateralized by mortgage loans held for sale.
Drafts payable related to mortgage loan closings totaled $162,487,492 and
$93,615,694 at September 30, 1998 and December 31, 1997. These borrowings
are related to mortgage closings at the end of the period which have not
been presented to banks for payment. When presented for payment these
borrowings will be funded internally or by borrowing from the lines of credit.
The Corporation has lines of credit available to fund mortgage loans held for
sale. Interest on the lines of credit is payable monthly at variable rates
ranging from 5.79% to the lender's prime rate.
NOTE 8 -- LONG-TERM DEBT
Long-term debt at September 30, 1998 of $9,973,627 consists of a note payable
with a variable interest rate averaging 7.9% and maturing on June 1, 2003.
Long-term debt as of December 31, 1997 was $7,095,718 and consisted of various
notes payable at annual interest rates ranging from 6.3% to 9.6% and maturity
dates through April 30, 2002.
NOTE 9 -- COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES
OF SUBSIDIARY TRUST
In January 1997, the Corporation issued $50,000,000 of trust preferred
securities through IFC Capital Trust I, a trust created and controlled
by the Corporation. The securities were issued at $25 per share with a
cumulative dividend rate of 9.25%, payable quarterly. They have an
initial maturity of 30 years with a 19-year extension option. The securities
are callable at par after five years, or immediately, in the event of an
adverse tax development affecting the Corporation's classification of the
securities for federal income tax purposes. They are not convertible into
common stock of the Corporation. The securities are shown on the balance
sheet net of capitalized issuance costs.
The sole assets of IFC Capital Trust I are subordinated debentures of the
Corporation with a principal balance of $51,546,400, an interest rate of
9.25% and an initial maturity of 30 years with a 19-year extension option.
NOTE 10 -- EARNINGS PER SHARE
On April 30, 1998, the Corporation's Board of Directors approved a two-for-one
stock split effective May 27, 1998, for all shareholders of record on May 15,
1998. Earnings per share calculations have been adjusted to reflect the
stock split.
Earnings per share calculations are summarized as follows:
<TABLE>
<S> <C> <C> <C>
Basic Earnings Effects of Diluted Earnings
Per Share Stock Options Per Share
Three months ended September 30, 1998
Net income available to common shareholders $10,092,428 $0 $10,092,428
Shares 21,661,712 250,103 21,911,815
Per-Share Amount available to common shareholders $0.47 ($0.01) $0.46
Nine months ended September 30, 1998
Net income available to common shareholders $24,202,788 $0 $24,202,788
Shares 21,753,320 385,371 22,138,691
Per-Share Amount available to common shareholders $1.11 ($0.02) $1.09
Basic Earnings Effects of Diluted Earnings
Per Share Stock Options Per Share
Three months ended September 30, 1997
Net income available to common shareholders $7,311,762 $0 $7,311,762
Shares 22,212,138 335,790 22,547,928
Per-Share Amount available to common shareholders $0.33 ($0.01) $0.32
Nine months ended September 30, 1997
Net income available to common shareholders $18,276,433 $0 $18,276,433
Shares 22,411,768 310,312 22,722,080
Per-Share Amount available to common shareholders $0.82 ($0.02) $0.80
</TABLE>
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 September 30, 1998, Irwin Mortgage Corporation (IMC) was a defendant
to five 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, IMC's right to pay
broker fees to mortgage brokers, and IMC's participation in a housing
opportunity program.
As of September 30, 1998, Affiliated Capital Corp. (ACC) and Irwin Financial
Corporation were defendants in a class action lawsuit alleging
misrepresentations by a manufacturer of certain equipment financed by ACC.
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.
Part I
Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's discussion and analysis should be read in
conjunction with the accompanying consolidated financial
statements and footnotes. 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.
Overview
Net income for the third quarter ended September 30, 1998,
was $10,092,428, up 38.0% from the third quarter 1997 net income
of $7,311,761. Net income per share(diluted)was $0.46 for the
third quarter of 1998 as compared to $0.33 for the same period in
1997. Return on equity for the third quarter of 1998 was 29.94%
compared to 23.14% in 1997. Third quarter results include a $3.1
million after-tax gain on the sale of substantially all of the
assets of the Corporation's leasing subsidiary. Excluding this
gain, third quarter 1998 income declined $363.7 thousand or 5.0%.
Net income per share (diluted) was $0.32, and the return on
equity was 20.6% absent the leasing gain.
For the year to date, the Corporation recorded net income
of $24,202,788 up 32.4% from 1997. Net income per share
(diluted) was $1.09, up from $0.81 a year earlier. Return on
equity for the year to date was 24.64% as compared to 19.91% for
the same period in 1997. Excluding the gain on sale of leasing
assets, 1998 income was up 15.2%. Net income per share (diluted)
was $0.95, and the return on equity was 21.38% absent the leasing
gain.
Lines of Business
Irwin Financial Corporation has four lines of business:
Mortgage banking (includes Irwin Mortgage Corporation and
the related activities of Irwin Union Bank)
Community banking (Irwin Union Bank)
Home equity lending (includes Irwin Home Equity and the
related activities of Irwin Union Bank)
Equipment leasing (includes Affiliated Capital Corp. and the
related activities of Irwin Union Bank)
Listed below are the earnings by line of business for the quarter
and year to date, as compared to the same periods in 1997:
<TABLE>
Three Months Nine Months
Ended September 30, Ended September 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Mortgage banking $7,141,928 $6,880,279 $20,358,799 $15,874,479
Community banking 1,711,436 1,207,828 4,767,583 3,848,774
Home equity lending (1,849,995) 158,810 (3,195,948) 1,860,642
Equipment leasing 5,084,865 75,020 5,167,083 146,160
Parent (including
consolidating entries) (1,995,806) (1,010,175) (2,894,729) (3,453,622)
$10,092,428 $7,311,762 $24,202,788 $18,276,433
</TABLE>
Mortgage Banking
Selected Financial Data (shown in thousands):
<TABLE>
Three Months Nine Months
Ended September 30, Ended September 30,
1998 1997 1998 1997
Selected Income Statement
Data:
<S> <C> <C> <C> <C>
Revenues:
Loan servicing fees 13,012 $13,039 $38,189 $37,619
Loan origination fees 14,753 11,300 41,487 30,350
Gain on sale of servicing 9,591 10,397 29,605 24,065
Gain from sales of loans 15,496 5,901 38,978 14,100
Servicing asset impairment ,net (2,640) (120) (5,461) (200)
Net interest income 7,082 4,819 18,556 13,060
Provision for loan losses (520) (914) (911) (1,621)
Other income 428 380 1,148 969
Total net revenues 57,202 44,802 161,591 118,342
Expenses:
Salaries and benefits 25,177 19,400 70,252 52,230
Amortization of servicing 6,011 3,972 16,586 10,916
asset
Other expenses 14,000 10,000 40,479 28,582
Income before tax 12,014 11,430 34,274 26,614
Income tax (4,872) (4,550) (13,915) (10,740)
Net income $7,142 $6,880 $20,359 $15,874
Return on average equity 33.20% 39.20% 31.50% 30.10%
Mortgage loan originations $2,112,547 $1,518,506 $6,162,200 $3,912,526
</TABLE>
<TABLE>
Selected Operating Data: September 30, December 31,
1998 1997
<S> <C> <C>
Servicing portfolio $11,124,715 $10,713,549
Mortgage loans held for sale 422,729 435,123
Mortgage servicing asset 93,945 81,610
</TABLE>
Mortgage banking activities are conducted by Irwin Mortgage
Corporation which originates, packages, sells and services
residential mortgage loans throughout the U.S. Net income for
the third quarter was $7.1 million, up 3.8% from the same period
in 1997. Year to date, net income was $20.4 million compared to
$15.9 million in 1997.
As a result of a declining interest rate environment,
mortgage loan originations of $2.1 billion were 39.1% above the
third quarter of 1997. For the year, originations totaled $6.2
billion, up 57.5% from 1997. Refinances, which earn lower
origination fees, accounted for 41.4% of loan production in the
third quarter of 1998 and 45.1% year to date. This compares to
22.1% and 18.9%, respectively, in 1997. Improved third quarter
production caused mortgage loan origination income to increase
30.6% for the quarter to $14.8 million. Year to date it was up
36.7% to $41.5 million.
As a result of increased loan production and a more
favorable market, gains on the sale of loans increased 162.6% in
the third quarter to $15.5 million. Year to date, gains on the
sale of loans totaled $39.0 million compared with $14.1 million
in 1997.
Mortgage servicing fees declined 0.2% in the third quarter
and were up 1.5% year to date to $13.0 million and $38.2 million,
respectively. The servicing portfolio totaled $11.1 billion at
September 30, 1998, up 4.5% from a year earlier and 3.8% from
December 31, 1997. The mortgage servicing asset totaled $93.9
million at September 30, 1998, up 15.1% from December 31, 1997.
Revenues from the sale of mortgage servicing declined 7.8%
from the third quarter of 1997 to $9.6 million. Year to date
servicing sale revenues totaled $29.6 million, up from $24.1
million in 1997. The third quarter decline resulted from a
reduced sales of servicing on adjustable rate loans which earn
higher servicing fees, and thus resulted in higher gains upon
sale.
The declining interest rate environment caused a
significant increase in the mortgage servicing asset impairment.
Due to the higher levels of mortgage refinancings, the mortgage
bank recorded gross impairment of $14.3 million in the third
quarter of 1998 and $18.1 million year to date. These amounts
compare to $0.1 million and $0.2 million in the third quarter and
year to date, respectively, in 1997. Partially offsetting the
1998 impairment were gains recorded on hedging activities of
$11.6 million and $12.7 million in the third quarter and year to
date, respectively. The mortgage bank had recorded on its
balance sheet $13.0 million of options on treasury futures which
were purchased during 1998 to hedge against the interest rate
risk associated with mortgage servicing assets. However, these
options do not satisfy the criteria for "hedge accounting." As a
result, they are accounted for as trading securities, and changes
in the fair value of the options are adjusted through earnings.
As a result of the increase in mortgage loan closings from
1997, net interest income was up in the third quarter and year to
date. Net interest income for the three months ended September
30, 1998 was $7.1 million, up 47.0% from the third quarter 1997.
Year to date, net interest income totaled $18.6 million, compared
to $13.1 million in 1997. The provision for loan losses
decreased to $0.5 million in the third quarter of 1998, down from
$0.9 million a year earlier. Year to date, the provision for
loan losses totaled $0.9 million as compared to $1.6 million in
1997. Provision levels in 1997 were higher due to increases in
nonperforming assets experienced during those periods. See the
section on credit losses for further discussion.
The increased production activities in mortgage banking
caused an increase in operating expenses. Salaries and employee
benefits increased 29.8% in the third quarter to $25.2 million.
Year to date, they were up 34.5% to $70.3 million. Other
operating expenses were up 40.0% from the third quarter of 1997
and 41.6% year to date.
An increase in the balance of mortgage servicing assets
combined with declining interest rates resulted in an increase in
the amortization of mortgage servicing assets in 1998.
Amortization expense totaled $6.0 million in the third quarter
and $16.6 million year to date, compared with $4.0 million and
$10.9 million in the same periods in 1997.
<TABLE>
Community Banking
Selected Financial Data (shown in thousands):
Three Months Nine Months
Ended September 30, Ended September 30,
Selected Income Statement 1998 1997 1998 1997
Data:
<S> <C> <C> <C> <C>
Net interest revenue $6,380 $5,621 $18,437 $16,101
Provision for loan losses (545) (560) (1,595) (1,555)
Other income 2,853 2,036 8,645 7,010
Operating expense (5,961) (5,176) ( 17,856) (15,440)
Income before tax 2,727 1,921 7,631 6,116
Income tax (1,016) (713) (2,863) (2,267)
Net income $1,711 $1,208 $4,768 $3,849
</TABLE>
<TABLE>
September 30, December 31,
Selected Balance Sheet Data: 1998 1997
<S> <C> <C>
Securities and short-term investments $42,622 $88,444
Loans and leases 498,285 388,177
Allowance for loan losses (6,607) (5,433)
All other assets 42,311 43,428
Total assets $576,611 $514,616
Deposits $522,735 $461,782
All other liabilities 10,065 15,680
Total liabilities 532,800 477,462
Shareholder's equity 43,811 37,154
$576,611 $514,616
</TABLE>
Community banking activities are conducted by Irwin Union
Bank through locations in eight counties in central Indiana. Net
income was up in the third quarter to $1.7 million from $1.2
million a year earlier. Year to date, net income was $4.8
million, up from $3.8 million in 1997. The provision for loan
and lease losses decreased 2.7% to $545.0 thousand in the third
quarter compared with a provision of $560.2 thousand a year
earlier. Year to date, the provision for loan and lease losses
increased 2.6% to $1.6 million.
Following is an analysis of net interest income and net
interest margin computed on a tax equivalent basis:
<TABLE>
For the Three Months
Ended September 30, 1998 1997
Average Yield/ Average Yield/
(In thousands) Balance Interest Rate Balance Interest Rate
Interest -
<S> <C> <C> <C> <C> <C> <C>
earning assets $532,800 $11,897 8.86% $484,828 $10,543 8.63%
Interest -
bearing liabilities 451,571 5,453 4.79% 327,057 4,850 5.88%
Net interest income * $6,444 * * $5,693 *
Net interest margin * * 4.80% * * 4.66%
</TABLE>
<TABLE>
For the Nine Months Ended
September 30, 1998 1997
Average Yield/ Average Yield/
(In thousands) Balance Interest Rate Balance Interest Rate
Interest -
<S> <C> <C> <C> <C> <C> <C>
earning assets $524,698 $34,585 8.81% $475,318 $30,227 8.50%
Interest -
bearing liabilities 446,876 15,952 4.77% 320,383 13,899 5.80%
Net interest income * $18,633 * * $16,328 *
Net interest margin * * 4.75% * * 4.59%
</TABLE>
Other income in the third quarter was up 40.2% to $2.9
million from $2.0 million in 1997. For the year to date, other
income increased 23.3% to $8.6 million. Operating expenses
increased 15.2% from the third quarter of 1997 to $6.0 million.
For the year, these expenses were up 15.6% to $17.9 million. The
continued expansion of operations in new markets led to increased
non-interest expense in 1998.
Home Equity Lending
Selected Financial Data (shown in thousands):
<TABLE>
Three Months Nine Months
Ended September 30, Ended September 30,
1998 1997 1998 1997
Selected Income Statement
Data:
Revenues:
<S> <C> <C> <C> <C>
Net interest revenue $162 $1,634 $2,942 $4,178
Gain from sale of loans 6,587 2,706 17,346 12,701
Loan servicing fees 916 616 2,430 1,506
Securities gain (loss) (1,756) 0 (3,203) 0
Other revenue 326 73 545 193
Total net revenues 6,235 5,029 20,060 18,578
Operating expenses (8,085) (4,870) (23,256) (16,717)
Pre-tax income (loss) $(1,850) $159 ($3,196) $1,861
</TABLE>
<TABLE>
Other Selected Financial Data: September 30, December 31,
1998 1997
<S> <C> <C>
Home equity loans $103,399 $111,779
Interest-only strip 29,630 22,134
Servicing portfolio 512,701 358,166
</TABLE>
The home equity lending business originates home equity
loans through direct mail and telemarketing and currently markets
in 26 states. The home equity lending business recorded a pre-
tax loss of $1.9 million during the third quarter of 1998 and
$3.2 million year to date. These results are compared to 1997
quarterly and year to date pre-tax income of $0.2 million and
$1.9 million, respectively.
During the third quarter of 1998, the home equity lending
business originated $119.0 million of loans, up 98.2% from the
same period a year earlier. Year to date, originations totaled
$273.8 million. Gains from the securitization of $67.6 million
of home equity loans totaled $4.5 million in the third quarter,
up 66.3% from the previous year when $35.1 million were
delivered. Year to date, securitization gains totaled $15.2
million on the delivery of $222.6 million of loans, compared to
$12.7 million on the delivery of $210.1 million in 1997.
Additionally, during the third quarter, the home equity lending
business recorded gains of $2.1 million on whole loan sales of
$53.8 million.
Market interest rate and competitive conditions caused
other areas of revenues to not reflect the growth in originations
experienced by the home equity business. Net interest revenue in
the third quarter of 1998 was $0.2 million, down from $1.6
million a year earlier. Year to date, net interest revenue was
down 29.6% to $2.9 million. The decline is the result of a
combination of factors. First, amortization of the interest-only
strip which results from the securitization of home equity loans
was higher in 1998. This was due to faster prepayment speeds
resulting from declining interest rates and increased competition
in the industry. Second, income from the interest-only strip was
reduced as a result of increased credit losses on the securitized
loans.
Interest-only strips are recorded on the balance sheet as
trading investment securities. They are carried at their market
values based on assumptions about the duration and performance of
the securitized loans. At September 30, 1998, the assumed annual
loss rates ranged from 0.5% to 1.0%, prepayment speeds ranged
from 10.0% to 51% CPR (constant prepayment rate) per year, and
the discount rate was 15.0%. In 1998, as a result of increased
prepayment activity, the home equity business recorded a net loss
on these securities of $1.8 million in the third quarter and $3.2
million year to date to write down their value to market value.
No impairment charges were recorded through the third quarter of
1997.
Servicing fee income was $0.9 million in the third quarter
of 1998, up $0.3 million from the same period a year earlier.
Year to date, servicing fees totaled $2.4 million, up from $1.5
million in 1997. The total amount of loans serviced for
investors at September 30, 1998 was $409.3 million, up from
$223.0 million at September 30, 1997 and $246.4 million at
December 31, 1997.
Operating expenses were $8.1 million in the third quarter of
1998, up 66.0% from 1997. Year to date, operating expenses
totaled $23.3 million, up 39.1% from the previous year.
Increases in 1998 were primarily due to increased production
activities which led to higher compensation and marketing
expenses.
Equipment Leasing
During the third quarter of 1998, substantially all of the
assets of the equipment leasing business were sold, generating a
pre-tax gain of $5.2 million. Excluding this gain, the equipment
leasing business recorded a pre-tax loss of $155.7 thousand in
the third quarter of 1998, down from pre-tax income of $75.0
thousand a year earlier. Year to date, excluding the gain from
the sale of leasing assets, the business recorded a pre-tax loss
of $73.4 thousand, compared to pre-tax income of $146.2 thousand
in 1997. The losses in 1998 resulted from a $390.0 thousand
provision for lease losses recorded in the third quarter for the
remaining lease assets that were not sold. These assets totaled
$5.4 million at September 30, 1998. The Corporation plans to
sell these remaining assets at a future date.
Parent Company (including other lines of business and
consolidating entries)
For the quarter ended September 30, 1998, the parent company
recorded a net loss of $2.0 million, compared with a net loss of
$1.0 million a year earlier. Year to date, the parent company's
net loss totaled $2.9 million compared with a net loss of $3.5
million in 1997. The parent company records the income tax
expense or benefit generated at the home equity lending and
equipment leasing businesses until such time that all net
operating losses carried forward are fully used. In the third
quarter and year to date 1998, the parent recorded $1.3 million
and $0.8 million, respectively, of income tax expense related to
these lines of business. This compares with $93.5 thousand and
$0.8 million of income tax expense recorded in the third quarter
and year to date, respectively, in 1997.
Consolidated Income Statement Analysis
Net interest income for the third quarter of 1998 totaled
$16.5 million, up 13.5% from the third quarter of 1997. For the
year, it increased 17.5% to $47.3 million. The increases were
the result of increased production of mortgage loans and growth
in the loan portfolio of the community bank.
The loan and lease loss provision was $1.9 million for the
third quarter of 1998, as compared with $2.2 million for the same
period in 1997. For the year, it totaled $4.6 million, down from
$5.1 million a year earlier. During the third quarter of 1997,
the mortgage bank recorded higher provisions as a result of an
increase in the level of nonperforming assets. See the section
on credit risk for more discussion of this subject.
Other income was up $17.4 million or 37.3% in the third
quarter of 1998. Year to date other income increased $47.0
million or 36.6%. This increase was due in part to the $5.2
million gain on the sale of leasing assets recorded in the third
quarter of 1998. The improvement was also driven by results from
mortgage banking activities. Total income from mortgage loan
originations, sales, servicing, and servicing sales was $50.2
million in the third quarter of 1998 and $142.8 million year to
date. This compares to 1997 revenues of $40.5 million and $105.9
million in the third quarter and year to date, respectively. As
previously discussed, the mortgage bank's revenues were reduced
by impairment charges against mortgage servicing assets. Gross
impairment charges of $14.3 million were recorded in the third
quarter of 1998 and $18.1 million year to date. These amounts
compare to $0.1 million and $0.2 million year to date,
respectively, in 1997. Partially offsetting the 1998 impairment
charges were gains recorded on hedging activities of $11.6
million and $12.7 million in the third quarter and year to date,
respectively.
Operating expenses also increased in 1998 as the third
quarter was up $15.2 million or 33.3% from 1997. For the year,
operating expenses increased $44.5 million or 34.3%. This
increase is due to increased production activities at the
mortgage bank and home equity business, and continued expansion
of the community bank.
The effective income tax rate for the Corporation was 40.3%
the third quarter of 1998 and 40.1% year to date. This is
compared with 40.6% in the third quarter of 1997 and 40.3% year
to date 1997.
Consolidated Balance Sheet Analysis
Total assets of the Corporation at September 30, 1998, were
$1.7 billion, an increase of $0.2 billion from December 31, 1997
total assets of $1.5 billion. The increase resulted from an
increase in loans held for sale of $159.9 million or 30.2%.
The increase in assets was funded by an increase in
deposits of $0.2 billion or 30.5%. A portion of noninterest
bearing deposits is associated with escrow accounts held on loans
in the servicing portfolio of Irwin Mortgage. These escrow
accounts totaled $342.0 million at September 30, 1998, up from
$218.7 million at December 31, 1997.
Shareholders' equity grew to $138.3 million or $6.39 per
share, an increase over the $128.0 million or $5.62 per share at
the end of 1997. The Corporation's equity to assets ratio ended
the quarter at 8.35%, compared to 8.55% at the end of 1997.
Prior to the adoption of new mortgage banking accounting
standards in 1995, mortgage banking accounting did not allow the
full value of mortgage servicing rights to be reflected on the
balance sheet. Since a significant portion of the Corporation's
mortgage servicing portfolio was generated prior to the adoption
of the new accounting standards, it represents substantial
economic value which is not recorded on the balance sheet. The
following table demonstrates the estimated after-tax value for
the current quarter as well as the past two year ends.
<TABLE>
(In thousands) Sept. 30, Dec. 31, Dec. 31,
1998 1997 1996
<S> <C> <C> <C>
Servicing portfolio balance $11,124,715 $10,713,549 $10,810,988
Value @1.5% $166,871 $160,703 $162,165
Less: Mortgage servicing asset 93,945 81,610 70,551
Tax liability at 40% 29,170 31,637 36,646
Net value not on balance sheet $43,755 $47,456 $54,968
Per share of common stock $2.02 $2.16 $2.42
</TABLE>
Credit Risk
The assumption of credit risk is a key source of earnings
for the community banking, home equity lending, and equipment
leasing businesses. In addition, the mortgage banking business
assumes some credit risk despite the fact that the mortgages are
typically secured.
The community banking and home equity lending businesses
manage credit risk through the use of lending policies, credit
analysis and approval procedures, and personal contact with the
borrowers. Loans over a certain size are reviewed prior to
approval by a loan committee. The equipment leasing business
manages credit risk in a similar manner through the use of
lending policies, credit analysis procedures, and personal
contact with lessees.
Management reviews various ratios as measurements of asset
quality; however, the two most significant areas are delinquent
loan and lease ratios and the adequacy of the allowance for
possible loan and lease losses.
The adequacy of the allowance for loan and lease losses is
critical to the fair valuation of net loans and leases recorded
on the Corporation's balance sheet. Management evaluates the
creditworthiness of significant borrowers, past loan and lease
loss experience, and current and anticipated economic conditions.
The allowance for loan and lease losses is reduced by loans and
leases which, in the opinion of management, are deemed to be
uncollectible. The allowance is increased by provisions against
income. The ending allowance at any reporting period reflects
management's opinion of the future loss potential of all loans
and leases currently recorded on the Corporation's books.
As of September 30, 1998, the allowance for loan and lease
losses totaled $9.1 million, or 1.73% of total loans and leases,
compared to $8.8 million or 1.44% at December 31, 1997. For the
three months ended September 30, 1998, the provision for possible
loan and lease losses totaled $1.9 million, a 13.6% decrease from
the amount recorded in the third quarter of 1997. Year to date,
the provision totaled $4.6 million, down from $5.1 million a year
earlier. The 1997 provision reflected an increase in
nonperforming assets experienced by the Corporation during the
third quarter of 1997 as discussed below. Net charge-offs for
the quarter were $487.0 thousand as compared to $502.0 thousand
in 1997. Year to date net charge-offs totaled $1.6 million, down
from $1.9 million a year earlier.
Nonperforming assets (loans 90 days past due, nonaccrual,
and owned real estate) were $12.0 million or 0.72% of total
assets at September 30, 1998, compared with $9.5 million or 0.64%
at December 31, 1997 and $9.4 million or 0.72% at December 31,
1996. The most significant increases occurred at the mortgage
bank where nonperforming assets were up $3.4 million from year
end 1997. 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 are not
eligible for 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.
Additionally, during 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 agencies for conforming first mortgages.
The majority of these loans are sold on a non-recourse, service
released basis to private investors. However, the mortgage bank
retains the credit risk on any loans that are not sold.
<TABLE>
Nonperforming Assets September 30, December 31, December 31,
(In Thousands) 1998 1997 1996
Accruing loans past
due 90 days or more:
<S> <C> <C> <C>
Real Estate $813 $534 $234
Commercial 215 382 256
Leasing 0 0 0
Consumer 262 86 205
Subtotal 1,290 1,002 695
Nonaccrual loans:
Real Estate 5,994 5,333 2,481
Commercial 1,287 777 2,739
Leasing 545 506 1,261
Consumer 175 63 0
Subtotal 8,001 6,679 6,481
Total nonperforming loans 9,291 7,681 7,176
Other real estate owned 2,660 1,828 2,239
Total nonperforming assets $11,951 $9,509 $9,415
Nonperforming assets
to total assets 0.72% 0.64% 0.72%
</TABLE>
Liquidity
Liquidity is the availability of funds to meet the daily
requirements of the business. For financial institutions, demand
for funds comes principally from extensions of credit and
withdrawal of deposits. Liquidity is provided by asset
maturities, sales of investment securities, or short-term
borrowings. Seasonal fluctuations in deposit levels and loan
demand require differing levels of liquidity at various times
during the year. Liquidity measures are formally reviewed by
management monthly, and they continue to show adequate liquidity
in all areas of the organization.
Interest Rate Sensitivity
Interest rate sensitivity refers to the degree to which the
Corporation's short- and long-term earnings would change due to
changes in market rates of interest. The Corporation's goal in
addressing this risk is to manage its businesses so that
movements of interest rates have an immaterial impact on net
income and on the value of its assets and liabilities. To
measure its sensitivity to changes in interest rates and
appropriate hedging strategies, the Corporation uses a
combination of measurement techniques including simulation, rate
shock analysis, and gap analysis.
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 September 30,
1998 (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. Fixed rate assets and
liabilities such as mortgage servicing rights and the escrow
deposits associated with them are analyzed based on their
expected maturities which reflect estimated pre-payment
characteristics, rather than their maximum contractual
maturities. 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.
<TABLE>
Within 4-12 1-5 Over 5 Subtotal Non- Total
3 Months Years Years market
Months
(In Thousands)
Assets:
<S> <C> <C> <C> <C> <C> <C>
Interest-bearing
deposits with banks $27,732 $3,510 $198 $0 $31,440 $0 $31,440
Federal Funds Sold 5,250 0 0 0 5,250 0 5,250
Taxable investment
securities 36,367 20,629 21,815 5,427 84,238 0 84,238
Tax-exempt investment
securities 0 501 615 4,092 5,208 0 5,208
Loans held for sale 615,192 71,981 0 0 687,173 0 687,173
Loans, net of
unearned income 308,823 19,245 92,050 107,408 527,526 0 527,526
Total interest-
earning assets 993,364 115,866 114,678 116,927 1,340,835 0 1,340,835
Liabilities:
Non-interest
bearing deposits 0 0 0 0 0 418,603 418,603
Money Market checking 27,864 0 42,845 12,812 83,521 0 83,521
Money Market savings 0 0 4,418 0 4,418 0 4,418
Regular savings 22,711 1,885 10,056 7,770 42,422 0 42,422
Time deposits 219,451 118,041 52,331 455 390,278 0 399,278
Short-term
borrowings 395,352 40,000 0 0 435,352 0 435,352
Long-term debt 0 0 9,974 0 9,974 0 59,974
Total interest-
bearing liabilities 665,378 159,926 119,624 21,037 965,965 418,603 1,384,568
Trust preferred
securities 0 0 0 50,000 50,000 0 50,000
Interest
sensitivity gap 327,986 (44,060) (4,946) 45,890 324,870 (418,603) (93,733)
Cumulative interest
sensitivity gap $327,986 $283,926 $278,980 $324,870 $(93,733) $(93,733)
</TABLE>
As the above table shows, the consolidated one-year gap at
September 30, 1998 was a positive $283.9 million. This compares
to a positive gap of $143.0 million at December 31, 1997.
Since the gap was positive at September 30, 1998, it means
that the Corporation's net interest income was positioned to
benefit from rising rates, or to be harmed from declining rates;
however, the Corporation benefits from declining rates through
increased first and second mortgage loan production. 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 rights. Management
attempts to monitor this exposure to traditional interest rate
risk as well as interest rate influences on production and
servicing value in a comprehensive manner.
Derivative Financial Instruments
The Corporation hedges its interest rate risk on mortgage
loans held for sale using mandatory commitments to sell the loans
at a future date. The economic value of mortgage servicing
assets are hedged using options on treasury futures. At
September 30, 1998, these options had a fair value of $13.0
million and a net notional amount (which does not represent the
amount at risk) of $0, which consisted of $750.0 million of long
positions and $750.0 million of short positions. Interest-only
strips are hedged using interest rate caps which had a fair value
of $705.0 thousand at September 30, 1998, and a notional amount
of $70.2 million. Options on treasury futures and interest rate
caps are classified as trading securities on the balance sheet
and carried at their market values. Adjustments to market values
are recorded as net securities gains or losses on the income
statement. In the third quarter and year to date 1998, the
Corporation recorded $11.6 and $12.7 million, respectively, of
securities gains related to these derivative products. No gains
or losses were reported in the previous year.
Capital Adequacy
The Corporation is 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 I capital
(as defined in the regulations) to risk-weighted assets (as
defined), and of Tier I capital to average assets (as defined).
Equity and risk-based capital ratios for the Corporation are as
follows:
<TABLE>
Ratio
required to Sept.30, Dec. 31, Dec. 31,
be considered 1998 1997 1996
well-
capitalized
<S> <C> <C> <C> <C>
Equity to Assets n/a 8.35% 8.55% 9.15%
Risk-Based Capital 10.0% 13.50% 14.85% 12.88%
Tier I Capital 6.0% 12.60% 13.56% 12.20%
Tier I Leverage 5.0% 10.27% 12.06% 9.84%
</TABLE>
Year 2000
The Corporation is actively addressing its exposure to the
Year 2000 issue and has four teams focusing on the issue
(one at each of its three principal operating entities and
at the parent company). The Corporation has developed a
seven-stage project plan to achieve Year 2000 readiness by
June 30, 1999 that includes: (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)
development of contingency plans to continue processes in
the event of Year 2000 readiness failure by the Corporation
or parties on whom it is dependent; (vi) implementation of
the remediated systems; and (vii) auditing after January 1,
2000, of the completed processes 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 entire project is overseen by a Year
2000 Steering Committee which includes the Corporation's
Chairman, President, and those in charge of Information
Technology (IT) at each entity.
Scope
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 and other
third-party service providers. 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, including
replacement of existing vendor's systems. The project plan
has addressed computer hardware and software as well as
environmental systems used in the Corporation's work places
to address readiness of both direct and indirect process
support systems (i.e., IT and non-IT systems).
An initial step in the implementation of the Year 2000
methodology involved the identification of all possible
technologies that utilize date logic. To ensure
completeness, the Corporation provided education and
awareness to affected stakeholders. Once this step was
completed, the Corporation engaged in a comprehensive
inventory to identify technologies that utilize date logic
by both business process and critical need.
Progress
The Corporation, together with its consultants, is currently
in varying stages of the remediation, testing,
implementation, and contingency planning steps of its
project and is generally on target to meet the milestones
necessary to achieve Year 2000 readiness by June 30, 1999.
However, as noted in the graphs below which illustrate
current project progress against the work plan for each of
the Corporation's principal entities, there have been delays
in the testing phase of the project. In general, this is
the result of delays brought upon by reliance on third
parties who are late in their delivery of remediated
programs and/or test documentation. The Corporation is
paying close attention to this issue as it is approaching
the point where it would not have time to change vendors if
these issues are not resolved. When certain elements of the
project plan are unexpectedly delayed (such as testing which
is dependent on remediation efforts), the Corporation has
accelerated progress on other areas of the project. For
example, for certain systems, testing is behind schedule
while for other systems implementation is ahead of schedule.
Costs
The Year 2000 project has required a reallocation of
business resources from other areas of the Corporation.
However, to date, the consolidated cost of the project has
not been material to the overall financial results of
operations, liquidity, or capital, nor does the Corporation
believe it will be material throughout the duration of the
project. Additionally, the Corporation does not believe
that the reallocation of resources necessary to address the
Year 2000 issue has resulted in a material adverse change in
the Corporation's ability to address other information
technology projects critical to the Corporation's growth.
The Corporation has incurred and expensed approximately $0.9
million pre-tax on the Year 2000 project since its
inception. These costs have been funded through operating
cash flows. The total cost of the project over the period
1997 to 2000 is anticipated to be in the range of $3.5
million pre-tax, excluding incentive stock-based
compensation valued at approximately $311 thousand at the
time of grant. The Corporation cannot guarantee that the
current estimate of $3.5 million will be adequate to
complete the project. If the costs increase significantly
beyond the current estimate, it could have a material
adverse affect on the Corporation's financial results. The
graph below illustrates the amounts expensed on the project
to date (excluding the cost of options which are not
expensed under GAAP) and on a pro forma basis through 1999
and contain forward-looking estimates.
Graph replaced with following text table
Year 2000 Project-Irwin Financial Consolidated
As of September 30, 1998
Pre-tax Costs in $000
1997--Actual $119
1998 YTD 779
4Q 1998 * 647
1999 * 1,919
* Estimate as of September 30, 1998.
Risks
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
others. The Corporation 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. The Corporation cannot guarantee that all of its
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
could have a materially adverse effect on the Corporation's
ability to successfully address its Year 2000 issue.
Certain of the Corporation's vendors are already late in
delivering remediated programs or test documentation. 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 which the Corporation interacts fail to address the
Year 2000 issue successfully.
Contingency Plans
The Corporation has not completed its assessment of the
probability or cost of potential Year 2000 system failures,
nor has it completed step five of its project plan,
contingency planning. Therefore, it is difficult at this
time to accurately estimate the cost to the Corporation of
Year 2000 failures by third parties or the Corporation
itself. Any of the failures mentioned above could have a
material adverse effect on the financial condition and
results of operations of the Corporation.
Additional detail on the Year 2000 project at the
Corporation's parent company and each of its principal
subsidiaries is shown below.
Irwin Financial Corporation (parent company)
The operations of the parent company largely are intended to
further the Corporation's strategic development, allocation
of capital, planning for entering or exiting lines of
business, certain support services for its operating
companies, and external relations. There are few direct,
ongoing revenue-producing interactions with end customers of
the Corporation. Nonetheless, the services of the parent
company are of sufficient size and importance to the overall
condition of the Corporation that a separate project team is
in place to assure Year 2000 readiness of its systems and
operating environment.
Scope
As with the Corporation's overall project plan, the parent
company's plan included an assessment of computer hardware
and software as well as environmental systems. The
principal risk of failure to be Year 2000 compliant at the
parent company lies in the failure or delay in providing its
services to its constituents in a timely manner. In most
cases, this will lead to increases in expenses, rather than
in ultimate failure to deliver the service.
Like the other units of the Corporation, the parent company
has developed a technology strategy that primarily uses
systems developed by third parties and has very few
internally developed applications. Consequently, the parent
company's principal focus is on assuring Year 2000
compliance from its commercial application vendors and other
third-party service providers.
Progress
The progress of this team in meeting the seven-stage
requirements of its project plan to achieve Year 2000
readiness by June 30, 1999 is shown below.
Graph replaced with following text table
Year 2000 Project-Irwin Financial (parent only)
As of September 30, 1998
Percent Completed
<TABLE>
Target Actual Projected Actual
Completion* Completion Completion Date
<S> <C> <C> <S>
Post-2000 Audit 0 0 During 2001
Implementation 25 25 2Q99
Contingency Planning 0 5 On-going
Testing 50 30 1Q99
Remediation 90 90 4Q98
Assessment 100 100 Done
Awareness 100 100 Done
</TABLE>
* Target is original plan to achieve Year 2000 Readiness by
June 30, 1998.
Costs
The parent company has expended approximately $99 thousand
pre-tax since inception on the Year 2000 project. The graph
below indicates the amounts expensed on the project to date
and on a pro forma basis through 1999.
Graph replaced with following text table
Year 2000 Project-Irwin Financial (parent only)
As of September 30, 1998
Pre-tax Costs in $000
1997--Actual $33
1998 YTD 66
4Q 1998 * 38
1999 * 196
* Estimate as of September 30, 1998.
Risks
The consequence of failure to achieve Year 2000 compliance
at the parent company is likely to be increased labor
expense as certain automated procedures are performed with
additional human intervention. If such failures caused the
parent company to miss deadlines for required filings, the
company could face fines or penalties for late reporting of
regulatory items. The company does not believe these risks
pose a material monetary risk.
Contingency Plans
The parent company has only recently begun work on
contingency planning and, therefore, cannot accurately
estimate the exact manner in which it would address likely
worst case scenarios, nor the financial or operational
impact of such scenarios.
Irwin Mortgage Corporation
Irwin Mortgage Corporation (IMC) is principally engaged in
the business of originating, selling, and servicing mortgage
loans. Its net income is dependent on information
technology and support systems which allow the efficient
production and servicing of loans.
Scope
IMC has had teams addressing Year 2000 readiness since
August of 1997 and it has adopted the same seven phase plan
to achieve readiness used by the Corporation as discussed
above. IMC participates with the Corporation's Steering
Committee and has specific internal personnel whose time is
dedicated solely to the Year 2000 project. In addition, IMC
has partnered with the local office of a national IT
consulting firm that has assisted with staff augmentation
and technical expertise in the areas of code renovation and
testing applications. IMC has kept abreast of Year 2000
issues by participating in local Year 2000 user groups and
national Year 2000 seminars.
IMC is dependent on third parties in three principal areas.
1. IMC has developed a technology strategy that primarily
uses systems developed by third parties and has very few
internally developed applications.
2. IMC depends on several key business partners to
successfully conduct operations (e.g., Government Sponsored
Enterprises, investors, title companies, mortgage brokers).
3. IMC needs a properly operating infrastructure (i.e.
power, communications, transportation) in order to
effectively conduct business.
Consequently, IMC is focusing its Year 2000 readiness
efforts on working with each of these groups.
As with the Corporation's overall project plan, IMC's plan
includes computer hardware, software, and environmental
systems. IMC owns none of the properties in which it
conducts business, so the principal focus of the
environmental systems review has been to work with the
management companies of the facilities it leases.
Additionally, the company has worked with various user
groups to address the Year 2000 issue with public service
providers on which it depends.
Progress
At present, IMC is generally on schedule with its existing
plan to achieve Year 2000 readiness by June 30, 1999. The
first three phases of the plan (awareness, assessment, and
renovation) have been completed. The company is somewhat
behind schedule in testing as it has not yet received
remediated software from the vendor of its loan servicing
system. The vendor has stated that it anticipates
delivering a Year 2000 compliant version of the software
during the fourth quarter of 1998; testing on this system
will commence immediately thereafter.
Graph replaced with following text table
<TABLE>
Year 2000 Project-Irwin Mortgage
As of September 30, 1998
Percent Completed
Target Actual Projected Actual
Completion* Completion Completion Date
<S> <C> <C> <S>
Post-2000 Audit 0 0 During 2001
Implementation 25 10 2Q99
Contingency Planning 0 5 On-going
Testing 50 30 1Q99
Remediation 90 100 4Q98
Assessment 100 100 Done
Awareness 100 100 Done
</TABLE>
Costs
IMC has expended approximately $644 thousand pre-tax since
inception on the Year 2000 project. The graph below
indicates the amounts expensed in the project to date and on
a pro forma basis through 1999.
Graph replaced with following text table
Year 2000 Project-Irwin Mortgage
As of September 30, 1998
Pre-tax Costs in $000
1997--Actual $40
1998 YTD 604
4Q 1998 * 506
1999 * 1,472
* Estimate as of September 30, 1998.
Risks
Failure to be Year 2000 compliant could cause the
malfunctioning of the loan origination or servicing systems.
If there is a failure within the loan origination system
that prevented IMC from closing mortgage loans, the company
could be adversely affected through delayed or failed loan
closings. This would reduce current revenues and/or would
increase the cost to originate loans as more processes are
performed with alternative, less efficient processes. The
company intends to develop contingency plans which should
allow a certain amount of production to continue, thus
mitigating the loss of revenues.
Another risk to the company could involve a failure of one
or more components in the loan servicing system. The loan
servicing system is a high-volume, transactional system that
makes logic decisions based on dates (both current and
future). For example, if the payment posting module of the
system fails, the company may be unable to remit payments
and information to IMC's investors. The cost associated
with this problem includes fines (for late reporting) that
could range from a few hundred dollars to cease and desist
orders that could cost IMC all revenue related to an
individual investor's servicing portfolio.
Contingency Plans
The company is in the early stages of its contingency
planning efforts. Its approach is to review the most
important business processes that were identified in the
assessment phase and work with the key personnel to develop
alternative plans in case the Year 2000 readiness efforts
fail. As these plans are developed, the company will be
better able to quantify the dollar costs of non-compliance.
Irwin Union Bank
Irwin Union Bank & Trust (the Bank) is engaged in providing
consumer and commercial banking, trust, insurance and
brokerage services throughout central and south central
Indiana. The Year 2000 technology compliance issue poses a
significant challenge to the organization as technology has
been integrated with all major business processes. The
methodology is based on the Corporation's seven-stage
implementation plan. Consistent with the corporation's goal
to be year 2000 ready by June 30, 1999, the Bank is
scheduled to complete all Year 2000 technology testing by
the end of March 1999.
Scope
Recognizing the impact of non-compliance, the Bank began a
formalized compliance program in 1997. The Bank has adopted
the same seven phase plan to achieve readiness used by the
Corporation as discussed above. The Bank participates with
the Corporation's Steering Committee. The Bank's plan
includes computer hardware, software, and environmental
systems.
The Bank's applications are primarily commercial off-the-
shelf applications, including its core banking technologies,
facility controls and desktop applications. In addition,
the Bank utilizes third party providers for retail brokerage
and trust/employee benefits account processing. Finally,
the Bank has two internally developed technologies, those
for certificate of deposit servicing and insurance
originations that required remediation due to non-
compliance.
Progress
The Bank involved over 25 staff members to participate in
Year 2000 technology discussions, vendor appraisals and
compliance testing. A multi-level testing strategy has been
deployed within the Bank. Depending on the level of vendor
and third party testing, the Bank has determined whether
additional testing is warranted. For those applications
that were certified by either a third party or vendor, the
Bank has requested and reviewed the test results and
scripts. An exception to this policy of reviewing the
testing procedures of others was deemed necessary for those
applications that were critical to the Bank's continued
operation. These "Hot List" technologies were, or are
currently in process of being, tested by the Bank staff
using either proxy testing, vendor scripts, or actual date
scenario testing with internally developed scripts.
The testing procedures for third party providers are more
challenging for the Bank to assess Year 2000 compliance.
The Bank has two critical technologies that are provided
through a service bureau environment: retail brokerage and
trust/employee benefits account processing. The vendors of
these services are both industry-leading providers who have
committed significant resources to ensure Year 2000
compliance. The providers have documented their efforts to
the Bank through ongoing disclosure of testing plans and
results. Both vendors have targeted December 1998 for full
compliance and intend to complete on-site client testing
within the first quarter of 1999.
The Bank's progress against each stage of its plan is shown
below.
Graph replaced with following text table
<TABLE>
Year 2000 Project-Irwin Union Bank
As of September 30, 1998
Percent Completed
Target Actual Projected Actual
Completion* Completion Completion Date
<S> <C> <C> <S>
Post-2000 Audit 0 0 During 2001
Implementation 25 50 2Q99
Contingency Planning 30 10 On-going
Testing 55 25 1Q99
Remediation 80 75 4Q98
Assessment 100 100 Done
Awareness 100 100 Done
</TABLE>
As noted above, the Bank is behind on testing due to its
reliance on third-parties on which it is dependent for
remediated applications. The Bank is also behind schedule
on contingency planning which was originally embedded in its
implementation plan. Conversely, the Bank is ahead of
schedule in implementation, having taken advantage of delays
in areas such as testing and contingency planning to make
additional implementation progress.
Costs
The focus on commercial off-the-shelf applications has
allowed the Bank to avoid major programming costs that are
required with proprietary systems. However, the impact of
testing existing systems has added significant time
requirements to the Bank's IT department. In 1998, the Bank
added a fifth IT professional to allow the department to
continue support of its 350 users while conducting Year 2000
activities. In addition, the Bank has incurred expense in
the replacement and repair of specific non-compliant
systems. To date, expenditures for the Year 2000 effort
have totaled $127 thousand as shown in the graph below.
Graph replaced with following text table
Year 2000 Project-Irwin Union Bank
As of September 30, 1998
Pre-tax Costs in $000
1997--Actual $46
1998 YTD 81
4Q 1998 * 16
1999 * 144
* Estimate as of September 30, 1998.
Risks
The impact of specific technologies utilized by the Bank not
being Year 2000 compliant could be significant, although the
risk has not yet been quantified by the Bank. The inability
to process, reconcile and report customer account
information could create concern for the safety and security
of the customer funds. However, customer funds which are
eligible for FDIC insurance will continued to be insured
against loss regardless of any Year 2000 disruption.
Contingency Planning
The Bank's contingency planning approach identifies core
processes and works with the teams that are involved in the
processes to develop alternative approaches to accomplishing
tasks. The IT manager of the Bank is responsible for
collecting the contingency plans and ensuring completeness.
At present, the Bank is about ten percent through this
process.
Irwin Home Equity
The primary products of Irwin Home Equity (IHE) are second
mortgage and line of credit loans secured by real estate.
Since IHE relies on third party processors and off-the-shelf
software, its efforts are mainly directed to the testing of
these applications. Principal remediation efforts,
therefore, have been the responsibility of its vendors.
Scope
The company's Year 2000 project plan was developed within
the guidelines set forth by the Corporation to achieve Year
2000 readiness by June 30, 1999.
When compiling the plan, all functions of the organization
were considered, including computer software, hardware, data
communications, environmental facilities, third party
vendors, and other companies with whom data is exchanged.
IHE's team to manage the Year 2000 effort consists of
individuals representing Senior Management, Information
Systems, Networks, Loan Origination, Loan Servicing,
Accounting, and Finance. In addition, Telecommunications,
Building, and Office Services are involved in various phases
of the project. A full time project manager oversees the
effort.
Progress
The company identified its mission critical applications and
is proceeding with testing of those modules first.
Applications were considered mission critical if they have
an impact on customers or could have a negative impact on
the continued operation of the company.
The company has completed the installation of the remediated
versions of software for the majority of its mission
critical applications and is in the process of installing
upgrades and/or researching options for certain non-critical
software. The mission critical applications for which a
remediated version has not yet been installed are in testing
at the vendor and/or data center sites.
The progress of the IHE Year 2000 team in meeting the
requirements of its project plan is shown below.
Graph replaced with following text table
<TABLE>
Year 2000 Project-Irwin Home Equity
As of September 30, 1998
Percent Completed
Target Actual Projected Actual
Completion* Completion Completion Date
<S> <C> <C> <S>
Post-2000 Audit 0 0 During 2001
Implementation 45 55 2Q99
Contingency Planning 0 0 On-going
Testing 5 10 1Q99
Remediation 45 55 4Q98
Assessment 100 100 Done
Awareness 100 100 Done
</TABLE>
Costs
Few direct Year 2000 costs have been expended to date, since
all software and hardware upgrades were planned as part of
our normal business plan. Year 2000 costs have largely been
limited to internal staff time. Costs directly associated
with the Year 2000 remediation have thus far totaled $29
thousand. Those costs and anticipated future costs for the
project are displayed below.
Graph replaced with following text table
Year 2000 Project-Irwin Home Equity
As of September 30, 1998
Pre-tax Costs in $000
1997--Actual -
1998 YTD $29
4Q 1998 * 105
1999 * 213
* Estimate as of September 30, 1998.
Risks
As a result of IHE's dependence on third party providers,
there is no assurance that all vendors will achieve Year
2000 compliance in a timely manner. For instance, should
the loan origination system be unavailable due to software
problems or environmental outages, this would slow the
closing and funding process. The loan servicing system
could be unavailable, requiring manual payment or billing
methods to be implemented, thereby incurring increased
expenses. The company anticipates that any Year 2000 failure
would lead principally to increased expenses rather than
failure to perform the origination, servicing, and support
functions of the company.
Contingency Plans
IHE has recently begun its contingency planning phase for
Year 2000 and has not yet determined the most likely worst
case scenario to consider. As contingency planning
progresses, the company will complete a detailed plan
addressing the potential impact a Year 2000 compliance
failure by it or its service providers could have on the
company.
Forward-looking Statements
Forward-looking statements contained in the previous
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 subject to change. These uncertainties can
affect actual results and could cause actual results to
differ materially from those expressed or implied in any
forward-looking statements in this discussion.
PART II
Item 1
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 September 30,
1998, in the following new actions:
Heifets, et al. v. Matrix Electromedical, et al. In August,
1998, Affiliated Capital Corp. and Irwin Financial Corporation
were served as defendants in a class action lawsuit filed in the
Superior Court of Los Angeles County, California. The suit
alleges that a manufacturer of certain medical devices made
misrepresentations to induce doctors to acquire the devices,
which Affiliated Capital Corp. financed by means of leases. The
alleged misrepresentations concerned the ability to obtain
Medicare coverage for treatments using the equipment, which
coverage was subsequently denied. The doctors are seeking
rescission of the leases and other damages allegedly caused by
the doctors' reliance on the manufacturer's statements. The
litigation is at an early stage and 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 Financial might be exposed. The leases affected
by this lawsuit (the "Matrix Leases") were not transferred as
part of the sale of assets of Affiliated Capital Corp. Irwin
Financial retains liability, if any, in connection with the
Matrix Leases.
Hiers et al. v. Irwin Mortgage Corporation et al. In August,
1998, Irwin Mortgage was served as a defendant in a class action
lawsuit filed in the United States District Court in the Northern
District of Alabama. The suit is similar to other "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. The litigation is at an
early stage and 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.
PART II
Item 6
(a) Exhibits to Form 10-Q
Number Assigned
In Regulation S-K
Item 601 Description
(2) No Exhibit
(3) No Exhibit
(4) No Exhibit
(10) No Exhibit
(11) Computation of earnings per
share is included in the
footnotes to the financial
statements
(15) No Exhibit
(18) No Exhibit
(19) No Exhibit
(22) No Exhibit
(23) No Exhibit
(24) No Exhibit
(99) No Exhibit
(b) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
IRWIN FINANCIAL CORPORATION
By: /s/ Thomas D. Washburn
________________________
Thomas D. Washburn
Chief Financial Officer
By: /s/ Marie C. Strack
_________________________
Marie C. Strack
Corporate Controller
(Chief Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000052617
<NAME> IRWIN FINANCIAL CORPORATION
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 67153
<INT-BEARING-DEPOSITS> 31438
<FED-FUNDS-SOLD> 5250
<TRADING-ASSETS> 43385
<INVESTMENTS-HELD-FOR-SALE> 19806
<INVESTMENTS-CARRYING> 46061
<INVESTMENTS-MARKET> 46661
<LOANS> 526084
<ALLOWANCE> 9087
<TOTAL-ASSETS> 1657441
<DEPOSITS> 939239
<SHORT-TERM> 435352
<LIABILITIES-OTHER> 86553
<LONG-TERM> 9974
47981
0
<COMMON> 29965
<OTHER-SE> 108377
<TOTAL-LIABILITIES-AND-EQUITY> 1657441
<INTEREST-LOAN> 42135
<INTEREST-INVEST> 3652
<INTEREST-OTHER> 53277
<INTEREST-TOTAL> 99064
<INTEREST-DEPOSIT> 17043
<INTEREST-EXPENSE> 51780
<INTEREST-INCOME-NET> 47284
<LOAN-LOSSES> 4560
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 175305
<INCOME-PRETAX> 43917
<INCOME-PRE-EXTRAORDINARY> 43917
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 24203
<EPS-PRIMARY> 1.11<F1>
<EPS-DILUTED> 1.09<F1>
<YIELD-ACTUAL> .05<F2>
<LOANS-NON> 9291
<LOANS-PAST> 1290
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 9087
<CHARGE-OFFS> 1904
<RECOVERIES> 338
<ALLOWANCE-CLOSE> 9087
<ALLOWANCE-DOMESTIC> 9087
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 4147
<FN>
<F1>Information not in 1,000 and earnings per share reported in basic and
diluted.
<F2>Information not in 1,000
</FN>
</TABLE>
