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 June 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
incorporation or organization Identification No.)
500 Washington Street, Columbus, IN 47201
(Address of principal executive offices)
(Zip Code)
812/376-1020
__________________________________________
Registrant's telephone number, including area code)
(Former name, former address and former fiscal year
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Indicate by check mark whether the registrant has filed all
documents and reports required to be filed by Sections 12, 13, or
15(d) of the Securities Exchange Act of 1934 subsequent to the
distribution of securities under a plan confirmed by a court.
Yes No
As of July 31, 1998, there were outstanding 21,688,277 common
shares, no par
<TABLE>
<CAPTION>
IRWIN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (UNAUDITED)
June 30, December 31,
Assets: 1998 1997
<S> <C> <C>
Cash and due from banks $74,848,941 $56,523,723
Federal funds sold 13,000,000 0
Cash and cash equivalents 87,848,941 56,523,723
Interest-bearing deposits with financial institutions 14,362,409 18,240,229
Investment securities (Market value:$86,526,043
in 1998 and $78,028,672 in 1997)-Note 2 86,061,759 77,341,443
Loans held for sale 756,601,116 641,081,704
Loans and leases, net of unearned income - Note 4 553,042,449 498,749,925
Less: Allowance for loan and lease losses - Note 5 (9,463,893) (8,811,645)
543,578,556 489,938,280
Servicing assets - Note 6 98,621,320 83,043,939
Accounts receivable 59,734,370 54,260,792
Accrued interest receivable 15,573,569 14,778,885
Premises and equipment 18,908,350 21,040,206
Other assets 47,179,658 40,544,715
$1,728,470,048 $1,496,793,916
Liabilities and Shareholders' Equity:
Deposits
Noninterest-bearing $368,188,852 $287,555,280
Interest-bearing 399,749,843 346,012,401
Certificates of deposit over $100,000 105,513,002 86,027,844
873,451,697 719,595,525
Short-term borrowings- Note 7 582,840,369 512,275,185
Long-term debt- Note 8 9,715,824 7,095,718
Other liabilities 82,636,222 81,917,591
Total liabilities 1,548,644,112 1,320,884,019
Company-obligated mandatorily redeemable
preferred securities of subsidiary trust- Note 9 47,962,556 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
1,719,529 and 1,401,280 shares in treasury in 1998 and 1997,
respectively 29,965,287 29,965,287
Additional paid in capital 1,194,541 779,976
Unrealized gains on investment securities 61,717 54,895
Retained earnings 127,783,809 115,413,986
159,005,354 146,214,144
Less treasury stock, at cost (27,141,974) (18,230,803)
Total shareholders' equity 131,863,380 127,983,341
$1,728,470,048 $1,496,793,916
</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) Three Months Ended
June 30,
Interest income: 1998 1997
<S> <C> <C>
Loans and leases $13,976,216 $14,882,560
Investment securities:
Taxable 1,443,121 1,185,675
Tax-exempt 79,532 70,832
Loans held for sale 15,310,301 7,667,524
Federal funds sold 67,267 40,738
Total interest income 30,876,437 23,847,329
Interest expense:
Deposits 5,720,639 4,553,903
Short-term borrowings 8,267,373 5,977,334
Long-term debt 199,172 227,100
Total interest expense 14,187,184 10,758,337
Net interest income 16,689,253 13,088,992
Provision for loan and lease losses - Note 5 1,056,063 2,018,821
Net interest income after provision for
loan and lease losses 15,633,190 11,070,171
Other income:
Loan origination fees 14,037,549 10,683,699
Gain from sales of loans 16,735,407 10,243,428
Loan servicing fees 13,623,522 13,461,005
Gain on sale of mortgage servicing 10,056,745 6,849,323
Brokerage fees and commissions 291,844 260,627
Trust fees 559,737 487,289
Service charges on deposit accounts 394,163 299,052
Insurance commissions, fees and premiums 466,043 375,274
Net loss on trading securities (913,166) 0
Other 655,107 749,838
55,906,951 43,409,535
Other expense:
Salaries 28,791,665 21,287,488
Pension and other employee benefits 4,061,905 3,435,283
Office expense 3,159,201 2,582,285
Premises and equipment 4,602,164 4,302,353
Amortization of mortgage servicing asset 5,803,620 3,577,379
Marketing and development 3,034,731 1,891,843
Other 9,239,256 6,612,623
58,692,542 43,689,254
Income before income taxes 12,847,599 10,790,452
Income taxes 4,627,202 3,850,896
8,220,397 6,939,556
Distribution on company-obligated mandatorily
redeemable preferred securities of subsidiary trust 1,174,250 1,171,163
Net income available to common shareholders $7,046,147 $5,768,393
Earnings per share of common stock:
Basic - Note 10 $0.32 0.26
Diluted - Note 10 $0.32 0.25
Dividends per share of common stock $0.04 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) Six Months Ended
June 30,
Interest income: 1998 1997
<S> <C> <C>
Loans and leases $30,388,803 $27,607,014
Investment securities:
Taxable 3,344,864 3,201,266
Tax-exempt 154,988 142,263
Loans held for sale 27,048,981 14,580,249
Federal funds sold 414,101 365,418
Total interest income 61,351,737 45,896,210
Interest expense:
Deposits 11,030,249 9,598,360
Short-term borrowings 19,111,356 10,046,832
Long-term debt 412,633 532,032
Total interest expense 30,554,238 20,177,224
Net interest income 30,797,499 25,718,986
Provision for loan and lease losses - Note 5 2,673,713 2,821,544
Net interest income after provision for
loan and lease losses 28,123,786 22,897,442
Other income:
Loan origination fees 27,009,209 19,272,045
Gain from sales of loans 31,012,584 18,394,930
Loan servicing fees 27,500,756 26,345,799
Gain on sale of mortgage servicing 20,013,321 13,668,135
Brokerage fees and commissions 510,527 607,454
Trust fees 1,106,260 1,067,434
Service charges on deposit accounts 797,491 801,662
Insurance commissions, fees and premiums 863,074 742,649
Netloss on trading securities (913,166) 0
Other 3,111,423 1,444,555
111,011,479 82,344,663
Other expense:
Salaries 54,296,231 40,182,279
Pension and other employee benefits 8,504,938 7,226,313
Office expense 6,078,687 5,226,397
Premises and equipment 9,321,003 8,185,202
Amortization of mortgage servicing asset 11,073,023 7,113,634
Marketing and development 6,326,019 4,916,736
Other 17,569,453 11,960,865
113,169,354 84,811,426
Income before income taxes 25,965,911 20,430,679
Income taxes 9,507,051 7,341,130
16,458,860 13,089,549
Distribution on company-obligated mandatorily
redeemable preferred securities of subsidiary trust 2,348,500 2,124,878
Net income available to common shareholders $14,110,360 $10,964,671
Earnings per share of common stock:
Basic - Note 10 $0.65 0.49
Diluted - Note 10 $0.64 0.48
Dividends per share of common stock $0.08 0.07
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<TABLE>
<CAPTION>
IRWIN FINANCIAL CORPORATION AND SUBSIDIARIES
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
Accumulated
Other Additional
Retained Comprehensive Common Paid in Treasury
Total Earnings Income Stock Capital Stock
<S> <C> <C> <C> <C> <C> <C>
Balance at April 1, 1998 $130,097,346 $121,605,947 $61,673 $29,965,287 $986,324 ($22,521,885)
Comprehensive Income: Note 1
Net Income 7,046,147
Other Comprehensive Income 44
Total 7,046,191
Cash dividends (868,285) (868,285)
Purchase of treasury stock (5,041,987) (5,041,987)
Sales of treasury stock 630,115 208,217 421,898
Balance June 30, 1998 $131,863,380 $127,783,809 $61,717 $29,965,287 $1,194,541 ($27,141,974)
Balance at April 1, 1997 $120,910,416 $98,488,716 ($60,653) $29,965,287 $53,880 ($7,536,814)
Comprehensive Income: Note 1
Net Income 5,768,395
Other Comprehensive Income 1,503,038
Total 7,271,433
Cash dividends (780,175) (780,175)
Purchase of treasury stock (5,407,183) (5,407,183)
Sales of treasury stock (153,999) (387,264) (53,880) 287,145
Balance June 30, 1997 $121,840,492 $103,089,672 $1,442,385 $29,965,287 $0 ($12,656,852)
</TABLE>
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
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 14,110,360
Other Comprehensive Income 6,822
Total 14,117,182
Cash dividends (1,740,537) (1,740,537)
Purchase of treasury stock (9,488,188) (9,488,188)
Sales of treasury stock 991,582 414,565 577,017
Balance June 30, 1998 $131,863,380 $127,783,809 $61,717 $29,965,287 $1,194,541 ($27,141,974)
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 10,964,671
Other Comprehensive Income 1,385,862
Total 12,350,533
Cash dividends (1,571,275) (1,571,275)
Purchase of treasury stock (8,191,372) (8,191,372)
Sales of treasury stock 350,526 (387,264) 0 737,790
Balance June 30, 1997 $121,840,492 $103,089,672 $1,442,385 $29,965,287 $0 ($12,656,852)
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<TABLE>
<CAPTION>
IRWIN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
Six Months Ended
June 30,
1998 1997
<S> <C> <C>
Net income $14,110,360 $10,964,671
Adjustments to reconcile net income to cash provided
by operating activities:
Depreciation and amortization 13,513,581 12,853,344
Provision for loan and lease losses 2,673,713 2,692,000
Amortization of premiums, less accretion of discounts 1,125,932 579,979
(Increase) decrease in loans held for sale (115,519,412) 47,122,403
Gain on sale of mortgage servicing (20,013,321) (13,668,135)
Other, net (13,060,316) (2,784,303)
Net cash (used) provided by operating activities (117,169,463) 57,759,959
Lending and investing activities:
Proceeds from maturities/calls of investment securities:
Held-to-Maturity 5,715,000 110,000
Available-for-Sale 3,792,543 18,745,042
Proceeds from sales of investment securities:
Available-for-Sale 1,000,000 0
Purchase of investment securities:
Held-to-Maturity (3,640,000) (1,987,500)
Available-for-Sale (4,090,798) (12,951,867)
Net trading securities (12,622,993) (9,974,594)
Net decrease in interest-bearing
deposits with financial institutions 3,877,820 857,160
Net increase in loans, excluding sales (264,254,243) (106,269,341)
Sale of loans 207,940,254 124,970,000
Additions to mortgage servicing assets (49,521,483) (26,384,430)
Proceeds from sale of mortgage servicing assets 42,884,400 32,341,018
Other, net 573,862 (2,485,340)
Net cash (used) provided by lending and investing activiti (68,345,638) 16,970,148
Financing activities:
Net increase in deposits 153,856,172 27,027,225
Net increase (decrease) in short-term borrowings 70,565,184 (145,708,655)
Proceeds (Repayment) of long-term debt 2,620,106 (7,853,038)
Sale of company-obligated manditorily redeemable
preferred securities of subsidiary trust 36,000 47,950,178
Purchase of treasury stock (9,488,188) (8,191,372)
Proceeds from sale of stock for employee benefit plans 991,582 350,526
Dividends paid (1,740,537) (1,571,275)
Net cash provided (used) by financing activities 216,840,319 (87,996,411)
Net increase (decrease) in cash and cash equivalents 31,325,218 (13,266,304)
Cash and cash equivalents at beginning of year 56,523,723 71,365,788
Cash and cash equivalents at end of year $87,848,941 $58,099,484
Supplemental disclosures of cash flow information:
Cash paid during the period:
Interest $30,104,474 $19,449,504
Income taxes $6,103,100 $5,609,375
</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 during
a 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). FAS 133 is effective
beginning January 1, 2000 for the Corporation. 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.
NOTE 2 - INVESTMENT SECURITIES
The carrying amounts of investment securities, including net unrealized gains of
$102,862 and $76,708 on available-for-sale securities at June 30, 1998 and
December 31, 1997, respectively, are summarized as follows:
<TABLE>
June 30, December 31,
1998 1997
<S> <C> <C>
Held-to-Maturity
US Treasury and Government obligations $21,832,100 $35,732,672
Obligations of states and political subdivisions 5,708,413 4,813,919
Mortgage-backed securities 3,591,107 5,968,340
Total Held-to-Maturity 31,131,620 46,514,931
Trading:
Interest -only strips 29,031,248 22,133,793
US Treasury options and other 5,725,538 0
Total Trading 34,756,786 22,133,793
Available-for-Sale
US Treasury and Government obligations 14,574,662 6,052,952
Mortgage-backed securities 5,133,939 2,617,804
Other 464,752 21,963
Total Available for Sale 20,173,353 8,692,719
Total Investments $86,061,759 $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. Interest-only strips are generated
through the securitization of home equity loans.
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>
<CAPTION>
Loans and leases are summarized as follows:
June 30, December 31,
1998 1997
<S> <C> <C>
Real estate-mortgage $113,263,080 $110,475,095
Commercial, financial and agricultural 244,241,243 212,094,742
Real estate-construction 82,319,080 73,279,176
Consumer 41,003,160 39,984,692
Lease financing 89,223,641 78,079,206
Unearned income (17,007,755) (15,162,986)
$553,042,449 $498,749,925
</TABLE>
NOTE 5 - ALLOWANCE FOR LOAN AND LEASE LOSSES
<TABLE>
<CAPTION>
Changes in the allowance for loan and lease losses are summarized as follows:
June 30, December 31,
1998 1997
<S> <C> <C>
Balance at beginning of year $8,811,645 $6,874,944
Provision for loan and lease losses 2,673,713 6,238,000
Reduction due to sale of loans (942,408) (1,694,316)
Recoveries 250,981 538,213
Charge-offs (1,330,038) (3,145,196)
Balance at end of period $9,463,893 $8,811,645
</TABLE>
NOTE 6- SERVICING ASSETS
Included on the consolidated balance sheet at June 30, 1998 and December 31,
1997 are $98,621,320 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>
<CAPTION>
Short-term borrowings are summarized as follows:
June 30, December 31,
1998 1997
<S> <C> <C>
Repurchase agreements and drafts payable related to
mortgage loan closings $279,202,842 $240,659,463
Lines of Credit 107,163,866 112,590,484
Federal funds 169,977,355 142,650,000
Commercial paper 26,496,306 16,375,238
Total $582,840,369 $512,275,185
</TABLE>
Repurchase agreements at June 30, 1998 and December 31, 1997, include
$119,743,892 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 $159,458,950 and
$93,615,694 at June 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 June 30, 1998 of $9,715,824 consists of various notes payable
at annual interest rates ranging from 6.3% to 9.6% and maturity dates ranging
from September 30, 1998 through April 30, 2002. 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.
<TABLE>
<CAPTION>
Earnings per share calculations are summarized as follows:
<S> <C> <C> <C>
Basic Earnings Effects of Diluted Earnings
Three months ended June 30, 1998: Per Share Stock Options Per Share
Net income $ 7,046,147 $0 $ 7,046,147
Shares 21,738,305 245,708 22,129,272
Per-Share Amount $0.32 $0 $0.32
Six months ended June 30, 1998:
Net income $14,110,360 $0 $14,110,360
Shares 21,799,884 329,388 22,129,272
Per-share Amount $0.65 $(0.01) $0.64
Three months ended June 30, 1997:
Net income $ 5,768,393 $0 $ 5,738,393
Shares 22,332,852 348,374 22,681,226
Per-share Amount $0.26 $(0.01) $0.25
Six months ended June 30, 1997:
Net income $10,964,671 $0 $10,964,671
Shares 22,507,216 369,038 22,876,252
Per-Share Amount $0.49 ($0.01) $0.48
</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 June 30, 1998, Irwin Mortgage Corporation (IMC) was a defendant to
four 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.
At present, it is not possible for the Corporation to predict the likelihood of
an unfavorable outcome or to establish the possible extent or amount of
liability or potential loss exposure with respect to the litigation.
Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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
forwarding-looking statements in this discussion.
Overview
Net income for the second quarter ended June 30, 1998, was
$7,046,147, up 22.2% from the second quarter 1997 net income of
$5,768,395. Net income per share(diluted) was $0.32 for the
second quarter of 1998 as compared to $0.25 for the same period
in 1997. Return on equity for the second quarter of 1998 was
21.69% compared to 19.11% in 1997.
For the year to date, the Corporation recorded net income
of $14,110,360, up 28.7% from 1997. Net income per share
(diluted) was $0.64, up from $0.48 a year earlier. Return on
equity for the year to date was 21.86% as compared to 18.21% for
the same period in 1997.
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 and Irwin Union Advisory
Services)
Home equity lending (includes Irwin Home Equity and the
related activities of Irwin Union Bank)
Equipment leasing (includes Irwin Equipment Finance 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:
Three Months Six Months
Ended June 30, Ended June 30,
1998 1997 1998 1997
Mortgage banking 7,565,353 $5,074,349 $13,216,871 $8,994,200
Community banking 1,509,562 1,279,973 3,056,147 2,630,796
Home equity lending (2,141,560) 515,421 (1,345,953) 1,701,832
Equipment leasing 72,624 65,868 82,218 71,140
Parent (including
consolidating entries) 40,168 (1,167,216) (898,923) (2,433,297)
$7,046,147 $5,768,395 $14,110,360 $10,964,671
Mortgage Banking
Selected Financial Data (shown in thousands):
Three Months Six Months
Ended June 30, Ended June 30,
1998 1997 1998 1997
Selected Income Statement
Data:
Revenues:
Loan origination fees $13,890 $10,571 $26,734 $19,050
Gain from sales of loans 12,965 4,808 23,481 8,199
Loan servicing fees 12,438 12,369 25,178 24,580
Net interest income 6,827 4,409 11,475 8,242
Provision for loan losses (109) (415) (390) (657)
Gain on sale of servicing 10,057 6,849 20,013 13,668
Other income 341 276 720 588
Total net revenues 56,409 38,867 107,211 73,670
Expenses:
Salaries and employee 23,601 17,463 45,075 32,950
benefits
Amortization of servicing 5,535 3,452 10,575 6,944
asset
Servicing asset impairment,
net of hedging 1,121 80 2,821 80
Other operating expenses 13,439 9,305 26,480 18,512
Income before tax 12,713 8,567 22,260 15,184
Income tax 5,148 3,493 9,043 6,190
Net income $7,565 $5,074 $13,217 $8,994
Return on average equity 36.10% 29.60% 31.50% 26.30%
Mortgage loan originations 2,052,999 $1,292,805 $4,049,659 $2,394,020
Selected Operating Data: June 30, December 31,
1998 1997
Servicing portfolio $10,929,750 $10,713,549
Mortgage loans held for sale 492,686 435,123
Mortgage servicing asset 95,766 81,610
Net income for the second quarter was $7.6 million, up
49.1% from the same period in 1997. Year to date, net income was
$13.2 million compared to $9.0 million in 1997.
As a result of a favorable interest rate environment,
mortgage loan originations of $2.1 billion were 58.8% above the
second quarter of 1997. For the year, originations totaled $4.0
billion, up 69.2% from 1997. Refinances accounted for 39.1% of
loan production in the second quarter of 1998 and 47.0% year to
date. This compares to 14.4% and 18.5%, respectively, in 1997.
Higher production volume caused mortgage loan origination income
to increase 31.4% in the second quarter to $13.9 million. Year to
date it was up 40.3% to $26.7 million.
As a result of increased loan production and a more favorable
market, gains on the sale of loans increased 169.7% in the
second quarter to $13.0 million. Year to date, gains on the sale
of loans totaled $23.5 million compared with $8.2 million in
1997.
Mortgage servicing fees increased 0.6% in the second
quarter and 2.4% year to date to $12.4 million and $25.2 million,
respectively. The servicing portfolio totaled $10.9 billion at
June 30, 1998, up 4.0% from a year earlier and up 2.0% from December
31, 1997. Mortgage servicing assets totaled $95.8 million at
June 30, 1998, up 17.3% from December 31, 1997.
Revenues from the sale of mortgage servicing were up 46.8%
from the second quarter of 1997 to $10.1 million. Year to date
servicing sale revenues totaled $20.0 million, up from $13.7
million in 1997. This improvement corresponds with the increased
loan volume in 1998.
Also a result of the increase in mortgage loan closings
from 1997, net interest income was up in the second quarter and
year to date. Net interest income for the three months ended
June 30, 1998 was $6.8 million, up 54.8% from the second quarter
1997. Year to date, net interest income totaled $11.5 million,
compared to $8.2 million in 1997.
The increased production activities in mortgage banking
caused an increase in operating expenses. Salaries and employee
benefits increased 35.1% to $23.6 million for the second quarter
of 1998. Year to date, they totaled $45.1 million, up 36.8% from
a year earlier. Other operating expenses increased 44.4% and
43.0% for the quarter and year to date, respectively.
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 $5.5 million in the second quarter
and $10.6 million year to date, compared with $3.5 million and
$6.9 million in the same periods in 1997.
The declining interest rate environment also caused a
significant increase in the mortgage servicing asset impairment
expense. Due to the higher levels of mortgage refinancings, the
mortgage bank recorded $1.1 million of servicing asset
impairment, net of hedging offsets, in the second quarter of
1998. Year to date, servicing asset impairment, net of hedging
offsets, totaled $2.8 million. This compares with $80.0 thousand
in the second quarter and year to date in 1997.
Community Banking
Selected Financial Data (shown in thousands):
Three Months Six Months
Ended June 30, Ended June 30,
1998 1997 1998 1997
Selected Income Statement
Data:
Net interest revenue $6,067 $5,395 $12,072 $10,473
Provision for loan and
lease losses (480) (553) (1,050) (995)
Other income 2,801 2,227 5,705 4,654
Operating expense (5,959) (5,058) (11,824) (9,951)
Income before tax 2,429 2,011 4,903 4,181
Income tax (919) (731) (1,847) (1,550)
Net income $1,510 $1,280 $3,056 $2,631
June 30, December 31,
Selected Balance Sheet 1998 1997
Data:
Securities and short-term
investments $57,579 $95,367
Loans and leases 456,023 410,272
Allowance for loan and
lease losses (6,183) (5,525)
All other assets 74,164 39,119
Total assets $581,583 $539,233
Deposits $511,996 $486,481
All other liabilities 27,538 14,362
Total liabilities 539,534 500,843
Shareholder's equity 42,049 38,390
$581,583 $539,233
Community banking activities are conducted by Irwin Union
Bank through locations in eight counties in central Indiana. Net
income was up in the second quarter to $1.5 million from $1.3
million a year earlier. Year to date, net income was $3.1
million, up from $2.6 million in 1997. Net interest income
improved 12.4% to $6.1 million in the second quarter of 1998.
Year to date, it was up 15.3% to $12.1 million. The increase
reflects the community bank's continued expansion into new
markets in central Indiana. The provision for loan and lease
losses decreased 13.2% to $480.0 thousand in the second quarter
compared with a provision of $553.0 thousand a year earlier.
However, year to date, it increased 5.6% to $1.1 million.
Following is an analysis of net interest income and net
interest margin computed on a tax equivalent basis:
For the Three
Months Ended June 30, 1998 1997
Average Yield/ Average Yield/
(In thousands) Balance Interest Rate Balance Interest Rate
Interest -
earning assets $526,967 $11,415 8.69% $475,821 $10,207 8.60%
Interest -
bearing $412,975 5,305 5.15% $412,042 4,733 4.61%
liabilities
Net interest * 6,110 * * $5,474 *
income
Net interest * * 4.65% * * 4.61%
margin
For the Six
Months Ended June 1998 1997
30,
Average Yield/ Average Yield/
(In thousands) Balance Interest Rate Balance Interest Rate
Interest -
earning assets $520,580 $22,539 8.73% $470,930 $19,846 8.50%
Interest -
bearing $407,505 10,350 5.12% $409,053 9,218 4.54%
liabilities
Net interest * $12,189 * * $10,628 *
income
Net interest * * 4.72% * * 4.55%
margin
Other income in the second quarter was up 25.8% to $2.8
million from $2.2 million in 1997. For the year to date, other
income increased 22.6% to $5.7 million. Other expenses increased
17.8% from the second quarter of 1997 to $6.0 million. For the
year, these expenses were up 18.8% to $11.8 million. The
continued expansion of operations in new markets has increased
non-interest expense in 1998.
Home Equity Lending
Selected Financial Data (shown in thousands):
Three Months Six Months
Ended June 30, Ended June 30,
1998 1997 1998 1997
Selected Income Statement
Data:
Revenues:
Net interest revenue $1,498 $1,399 $3,750 $3,279
Provision for loan and lease (67) (813) (466) (732)
losses
Gain from sale of loans 5,578 5,336 10,759 9,995
Loan servicing fees 784 908 1,514 1,340
Other revenue 95 73 219 120
Total net revenues 7,888 6,903 15,776 14,002
Expenses:
Impairment of interest only 1,942 0 1,942 0
strip
Operating expense 8,088 6,388 15,180 12,300
Pre-tax income (loss) $(2,142) $515 $(1,346) $1,702
Other Selected Financial Data: June 30, December 31,
1998 1997
Home equity loans $108,184 $111,779
Interest only strip 29,031 22,134
Servicing portfolio 437,516 358,166
The home equity lending business markets home equity loans
through direct mail and telemarketing and currently markets in 24
states. The home equity lending business recorded a pre-tax loss
of $2.1 million during the second quarter of 1998 and $1.3
million year to date. These results are compared to 1997
quarterly and year to date pre-tax income of $0.5 million and
$1.7 million, respectively.
During the second quarter of 1998, the home equity business
originated $99.6 million of loans, up 75.9% from the same period
a year earlier. Year to date originations totaled $154.8
million, 52.6% higher than 1997. Gains from the securitization
and delivery of $75.0 million of home equity loans totaled $5.6
million in the second quarter, up 4.5% from the previous year when
$64.9 million of loans were delivered. Year to date, securitization
gains totaled $10.8 million on the delivery of $125.0 million in 1997.
Higher loan production resulted in increased net interest
income during 1998. For the second quarter net interest income
was up 7.1% over 1997, while year to date it was up 14.4%.
Interest only strips are carried at their market values
which are determined using assumptions about the duration and
performance of the securitized loans. At June 30, 1998, the
assumed annual loss rates ranged from 0.50% to 1.00%, prepayment
speeds ranged from 30% to 44% CPR (constant prepayment rate)
per year, and the discount rate was 15.0%. In the second quarter
of 1998, as a result of increased prepayment activity, the home
equity business recorded an impairment charge of $1.9 million to
write down the value of the interest only strips to market value.
Operating expenses were $8.1 million in the second quarter
of 1998, up 26.6% from 1997. Year to date, they increased 23.4%
to $15.2 million. The increase is reflective of the increased
production activities of the company in 1998.
Equipment Leasing
The equipment leasing business recorded pre-tax income for
the quarter and for the year of $72.6 thousand and $82.2
thousand, respectively. This compares to pre-tax income of $65.9
thousand and $71.1 thousand in the second quarter and year to
date 1997, respectively. Net revenues were up 10.1% for the
quarter to $1.2 million and 9.6% year to date to $2.4 million.
Lease volume was $13.3 million in the second quarter of 1998, up
33.9% from a year earlier. Year-to-date volume was $24.4
million, up 33.5%.
Parent Company (Including Consolidating Entries)
For the quarter ended June 30, 1998, the parent company
recorded net income of $40.2 thousand, compared with net loss of
$1.2 million a year earlier. Year to date, the parent company's
net loss totaled $898.9 thousand compared with net loss of $2.4
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 second
quarter and year to date 1998, the parent recorded $827.6
thousand and $505.5 thousand, respectively, of income tax
benefits related to these lines of business. This compares with
$232.5 thousand and $709.2 thousand of income tax expense
recorded in the second quarter and year to date, respectively, in
1997.
Consolidated Income Statement Analysis
Net interest income for the second quarter of 1998 totaled
$16.7 million, up 27.5% from the second quarter of 1997. For the
year, it increased 19.7% to $30.8 million. The increase was the
result of the increased loan production at each of the
Corporation's lines of business during 1998.
The loan and lease loss provision was $1.1 million for the
second quarter of 1998, as compared with $2.0 million for the
same period in 1997. For the year, it totaled $2.7 million, down
from $2.8 million a year earlier. The decline was due to two
factors. First, the home equity line of business reclassified
its loans from a portfolio to a held-for-sale classification
during the second quarter. Loans held for sale are carried at
the lower of cost or market in the aggregate, with market value
taking into consideration loss expectations. Thus, in making the
reclassification, $500.0 thousand was reversed through the current
year loan loss provision. The second factor in the decline in the
loan and lease loss provision was a reduction of loan charge-offs in
the second quarter of 1998. See the section on credit risk for additional
information on this subject.
Other income was up $12.5 million or 28.8% in the second
quarter of 1998. Year to date other income increased $28.7
million or 34.8%. This increase was driven primarily by mortgage
banking activities. Total income from mortgage loan
originations, sales, servicing, and servicing sales was $47.2
million in the second quarter of 1998 and $91.6 million year to
date. This compares to 1997 revenues of $34.5 million and $65.4
million in the second quarter and year to date, respectively.
Other expenses also increased in 1998 as the second quarter
was up $15.0 million or 34.3% from 1997. For the year, other
expenses increased $28.4 million or 33.4%. This increase is due
in part to the increased production activities at all of the
Corporation's lines of business. Salaries and benefits expense
increased $8.1 million or 32.9% in the second quarter and $15.4
million or 32.5% year to date. Also contributing to the increase
was additional amortization expense associated with servicing
assets on the balance sheets of the mortgage bank and home equity
lending business. Amortization expense increased $2.2 million in
the second quarter to $5.8 million. Year to date, the expense
grew to $11.1 million from $7.1 a year earlier. The increase in
amortization reflects both an increase in the balance of
servicing assets as well as faster amortization caused by
declining interest rates.
The effective income tax rate for the Corporation was 39.6%
in the second quarter of 1998 and 40.3% year to date. This is
compared with 40.0% in the second quarter of 1997 and 40.1% year
to date 1997.
Consolidated Balance Sheet Analysis
Total assets of the Corporation at June 30, 1998, were $1.7
billion, up from December 31, 1997 total assets of $1.5 billion.
The increase was due to an increase in loans and loans held for
sale of $0.2 billion.
The increase in assets was accompanied by an increase in
deposits of $153.9 million, or 21.4%. 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 $299.7 million at June 30, 1998, up from $218.7
million at December 31, 1997.
Shareholders' equity grew to $131.9 million or $6.08 per
share, an increase over the $123.5 million or $5.62 per share at
the end of 1997. Treasury stock purchases totaled $9.5 million
through the second quarter of 1998. The Corporation's equity to
assets ratio ended the quarter at 7.63% compared to 8.55% at the
end of 1997.
Prior to the adoption of new mortgage banking accounting
standards 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 standards,
it represents substantial economic value which is not recorded on
the balance sheet. The following table demonstrates the
estimated after-tax value at June 30, 1998 and December 31, 1997
and 1996.
(In thousands) June 30, Dec. 31, Dec. 31,
1998 1997 1996
Servicing portfolio $10,929,750 $10,713,549 $10,810,988
balance
Value @1.5% $163,946 $160,703 $162,165
Less: mortgage servicing asset 95,766 81,610 70,551
Tax liability at 40% 27,272 31,637 36,646
Net value not on balance $40,908 $47,456 $54,968
sheet
Per share of common stock $1.89 $2.16 $2.42
In January 1997, the Corporation issued $50.0 million of
trust preferred securities through a trust created and controlled
by the Corporation. The securities, which are publicly traded,
were issued at $25 per share with a cumulative dividend rate of
9.25%, payable quarterly. They have an initial maturity of 30
years with a 19-year extension option which the Corporation can
exercise at any point during the first 30 years. The securities
are callable at par after five years, or immediately, in the
event of an adverse tax development affecting the Corporation's
classification of the securities for federal income tax purposes.
The securities are not convertible into common stock of the
Corporation.
Credit Risk
The assumption of credit risk is a key source of earnings
for the community banking, home equity lending, and equipment
leasing businesses. In addition, the mortgage banking business
assumes some credit risk despite the fact that the mortgages are
typically secured and generally sold to investors on a nonrecourse
basis.
The community banking and home equity lending businesses
manage credit risk through the use of lending policies, credit
analysis and approval procedures, and personal contact with the
borrowers. Loans over a certain size are reviewed prior to
approval by a loan committee. The equipment leasing business
manages credit risk in a similar manner through the use of
lending policies, credit analysis procedures, and personal
contact with lessees.
Management reviews various ratios as measurements of asset
quality; however, the two most significant areas are delinquent
loan and lease ratios and the adequacy of the allowance for
loan and lease losses.
The adequacy of the allowance for loan and lease losses is
critical to the fair valuation of net loans and leases recorded
on the Corporation's 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 possible future loss potential of all
loans and leases currently recorded on the Corporation's books.
As of June 30, 1998, the allowance for loan and lease
losses as a percentage of total loans and leases was 1.71%
compared to 1.44% at December 31, 1997. For the three months
ended June 30, 1998, the provision for loan and lease
losses totaled $1.1 million, a 47.7% decrease from the amount
recorded in the second quarter of 1997. Year to date, the
provision totaled $2.7 million, down from $2.8 million a year
earlier. Net charge-offs for the quarter were $554.0 thousand as
compared to $981.2 thousand in 1997. Year to date net charge-
offs totaled $1.1 million, down from $1.4 million a year earlier.
Nonperforming assets (loans 90 days past due, nonaccrual,
and owned real estate) were $12.6 million or 0.73% of total
assets at June 30, 1998, up from $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 $2.9 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.
Nonperforming Assets June 30, December 31, December 31,
(In Thousands) 1998 1997 1996
Accruing loans past
due
90 days or more:
Real Estate $332 $534 $234
Commercial 735 382 256
Leasing 0 0 0
Consumer 182 86 205
Subtotal 1,249 1,002 695
Nonaccrual loans:
Real Estate 6,012 5,333 2,481
Commercial 1,151 777 2,739
Leasing 1,054 506 1,261
Consumer 310 63 0
Subtotal 8,527 6,679 6,481
Total nonperforming 9,776 7,681 7,176
loans
Other real estate 2,817 1,828 2,239
owned
Total nonperforming
assets $12,593 $9,509 $9,415
Nonperforming assets
to 0.73% 0.64% 0.72%
total assets
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 a non-material 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 June 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>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
Within 4-12 1-5 Over 5 Subtotal Non- Total
3 Months Years Years market
Months
(In Thousands)
Assets:
Interest-bearing $9,359 $4,209 $794 0 $14,362 0 $14,362
deposits with
banks
Federal Funds 13,000 0 0 0 13,000 0 13,000
Sold
Taxable 32,721 13,078 28,671 5,884 80,354 0 80,354
investment
securities
Tax-exempt 470 501 0 4,737 5,708 0 5,708
investment
securities
Mortgages held 684,620 71,981 0 0 756,601 0 756,601
for sale
Loans, net of 256,737 43,100 151,270 101,935 553,042 0 553,042
unearned
income
996,907 132,869 180,735 112,556 1,423,067 0 1,423,067
Total interest-
earning assets
Liabilities:
Non-interest 0 0 0 0 0 $368,189 $368,189
bearing deposits
27,872 0 45,278 11,396 84,546 0 84,546
Money Market
checking
Money Market 1,695 0 4,712 0 6,407 0 6,407
savings
Regular savings 26,693 1,915 10,212 7,890 46,710 0 46,710
Time deposits 229,164 79,622 58,351 463 367,600 0 367,600
Short-term 582,840 0 0 0 582,840 0 582,840
borrowings
Long-term debt 852 2,026 6,838 0 9,716 0 9,716
Total interest- 869,116 83,563 125,391 19,749 1,097,819 368,189 1,466,008
bearing
liabilities
Trust preferred 0 0 0 50,000 50,000 0 50,000
securities
127,791 49,306 55,344 42,807 275,248 (368,189) (92,941)
Interest
sensitivity gap
Cumulative $127,791 $177,097 $232,441 $275,248 $(92,941)
interest
sensitivity gap
</TABLE>
As the above table shows, the consolidated one-year gap at June
30, 1998 was a positive $177.1 million. This compares to a
positive gap of $215.4 million at March 31, 1998.
Since the gap was positive at June 30, 1998, 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 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.
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:
Ratio
required to June December December
be considered 30, 31, 31,
well- 1998 1997 1996
capitalized
Equity to Assets n/a 7.63% 8.55% 9.15%
Risk-Based Capital 10.0% 14.41% 14.85% 12.88%
Tier I Capital 6.0% 13.24% 13.56% 12.20%
Tier I Leverage 5.0% 10.65% 12.06% 9.84%
Year 2000
The Year 2000 issue is the result of practices within the
information technology industry initiated years ago 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 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.
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 (such as the Federal Reserve) 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.
PART II
Other Information
Item 4. Submission of Matters to a Vote of Security Holders
a. The Annual Meeting of Shareholders of Registrant was held on
April 30, 1998.
b. The following directors were elected at the meeting:
Affirmative Negative Votes Votes
Votes Votes Withheld Abstained
Sally A. Dean 10,275,813 69,456 93 18,824
David W. Goodrich 10,275,763 69,456 143 18,824
John T. Hackett 10,275,773 69,456 133 18,824
William H. Kling 10,233,143 69,456 42,763 18,824
Brenda J. Lauderback10,234,704 69,456 41,202 18,824
John C. McGinty 10,238,296 69,456 37,610 18,824
Irwin Miller 9,983,240 69,456 292,666 18,824
William I. Miller 10,273,906 69,456 2,000 18,824
John A. Nash 10,275,906 69,456 0 18,824
Lance R. Odden 10,236,468 69,456 39,438 18,824
Theodore M. Solso 10,275,633 69,456 273 18,824
c. Other matters voted on during the meeting were as follows:
Confirmation of independent auditors, Coopers & Lybrand, of
the Registrant. 10,258,361 affirmative, 65,255 negative, 40,230
abstained
PART II
Item 6
(a) Exhibits to Form 10-Q
Number Assigned Sequential Numbering
In Regulation S-K System Page Number
Item 601 Description of Exhibit
(2) No Exhibit
(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
(27) Financial Data Schedule
(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)
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<F2>Information not in 1,000
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