SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
(Mark One)
_x_ Annual report pursuant to Section
13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended December 31, 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
Incorporation or (I.R.S. Employer Identification No.)
Organization)
500 Washington Street
Columbus, Indiana 47201
(Address of Principal Executive Offices) (Zip Code)
(812)376-1020
(Registrant's Telephone Number,
Including Area Code)
Securities registered pursuant to Section
12(b) of the Act: None
Securities registered pursuant to Section
12(g) of the Act: Common Shares
(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes x No ____
Indicate by check mark if disclosure ofdelinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein,and will not be contained, to the best of
registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [ x ]
The aggregate market value of the voting stock held by nonaffiliates of the
Registrant was $235,049,397 as of March 11, 1999. As of March 11, 1999, there
were outstanding 21,689,574 common shares of the Registrant.
DOCUMENTS INCORPORATED BY REFERENCE
Selected Portions of Part of Form 10-K Into Which
the Following Documents Incorporated
Annual Report to Shareholders Part I, Part II
for the year ended December
31, 1998
Definitive Proxy Statement for Part III
Annual Meeting of
Shareholders to be held
April 29, 1999
Exhibit Index on Pages
15 through 17 Page 1
Total Pages in This Filing: 120
___
FORM 10-K TABLE OF CONTENTS
Part I
Item 1 - Business 3
Item 2 - Properties 7
Item 3 - Legal
Proceedings 8
Item 4 - Submission of
Matters to a Vote of
Security Holders 9
Part II
Item 5 - Market for Registrant's
Common Equity and Related
Security Holder Matters 9
Item 6 - Selected Financial Data 10
Item 7 - Management's Discussion and
Analysis of Financial Condition and
Results of Operations 10
Item 8 - Financial Statements and
Supplementary Data 12
Item 9 - Changes in and Disagreements
with Accountants on Accounting
and Financial Disclosure 12
Part III
Item 10 - Directors and Executive
Officers of the Registrant 12
Item 11 - Executive Compensation 13
Item 12 - Security Ownership of Certain
Beneficial
Owners and Management 13
Item 13 - Certain Relationships and
Related Transactions 13
Part IV
Item 14 - Exhibits, Financial
Statement Schedules and
Reports on Form 8-K 14
Signatures 19
PART I
Item 1 Business General
Irwin Financial Corporation (the "Registrant") is a diversified financial
services company organized as an Indiana bank holding company in May, 1972.
The Registrant's principal subsidiaries are Irwin Mortgage Corporation
("Irwin Mortgage", formerly Inland Mortgage Corporation), a mortgage banking
company; Irwin Union Bank and Trust Company ("Irwin Union Bank"), a
commercial bank; Irwin Home Equity Corporation ("Home Equity"), a
consumer home equity lending company; Irwin Equipment Finance Corp. ("Irwin
Equipment"), a leasing company; White River Capital Corporation, a small
venture capital company; and Irwin Union Credit Insurance Corporation, a
credit insurance company. Registrant is also the sole equity shareholder of
IFC Capital Trust I ("Capital Trust"), a special purpose trust.
Business of Subsidiaries
Irwin Mortgage, acquired in 1981, originates, purchases and services
conventional or government agency backed (i.e., FHA and VA) residential
mortgage loans. Most mortgages are either insured by an agency of the
federal government, or in the case of a conventional mortgage, meet
requirements for resale to the Federal National Mortgage Association or
the Federal Home Loan Mortgage Corporation. Irwin Mortgage also engages
in the nonprime first mortgage lending market. This market is composed of
borrowers who do not qualify under the underwriting guidelines established
by the government-sponsored secondary market agencies for conforming first
mortgages.
Irwin Mortgage sells mortgage loans to institutional and private investors
but may retain servicing rights to mortgage loans that it originates or
purchases from correspondents. Irwin Mortgage collects and accounts for the
monthly payments on each loan serviced and pays the real estate taxes and
insurance necessary to protect the integrity of the mortgage lien, for which
it receives a servicing fee. Irwin Mortgage operates 103 production and
satellite offices in twenty-eight states. During 1998, Irwin Mortgage
established offices in Orinda and San Diego, California; Gary and New Albany,
Indiana; Boca Raton, Florida; Jackson, Mississippi; Desloge, Missouri;
Las Vegas (2), Nevada; Brick, New Jersey; Burlington, Madison and Greensboro,
North Carolina; Broken Arrow and Bristow, Oklahoma; Hillsboro, Oregon;
Columbia, South Carolina; Chattanooga, Tennessee; Austin, Texas; and Newport
News and Virginia Beach, Virginia. During 1998, Irwin Mortgage closed
offices in Phoenix, Arizona; Covina, Morgan Hill and Irvine, California;
Farmington, Connecticut; Columbus and Macon, Georgia; Lexington, Kentucky;
New Orleans, Louisiana; Marlton, New Jersey; Independence/Cleveland, Ohio;
Columbia, South Carolina; and Chattanooga, Tennessee.
Irwin Mortgage and the Registrant have,for several years, explored
opportunities to test the development of mortgage banking operations in
markets outside the United States. During 1998, Irwin Mortgage made a
small number of loans on real estate located in Mexico. The Registrant will
continue research of international opportunities to which the Registrant
might apply its knowledge and competencies.
Irwin Union Bank, organized in 1871, is a full service commercial bank
offering a wide variety of services to individual, business, institutional,
and governmental customers. Irwin Union Bank's services include personal and
commercial checking accounts, savings and time deposit accounts, personal and
business loans, credit card services, money transfer, financial counseling,
property and casualty insurance agency services, trust services, securities
brokerage and safe deposit facilities. Irwin Union Bank is the largest of
eleven financial institutions operating in Bartholomew County, Indiana, with
eight locations throughout the county. Irwin Union Bank also has branch
facilities in Seymour (Jackson County - 2), Shelbyville (Shelby County),
Bloomington (Monroe County - 3), Franklin and Greenwood (Johnson County 2),
Carmel (Hamilton County), Avon (Hendricks County), and Greensburg (Decatur
County), Indiana. In January, 1999, Irwin Union Bank opened loan production
offices in Kalamazoo, Michigan and St. Louis, Missouri. As of February 1,
1998, Irwin Union Insurance, Inc., an insurance agency subsidiary of Irwin
Union Bank, purchased substantially all the property and casualty assets of
Maximum Benefits & Protection Co., Inc., an Indiana corporation. On December
10, 1998, Irwin Union Bank established Irwin Reinsurance Corporation as a
subsidiary, incorporated in Vermont, to engage in the business of insuring
and reinsuring primarily mortgage lending risks.
Home Equity was formed in 1994 and is located in San Ramon, California. Home
Equity originates and services home equity loans and lines of credit. The
loans are marketed through direct mail and telemarketing in twenty-nine
states. At year end, Home Equity began offering a first mortgage refinance
program in selected states.
Irwin Equipment, formed in 1990 and located in Columbus, Indiana, is the
parent company of the former Affiliated Capital Corp., a small-ticket
equipment leasing and commercial lending business. On September 30, 1998,
substantially all of the assets of Affiliated Capital Corp. were sold to DVI
Financial Services, Inc. After the asset sale, Affiliated Capital
Corp. changed its name to Irwin Leasing Corporation, which continues to hold
certain leases that were not part of the asset sale.
White River Capital Corporation ("White River"), a venture capital company, is
located in Columbus, Indiana and currently holds one investment but has
suspended making new investments.
Irwin Union Credit Insurance Corporation is located in Columbus, Indiana and
provides credit life insurance to consumer loan customers of Irwin Union Bank.
IFC Capital Trust I ("Capital Trust"), is a statutory business trust created
under the laws of Delaware. The Registrant owns all of the Common
Securities of Capital Trust. Capital Trust exists for the purpose of issuing
the Preferred Securities and investing the proceeds thereof in an equivalent
amount of 9.25% Subordinated Debentures of the Registrant. The Subordinated
Debentures will mature on March 31, 2027, which date may be (i) shortened to
a date not earlier than March 31, 2002, or (ii) extended to a date not
later than March 31, 2046, in each case if certain conditions are met
(including, in the case of shortening the Stated Maturity, the Registrant
having received prior approval of the Board of Governors of the Federal
Reserve System ("Federal Reserve") to do so if then required under applicable
capital guidelines or policies of the Federal Reserve). The Preferred
Securities will have a preference under certain circumstances with respect to
cash distributions and amounts payable on liquidation, redemption or
otherwise over the Common Securities. Holders of Preferred Securities are
entitled to receive preferential cumulative cash distributions, at the annual
rate of 9.25% of the liquidation amount of $25 per Preferred Security
accruing from the date of original issuance and payable quarterly
in arrears on the last day of March, June, September and December of each
year, commencing March 31, 1997.
No single part of the business of the Registrant is dependent upon a single
customer or upon a very few customers and the loss of any one customer would
not have a materially adverse effect upon the business of the Registrant.
Irwin Mortgage is registered as a Foreign Financial Institution in Mexico.
Competition
Irwin Mortgage originates and services residential first mortgage loans from
103 production and satellite offices in Arizona, California, Colorado,
Delaware, Florida, Georgia, Hawaii, Illinois, Indiana, Kentucky, Louisiana,
Massachusetts, Minnesota, Mississippi, Missouri, Nevada, New Jersey, North
Carolina, Ohio, Oklahoma, Oregon, Pennsylvania, Texas, Utah, Washington,
Wisconsin, and the Washington, D.C. metropolitan area, including offices in
Maryland and Virginia. In each of these locations, competition for mortgage
loans is vigorous, coming from other national, regional and local mortgage
banking companies as well as commercial banks, savings banks, and savings &
loan associations. Irwin Mortgage purchases mortgage loans from
correspondents in these and other states as well.
The commercial banking business for Irwin Union Bank in the Bartholomew,
Decatur, Hamilton, Hendricks, Jackson, Johnson, Monroe and Shelby County
areas is very competitive. Within these counties, in addition to the
commercial banks, there are a number of savings banks, savings &
loan associations, and credit unions competing for deposits and loans. Irwin
Union Bank also competes for the provision of banking services with banks
located elsewhere in Indiana, primarily in south central Indiana, and with a
number of nonbank companies located throughout the United States, including
insurance companies, retailers, brokerage firms, companies offering money
market accounts, and national credit card companies. As of December 31,
1998, Irwin Union Bank ranked first among commercial banking and savings bank
institutions on the basis of Bartholomew County deposits. In addition to the
above mentioned counties, Irwin Union Bank derives its business from several
other counties in south central Indiana and is exploring the development of
markets outside Indiana.
Home Equity originates and services home equity loans and lines of credit for
private home owners in several states. Home Equity's primary competitors
include banks, thrifts, credit unions and other home equity lenders with
operations that are either national, regional or local in scope. Such
competitors may be headquartered anywhere in the country.
Irwin Equipment is inactive at present, except for managing the equipment
leases that were not sold with the rest of the assets of the former
Affiliated Capital Corp. in September of 1998.
Supervision and Regulation
The Registrant is a bank holding company within the meaning of the Bank
Holding Company Act of 1956, as amended, and is registered with, regulated
and examined by the Board of Governors of the Federal Reserve System (the
"Board of Governors").
Subject to certain exceptions, a bank holding company is prohibited from
acquiring direct or indirect ownership or control of more than five percent
of the voting shares of any company which is not a bank and from engaging
directly or indirectly in activities unrelated to banking or managing or
controlling banks. One exception to this prohibition permits
activities by a bank holding company or its subsidiary which the Board of
Governors determines to be so closely related to banking or managing or
controlling banks as to be a proper incident thereto. The Board of Governors
has adopted regulations prescribing those activities it presently regards as
permissible, which include the activities engaged in by Registrant and its
subsidiaries.
The Bank Holding Company Act, the Federal Reserve Act, and the Federal Deposit
Insurance Act also subject bank holding companies and their subsidiaries to
certain restrictions on extensions of credit by subsidiary banks to the bank
holding company or any of its subsidiaries, or investments in the
securities thereof, and on the taking of such securities as collateral for
loans to any borrower. Further, the Bank Holding Company Act and the
regulations of the Board of Governors thereunder, prohibit a bank
holding company and its subsidiaries from engaging in certain tie-in
arrangements in connection with any extension of credit, sale or lease of any
property or furnishing of services.
In addition to the regulation of the Registrant, Irwin Union Bank is subject
to extensive regulation and periodic examination, principally by the Indiana
Department of Financial Institutions and the Federal Reserve Bank of Chicago.
Irwin Mortgage is subject to audit and examination oversight by the federal
department of Housing and Urban Development as well as the Government
National Mortgage Association, the Federal National Mortgage Association, and
the Federal Home Loan Mortgage Corporation. The insurance subsidiary of the
Registrant and the insurance subsidiary of Irwin Union Bank are dependent
upon state licenses and upon franchise agreements with private corporations
for their continued existence. The reinsurance subsidiary of Irwin Union
Bank is subject to examination by the state of Vermont.
The home equity subsidiary of the Registrant is also dependent upon state
licenses for its ability to extend credit in certain states. Finally, the
securities brokerage activities of Irwin Union Bank's registered
broker/dealer are regulated and examined by the Securities and Exchange
Commission, the Indiana Securities Division, the securities divisions of the
various states in which Irwin Union Securities, Inc. operates, and the
National Association of Securities Dealers.
Employees and Labor Relations
As of December 31, 1998, the Registrant and its subsidiaries had a total of
2,401 employees, including full-time and part-time employees. The Registrant
continues a commitment of equal employment opportunity for all job applicants
and staff members, and management regards its relations with its employees as
satisfactory.
Further Information
The following information responsive to Guide 3 promulgated under the
Securities Exchange Act of 1934, is contained in the "Management's Discussion
and Analysis of Financial Condition and Results of Operations" section of the
Annual Report to Shareholders for the year ending December 31, 1998 and is
incorporated herein by reference: "Daily Average Consolidated Balance Sheet,
Interest Rates and Interest Differential" (p. 68), "Investment Securities"
(p. 52), "Short-Term Borrowings" (p. 54), "Summary of Net Interest Income
Changes" (p. 50), "Deposits" (p. 53), "Loans and Leases" (p. 51), "Five-Year
Selected Financial Data" (p. 23), and the discussion and tabular information
under the caption "Credit Risk" on pages 58 to 62.
Executive Officers of the Registrant
The Executive Officers of the Registrant are elected annually by the Board of
Directors and serve for a term of one year or until their successors are
elected and qualified. There are no arrangements or understandings between
any Executive Officer and any other person pursuant to which the Officer was
or is to be selected as an Officer.
Marie S. Ameis (36) is Vice President and Controller of the Registrant since
May of 1992.
Claude E. Davis (38) is President of Irwin Union Bank since January 2, 1996.
He has been an officer since 1988.
Elena Delgado (43) is President of Irwin Home Equity Corporation since
September 4, 1994. From March through August, 1994, Ms. Delgado was an
independent consultant to Irwin Financial Corporation. From 1990 to 1993,
Ms. Delgado was Vice President, Second Mortgage Lending of First Deposit
Corporation.
Gregory F. Ehlinger (36) is Vice President and Treasurer of the Registrant
since August of 1992.
Jose M. Gonzalez (40) is Vice President and Director of Internal Audit of the
Registrant since October of 1995. From 1993 to 1995, Mr. Gonzalez was Senior
Vice President, Audit & Compliance Services of Premier Bank and Trust. From
1991 to 1993, Mr. Gonzalez was Vice President and Senior Compliance Officer
at First Empire State Corporation.
Theresa L. Hall (46) is Vice President - Human Resources of the Registrant,
since 1988. She has been an officer since 1980.
Rick L. McGuire, (46) is President of Irwin Mortgage since January 1, 1996.
He has been an officer since 1978.
William I. Miller (42) is Chairman of the Board, since 1990, and has been a
Director of the Registrant since 1985.
Ellen Z. Mufson (50) is Vice President - Legal of the Registrant, since
September, 1997. She was Vice President - Legal Counsel of Irwin Union Bank
and Trust Company from July, 1996 through August, 1997; Corporate Counsel of
Irwin Financial Corporation from January, 1995 through June, 1996; Deputy
Director/General Counsel of the Indiana Development Finance Authority from
March, 1992 through November, 1994.
John A. Nash (61) is Chairman of the Executive Committee, since 1990, and
President, since 1985, of the Registrant. He has been an officer and Director of
the Registrant since 1972.
Michael F. Ryan (53) is Vice President - Community Development of the
Registrant since January 2, 1996. He was President of Irwin Union Bank from
1981 1995. He has been an officer since 1976.
Matthew F. Souza (42) is Vice President and Ethics Officer/Secretary of the
Registrant. He has been an officer since 1985.
Thomas D. Washburn (52) is Senior Vice President and Chief Financial Officer,
since 1980, of the Registrant. He has been an officer since 1976.
Item 2. Properties
The location and general character of the materially important physical
properties of the Registrant and its subsidiaries are as follows: The main
office of Irwin Mortgage, where administrative and servicing activities are
centered, is located at 9265 Counselor's Row, Indianapolis, Indiana
and a servicing facility is located at 11800 Exit Five Parkway, Indianapolis,
Indiana. Irwin Mortgage also has loan production and satellite offices located
in Flagstaff, Phoenix, Mesa, Scottsdale, and Tucson, Arizona; Antioch,
Bakersfield, Concord, Covina, Fresno, Laguna Hills, Orinda, Richmond,
Sacramento, Salinas, San Diego, Temecula, Ventura, Visalia, Walnut Creek,
Woodland, Yuba City, and Yreka, California; Castle Rock, Colorado Springs,
Denver, Englewood, and Woodland Park, Colorado; Newark, Delaware; Boca Raton,
Clearwater and Orlando/Longwood, Florida; Atlanta, Georgia; Aiea, Honolulu,
Kailua, and Maui, Hawaii; Chicago and Decatur, Illinois; Indianapolis (5),
Anderson, Gary, Ft. Wayne, Kendallville, Kokomo, Lafayette, New Albany, South
Bend, and Warsaw, Indiana; Louisville, Kentucky; Baton Rouge, Louisiana;
Columbia, Rockville, and Towson, Maryland; Braintree, Massachusetts; Arden
Hills, Burnsville, and Minneapolis, Minnesota; Jackson, Mississippi; Desloge
and St. Louis, Missouri; Las Vegas(2), Nevada; Brick, New Jersey; Cary,
Charlotte, Greensboro (2), Raleigh, Wilmington, Madison and Burlington, North
Carolina; Dayton, Ohio; Broken Arrow, Bristow and Tulsa, Oklahoma; Beaverton,
Hillsboro and Lake Oswego, Oregon; Wyomissing, Pennsylvania; Austin (2),
Corpus Christi, Dallas, El Paso, and Houston, Texas; Salt Lake City, Utah;
Fredericksburg, Glen Allen, Newport News, Richmond, Springfield, Suffolk, and
Virginia Beach, Virginia; Bellevue, Battleground, Everett, and Mount Lake
Terrace, Washington; and Madison, Wisconsin. All offices occupied by Irwin
Mortgage are leased.
The main office of Irwin Union Bank is located in four connected buildings all
at 500 and 520 Washington Street, Columbus, Indiana. These buildings and
one branch building are owned in fee by Irwin Union Realty Corporation, a
wholly-owned subsidiary of Irwin Union Bank, and are leased by Irwin Union
Bank. Irwin Union Bank owns in fee three of its other fifteen relatively
small branch banking premises. The other branch offices are leased. None of
the properties owned by Irwin Union Bank are subject to any major encumbrances.
The main office of Irwin Home Equity is located at 12677 Alcosta Blvd., Suite
500, San Ramon, California. This office location is leased.
The main offices of the Registrant, Irwin Equipment, White River Capital
Corporation and Irwin Union Credit Insurance Corporation are located at 500
Washington Street, Columbus, Indiana in space leased from Irwin Union Bank.
Item 3. Legal Proceedings
As a part of the ordinary course of business, the Registrant and its
subsidiary companies are parties to litigation involving claims to the
ownership of funds in particular accounts, the collection of delinquent
accounts, challenges to security interests in collateral, and foreclosure
interests, that is incidental to their regular business activities. In
addition to such claims, the Registrant was involved, as of December 31,
1998, in the following actions:
Banda et al. v. City of Houston et al. Irwin Mortgage was
- --------------------------------------
served as a defendant in a class action lawsuit initiated in the district
court of Harris County, Texas in March of 1998. The suit alleged that a
Houston housing opportunity program, in which Irwin Mortgage was a
participating lender, used inaccurate lead paint tests that resulted
in a class of homeowners being subjected to harmful levels of lead and
property devaluations. At present, it is difficult to predict the likelihood
of an unfavorable outcome or to establish the possible extent or
amount of liability or potential loss exposure, if any, to which Irwin
Mortgage might be exposed.
Culpepper, et al. v. Inland Mortgage Corporation. As of December 31, 1998,
- -------------------------------------------------
Irwin Mortgage was a defendant in a class action lawsuit initiated in the
United States District Court, Northern District of Alabama in April, 1996.
This action is one of a number of "RESPA Section 8" class actions that have
been filed against several mortgage lenders challenging the legality of the
payment of broker fees by mortgage lenders to mortgage brokers. On January 9,
1998, the Court of Appeals for the Eleventh Circuit reversed the district
court's grant of summary judgment in favor of Irwin Mortgage and vacated the
district court's dismissal of class claims and denial of class certification.
On June 22, 1998, the appeals court denied Irwin Mortgage's petition for
rehearing, but issued an opinion clarifying its original opinion.
Subsequently on remand, the district court granted a joint motion to
consolidate Culpepper and Hiers (see below). At present, it is impossible to
predict the likelihood of an unfavorable outcome or to establish the possible
extent or amount of liability or potential loss exposure, if any, to which
Irwin Mortgage might be exposed.
Heifets, et al. v. Matrix Electromedical, et al. As of December 31, 1998,
- ------------------------------------------------
Affiliated Capital Corp. (now, Irwin Leasing Corporation) and Irwin Financial
Corporation were defendants in a class action lawsuit initiated against them
in August, 1998 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. As of December 31,
- --------------------------------------------------
1998, Irwin Mortgage was a defendant in a class action lawsuit initiated in
August, 1998 in the United States District Court, Northern District of
Alabama. As mentioned above, this suit was consolidated with Culpepper and 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.
Howell, et al. v. Inland Mortgage Corporation. As of December 31, 1998,
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Irwin Mortgage was a defendant in a class action lawsuit initiated in the
state of Indiana in January 1995. Plaintiffs alleged that lenders do not have
the right to require borrowers to pay premiums for private mortgage insurance.
On February 2, 1999, the Marion County, Indiana Superior Court dismissed the
case with prejudice.
Kruta (formerly referred to as Basmoen), et al. v. Inland Mortgage Corporation.
- -------------------------------------------------------------------------------
As of December 31, 1998, Irwin Mortgage was a defendant in a class action
lawsuit initiated in the state of Minnesota in October, 1995. The case is
currently pending before a federal Multidistrict Litigation Panel in Chicago,
Illinois. Plaintiffs allege that they represent a nationwide class of
persons who have or had mortgage escrow accounts allegedly improperly managed
by Irwin Mortgage. This case is among a series of class action cases
commenced against a number of mortgage servicers in several states
challenging the practices used in connection with the administration of
escrow accounts for single family residential mortgages. The court granted
plaintiff's motion to add James Kruta as a class representative on September
8, 1997 and also granted a renewed motion for class certification on March
25, 1998. At this stage of the litigation, it is impossible to predict
the likelihood of an unfavorable outcome or to establish the possible extent
or amount of liability or potential loss, if any, to which Irwin Mortgage
might be exposed. Except as described above, there is no material pending
litigation in which the Registrant or any of its subsidiaries is
involved or of which any of their property is the subject. Furthermore,
there is no pending legal proceeding that is adverse to the Registrant in
which any director, officer or affiliate of the Registrant, or any associate
of any such director or officer, is a party, or has a material interest.
Item 4. Submission of Matters to a Vote of Security Holders
During the fourth quarter of 1998, no matters were submitted to a vote of
security holders of the Registrant, through the solicitation of
proxies or otherwise.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Common Stock of the Registrant is quoted on the National Association of
Securities Dealers Automated Quotation/National Market System
(NASDAQ/NMS trading symbol, IRWN). The following table sets forth certain
information regarding trading in, and cash dividends paid with respect to, the
shares of the Registrant's Common Stock in each quarter of the two most recent
calendar years. All data have been adjusted for stock splits.
The approximate number of shareholders of record on March 11, 1999 was 1,818.
Stock Prices and Dividends:
High Low Quarter Cash Total Dividens
$ $ End Dividend For Year
$ $ &
1997 (split
adjusted)
First Quarter 15 1/4 12 1/8 13 5/8 $0.035
Second Quarter 14 3/4 12 14 3/4 0.035
Third Quarter 18 5/8 14 3/8 18 0.035
Fourth Quarter 21 1/2 18 1/4 21 0.035 $0.14
1998 (split
adjusted)
First Quarter 28 1/4 19 1/2 28 1/8 $0.04
Second Quarter 30 25 1/8 29 $0.04
Third Quarter 37 20 1/2 24 5/8 $0.04
Fourth Quarter 31 20 1/8 27 1/5 $0.04 $0.16
The Registrant expects to continue its policy of paying regular cash dividends,
although there is no assurance as to future dividends because they are
dependent on future earnings, capital requirements, and financial condition.
On February 19, 1998, the Registrant's Board of Directors approved an increase
in the Registrant's quarterly dividend to $.04 per share (split adjusted)
which dividend rate was unchanged as of December 31, 1998. Dividends paid by
Irwin Union Bank to the Registrant are restricted by banking law.
No sales of unregistered equity securities were made by the Registrant
during the fourth quarter of 1998.
Item 6. Selected Financial Data
The information contained in the Annual Report to Shareholders for the year
ended December 31, 1998, under the caption "FiveYear Selected Financial
Data", is incorporated herein by reference in response to this item.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The information set forth under the caption "Management's Discussion and
Analysis of Results of Operations and Financial Condition" in the Annual
Report to Shareholders for the year ended December 31, 1998, is incorporated
herein by reference in response to this item.
Item 7a. Quantitative and Qualitative Disclosures About Market Risk--Interest
Rate Sensitivity
Interest rate sensitivity refers to the potential for changes in market rates of
interest to cause changes in net interest income and in the market value of
assets and liabilities.
The Asset-Liability Management Committee of the commercial bank monitors the
repricing structure of both assets and liabilities over various time horizons.
Exposure to changes in interest rates is evaluated by modeling the repricing
characteristics of the commercial bank's portfolio under multiple rate
scenarios. Rate sensitivity at the commercial bank can typically be managed
by controlling the maturity of loans, securities, and deposits. The
commercial bank may also use financial futures or interest rate swaps
from time to time. Formal policies approved by the Bank's Board of Directors
ensure that exposure to changes in net interest revenues is maintained within
acceptable levels.
The mortgage banking business assumes a form of interest rate sensitivity by
entering into commitments to extend loans to borrowers at a fixed price for a
limited period of time. Loans are also held temporarily until a pool is
formed. The mortgage bank buys commitments to deliver loans at a fixed price
to manage risk. The policy at the home equity lending business is to
matchfund all loan assets. The mortgage bank and the home equity company are
also exposed to interest rate risk through their ownership of servicing
assets. As discussed in the analysis of each line of business earlier
in this report, the companies also manage their risk using a variety of
techniques including: maintaining a strong production operation which offsets
the interest rate risk, selective sales of the servicing rights, and the use
of financial hedges. In some cases, the Registrant uses internal hedges to
allow for the risk characteristics of one line of business to offset those
of another line.
While traditional interest rate risk focuses on the changes in
net interest income due to interest rate changes, the Registrant 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, option-adjusted valuation techniques
for estimating expected customer behavior, and Monte Carlo based cash flow
simulation, the Registrant attempts to analyze and mitigate total interest
rate risk that is associated with both net interest income and non-interest
income. For example, if interest rates decline, management expects an
increase in mortgage loan origination income and a decline in the value of
mortgage servicing assets. Management attempts to monitor this exposure to
traditional interest rate risk as well as interest rate influences on
production and servicing value in a comprehensive manner.
The following table shows management's estimate of the present value of
interest-sensitive assets and liabilities, as well as off-balance sheet
financial contracts as of December 31, 1998, at then current interest rates
as well as simulated rates 1.0% and 2.0% above and below those interest
rates. It does not take into account the book values of the Registrant's
non-interest sensitive assets and liabilities, such as cash, accounts
receivable, and fixed assets, the value of which is not directly
determined by interest rates.
As noted above, the analysis is based on discounted cash flows over the
remaining estimated lives of the financial instruments. The total measurement
of the Registrant's exposure to interest rate risk as presented in the
following table may not be representative of the actual values which might
result from a higher or lower rate environment. Such environments would
likely result in different lending and borrowing strategies by the
Registrant, designed in part to further mitigate the effect on
the value of, and the net earnings generated from, the Registrant's net
assets from any change in interest rates.
The figures suggest, based on balance sheet and off balance sheet financial
assets, that the present value of the Registrant's interest-sensitive assets
and liabilities would decline in a falling rate environment and increase in
a rising rate environment. The magnitude and direction of the present value
rate sensitivity is largely unchanged from 1997.
As previously noted, this present value sensitivity analysis does not account
for potential earnings the Registrant would recognize due to strategic
initiatives it would undertake if the interest rate scenarios model occurred,
nor does it reflect activities not traditionally measured as financial assets or
liabilities. Principal among these activities for the Registrant would be
the change in mortgage loan production and the earnings stream the Registrant
derives therefrom.
PRESENT VALUE ($000)
AT DECEMBER 31, 1998
-2% -1% CURRENT +1% +2%
Interest Sensitive
Assets
Interest-bearing 18,528 18,512 18,495 18,479 18,463
deposits with banks
Federal Funds Sold 8,651 8,651 8,651 8,651 8,651
Taxable investment 80,556 78,210 76,873 76,069 75,554
securities
Tax-exempt investment 5,727 5,513 5,309 5,115 4,930
securities
Mortgages held for sale 974,732 970,182 965,055 959,305 952,905
Mortgage Servicing 41,930 77,595 117,728 152,402 174,714
Rights
Loans, net of unearned 624,196 612,499 601,338 591,228 581,262
discount
Total Interest 1,754,320 1,771,162 1,793,449 1,811,249 1,816,479
Sensitive Assets
Interest Sensitive
Liabilities
Non-Interest Bearing 486,091 483,042 480,168 477,458 474,898
Deposits
Money Market Checking 122,395 122,317 122,239 122,162 122,084
Money Market Savings 6,509 6,504 6,499 6,494 6,489
Regular Savings 98,965 98,886 98,808 98,730 98,653
Time Deposits 295,576 292,831 290,152 287,566 285,123
Short term borrowings 637,654 637,272 636,890 636,512 636,134
Long Term Debt 70,887 65,220 60,750 57,199 54,344
Total Interest 1,718,077 1,706,072 1,695,506 1,686,121 1,677,725
Sensitive Liabilities
Interest Sensitive Off 14,423 13,690 5,347 1,027 1,484
Balance Sheet Items
Net Sensitivity as of 50,666 78,780 103,290 126,155 140,238
December 31, 1998
Potential Change -52,624 -24,510 22,865 36,948
Net Sensitivity as of -12,165 6,895 28,911 47,188 55,873
December 31, 1997
Potential Change -41,076 -22,016 18,277 26,962
Item 8. Financial Statements and Supplementary Data
Consolidated financial statements of the Registrant and its subsidiaries are
contained in the Annual Report to Shareholders for the year ending December
31, 1998, under the caption "1998 Financial Statements", and are incorporated
herein by reference in response to this item.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
In connection with the audits of the Registrant for the two most
recent fiscal years ended December 31, 1998, the Registrant has not changed
its independent certified public accountants nor have there been any
disagreements (as defined in Instruction 4 to Item 304 of Regulation S-K)
with such accountants on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure.
PART III
Item 10. Directors and Executive Officers of the Registrant
The information contained in the proxy statement of the Registrant for the
1999 Annual Meeting of Shareholders under the caption "Election of
Directors", on pages 4 through 7, inclusive, is incorporated herein by
reference in response to this item.
Item 11. Executive Compensation
The information contained in the proxy statement of the Registrant for the
1999 Annual Meeting of Shareholders under the captions "Election of Directors -
Outside Director Compensation ", "Executive Compensation and Other
Information" and "Board Compensation Committee Report on Executive
Compensation" on pages 10 through 19, inclusive, is incorporated herein by
reference in response to this item.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information contained in the proxy statement of the Registrant for the
1999 Annual Meeting of Shareholders under the captions "Voting
Securities and Principal Holders" and "Security Ownership of Management", on
pages 2 and 3, inclusive, is incorporated herein by reference in
response to this item.
Item 13. Certain Relationships and Related Transactions
The information contained in the proxy statement of the Registrant for the
1999 Annual Meeting of Shareholders under the caption "Interest of Management in
Certain Transactions" on pages 20 and 21, is incorporated herein by reference
in response to this item.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
Page #
a. Documents filed as a part of this Report: Form Annual
10-K Report
1. Financial Statements:
A. Irwin Financial Corporation and
Subsidiaries:
Report of PricewaterhouseCoopers LLP,
Independent Accountants 88
Consolidated Statement of Income
for the years ended December 31, 1998,
1997, and 1996 89
Consolidated Balance Sheet as of
December 31, 1998, and 1997 90
Consolidated Statement of Changes in
Shareholders' Equity for the years
ended December 31, 1998, 1997 and
1996 91
Consolidated Statement of Cash Flows
for the years ended December 31, 1998,
1997, and 1996 92
Notes to Consolidated Financial Statements 93
The above listed report, financial statements, and the notes thereto, set
forth on pages 85 through 115 of the Registrant's 1998 Annual Report to
Shareholders are incorporated herein by reference.
2. Financial Statement Schedules
None
Schedules are omitted because they are not required or the information is
included in the Notes to Consolidated Financial Statements.
3. Exhibits
A. Exhibits to Form 10-K
Number Assigned in Sequential Numbering
Regulation System Page Number
S-K Item 601 Description of Exhibit of Exhibit
(2) No exhibit.
(3) (i) 3(a) Amended Articles of
Incorporation,
dated December 29, 1972.
(Incorporated by
reference to
Exhibit 3(a) to
Form 10-K Report
for year ended
December 31,1985,
File No. 0-6835.)
3(b) Articles of Amendment, dated
March 30, 1973.
(Incorporated by reference to
Exhibit 3(b) to Form 10-K
Report for year ended December
31, 1985, File No. 0-6835.)
3(c) Articles of Amendment, dated
September 4,1990. (Incorporated
by reference to Exhibit 3(d) to
Form 10-K Report for year ended
December 31, 1990, File No. 0-6835.)
3(d) Articles of Amendment, dated
April 30, 1992. (Incorporated by
reference to Exhibit 3(d)
to Form 10-K Report for year
ended December 31, 1992,
File No. 0-6835.)
3(e) Articles of Amendment, dated
April 26, 1994.
(Incorporated by reference
to Exhibit 3(e) to Form 10-K
Report for year ended December
31, 1994, File No. 0-6835.)
3(f) Articles of Amendment, dated
April 30, 1996. (Incorporated by
reference to Exhibit (f) to Form
10-K Report for year ended
December 31, 1996, File No.
0-6835.)
(ii) 3(a) Code of By-Laws as amended to date.
(4) 4(a) Specimen stock certificate.
(Incorporated by reference
to Exhibit 4(a) to Form 10-K
Report for year ended December
31, 1994, File No. 0-6835.)
4(b) Certain instruments defining
the rights of the holers oflong-
term debt of the Registrant and
certain of its subsidiaries, none
of which authorize a total amount
of indebtedness in excess of 10%
of the total assets of the Registrant
and its subsidiaries on a
consolidated basis, have not been
filed as Exhibits. The Registrant
hereby agrees to furnish a copy of
any of these agreements to the
Commission upon request.
(9) No exhibit.
(10) 10(a)Amended 1986 Stock Option Plan.
(Incorporated by reference to
Exhibit 10(b) to Form 10-K Report
for year ended December 31, 1991,
File No. 06835.)
10(b)Amended and Restated Management Bonus
Plan. (Incorporated by reference to Exhibit
19(a) to Form 10-K Report for year ended
December 31, 1986, File No. 06835.)
10(c) Long-Term Management Performance Plan.
(Incorporated by reference to Exhibit 10(d) to
Form 10-K Report for year ended December 31, 1986,
File No. 06835.)
10(d) Long-Term Incentive Plan Summary of Terms.
(Incorporated by reference to Exhibit 10(e) to
Form 10-K Report for year ended December 31,
1986, File No. 06835.)
10(e) Irwin Financial Corporation Employees' Stock
Purchase Plan. (Incorporated by reference to Exhibit
10(f) to Form 10-K Report for year ended December 31,
1991, File No. 0 6835.)
10(f) Employee Stock Purchase Plan II. (Incorporated
by reference to Exhibit 10(f) to Form 10-K
Report for year ended December 31, 1994, File No.
06835.)
10(g) Amended Irwin Financial Corporation Outside
Directors Restricted Stock Compensation Plan.
(Incorporated by reference to Exhibit 10(g) to
Form 10-K Report for year ended December 31, 1991,
File No. 0 6835.)
10(h) Irwin Financial Corporation 1992 Stock Option Plan.
(Incorporated by reference to Exhibit 10(h) to Form
10-K report for year ended December 31, 1992, File
No. 06835.)
10(i) Amended Irwin Financial Corporation Outside
Director Restricted Stock Compensation Plan.
(Incorporated by reference to Exhibit
10(i) to Form 10-K report for year ended
December 31, 1995, File No. 0-6835.)
10(j) Inland Mortgage Corporation Long Term
Incentive Plan. (Incorporated by
reference to Exhibit (10)(j) to Form 10-K
report for year ended December 31,
1996, File No. 0-6835.)
10(k) Irwin Financial Corporation 1997 Stock
Option Plan. (Incorporated by
reference to Exhibit (10) to Form 10-Q
report for quarter ended June 30, 1997,
File No. 0-6835.)
10(l) Amendment to Irwin Financial Corporation
1997 Stock Option Plan. (Incorporated by
reference to Exhibit (10) to Form 10-Q report for
quarter ended June 30, 1997, File No. 06835.)
(11) 11(a) Computation of Earnings Per Share. 21
(12) No exhibit.
(13) 13(a) Registrant's 1998 Annual 22
Report to Shareholders.
This exhibit contains
such portions thereof
that have been
incorporated by
reference into this
Report.
(16) No exhibit.
(18) No exhibit.
(21) 21(a) Subsidiaries of the Registrant. 117
(22) No exhibit.
(23) 23(a) Consent of Independent Accountants. 118
(24) No exhibit.
(27) Financial Data Schedule. 119
(99) 99(a) Annual Report on Form 11-K for the Irwin
Financial Corporation Employees'
Savings Plan for the year
ending December 31, 1998.*
99(b) Annual Report on Form 11-K for the
Irwin Mortgage Corporation
Retirement and Profit Sharing
Plan for the year ending December 31, 1998.*
* To be filed by amendment pursuant to Rule 15d-21.
b. Reports on Form 8-K
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d)of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the Undersigned, thereunto duly authorized.
IRWIN FINANCIAL CORPORATION
Date: March 30, 1999
By: /s/ William I. Miller
---------------------
William I. Miller,
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report on Form 10-K has been signed below by the following persons on behalf
of the Registrant and in the capacities on the dates indicated.
Signature Capacity with Date
Registrant
/s/ Sally A. Dean Director March 30, 1999
- -----------------
Sally A. Dean
/s/ David W. Goodrich Director March 30, 1999
- ---------------------
David W. Goodrich
/s/ John T. Hackett Director March 30, 1999
- -------------------
John T. Hackett
/s/ William H. Kling Director March 30, 1999
- --------------------
William H. Kling
/s/ Brenda J. Lauderback Director March 30, 1999
- ------------------------
Brenda J. Lauderback
/s/ John C. McGinty, Jr. Director March 30, 1999
- ------------------------
John C. McGinty, Jr.
/s/ Irwin Miller Director March 30, 1999
- ----------------
Irwin Miller
/s/ William I. Miller Director, Chairman March 30, 1999
- -------------------- of the Board
William I. Miller (Principal
Executive Officer)
/s/ John A. Nash Director, Chairman March 30, 1999
- ---------------- of the Executive
John A. Nash Committee
/s/ Lance R. Odden Director March 30, 1999
- ------------------
Lance R. Odden
/s/ Theodore M. Solso Director March 30, 1999
- ---------------------
Theodore M. Solso
/s/ Thomas D. Washburn Senior Vice President March 30, 1999
- ---------------------- (Principal Financial
Thomas D. Washburn Officer)
/s/ Marie S. Ameis Vice President and March 30, 1999
- ------------------ Controller
Marie S. Ameis (Principal Accounting
Officer)
Exhibit 11 (a)
IRWIN FINANCIAL CORPORATION AND SUBSIDIARIES
EXHIBIT 11(a) - COMPUTATION OF EARNINGS PER
SHARE
Year Ended December 31, 1998 1997 1996
(In thousands except per
share amounts)
AVERAGE NUMBER OF SHARES 21,732 22,326 22,716
OUTSTANDING
NET INCOME $30,503 $24,444 $22,428
BASIC EARNINGS PER SHARE $ 1.40 $ 1.09 $ 0.99
(Note 2)
DILUTED SHARES
OUTSTANDING:
Average number of 21,732 22,326 22,716
shares outstanding
Assumed exercise of 407 396 314
stock options (Note 1)
Total shares (Note 2) 22,139 22,722 23,030
NET INCOME $30,503 $24,444 $22,428
DILUTED EARNINGS PER $ 1.38 $ 1.08 $ 0.97
SHARE (Note 2)
(1) The dilutive effect of stock options is based on the Treasury Stock
method.
(2) Adjusted for the two-for-one stock splits effective May 27, 1998 and
December 30, 1996. Previously reported per share data have been
adjusted to reflect these splits.
Management's Discussion and Analysis of Results of Operations
and Financial Condition
Irwin Financial Corporation
Five-Year Selected Financial Data
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Financial Data For the Year: 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Net revenues $300,918 $221,224 $195,448 $148,239 $116,908
Operating expenses 245,436 174,573 158,160 115,790 86,844
Net income 30,503 24,444 22,428 20,083 18,216
Mortgage loan closings 8,944,615 5,397,338 5,085,625 3,559,310 2,812,962
Return on average equity 22.84% 19.80% 20.58% 22.60% 23.91%
Return on average assets 1.85 1.94 1.95 2.28 2.43
Dividend payout ratio 11.39 12.74 12.15 12.36 11.38
Per share:*
Net income - Basic $1.40 $1.10 $0.99 $0.89 $0.79
Net income - Diluted 1.38 1.08 0.98 0.88 0.79
Cash dividends 0.16 0.14 0.12 0.11 0.09
Book value 6.70 5.82 5.23 4.38 3.60
Market value at
December 31, 27.20 20.94 12.38 9.97 6.69
At year end:
Assets $1,946,179 $1,496,794 $1,300,122 $1,037,541 $659,671
Deposits 1,009,211 719,596 640,153 563,999 439,918
Loans held for sale 936,788 528,739 446,898 378,658 154,964
Loans and leases, net 547,103 602,281 526,175 407,904 304,548
Shareholders' equity 145,233 127,983 118,903 99,216 81,104
Owned mortgage servicing
portfolio 11,242,470 10,713,549 10,810,988 10,301,914 8,818,502
Equity to assets ratio 7.46% 8.55% 9.15% 9.56% 12.29%
Risk-based capital ratio 12.25 14.85 12.88 14.49 19.18
Leverage ratio (Tier 1) 10.51 12.06 9.84 10.57 10.82
Averages:
Assets $1,650,384 $1,262,714 $1,151,535 $882,164 $748,981
Equity 133,563 123,483 108,970 88,867 76,178
Shares outstanding* - Basic 21,732 22,326 22,716 22,560 23,094
Shares outstanding* - Diluted 22,139 22,722 23,030 22,860 23,278
</TABLE>
- ------------------------------------------------------------------------------
*Adjusted for stock splits
(In thousands, except for per share amounts)
Summary of Quarterly Financial Information 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Fourth Third Second First
Summary Income Information Quarter Quarter Quarter Quarter
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income $29,441 $34,558 $31,944 $26,443
Interest expense 13,070 18,240 15,425 12,467
Provision for loan and lease losses 1,350 1,951 1,056 1,638
Noninterest income 67,710 64,706 56,077 55,237
Noninterest expense 71,167 61,122 58,693 54,455
Income taxes 4,162 6,684 4,627 4,881
------- ------- ------- -------
Net income 7,402 11,267 8,220 8,239
------- ------- ------- -------
Distribution on company-obligated mandatorily
redeemable preferred securities of subsidiary trust 1,102 1,174 1,174 1,175
------- ------- ------- -------
Net income available to common shareholders $6,300 $10,093 $7,046 $7,064
======= ======= ======= =======
Earnings per share of common stock: Basic* $0.29 $0.47 $0.32 $0.32
Diluted* $0.29 $0.46 $0.32 $0.31
</TABLE>
1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Fourth Third Second First
Summary Income Information Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income $27,597 $26,237 $23,127 $22,480
Interest expense 12,989 11,705 10,032 9,856
Provision for loan and lease losses 1,374 2,042 2,019 803
Noninterest income 44,270 46,439 43,299 38,595
Noninterest expense 44,758 45,454 43,585 40,776
Income taxes 5,404 4,989 3,851 3,490
------- ------- ------- -------
Net income 7,342 8,486 6,939 6,150
------- ------- ------- -------
Distribution on company-obligated mandatorily
redeemable preferred securities of subsidiary trust 1,174 1,174 1,171 954
------- ------- ------- -------
Net income available to common shareholders $6,168 $7,312 $5,768 $5,196
======= ======= ======= =======
Earnings per share of common stock: Basic* $0.28 $0.33 $0.26 $0.23
Diluted* $0.28 $0.33 $0.26 $0.23
</TABLE>
<TABLE>
1996
- -------------------------------------------------------------------------------
Fourth Third Second First
Summary Income Information Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income $26,764 $23,062 $22,004 $19,815
Interest expense 12,230 10,591 9,886 8,918
Provision for loan and lease losses 1,199 1,126 1,227 1,001
Noninterest income 38,970 38,176 38,339 34,496
Noninterest expense 41,152 40,346 40,707 35,955
Income taxes 4,244 3,672 3,495 3,449
------- ------- ------- -------
Net income $6,909 $5,503 $5,028 $4,988
======= ======= ======= =======
Earnings per share of common stock: Basic* $0.31 $0.24 $0.22 $0.22
Diluted* $0.30 $0.24 $0.22 $0.22
</TABLE>
- ------------------------------------------------------------------------------
*Adjusted for stock splits
Total Net Revenues ($Millions)
1990 $43.3
1991 60.0
1992 94.9
1993 119.4
1994 116.9
1995 148.2
1996 195.4
1997 221.2
1998 300.9
Net Income ($Millions)
1990 $4.6
1991 6.7
1992 12.9
1993 15.6
1994 18.2
1995 20.1
1996 22.4
1997 24.4
1998 30.5
Return on Average Equity (Percent)
1990 13.5%
1991 16.93
1992 26.51
1993 24.91
1994 23.91
1995 22.60
1996 20.58
1997 19.80
1998 22.84
Management's Discussion
Management's discussion and analysis should be read in
conjunction with the accompanying consolidated financial
statements, footnotes, and tables. Forward-looking
statements contained in the following discussion are based
on estimates and assumptions that are subject to significant
business, economic, and competitive uncertainties, many of
which are beyond the Corporation's control and are subject
to change. These uncertainties can affect actual results and
could cause actual results to differ materially from those
expressed in any forward-looking statements in this
discussion.
Consolidated Overview:
Irwin Financial Corporation earned record net income in
1998. A favorable interest rate environment led to strong
results at the Corporation's mortgage banking line of
business. That, coupled with continued growth at the
community bank, offset a decline in earnings at the home
equity line of business. Additionally, in the third quarter
of 1998, the Corporation sold the majority of the assets of
its equipment leasing line of business, generating a one-
time after-tax gain of $3.1 million.
Net income for 1998 totaled $30.5 million, up 24.8% from
1997 and 36.0% from 1996. Basic earnings per share were
$1.40 in 1998, up from $1.10 in 1997 and $0.99 in 1996.
Diluted earnings per share in 1998 were $1.38 compared to
$1.08 in 1997 and $0.98 in 1996. Return on average equity
for 1998 was 22.84% compared to 19.80% in 1997 and 20.58% in
1996. Return on average assets was 1.85%, compared to 1.94%
in 1997 and 1.95% in 1996.
Excluding the aforementioned gain on the sale of leasing
assets, net income totaled $27.4 million. Basic earnings per
share were $1.26 and diluted earnings per share were $1.24
without the leasing gain. Return on average equity was
20.48%, and return on average assets was 1.66%.
Earnings By Line of Business:
Irwin Financial Corporation is comprised of three principal
lines of business:
- - Mortgage banking
- - Community banking
- - Home equity lending
<TABLE>
<CAPTION>
Earnings:
(In thousands) 1998 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Mortgage Banking $28,853 $21,300 $20,422
Community Banking 6,509 5,587 4,254
Home Equity Lending (6,668) 1,710 (816)
Equipment Leasing (including gain on sale of
assets in 1998) 2,898 151 (141)
Parent (including consolidating entries) (1,089) (4,304) (1,291)
------- -------- --------
$30,503 $24,444 $22,428
</TABLE>
- -------------------------------------------------------------------------------
Business Profile:
Mortgage Banking
<TABLE>
<CAPTION>
Selected Financial Data
(In thousands) 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Selected Income Statement Data:
Net interest income $26,244 $17,577 $17,178 $13,415 $12,942
Provision for loan losses (1,721) (1,383) (455) (125) (240)
Loan origination fees 59,328 41,045 43,463 31,871 25,308
Gain on sale of loans 44,124 21,613 25,541 18,020 2,219
Loan servicing fees 52,217 50,194 45,573 36,087 32,426
Gain on sale of servicing 43,308 32,631 16,378 15,271 17,716
Other income 6,740 1,223 891 787 647
-------- -------- -------- -------- --------
Total net revenues 230,240 162,900 148,569 115,326 91,018
Operating expense 182,194 126,610 114,474 83,344 64,571
-------- -------- -------- -------- --------
Income before taxes 48,046 36,290 34,095 31,982 26,447
Income taxes 19,193 14,990 13,673 12,651 10,719
-------- -------- -------- -------- --------
Net income $28,853 $21,300 $20,422 $19,331 $15,728
======== ======== ======== ======== ========
Selected Balance Sheet Data
at End of Period:
Mortgage loans held for sale $555,197 $435,123 $372,855 $309,262 $131,543
Mortgage servicing assets 113,131 81,610 71,715 51,783 18,834
Total assets 877,904 698,391 555,486 445,129 216,180
Short-term debt 288,514 335,835 265,646 227,021 68,259
Long-term debt 2,839 54 4,914 2,300 2,605
Shareholder's equity 104,696 81,058 66,182 55,811 50,805
Selected Operating Data:
Mortgage loan originations $8,944,615 $5,397,338 $5,085,625 $3,559,310 $2,812,962
Servicing portfolio:
Balance at December 31, 11,242,470 10,713,549 10,810,988 10,301,914 8,818,502
Weighted average coupon
rate 7.56% 7.85% 7.83% 7.83% 7.59%
Weighted average servicing
fee 0.43 0.40 0.38 0.38 0.38
Servicing sold as a percent of
production 54.6 71.8 60.9 28.4 49.8
</TABLE>
- --------------------------------------------------------------------------------
Overview & Strategy:
The mortgage banking line of business consists of Irwin
Mortgage Corporation and the related activities of Irwin
Union Bank and Trust. The business is headquartered in
Indianapolis and originates, sells, and services residential
mortgage loans throughout the U.S. It has offices in 28
states and ranks among the top 35 mortgage loan originators
in the country. The majority of the loans originated and
serviced are either government-insured through the Veterans'
Administration (VA) or Federal Housing Administration (FHA)
or conventional loans which conform to the underwriting
guidelines of the two principal government-sponsored
agencies which support the secondary mortgage markets, the
Federal National Mortgage Association (FNMA) and the Federal
Home Loan Mortgage Corporation (FHLMC).
Mortgage loans are originated through both direct
branches (retail) and third party sources (wholesale).
Potential borrowers are identified principally through
relationships maintained with housing intermediaries
including realtors and home builders.
Loans are funded on a short-term basis through credit
facilities provided by commercial banks including Irwin
Union Bank. Financing agreements with investment banks are
also used. Individual loans are pooled, securitized, and
sold into the secondary mortgage market. Servicing rights
are periodically sold for a variety of reasons including
cash flow and servicing portfolio management.
1998 Review:
Net income from mortgage banking was $28.9 million in 1998,
an increase of 35.5% over 1997 results of $21.3 million and
41.3% over 1996 results of $20.4 million. Return on average
equity was 31.8% in 1998 compared to 29.6% in 1997 and 33.4%
in 1996.
Mortgage Loan Originations:
(In thousands) 1998 1997 1996
- -------------------------------------------------------------------------
Total originations $8,944,615 $5,397,338 $5,085,625
Percent retail loans 35.9% 36.6% 41.8%
Percent wholesale loans 59.7 57.2 52.4
Percent brokered 4.4 6.2 5.8
Percent refinances 49.5 22.5 19.0
- -------------------------------------------------------------------------
As a result of a low interest rate environment, the
mortgage banking line of business had record loan
originations in 1998. Loan originations of $8.9 billion were
up 65.7% from 1997 and 75.9% from 1996. Income from mortgage
loan originations totaled $59.3 million which was 44.5%
higher than 1997 and 36.5% over 1996. Refinances accounted
for 49.5% of 1998 loan closings, and because certain fees
are not collected for loan refinancings, loan origination
fees did not increase at the same rate as loan production in
1998.
Gains from the sale of mortgage loans totaled $44.1
million in 1998, compared to $21.6 million in 1997 and $25.5
million in 1996. Higher loan production levels combined with
more favorable market pricing accounted for the 1998
increase.
In early 1997, the mortgage bank entered into the
nonprime mortgage market which is comprised of borrowers who
do not qualify under the underwriting guidelines established
by the government-sponsored secondary market agencies for
conforming first mortgages. Total mortgage banking
originations include $173.5 million and $66.1 million of
nonprime loans in 1998 and 1997, respectively. These loans
are sold on a non-recourse, service-released basis to
private investors.
Mortgage Servicing:
Servicing Portfolio:
(Portfolio balances in billions) 1998 1997 1996
- ------------------------------------------------------------------------------
Beginning portfolio $10.7 $10.8 $10.3
Add:
Loans originated 3.2 2.0 2.1
Loans purchased 5.7 3.4 3.0
Deduct:
Sale of servicing rights (4.9) (3.9) (3.1)
Run-off* (3.5) (1.6) (1.5)
-------- -------- --------
Ending portfolio $11.2 $10.7 $10.8
======== ======== ========
Number of loans 135,833 141,737 140,354
Average loan size $82,767 $82,902 $83,540
Percent GNMA 65% 59% 51%
Percent FHLMC 5 11 15
Percent FNMA 13 19 16
Delinquency ratio: 5.0% 6.0% 5.1%
Capitalized servicing as a percentage of
servicing portfolio 1.0% 0.8% 0.7%
- -------------------------------------------------------------------------------
*Run-off is the reduction in principal balance of the
servicing portfolio due to regular principal payments made
by mortgagees and early repayment of an entire loan.
The mortgage servicing portfolio was $11.2 billion at
December 31, 1998, up 4.9% from the same date in 1997 and
4.0% from 1996. The 1998 annual portfolio run-off rate was
27.6% compared with the 1997 rate of 12.3% and the 1996
rate of 10.7%. The following table sets forth certain
information regarding the interest rates of loans in the
servicing portfolio at December 31:
- ------------------------------------------------------------------
Servicing Portfolio by Interest Rate:
1998 1997 1996
Less than 7% 15.1% 8.4% 8.9%
7.00 - 7.99% 52.7 42.5 44.3
8.00 - 8.99% 27.6 42.6 38.7
9% or greater 4.6 6.5 8.1
------ ----- -----
Total 100% 100% 100%
- ------------------------------------------------------------------
Mortgage servicing assets carried on the balance sheet
totaled $113.1 million at December 31, 1998, up from $81.6
million at the end of 1997 and $71.7 million at the end of
1996.
The value of mortgage servicing assets must be adjusted
for impairment which could result from interest rate
changes. Although impairment write-offs caused by declining
interest rates would likely be accompanied by increased loan
origination fees, management has implemented hedging
alternatives from time to time to offset potential
impairment provisions. The company addresses its impairment
risk by the selective selling of servicing rights it
believes to be most at risk to refinancing. In 1998, it sold
$4.9 billion of servicing for this reason. In addition,
during 1998, the business purchased options on treasury
futures to offset the interest rate risk associated with
mortgage servicing assets. Gross impairment charges of $11.1
were recorded in 1998, up from $0.6 million in 1997 and
1996. Impairment charges in 1998 were partially offset by
income from the options on treasury futures which totaled
$4.3 million for the year. See page 67 for further
discussion of derivative instruments.
Servicing and Other Fees:
(In thousands) 1998 1997 1996
- -----------------------------------------------------------
Servicing fees $52,217 $50,194 $45,573
Other fees 2,422 1,223 891
-------- ------- -------
Total $54,639 $51,417 $46,464
- -----------------------------------------------------------
Servicing fee income is recognized by collecting fees
which normally range between 25 and 44 basis points annually
on the principal amount of the underlying mortgages. An
increase in the average portfolio combined with a change in
the portfolio mix to a higher percentage of government loans
positively affected servicing income which increased 4.0%
from 1997 and 14.6% from 1996.
Sale of Mortgage Servicing:
The mortgage banking business maintains the flexibility to
either sell servicing assets for current cash flow or
retain servicing for future cash flow. The decision to sell
or retain servicing is based on current market conditions
balanced with the interest rate risk tolerance of the
business.
Servicing for loans with principal balances totaling $4.9
billion was sold in 1998, generating a $43.3 million pre-tax
gain. This compares to servicing sales of $3.9 billion in
1997 that produced a $32.6 million pre-tax gain and $3.1
billion in 1996 that produced a $16.4 million pre-tax gain.
Had all servicing been retained, gains on sales of loans
would have been higher than what was recorded, but gains
from sales of servicing would have been reduced. Servicing
sales in 1998 represented 54.6% of 1998 originations versus
1997 sales which were 71.8% of that year's originations and
1996 sales which were 60.9% of originations.
Net Interest Income:
Net interest income is generated from the interest earned on
mortgage loans before they are sold to investors, less the
interest expense incurred on borrowings to fund the loans.
Net interest income totaled $26.2 million in 1998 compared
to $17.6 million in 1997 and $17.2 million in 1996. The 1998
increase resulted from the increased loan production during
the year.
Operating Expenses:
(In thousands, except for number of employees) 1998 1997 1996
- --------------------------------------------------------------------------------
Salaries and employee benefits $101,477 $71,389 $66,153
Amortization of servicing assets 23,002 15,243 14,245
Other expenses 57,715 39,978 34,076
--------- -------- --------
Total operating expenses $182,194 $126,610 $114,474
======== ======== ========
Number of employees at December 31, 1,752 1,411 1,474
- --------------------------------------------------------------------------------
Amorization of servicing assets increased 50.9% from
1997 and 61.5% from 1996. The increase corresponds with the
increase in servicing assets. Salaries and employee benefits
were up 42.1% from 1997 and 53.4% from 1996. Other operating
expenses were up 44.4% from 1997 and 69.4% from 1996. These
increases reflect the increased production activities
throughout 1998 and investments in technology.
Credit Quality:
(In thousands) 1998 1997 1996
- --------------------------------------------------------------------------------
At December 31,
Nonperforming loans $9,449 $3,784 $2,221
Other real estate owned 3,338 1,415 1,839
-------- ------- -------
Total nonperforming assets $12,787 $5,199 $4,060
======== ======== =======
Allowance for loan losses $2,568 $1,606 $633
======== ======== =======
Allowance for loan losses as a
percentage of loans 8.9% 6.0% 2.7%
For the year ended December 31,
Provision for loan losses $1,721 $1,383 $455
- --------------------------------------------------------------------------------
Although most mortgages are either government-insured or
conform to the underwriting guidelines of the government-
sponsored agencies that support the secondary mortgage
market, the mortgage bank has credit risk on those loans that
do not qualify for government insurance or that must be
repurchased from agencies due to lack of conformity to
underwriting guidelines. In recent 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. In addition, during periods of
high origination volume, due to delays in gathering
documentation required for submission to the insuring
agencies, the mortgage bank experiences an increase in the
number of new loans which do not qualify for insurance prior
to the borrower's first 30-day delinquency. As such, the
mortgage bank has had an increase in the number of loans it
has repurchased from or been unable to submit to the agencies
and other investors. This increase has resulted in an
increase in the nonperforming loans and other real estate
owned at the mortgage bank. The mortgage bank seeks to cure
the underwriting defect in these loans and resell them to the
agencies or sell them to alternative investors.
As a result of the increase in nonperforming loans in
1998, the allowance for loan losses and the provision for
loan losses have increased from previous years. In providing
for the loan loss allowance, management reviews each loan
individually to assess probable credit losses based on
information about the borrower and the underlying collateral.
1999 Outlook:
The mortgage bank expects the interest rate environment to
remain favorable for mortgage loan production in 1999.
However, it is anticipated that refinance activities will
decline slightly from levels experienced in 1998. Should
production levels decline in 1999, cost cutting strategies
will be implemented to keep expenses in line with revenues.
Additionally, the business will complete the rollout of
technology initiatives which are expected to enhance
efficiencies in the area of loan production.
The business will continue to emphasize the growth of
its other lending activities in 1999, such as nonprime,
manufactured housing, and Internet originations. These
activities are expected to be an integral part of the overall
growth of the business in the coming year.
Employees:
As of December 31, 1998, the mortgage banking line of
business employed 1,752 people -- approximately 73% of the
Corporation's total employee base. Total employment expense
in 1998 was $101.5 million or 55.7% of operating expenses.
Irwin Mortgage Corporation Directors and Senior Officers
Directors:
Rick L. McGuire - President--Irwin Mortgage Corporation
William I. Miller Chairman--Irwin Financial Corporation
John A. Nash President--Irwin Financial Corporation
Thomas D. Washburn Senior Vice President
Irwin Financial Corporation
Senior
Officers:
T. Lester Acree Senior Vice President
Wholesale Loan Purchasing
Kenneth R. Block Senior Vice President
Loan Production
Katrina J. Crubaugh Senior Vice President--Human Resources
Robert H. Griffith,Jr. Senior Vice President and Legal Counsel
Mark J. Lynch Senior Vice President--Consumer Lending
William M. Meyer Senior Vice President--Loan Servicing
Timothy L. Murphy Senior Vice President--Finance
Erik J. Sorensen Senior Vice President--Secondary Marketing
Scott G. Beer First Vice President--Secondary Marketing
Mark E. Braden First Vice President--Information Technology
Richard C. Cargill First Vice President--Western Region
Randall G. Chumley First Vice President--Atlanta Branch
Renee M. Gunderson First Vice President--Underwriting/Closing
Post Closing
Darla S. Habig First Vice President--Loan Control
Richard E. Hawkins First Vice President--Investor Reporting
Allan D. Karlander First Vice President--Central Region
Scott A. Korbin First Vice President--South Atlantic Region
Kimberly M. Krick First Vice President--Orlando Branch
John F. Macke First Vice President--Management Information
Rachelle E. Mikosz First Vice President--Office Services
Kevin M. Murphy First Vice President--Accounting
Diana M. Rossetter First Vice President--Quality Control
Sherri K. Sanford First Vice President--Customer Service
Debra J. Saviola First Vice President--Wholesale Loan Purchasing
Lyle E. Shearer First Vice President--All Pacific Region
Richard E. Skiles First Vice President--Appraisals
Nicholas Vracas First Vice President--Mid-states Region
Carla L. Wise First Vice President--Default Administration
Business Profile:
Community Banking
<TABLE>
<CAPTION>
Selected Financial Data
(In thousands) 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------
Selected Income Statement Data:
<S> <C> <C> <C> <C> <C>
Interest income $46,056 $41,115 $35,645 $31,965 $23,808
Interest expense 20,957 19,120 15,908 14,048 8,822
Provision for loan and lease losses 1,820 2,201 2,284 2,038 1,344
-------- -------- -------- ------- --------
Net interest income after provision
for loan and lease losses 23,279 19,794 17,453 15,879 13,642
Noninterest income 12,218 9,434 9,384 7,187 5,719
-------- -------- -------- ------- --------
Total net revenues 35,497 29,228 26,837 23,066 19,361
Operating expenses 25,021 20,372 20,311 17,582 14,858
-------- -------- -------- ------- --------
Income before taxes 10,476 8,856 6,526 5,484 4,503
Income taxes 3,967 3,269 2,272 1,845 1,453
-------- -------- -------- ------- --------
Net income $6,509 $5,587 $4,254 $3,639 $3,o50
======== ======== ======== ======= ========
Selected Balance Sheet Data at
End of Period:
Loans $514,950 $410,272 $336,580 $310,083 $255,644
Allowance for loan losses 6,680 5,525 4,790 3,668 3,418
Total assets 607,992 539,233 503,507 440,035 370,462
Deposits 567,526 486,481 453,897 400,149 341,459
Shareholders' equity 46,990 38,390 33,967 28,722 24,686
Daily Averages:
Assets $567,116 $515,666 $459,893 $405,249 $344,691
Deposits 514,694 463,851 413,935 358,343 315,229
Loans 462,319 370,313 329,658 284,713 231,592
Allowance for loan losses 6,308 5,332 4,367 3,566 3,048
Shareholder's equity 42,026 36,232 31,863 27,661 23,580
Shareholder's equity to assets 7.41% 7.03% 6.93% 6.83% 6.84%
</TABLE>
- -------------------------------------------------------------------------------
Overview & Strategy:
Community banking is conducted by Irwin Union Bank and Trust
Company which is headquartered in Columbus, Indiana. At
year-end 1998, it had 19 offices in 8 counties in Indiana.
It holds a major share of the market in Bartholomew County
where it has operated since 1871. Expansion into new markets
has occurred in recent years and has been on a de novo
basis. The community bank's strategy in these and other
possible new markets is to position itself with local
management and staff that can provide highly personalized,
flexible service. The objective is to deliver services in
the way customers would expect from a bank headquartered in
that market. This means that every effort is made to staff
the offices with local people and to give those people the
authority to make key customer decisions. Credit,
investment, trust, and insurance services are provided to
individual and corporate customers.
1998 Review:
Community banking net income in 1998 totaled $6.5 million,
up 16.5% from 1997 net income of $5.6 million and 53.0% from
1996 net income of $4.3 million. The return on average
equity was 15.49% in 1998 as compared to 15.42% in 1997 and
13.35% in 1996. Results in 1998 reflect the continued growth
and expansion efforts of the community bank into new
markets.
Net interest revenue:
(In thousands) 1998 1997 1996
- -----------------------------------------------------------------------------
Net interest revenue on a taxable
equivalent basis* $25,367 $22,206 $20,095
Average interest earning assets 534,439 481,707 429,520
Net interest margin 4.75% 4.61% 4.67%
- -----------------------------------------------------------------------------
*Reflects what net interest revenue would be if all interest
income were subject to federal and state income taxes.
Net interest revenue on a taxable equivalent basis
increased 14.2% from 1997 and 26.2% from 1996 to a total of
$25.4 million. Net interest revenue is the product of net
interest margin and average earning assets.
Net interest margin was up for the year, coming in at
4.75% for 1998 compared to 4.61% in 1997 and 4.67% in 1996.
This improvement resulted from a change in mix of the
community bank's assets in 1998 to a lower percentage of
investments and federal funds sold and a higher percentage
of loans.
<TABLE>
<CAPTION>
Noninterest Income:
(In thousands) 1998 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Trust fees $2,136 $2,178 $2,571
Service charges on deposit accounts 2,076 1,831 1,820
Insurance commissions, fees, and premiums 1,265 1,044 1,105
Gain from sale of loans 1,346 1,088 909
Loan servicing fees 1,745 972 690
Brokerage fees 1,050 757 736
Loan origination fees 686 416 316
Other 1,914 1,148 1,237
-------- -------- --------
Total noninterest income $12,218 $9,434 $9,384
</TABLE>
- -------------------------------------------------------------------------------
As a result of the community bank's expansion efforts,
noninterest income was up 29.5% from 1997 and 30.2% from
1996. During 1998, the community bank recorded $1.3 million
of gains on the sale of consumer, commercial, and mortgage
loans. This compares to $1.1 million in 1997 and $0.9
million recorded in 1996. The community bank retained the
right to service the sold loans, which contributed to
increased loan servicing fees in 1998. Other noninterest
income includes $222.4 thousand of securities gains which
were up from $56.1 thousand in 1997 and $9.0 thousand in
1996.
<TABLE>
<CAPTION>
Operating Expenses:
(In thousands, except for number of employees) 1998 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Salaries and employee benefits $14,142 $11,333 $10,916
Other expenses 10,879 9,039 9,395
-------- -------- --------
Total operating expenses $25,021 $20,372 $20,311
======== ======== ========
Number of employees at December 31, 353 339 304
</TABLE>
- -------------------------------------------------------------------------------
Operating expenses increased 22.8% from 1997 and 23.2%
from 1996. Costs associated with expanding new products and
markets contributed to the increase.
Balance Sheet:
Total assets averaged $567.1 million in 1998 compared to
$515.7 million in 1997 and $459.9 million in 1996. Average earning
assets for the year were $534.4 million, up $52.7 million or 10.9%
from 1997 and up $104.9 million or 24.4% from 1996. The most
significant component of the 1998 increase was loans and
leases which were up $92.0 million on average in 1998 as a
result of the community bank's expansion efforts into new
markets. Average deposits were $514.7 million in 1998, 11.0%
higher than 1997 and 24.3% higher than 1996.
The community bank's equity to assets ratio averaged
7.41% for the year, compared to 7.03% in 1997 and 6.93% in
1996.
<TABLE>
<CAPTION>
Credit Quality:
(In thousands) 1998 1997 1996
- ------------------------------------------------------------------------------
At December 31,
<S> <C> <C> <C>
Nonperforming loans $1,858 $2,856 $3,434
Other real estate owned 48 413 400
------- ------- -------
Total nonperforming assets $1,906 $3,269 $3,834
======= ======= =======
Nonperforming assets as a percentage of
total assets 0.31% 0.60% 0.76%
======= ======= =======
Allowance for loan losses $6,680 $5,525 $4,790
======= ======= =======
Allowance for loan losses as a percentage
of loans 1.30% 1.35% 1.42%
======= ======= =======
For the Year Ended December 31,
Provision for loan losses $1,820 $2,201 $2,284
======= ======= =======
Net charge-offs $592 $1,277 $1,107
</TABLE>
- ------------------------------------------------------------------------------
1999 Outlook:
During 1999, the community bank plans to continue its
expansion efforts into new markets, including markets
outside of Indiana. This expansion will be the first time
the community bank has operated beyond its home state. The
bank has developed a growth strategy for its small business
lending unit which includes the opening of offices in
Michigan and Missouri as well as other states yet to be
determined. The focus will be to provide personalized
banking services to small businesses in cities with good
growth potential and those affected by consolidation in the
banking industry.
The community bank will continue to develop its
infrastructure to support growth and expansion plans.
Included is the implementation of new sales systems as well
as the centralization of certain processes.
Employees:
As of December 31, 1998, the community bank employed 353
people. Total employment expense in 1998 was $14.1 million
or 56.5% of total operating expenses.
Irwin Union Bank and Trust Company
Directors
Robert H. Claxton Senior Vice President-Finance,
Knauf Fiber Glass
Claude E. Davis President,
Irwin Union Bank and Trust Company
John T. Hackett Managing General Partner,
CID Equity Partners, L.P.
Robert W. Haddad Chairman and President,
Columbus Container, Inc.
Carolyn A. Lickerman Homemaker
William I. Miller Chairman,
Irwin Financial Corporation
John A. Nash President,
Irwin Financial Corporation
Charles A. Rau, M.D. Physician
Albert H. Shumaker II President,
Coca-Cola Bottling Company of
Columbus
John S. Spangler Chairman,
Milestone Contractors, L.P.
Christine M. Vujovich Vice President,
Cummins Engine Company, Inc.
Irwin Union Bank and Trust Company
Senior Officers
Claude E. Davis President
Bradley J. Kime Executive Vice President
Kevin P. Barr Senior Vice President and Chief Financial Officer
Richard S. Barbercheck President--Decatur County
William S. Beitler President--Shelby County
Debora L. Cox Vice President--Operations
Bradley R. Davis Vice President and Controller
Brian D. Hall President--Monroe County
Carrie K. Houston Senior Vice President--Human Resources
J. Kevin Johnson President--Jackson County
Timothy J. Kilmartin President--Kalamazoo
Mark C. Kugar President--Hendricks County
Gary S. Martin President--St. Louis
Timothy S. Massey Senior Vice President--Indianapolis
Robert L. Phillips President--Johnson County
William R. Redman President--Hamilton County
Timothy P. Robinson Vice President--Trust
Albert C. Roszczyk Senior Vice President--Bartholomew County
William R. Shomaker President--Irwin Union Insurance
Donald J. Stuart President--Irwin Union Advisory Services
Mark R. Willis President--Irwin Union Securities
Business Profile:
Home Equity Lending
<TABLE>
<CAPTION>
Selected Financial Data
(In thousands) 1998 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net interest income $4,780 $7,129 $7,755 $1,828
Provision for loan losses (513) (1,404) (983) (363)
Gain on sale of loans 18,604 15,908 7,798 2,985
Loan servicing fees 3,323 2,145 710 13
Trading losses (2,952) (1,961) - -
Other income 1,431 294 140 10
-------- -------- -------- --------
Total net revenues 24,673 22,111 15,420 4,473
Operating expenses 31,341 20,401 16,236 7,693
-------- -------- -------- --------
Pre-tax income (loss) $(6,668) $1,710 $(816) $(3,220)
======== ======== ======== ========
Selected Balance Sheet Data at End of Period:
Home equity loans net of loan
loss allowance $7,832 $111,216 $117,588 $36,225
Home equity loans held for sale 239,613 - - -
Interest-only strips 26,761 22,134 12,661 4,446
Total assets 311,974 165,242 145,113 50,845
Short-term debt 226,998 146,219 129,627 24,981
Shareholders' equity 40,272 10,936 13,221 5,538
Selected Operating Data:
Loan Volume:
Lines of credit $98,855 $115,274 $80,724 $87,420
Loans 290,818 99,244 88,396 -
Servicing portfolio:
Balance at December 31, 581,241 358,166 230,450 86,691
Weighted average coupon rate:
Lines of credit 11.89% 12.96% 12.80% 13.61%
Loans 11.86 13.97 14.08 -
</TABLE>
- --------------------------------------------------------------------------------
Overview & Strategy:
The home equity line of business includes Irwin Home Equity
Corporation and the related activities of Irwin Union Bank
and Trust. Irwin Home Equity is located in San Ramon,
California, and was incorporated in late 1994. The company
began marketing home equity loans in early 1995 through
direct mail and telemarketing and currently markets in 29
states.
The business has the option to either hold the loans in
portfolio or securitize and service them. If the loans are
held in portfolio, many costs incurred during the period to
produce the loans are expensed immediately, whereas the
revenue from the loans accrues over the lives of the loans.
Alternatively, if the loans are securitized and sold on the
secondary market to investors, a portion of the present
value of the future net revenues from the loans will be
recognized in the current period, helping to offset the
expenses incurred in producing the loans.
1998 Review:
The home equity lending business recorded a pre-tax loss of
$6.7 million in 1998 compared with pre-tax income of $1.7
million in 1997 and a pre-tax loss
of $0.8 million in 1996. Low interest rates throughout 1998
and competitive pressures caused increased loan prepayment
speeds. Additionally, unfavorable market conditions late in
1998 caused the business to delay the securitization of
loans produced in the last half of the year.
Loan Originations and Securitizations:
During 1998, the home equity lending business originated
$389.7 million of home equity loans, up 81.7% from 1997
volume of $214.5 million and 130.4% from 1996 volume of
$169.1 million.
The business securitized $294.3 million of loans, or
75.5% of originations in 1998 which generated a pre-tax gain
of $18.6 million. These results compare with a $15.9 million
gain recognized in 1997 on the sale of $210.1 million of
loans, or 97.9% of originations, and a $7.8 million gain
recognized in 1996 on the sale of $79.9 million of loans, or
47.3% of originations.
Servicing Portfolio:
(In thousands) 1998 1997 1996
- -----------------------------------------------------------------
Balance at December 31, $581,241 $358,166 $230,450
Delinquency ratio 1.3% 1.5% 0.7%
- -----------------------------------------------------------------
The home equity lending business continues to service
loans it has securitized. The servicing portfolio, which
includes loans held on the balance sheet as well as
securitized loans, increased 62.3% from 1997 and 152.2% from
1996. The business earns a servicing fee equal to 1% of the
outstanding principal balance of the securitized loans.
Servicing fee income increased to $3.3 million in 1998 from
$2.1 million in 1997 and $0.7 million in 1996.
The home equity lending business recognizes on its
balance sheet a servicing asset equal to the discounted cash
flows of future servicing income.
At December 31, 1998, net servicing assets totaled $3.1
million compared with $1.3 million at the end of 1997 and
$0.7 million at the end of 1996. Servicing asset
amortization and impairment expense totaled $0.8 million in
1998 and $0.3 million in 1997, the increase resulting from
the increase in the asset.
When the home equity lending business securitizes loans,
the business recognizes an interest-only strip equal to the
discounted available future cash flows of the interest paid
by borrowers less servicing fees, expected losses, and
interest remitted to investors. The interest-only strip had
a balance of $26.8 million at December 31, 1998, compared
with $22.1 million at the same date in 1997 and $12.7
million in 1996. Interest-only strips are recorded on the
balance sheet as trading assets and are carried at their
market values. Market values are determined using
assumptions about the duration and performance of the
securitized loans. Included in these assumptions are
estimates of the lives of the loans, expected losses, and
appropriate discount rates. Management continually evaluates
these assumptions to determine the proper carrying values of
these items on the balance sheet. Adjustments to carrying
values are recorded as trading gains or losses. During 1998,
the home equity lending business recorded a trading loss of
$2.8 million compared with a trading loss of $2.0 million
recorded in 1997. No adjustments were recorded in 1996.
At the end of 1998, the home equity lending business
owned rights to excess interest in five securitizations. The
prepayment speeds, annual credit losses and discount rates
used in the calculation of carrying value for these interest-
only strips were as follows:
<TABLE>
<CAPTION>
Constant Annual
Prepayment Credit Discount
Pool (Product Type) Rate (CPR) Loss Rate
- -------------------------------------------------------------------------------
<C> <C> <C> <C> <C>
1995-2 (Line of credit) 39% 1.00% 15%
1996-1 (Line of credit) 43 0.64 15
1996-1 (Fixed rate second mortgages) 51 0.64 15
1997-1 (Line of credit) 47 0.50 15
1997-1 (Fixed rate second mortgages) 46 0.50 15
1997-2 (Line of credit) 44 0.50 15
1997-2 (Fixed rate second mortgages) 41 0.50 15
1998-1 (Line of credit) 25 2.00 15
1998-1 (Fixed rate second mortgages) 27 0.50 15
1998-1 (Fixed rate first mortgages) 10 0.50 15
</TABLE>
- --------------------------------------------------------------------------------
A summary of assumptions in place at the end of 1998 and
the two previous years follows:
December 31, 1998 1997 1996
- ----------------------------------------------------------------------------
CPR 10%-51% 30%-40% 26%
Annual credit losses 0.50%-2.00% 0.50%-0.64% .050%
Discount rate 15% 15% 15%
Net Interest Income:
Net interest income before loan loss provision was $4.8
million in 1998, compared to $7.1 million in 1997 and $7.8
million in 1996. Included in interest income is income
earned on the interest-only strip, net of amortization
expense, which amounted to $0.4 million in 1998 compared to
$1.8 million in 1997 and $2.2 million in 1996. The decline
resulted from increases in prepayment speed assumptions
which caused the interest-only strip to amortize more
quickly.
<TABLE>
<CAPTION>
Operating Expenses:
(In thousands, except for number of employees) 1998 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Salaries and employee benefits $15,480 $11,175 $8,663
Marketing and development 5,314 2,731 2,462
Other 10,547 6,495 5,111
-------- ------- -------
Total operating expenses $31,341 $20,401 $16,236
======== ======= =======
Number of employees at December 31, 266 189 159
</TABLE>
- --------------------------------------------------------------------------------
Operating expenses increased 53.6% from 1997 and 93.0% from
1996. The increase results from growth of this business as
evidenced by the increase in loan production in 1998.
Balance Sheet:
The home equity lending business had $247.5 million of loans
and loans held for sale at December 31, 1998, compared to
$111.8 million at the end of 1997 and $118.2 million at the
end of 1996. During 1998, the business changed the
classification of the majority of loans on its balance sheet
to "held for sale" to reflect better management's intent to
securitize the loans. Loans held for sale are carried at the
lower of cost or market value, with market value reflecting
any expected loan losses. Loans that will not be securitized
are still classified as portfolio loans. The loan loss
allowance for portfolio loans totaled $39.4 thousand
December 31, 1998, compared to $563.5 thousand at the end of
1997 and $589.4 thousand at the end of 1996. The decrease
reflects the reduction of loans classified as portfolio
loans.
<TABLE>
<CAPTION>
Credit Quality:
(In thousands) 1998 1997 1996
- --------------------------------------------------------------------------------
At December 31,
<S> <C> <C> <C>
Nonperforming assets $240 $535 $260
======= ======= =======
Nonperforming assets as a percentage of
total assets 0.08% 0.32% 0.18%
======= ======= =======
Allowance for loan losses $39 $564 $589
======= ======= =======
Allowance for loan losses as a percentage
of loans 0.50% 0.50% 0.50%
======= ======= =======
For the year ended December 31,
Provision for loan losses $513 $1,404 $983
======= ======= =======
Net charge-offs $- $335 $37
</TABLE>
- --------------------------------------------------------------------------------
1999 Outlook:
The change in the competitive environment for home equity
lending that took place in the second half of 1998 altered
the competitive landscape. There are fewer independent home
equity lenders, and some that remain are weaker. In
addition, management believes it is unlikely that there will
be as many new entrants as there were in the previous two
years. These factors should tend to reduce competitive
pressure on this line of business. Offsetting these trends
is consolidation which is producing larger competitors with
access to significant resources. Management believes that
its experience base and strategy will allow it to compete
effectively. In addition, consumer demand for home equity
loans is expected to remain high. A more stable interest
rate environment, combined with new product features that
include prepayment penalties, points, and fees, should
reduce the speed at which its loans and interest in sold
loans prepay. At year-end 1998, 40% of the company's
servicing portfolio had prepayment fees, compared with 2%
and 0% at the end of 1997 and 1996, respectively.
The strategy for 1999 includes an increase in fee income,
including loan origination and prepayment fees. The business
will continue to explore new product market and distribution
channel opportunities in order to increase loan volume in
1999. In addition, there will be a significant effort to
improve operating efficiency and limit the growth of
expenses.
Employees:
As of December 31, 1998, the home equity business employed
266 people. Total employment expense in 1998 was $15.5
million or 49.4% of total operating expenses.
Irwin Home Equity Corporation
Directors and Senior Officers
Directors Elena Delgado President,
Irwin Home Equity Corporation
William I. Miller Chairman,
Irwin Financial Corporation
John A. Nash President,
Irwin Financial Corporation
Thomas D. Washburn Senior Vice President,
Irwin Financial Corporation
- -------------------------------------------------------------------------
Senior Officers
Elena Delgado President
Spencer J. Carlsen Vice President--Production
Edwin K. Corbin Vice President--Finance
J. Christopher Huseby Vice President--Marketing
and Business Development
Sunita Liggin Vice President--Human Resources
Jocelyn Martin-Leano Vice President--Operations Support
Jack Nichols Vice President--Information Services
Fern P. Prosnitz Vice President--Legal Counsel
Other Irwin Financial Businesses
In the third quarter of 1998, the Corporation sold the
majority of the assets of its equipment leasing line of
business. This line of business consisted of small-ticket
medical equipment leases. The decision to sell the assets
was based on the conclusion that the medical equipment
leasing operation would benefit strategically from being a
part of a company with broader health care leasing
activities. The sale excluded certain leases that the
Corporation intends to sell at a future date. These leases
totaled $4.4 million at December 31, 1998, net of a $600.0
thousand lease loss allowance.
A summary of results for this line of business follows:
<TABLE>
<CAPTION>
(In thousands) 1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net interest revenue $4,534 $4,809 $4,413
Provision for lease losses (1,941) (1,250) (791)
Other income 602 713 418
------- ------- -------
Total net revenues 3,195 4,272 4,040
Other expenses 3,686 4,121 4,181
------- ------- -------
Income (loss) before gain on sale of assets (491) 151 (141)
Gain on sale of assets 5,241 - -
------- ------- -------
Income before income taxes 4,750 151 (141)
Income taxes 1,852 - -
------- ------- -------
Net income $2,898 $151 $(141)
</TABLE>
- --------------------------------------------------------------------------------
The Corporation continues to investigate new opportunites
in the equipment leasing industry and other niches in the
financial services industry.
The results of parent company and other subsidiary
operations are summarized below:
<TABLE>
<CAPTION>
(In thousands) 1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net revenues $24,806 $20,329 $15,494
Operating expenses (6,702) (6,030) (5,636)
Tax credit 4,657 632 903
--------- --------- ---------
22,761 14,931 10,761
Eliminations (19,225) (14,762) (12,052)
--------- --------- ---------
Income before preferred securities distribution 3,536 169 (1,291)
Preferred securities distribution (4,625) (4,473) -
--------- --------- ---------
Net income $(1,089) $(4,304) $(1,291)
</TABLE>
- --------------------------------------------------------------------------------
Dividends from subsidiaries are recorded as parent
company revenues but are eliminated in determining
consolidated net income. Tax benefits resulting from the
operating losses generated by the home equity line of
business are recorded by the parent company. The parent
company will continue to do so until all of the losses
carried forward have been used.
Each subsidiary pays taxes to the parent company at the
statutory rate. Subsidiaries also pay fees to the parent
company to cover direct and indirect services. In addition,
services are provided from one subsidiary to another. Inter-
company income and expenses are calculated on an arm's-
length, external market basis and are eliminated in
consolidation.
In January 1997, the Corporation issued $50.0 million of
trust preferred securities through a trust created and
controlled by the Corporation. Distributions to security
holders totaled $4.6 million in 1998. See the section on
capital for further discussion of the trust preferred
securities.
Consolidated Income Statement Analysis:
Pre-tax income for 1998 totaled $50.9 million, up 20.6% from
1997 and 36.4% from 1996. The effective income tax rate was
40.0% in 1998, 42.0% in 1997, and 39.8% in 1996. Please see
Note 18 of Notes to the Consolidated Financial Statements
for more information on income taxes.
The Corporation's return on average equity for 1998 was
22.84% compared to 19.80% in 1997 and 20.58% in 1996. The
return on average assets was 1.85% in 1998 compared to 1.94%
in 1997 and 1.95% in 1996.
The Corporation has experienced a decline in its return
on average assets in recent years. An important factor in
the 1998 decline was that, because of capital market
volatility in 1998, the Corporation did not securitize as
great a percentage of its home equity loan production as it
did in the previous year. As a result, the Corporation
incurred production expenses without recognizing
securitization revenues at levels similar to previous years.
Additionally, these assets remained on the balance sheet
throughout the year.
Net interest revenue for 1998 totaled $63.2 million, up
15.2% from 1997 and 26.3% from 1996. The increase was due to
increased lending volume at each of the lines of business.
The net interest margin was 4.37% in 1998 compared to 4.95%
in 1997 and 5.12% in 1996. The decline was primarily due to
increased mortgage production activities which caused the
Corporation to seek a greater proportion of its funding from
more expensive sources than had been done in previous years.
See page 68 for further analysis of the net interest margin.
The following table sets forth, for the periods
indicated, a summary of the changes in interest income and
interest expense resulting from changes in volume and rates
for the major components of interest-earning assets and
interest-bearing liabilities on a fully taxable equivalent
basis:
<TABLE>
<CAPTION>
1998 Over 1997 1997 Over 1996
- -------------------------------------------------------------------------------
(In thousands) Volume Rate Total Volume Rate Total
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest Income:
Loans and leases $1,562 $(5,747) $(4,185) $7,657 $(3,419) $4,238
Loans held
for sale 26,051 4,419 30,470 4,429 (681) 3,748
Taxable investment
securities (137) (3,013) (3,150) 921 (885) 36
Tax-exempt
securities 96 (81) 15 (95) 29 (66)
Interest-bearing
deposits
with financial
institutions (85) (209) (294) 388 10 398
Federal funds sold 47 10 57 (631) 15 (616)
------- ------- ------- ------- -------- -------
Total 27,534 (4,621) 22,913 12,669 (4,931) 7,738
------- ------- ------- ------- -------- -------
Interest Expense:
Money market
checking 199 4 203 (3) 75 72
Money market
savings (82) (2) (84) (58) 10 (48)
Regular savings (265) (124) (389) 7 21 28
Time deposits 3,856 (209) 3,647 2,148 31 2,179
Short-term
borrowings 13,280 (2,020) 11,260 2,031 (358) 1,673
Long-term debt (35) 17 (18) (907) (40) (947)
------- ------- ------- ------- -------- -------
Total 16,953 (2,334) 14,619 3,218 (261) 2,957
------- ------- ------- ------- -------- -------
Net interest
revenue $10,581 $(2,287) $8,294 $9,451 $(4,670) $4,781
</TABLE>
- -------------------------------------------------------------------------------
Note: Variance not solely due to rate or volume is allocated
on the basis of the absolute relationship between volume
variances and rate variances.
The consolidated provision for loan losses for 1998 was
$6.0 million, down 3.9% from 1997 and up 31.7% from 1996.
More information on this subject is contained in the section
on credit risk.
Other income increased 41.2% in 1998 to $243.7 million,
compared to $172.6 million in 1997 and $150.0 million in
1996. The most significant increases came in the categories
related to mortgage banking activities which were previously
discussed on pages 29 through 32.
Other expenses in 1998 totaled $245.4 million, up 40.6%
from 1997 and 55.2% from 1996. The 1998 increase in
consolidated other expense of $70.9 million was mostly due
to operating expenses associated with higher mortgage and
home equity loan production.
Consolidated Balance Sheet Analysis:
Total assets at year-end 1998 were $1.9 billion, up 30.0%
from 1997 and 49.7% Sheet from 1996. However, changes in
the average balance sheet are a more accurate reflection of
the actual changes in the level of activity on the balance
sheet. Average assets were $1.7 billion in 1998, up 30.7%
from 1997 and 43.3% from 1996. The increase is due to
increased loans and loans held for sale as a result of the
increased production activities throughout the Corporation.
The Corporation's commercial loans are extended primarily
to local regional businesses and to local farming
operations. The Corporation also extends credit to consumers
through installment loans and revolving credit arrangements.
The majority of the remaining portfolio consists of
residential mortgage loans (1-4 family dwellings) and
mortgage loans on commercial property. Loans by major
category at the end of the last five years were as follows:
<TABLE>
<CAPTION>
Loans by Category:
At December 31, (In thousands) 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial, financial,
and agricultural $278,834 $212,095 $179,650 $150,312 $136,083
Real estate construction 97,253 73,279 48,991 36,126 21,960
Real estate mortgage 123,980 222,818 214,696 108,351 47,423
Consumer 51,730 39,985 38,371 67,756 55,323
Direct lease financing 6,375 78,079 62,372 60,979 58,348
Unearned income (1,181) (15,163) (11,030) (10,999) (10,726)
-------- -------- -------- -------- --------
Total $556,991 $611,093 $533,050 $412,525 $308,411
</TABLE>
- -------------------------------------------------------------------------------
Maturity Distribution of Loans:
<TABLE>
<CAPTION>
After
One But
Within Within After
At December 31, 1998 (In thousands) One Year Five Years Five Years Total
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial, financial, and agricultural $77,727 $49,094 $152,013 $278,834
Real estate construction 97,253 - - 97,253
Real estate mortgage 30,265 40,559 53,156 123,980
Consumer loans 7,226 17,707 26,797 51,730
Direct lease financing 249 4,945 - 5,194
--------
Total $556,991
========
Loans due after one year with:
Fixed interest rates $172,694
Variable interest rates 171,577
--------
Total $344,271
</TABLE>
- --------------------------------------------------------------------------------
On average, trading and investment securities decreased
$0.7 million in 1998 to $81.2 million. The carrying value of
investments at December 31, 1998, includes $142.0 thousand
of unrealized gains on available-for-sale securities.
Maturity Distribution of Investment Securities:
<TABLE>
<CAPTION>
After
After Five
One But But
Within Within Within After
One Five Ten Ten
At December 31, 1998 (In thousands) Year Years Years Years
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury and Government
obligations $9,234 $6,513 - $18,507
Obligations of states and political
subdivisions 501 1,121 1,060 2,525
Mortgage-backed securities - 503 4,542 3,510
Other 39 - - -
------- ------- ------- -------
Total $9,774 $8,137 $5,602 $24,542
======= ======= ======= =======
Weighted Average Yield:
Held-to-maturity 6.82% 6.83% 7.53% 7.96%
Available-for-sale - 6.74% 6.16% 6.86%
</TABLE>
- --------------------------------------------------------------------------------
Average yield represents the weighted average yield to
maturity. The yield on state and municipal obligations has
been calculated on a fully taxable equivalent basis,
assuming a 35% tax rate.
Deposits averaged $878.6 million during 1998 compared to
$691.8 million in 1997 and $632.2 million in 1996. Demand
deposits were up 45.4% on average or $119.2 million from
1997. A significant portion of demand deposits is related to
deposits at Irwin Union Bank which are associated with
escrow accounts held on loans in the servicing portfolio of
Irwin Mortgage. These escrow accounts averaged $342.4
million in 1998.
Maturities of certificates of deposit of $100 thousand or
more are set forth in the following table:
At December 31, (In thousands) 1998 1997 1996
- ------------------------------------------------------------------------------
Under 3 months $81,850 $60,379 $47,907
3 to 6 months 17,107 10,123 5,127
6 to 12 months 17,807 10,115 7,493
After 12 months 25,207 5,411 5,977
-------- -------- --------
Total $141,971 $86,028 $66,504
- -------------------------------------------------------------------------------
Short-term borrowings averaged $568.8 million in 1998
compared to $365.0 million in 1997 and $334.3 million in
1996. The increase in 1998 is due to the increase in loan
closings in 1998.
The following table shows the distribution of the
Corporation's short-term borrowings and the weighted average
rates at the end of each of the last three years. Also
provided are the maximum amount of borrowings and the
average amounts of borrowings as well as weighted average
interest rates for the last three years.
<TABLE>
<CAPTION>
Repurchase
Agreements
&Drafts Federal
Payable Home
Related to Loan Bank
Mortgage Borrowings Lines
Loan Commercial & Federal of
(In thousands) Closings Paper Funds Credit
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year Ended 1998 $172,126 $26,617 $266,000 $180,118
December 31: 1997 240,659 16,375 142,650 112,591
1996 264,998 17,175 74,118 105,575
Weighted average 1998 5.43% 5.78% 4.93% 6.01%
interest rates at 1997 5.88 6.00 6.18 6.87
year-end: 1996 6.45 5.95 5.80 6.68
Maximum amount 1998 $301,849 $26,691 $316,200 $249,519
outstanding at any 1997 274,363 16,375 142,650 151,111
month's end: 1996 270,516 27,214 121,000 135,442
Average amount 1998 $218,342 $26,166 $115,479 $208,785
outstanding during 1997 237,953 12,738 48,823 65,490
the year: 1996 218,810 23,794 44,139 47,561
Weighted average 1998 5.84% 6.05% 5.63% 6.20%
interest rate during 1997 5.82 6.01 6.00 6.65
the year: 1996 5.66 6.02 5.80 6.80
</TABLE>
- --------------------------------------------------------------------------------
Capital:
Shareholders' equity averaged $133.6 million in 1998, up
8.2% from 1997 and 22.6% from 1996. Year-end shareholders'
equity of $145.2 million represented book value per share of
$6.70 compared to $5.82 and $5.23 at December 31, 1997 and
1996, respectively.
Prior to the adoption of a new mortgage banking
accounting standard in the second quarter of 1995, mortgage
banking accounting did not allow the full value of mortgage
servicing rights to be reflected on the balance sheet. Since
a portion of the Corporation's mortgage servicing portfolio
was generated prior to the adoption of the new accounting
standard, it represents economic value which is not recorded
on the balance sheet. The following table demonstrates the
estimated after-tax value of the servicing portfolio at
December 31:
<TABLE>
<CAPTION>
(In thousands) 1998 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Total loans serviced $11,242,470 $10,713,549 $10,810,988
----------- ----------- -----------
Value (@ 1.3% in 1998 and 1.5% in
1997 and 1996) $146,152 $160,703 $162,165
Less capitalized servicing 113,130 81,610 71,715
Tax liability (@ 40%) 13,209 31,637 36,180
----------- ----------- -----------
Net value $19,813 $47,456 $54,270
=========== =========== ===========
Per share of common stock $0.91 $2.16 $2.39
</TABLE>
- --------------------------------------------------------------------------------
With the implementation of the new accounting standard in
1995, this off-balance sheet value will decline over future
years and eventually be reduced to zero.
Total book value per share, including the value of the
servicing portfolio, was $7.61 at December 31, 1998 compared
with $7.98 and $7.62 at December 31, 1997 and 1996,
respectively.
Capital is a major focus of regulatory attention, with
both book and risk-based capital standards used as capital
adequacy measures. Unless an institution has adequate
capital in the opinion of the regulators, they may withhold
approval for new activities or force additions to capital.
Therefore, the Corporation considers both the regulators'
viewpoint and its own analysis of the capital structure and
leverage amounts that are consistent with underlying
business risks.
<TABLE>
<CAPTION>
(In thousands) 1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Tier 1 capital $191,806 $169,366 $117,416
Tier 2 capital 11,505 16,170 6,594
----------- ----------- -----------
Total risk-based capital $203,311 $185,536 $124,010
=========== =========== ===========
Risk-weighted assets $1,649,227 $1,249,385 $962,459
=========== =========== ===========
Risk-based ratios:
Tier 1 capital 11.63% 13.56% 12.20%
Total capital 12.25 14.85 12.88
Tier 1 leverage ratio 10.51 12.06 9.84
Ending shareholders' equity to assets 7.46 8.55 9.15
Average shareholders' equity to assets 8.09 9.78 9.46
</TABLE>
- ------------------------------------------------------------------------------
At year-end 1998, the Corporation's total risk-adjusted
capital ratio was 12.25% compared to 10.0% which is
required in order to be considered well capitalized by the
regulators. The Corporation's ending equity to assets
ratio for 1998 was 7.46%. However, as previously
discussed, temporary conditions which existed at year end
make the average balance sheet ratio a more accurate
measure of capital. The Corporation's average equity to
assets for 1998 was 8.09%.
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.
Stock Prices and Dividends:
The common stock of Irwin Financial is quoted on the
National Association of Securities Dealers Automated
Quotation System National Market System (NASDAQ-NMS-
trading symbol, IRWN). The following table sets forth
certain information regarding trading in, and cash
dividends paid with respect to, the shares of the
Corporation's common stock in each quarter of the three
most recent calendar years.
<TABLE>
<CAPTION>
Total
Quarter Cash Dividends
1996 *High *Low *End *Dividends *For Year
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
First quarter $11 3/8 $9 7/8 $11 $0.030
Second quarter 11 1/8 9 4/5 9 4/5 0.030
Third quarter 10 4/5 9 10 5/8 0.030
Fourth quarter 12 3/8 10 5/8 12 3/8 0.030 $0.12
1997
- --------------------------------------------------------------------------------
First quarter $15 1/4 $12 1/8 $13 5/8 $0.035
Second quarter 14 3/4 12 14 3/4 0.035
Third quarter 18 5/8 14 3/8 18 5/8 0.035
Fourth quarter 21 1/2 18 1/4 21 0.035 $0.14
1998
- --------------------------------------------------------------------------------
First quarter $28 1/4 $19 1/2 $28 1/8 $0.040
Second quarter 30 25 1/8 29 0.040
Third quarter 37 20 1/2 24 5/8 0.040
Fourth quarter 31 20 1/8 27 1/5 0.040 $0.16
</TABLE>
*Adjusted for December 31, 1996, and May 27, 1998, two-
for-one stock splits.
The Corporation expects to continue its policy of paying
regular cash dividends, although there is no assurance as
to future dividends because they are dependent on future
earnings, capital requirements, and financial condition. On
February 24, 1999, the Corporation's Board of Directors
approved an increase in the first quarter dividend to $0.05
per share, payable in March 1999.
Risk Management:
As a financial intermediary, Irwin Financial Corporation is
engaged in businesses which involve the assumption of
financial risks including:
- - Credit risk
- - Liquidity risk
- - Interest rate risk
Each line of business that assumes financial risk uses a
formal process to manage this risk. In all cases, the
objectives are to ensure that risk is contained within
prudent levels and that the Corporation is adequately
compensated for the level of risk assumed. The Chairman,
the President, and the Chief Financial Officer of the
parent company participate in each subsidiary's risk
management process.
Credit Risk:
The assumption of credit risk is a key source of earnings
for the community banking and home equity lending lines of
business. In addition, the mortgage banking business
assumes some credit risk despite the fact that its
mortgages are typically insured. The credit risk in the
loan portfolios of the community bank and the home equity
lending business has the most potential to have a
significant effect on consolidated financial performance.
The community bank and home equity lending business
manage credit risk through the use of lending policies,
credit analysis and approval procedures, periodic loan
reviews, and personal contact with borrowers. Loans over a
certain size are reviewed by a loan committee prior to
approval.
An allowance for loan losses is established as an
estimate of the probable credit losses on the loans held by
the Corporation. A specific allowance is determined by
evaluating those loans which are either substandard or have
the potential to become substandard. In general, commerical
loans, mortgage loans, and leases are evaluated
individually. Consumer loans, including home equity loans,
are generally evaluated as a group. A specific allowance is
set at a level which management considers sufficient to
cover probable losses on these loans. A general allowance
is determined by analyzing historical loss experience by
loan type and then adjusting these loss factors for current
conditions not reflected in prior experience. The allowance
for loan losses is an estimate which is based on
management's judgement combined with a quantitative process
of evaluation and analysis.
Loans and leases that are determined by management to be
uncollectible are charged against the allowance. The
allowance is increased by provisions against income and
recoveries of loans and leases previously charged off. The
table on page 60 analyzes the consolidated allowance for
loan and lease losses over the past five years.
Net charge-offs in 1998 were $1.9 million, down 25.5%
from 1997 and up 9.1% from 1996. The ratio of net charge-
offs to average loans and leases was 0.33% compared to
0.46% in 1997 and 0.36% in 1996. The provision for loan and
lease losses was $6.0 million, 308.5% of net charge-offs.
The coverage ratio was 239.3% in 1997 and 255.6% in 1996.
At year end, the allowance for loan losses was 1.78% of
outstanding loans and leases compared to 1.44% in 1997 and
1.29% in 1996. This increase in the allowance for loan
losses is the result of an increase in nonperforming loans
experienced in 1998.
Total nonperforming loans and leases at year end were
$11.9 million compared to $7.7 million at the end of 1997
and $7.2 million at the end of 1996. Nonperforming loans
and leases as a percent of total loans and leases were
2.13% at year-end 1998 compared to 1.26% in 1997 and 1.35%
in 1996. Other real estate owned totaled $3.5 million at
December 31, 1998, up from $1.8 million in 1997 and $2.2 in
1996. Total nonperforming assets were $15.4 million or
0.79% of total assets at December 31, 1998, as compared to
$9.5 million or 0.64% at year-end 1997 and $9.4 million or
0.72% at the end of 1996. The increase in nonperforming
assets occurred primarily at the Corporation's mortgage
banking line of business as previously discussed on page 33.
<TABLE>
<CAPTION>
Analysis of Allowance for Loan and Lease Losses
(In Thousands) 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------
Loans and leases outstanding at
end of period, net of unearned
<S> <C> <C> <C> <C> <C>
income $556,991 $611,093 $533,050 $412,525 $308,411
======== ========= ======== ======== ========
Average loans and leases for the
period, net of unearned income $585,025 $569,325 $496,729 $369,220 $279,389
======== ========= ======== ======== ========
Allowance Balance beginning of period $8,812 $6,875 $5,033 $4,174 $3,293
for loan and
lease losses:
Charge-offs: Commercial, financial, and
agricultural loans 246 800 495 845 266
Real estate mortgage loans 232 356 37 2 -
Consumer loans 761 734 959 953 543
Lease financing 1,263 1,255 883 690 757
-------- -------- -------- -------- --------
Total charge-offs 2,502 3,145 2,374 2,490 1,566
-------- -------- -------- -------- --------
Recoveries: Commercial, financial, and
agricultural loans 14 32 133 2 34
Real estate mortgage loans - 1 - - -
Consumer loans 362 246 214 197 180
Lease financing 183 259 246 191 195
-------- -------- -------- -------- --------
Total recoveries 559 538 593 390 409
-------- -------- -------- -------- --------
Net charge-offs (1,943) (2,607) (1,781) (2,100) (1,157)
Reduction due to sale of loans (2,976) (1,694) (930) (239) -
Provision charged to expense 5,995 6,238 4,553 3,198 2,038
-------- -------- -------- -------- --------
Balance end of period $9,888 $8,812 $6,875 $5,033 $4,174
======== ========= ======== ======== ========
Allowance for By category of loans and leases
loan and Commercial, financial, and
lease losses: agricultural loans $5,899 $5,118 $3,676 $2,349 $2,586
Real estate mortgage loans 2,774 2,170 281 413 311
Consumer loans 615 446 1,974 1,420 767
Lease financing 600 1,078 944 851 510
-------- -------- -------- -------- --------
Total $9,888 $8,812 $6,875 $5,033 $4,174
======== ========= ======== ======== ========
Ratios: Net charge-offs to average loans
and leases 0.33% 0.46% 0.36% 0.57% 0.41%
Allowance for possible loan losses
to average loans and leases 1.69% 1.55% 1.38% 1.36% 1.38%
Allowance for possible loan losses to
loans and leases outstanding 1.78% 1.44% 1.29% 1.22% 1.25%
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Nonperforming Assets
(In thousands) 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------
<S> <S> <C> <C> <C> <C> <C>
Accruing loans past
due 90 days or more: Commercial, financial, and
agricultural loans $252 $382 $256 $418 $113
Real estate mortgages 291 534 234 - -
Consumer loans 89 86 205 202 93
-------- -------- ---------------- --------
632 1,002 695 620 206
-------- -------- ---------------- --------
Nonaccrual loans and Commercial, financial, and
leases: agricultural loans 1,052 777 2,739 670 1,523
Real estate mortgages 9,570 5,333 2,481 848 947
Consumer loans 174 63 - - -
Lease financing receivables 426 506 1,261 415 363
-------- -------- ---------------- --------
11,222 6,679 6,481 1,933 2,833
-------- -------- ---------------- --------
Total nonperforming loans and
leases 11,854 7,681 7,176 2,553 3,039
-------- -------- ---------------- --------
Other real estate owned 3,506 1,828 2,239 295 489
-------- -------- ---------------- --------
Total nonperforming assets $15,360 $9,509 $9,415 $2,848 $3,528
======== ======== ================ ========
Nonperforming loans and leases
to total loans and leases 2.13% 1.26% 1.35% 0.62% 0.90%
======== ======== ================ ========
Nonperforming assets to total
assets 0.79% 0.64% 0.72% 0.27% 0.50%
</TABLE>
- --------------------------------------------------------------------------------
Loans which are past due 90 days or more are placed on nonaccrual status
unless, in management's opinion, there is sufficient collateral value
to offset both principal and interest.
<TABLE>
<CAPTION>
Renegotiated and Nonaccrual Loans
(In thousands) 1998 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest which would have been recorded under
original terms
Renegotiated $- $- $-
Nonaccrual 323 302 356
----- ----- -----
323 302 356
----- ----- -----
Interest income actually recorded
Renegotiated - - -
Nonaccrual 47 36 150
----- ----- -----
47 36 150
----- ----- -----
Reduction in interest income $276 $266 $206
</TABLE>
- --------------------------------------------------------------------------------
No loan concentrations existed of more than 10% of
total loans to borrowers engaged in similar activities
that would be similarly affected by economic or other
conditions.
Generally, the accrual of income is discontinued
when the full collection of principal or interest is in
doubt, or when the payment of principal or interest has
become contractually 90 days past due unless the
obligation is both well secured and in the process of
collection.
Liquidity:
Liquidity is the availability of funds to meet the
daily requirements of the business. For financial
institutions, demand for funds comes principally from
extensions of credit and withdrawal of deposits.
Liquidity is provided by asset maturities or sales and
through short-term borrowings.
The objectives of liquidity management are to
ensure that funds will be available to meet demands and
that funds are available at a reasonable cost. As with
other forms of financial risk, liquidity is managed
separately at each of the Corporation's lines of
business.
Since loans are less marketable than securities,
the ratio of total loans to total deposits is the
traditional measure of liquidity for banks and bank
holding companies. At year-end 1998, this ratio stood
at 55.2%. The Corporation is able to maintain this
position of high liquidity without a substantial
sacrifice in the form of a lower net interest margin
due to the position in mortgage loans held for sale.
These loans carry an interest rate equal to the current
market rate for mortgage loans. However, liquidity is
significantly improved since nearly all mortgage loans
held for sale are in the process of being securitized
and sold. The holding period for an individual loan
typically does not exceed 90 days.
Interest Rate Risk:
Interest rate risk refers to the potential for changes
in market rates of interest to cause changes in net
interest income and in the market value of assets and
liabilities.
The Asset-Liability Management Committee of the
community bank monitors the repricing structure of both
assets and liabilities over various time horizons.
Exposure to changes in interest rates is evaluated by
modeling the repricing characteristics of the community
bank's portfolio under multiple rate scenarios. Rate
sensitivity at the community bank can typically be
managed by controlling the maturity of loans,
securities, and deposits. The community bank may also
use financial futures or interest rate swaps from time
to time. Formal policies approved by the community
bank's Board of Directors ensure that exposure to
changes in net interest revenues is maintained within
acceptable levels.
The mortgage banking business assumes a form of
interest rate sensitivity by entering into commitments
to extend loans to borrowers at a fixed price for a
limited period of time. Loans are also held temporarily
until a pool is formed. The mortgage bank buys
commitments to deliver loans at a fixed price to manage
risk. The policy at the home equity lending business is
to match-fund all loan assets. The mortgage bank and
the home equity company are also exposed to interest
rate risk through their ownership of servicing assets.
As discussed in the analysis of each line of business
earlier in this report, the companies also manage their
risk using a variety of techniques including:
maintaining a strong production operation which offsets
the interest rate risk, selective sales of the
servicing rights, and the use of financial hedges. In
some cases, the Corporation uses internal hedges to
allow for the risk characteristics of one line of
business to offset those of another line.
The following table shows in summary form the
Corporation's interest rate sensitivity based on
expected interest rate repricing intervals for the
balance sheet as of December 31, 1998, (a "gap"
analysis). Fixed rate assets and liabilities are
analyzed based on their expected maturities which
reflect estimated prepayment characteristics, rather
than their maximum contractual maturities. For example,
the majority of 30-year adjustable rate residential
mortgages held in the portfolio of Irwin Union Bank are
included in the "3 months to 1 year" category since
that is the time frame over which the assets will
reprice. Some items, such as certain deposit accounts,
especially those associated with the escrows on
mortgage servicing assets, 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 based on their expected maturities
over interest rate cycles.
As the table shows, the consolidated one-year gap at
December 31, 1998, was a positive $135.0 million. This
compares to a positive gap of $143.0 million at
December 31, 1997.
<TABLE>
<CAPTION>
Interest Sensitivity
Within 3 Months 1 to 5 Over 5
(In thousands) 3 Months to 1 Year Years Years Total
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Assets:
Interest-bearing deposits
with banks $17,472 $772 $197 $- $18,441
Federal funds sold 8,580 - - - 8,580
Taxable investment
securities and trading assets 42,839 16,538 12,528 3,091 74,996
Tax-exempt investment
securities - 500 832 3,875 5,207
Loans held for sale 734,481 50,639 103,016 48,652 936,788
Loans, net of unearned
income 328,301 19,624 99,572 109,494 556,991
--------- --------- --------- --------- ---------
Total interest-earning
assets 1,131,673 88,073 216,145 165,112 1,601,003
--------- --------- --------- --------- ---------
Liabilities:
Non-interest bearing
deposits 16,492 41,398 190,178 229,656 477,724
Money market checking 47,349 - 53,888 14,138 115,375
Money market savings 1,685 - 5,539 - 7,224
Regular savings 21,242 1,835 9,785 7,560 40,422
Time deposits 221,551 90,097 56,430 388 368,466
Short-term borrowings 516,428 126,649 1,784 - 644,861
Long-term debt - - 2,839 50,000 52,839
--------- --------- --------- --------- ---------
Total interest-bearing
liabilities 824,747 259,979 320,443 301,742 1,706,911
Interest rate swaps - - - - -
--------- --------- --------- --------- ---------
Interest sensitivity gap 306,926 (171,906) (104,298) (136,630) (105,908)
--------- --------- --------- --------- ---------
Cumulative interest
sensitivity gap $306,926 $135,020 $30,722 $(105,908) $(105,908)
</TABLE>
- -------------------------------------------------------------------------------
Since the gap was positive at December 31, 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, option-adjusted
valuation techniques for estimating expected customer
behavior, and Monte-Carlo based cash flow simulation,
the Corporation attempts to analyze and mitigate total
interest rate risk, that associated with both net
interest income and non-interest income. For example,
if interest rates decline, management expects an
increase in mortgage loan origination income and a
decline in the value of mortgage servicing assets.
Management attempts to monitor this exposure to
traditional interest rate risk as well as interest rate
influences on production and servicing value in a
comprehensive manner.
The following table shows management's estimate of
the present value of interest-sensitive assets and
liabilities, as well as off-balance sheet financial
contracts as of December 31, 1998, at then current
interest rates as well as simulated rates 1.0% and 2.0%
above and below those interest rates. It does not take
into account the book values of the Corporation's non-
interest sensitive assets and liabilities, such as
cash, accounts receivable, and fixed assets, the value
of which is not directly determined by interest rates.
<TABLE>
<CAPTION>
Present Value (In thousands)
December 31, 1998 -2% -1% Current +1% +2%
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest Sensitive Assets:
Interest-bearing deposits with banks $18,528 $18,512 $18,495 $18,479 $18,463
Federal funds sold 8,651 8,651 8,651 8,651 8,651
Taxable investment securities 80,556 78,210 76,873 76,069 75,554
Tax-exempt investment securities 5,727 5,513 5,309 5,115 4,930
Loans held for sale 974,732 970,182 965,055 959,305 952,905
Mortgage servicing rights 41,930 77,595 117,728 152,402 174,714
Loans, net of unearned income 624,196 612,499 601,338 591,228 581,262
--------- --------- --------- --------- ---------
Total Interest Sensitive Assets 1,754,320 1,771,162 1,793,449 1,811,249 1,816,479
--------- --------- --------- --------- ---------
Interest Sensitive Liabilities:
Non-interest bearing deposits 486,091 483,042 480,168 477,458 474,898
Money market checking 122,395 122,317 122,239 122,162 122,084
Money market savings 6,509 6,504 6,499 6,494 6,489
Regular savings 98,965 98,886 98,808 98,730 98,653
Time deposits 295,576 292,831 290,152 287,566 285,123
Short-term borrowings 637,654 637,272 636,890 636,512 636,134
Long-term debt 70,887 65,220 60,750 57,199 54,344
--------- --------- --------- --------- ---------
Total interest sensitive liabilities 1,718,077 1,706,072 1,695,506 1,686,121 1,677,725
--------- --------- --------- --------- ---------
Interest sensitive off-balance
sheet items 14,423 13,690 5,347 1,027 1,484
--------- --------- --------- --------- ---------
Net sensitivity as of
December 31, 1998 $50,666 $78,780 $103,290 $126,155 $140,238
========= ========= ========= ========= =========
Potential change $(52,624) $(24,510) $- $22,865 $36,948
========= ========= ========= ========= =========
Net sensitivity as of
December 31, 1997 $(12,165) $6,895 $28,911 $47,188 $55,873
========= ========= ========= ========= =========
Potential change $(41,076) $(22,016) $- $18,277 $26,962
</TABLE>
- ------------------------------------------------------------------------------
As previously noted, the analysis is based on
discounted cash flows over the remaining estimated lives
of the financial instruments. The total measurement of
the Corporation's exposure to interest rate risk as
presented in the table may not be representative of the
actual values which might result from a higher or lower
rate environment. Such environments would likely result
in different lending and borrowing strategies by the
Corporation, designed in part to further mitigate the
effect on the value of, and the net earnings generated
from, the Corporation's net assets from any change in
interest rates.
The figures suggest, based on balance sheet and off-
balance sheet financial assets, that the present value
of the Corporation's interest-sensitive assets and
liabilities would decline in a falling rate environment
and increase in a rising rate environment. The magnitude
and direction of the present value rate sensitivity is
largely unchanged from 1997.
As previously noted, this present value sensitivity
analysis does not account for potential earnings the
Corporation would recognize due to strategic initiatives
it would undertake if the interest rate scenarios model
occurred, nor does it reflect activities not
traditionally measured as financial assets or
liabilities. Principal among these activities for the
Corporation would be the change in mortgage loan
production and the earnings stream the Corporation
derives therefrom.
Derivative Financial Instruments:
The Corporation manages its interest rate risk on
mortgage loans held for sale using mandatory
commitments to sell the loans at a future date. Changes
in the economic value of mortgage servicing assets are
offset using options on treasury futures. At December
31, 1998, these options had a fair value of $4.8 million
and a net notional amount (which does not represent the
amount at risk) of $0, consisting of $750.0 million of
long positions and $750.0 million of short positions.
Changes in the value of interest-only strips are offset
using interest rate caps which had a fair value of
$540.1 thousand at December 31, 1998, and a notional
amount of $65.6 million. Options on treasury futures and
interest rate caps are classified as trading assets on
the balance sheet and carried at their market values.
Adjustments to market values are recorded as net trading
gains or losses on the income statement. In 1998, the
Corporation recorded $4.2 million of net trading gains
related to these derivative products. No gains or losses
were reported in 1997.
Daily Average Consolidated Balance Sheet,
Interest Rates and Interest Differential
<TABLE>
<CAPTION>
For the year ended December 31, 1998
Average Yield/
(In thousands) Balance Interest Rate
- --------------------------------------------------------------------------------
<S> <S> <C> <C> <C>
Assets:
Interest-earning assets: Interest-bearing deposits with banks $15,462 $707 4.57%
Federal funds sold 13,317 731 5.49
Taxable investment securities 75,908 3,159 4.16
Tax-exempt investment securities (1) 5,291 453 8.56
Loans held for sale 758,640 65,160 8.59
Loans and leases, net of unearned
income (1) (2) 585,025 52,444 8.96
--------- -------- ------
Total interest-earning assets 1,453,643 122,654 8.44%
--------- -------- ======
Noninterest-earning assets: Cash and due from banks 50,754
Premises and equipment, net 18,944
Other assets 135,693
Less allowance for possible loan and
lease losses (8,650)
----------
Total assets $1,650,384
==========
Liabilities and Shareholders'
Equity:
Interest-bearing liabilities:
Money market checking $89,158 $1,845 2.07%
Money market savings 7,281 197 2.70
Regular savings 45,414 1,500 3.30
Time deposits 355,431 19,798 5.57
Short-term borrowings 568,772 35,048 6.16
Long-term debt 10,245 814 7.94
--------- -------- ------
Total interest-bearing liabilities 1,076,301 59,202 5.50%
--------- -------- ======
Noninterest-bearing Demand deposits 381,343
liabilities: Other liabilities 59,177
Shareholders' equity 133,563
----------
Total liabilities and shareholders' equity $1,650,384
==========
Net interest income $63,452
========
Net interest income to average interest-earning
assets 4.37%
</TABLE>
- -------------------------------------------------------------------------------
Notes: (1) Interest is reported on a fully taxable equivalent
basis. The prevailing federal income tax rate was
35% in 1998 and 1997 and 34.5% in 1996.
(2) For purposes of these computations, nonaccrual loans
are included in daily average loan amounts outstanding.
<TABLE>
<CAPTION>
1997 1996
- --------------------------------------------------------------------------------
<C> <S> <C> <C> <S> <C>
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
$16,887 $1,001 5.93% $10,282 $603 5.87%
12,454 674 5.41 24,370 1,290 5.29
77,590 6,309 8.13 67,654 6,273 9.27
4,336 438 10.10 5,348 504 9.43
433,275 34,691 8.01 379,027 30,943 8.16
569,325 56,629 9.95 496,729 52,391 10.55
--------- ----------- ------- ---------- ------- -------
1,113,867 99,742 8.95% 983,410 92,004 9.36%
--------- ----------- ======= ---------- ------- =======
34,347 38,309
18,568 17,425
103,682 118,115
(7,750) (5,724)
--------- ----------
$1,262,714 $1,151,535
========== ==========
$79,549 $1,643 2.07% $79,704 $1,571 1.97%
10,267 280 2.73 12,455 328 2.63
52,843 1,889 3.57 52,657 1,861 3.53
286,934 16,151 5.63 248,694 13,972 5.62
365,005 23,788 6.52 334,304 22,115 6.62
10,698 831 7.77 21,840 1,778 8.14
--------- ----------- ------- ---------- ------- -------
805,296 44,582 5.54% 749,654 41,625 5.55%
--------- ----------- ======= ---------- ------- =======
262,190 238,673
71,745 54,238
123,483 108,970
--------- ----------
$1,262,714 $1,151,535
========= ==========
$55,160 $50,379
=========== =======
4.95% 5.12%
</TABLE>
- ----------------------------------------------------------------------------
Year 2000 Readiness:
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 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 $1.5 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 $3.3 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 $3.3 million will be adequate to complete the
project. If the costs increase significantly beyond the
current estimate, they could have a material adverse
effect 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 contains forward-looking estimates.
Graph: Consolidated Project Expense
(In millions (Pre-tax))
1997--Actual $ 119
1998--Actual 1340
1999 * 1,863
* Estimate as of December 31, 1998.
Risks:
Financial services require exact calculations and prompt
delivery. If the Corporation's products are not accurate
and timely, there is increased exposure to risks such as
client service failure, regulatory compliance problems
and disruption of third party operations. 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, there could be 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, such failure would 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 on the next page.
Graph: Irwin Financial Parent Project Plan Status
As of December 31, 1998
(Percent Completed)
Projected Actual
Target Completion * Actual Completion Completion Date
Post-2000 Audit 0 0 During 2000 and 2001
Implementation 50 50 2Q99
Contingency Planning 10 10 On-going
Testing 85 80 1Q99
Remediation 100 100 Done
Assessment 100 100 Done
Awareness 100 100 Done
* Target is original plan to achieve Year 2000 Readiness by June 30, 1999.
Costs:
The parent company has expended approximately $136
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: Irwin Financial Parent Project Expenses
(In millions (Pre-tax))
1997--Actual $33
1998--Actual 103
1999 * 115
* Estimate as of December 31, 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:
At this time the parent company 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.
Graph: Irwin Mortgage Project Plan Status
As of December 31, 1998
(Percent Completed)
Projected Actual
Target Completion * Actual Completion Completion Date
Post-2000 Audit 0 0 During 2000 and 2001
Implementation 50 80 2Q99
Contingency Planning 10 20 On-going
Testing 75 65 1Q99
Remediation 100 100 Done
Assessment 100 100 Done
Awareness 100 100 Done
* Target is original plan to achieve Year 2000 readiness by June 30,1999.
Costs:
IMC has expended approximately $1.1 million 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: Irwin Mortgage Project Expenses
(In millions (Pre-tax))
1997--Actual $40
1998--Actual 1,046
1999 * 1,370
* Estimate as of December 31, 1998.
Risks:
Failure to be Year 2000 compliant could cause the
malfunctioning of the loan origination or servicing
systems.
If there were 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 failure 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 and 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
require 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 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: Irwin Union Bank Project Plan Status
As of December 31, 1998
Percent Completed
Projected Actual
Target Completion * Actual Completion Completion Date
Post-2000 Audit 0 0 During 2000 and 2001
Implementation 25 50 2Q99
Contingency Planning 30 80 On-going
Testing 55 25 1Q99
Remediation 80 75 1Q99
Assessment 100 100 Done
Awareness 100 100 Done
* Target is original plan to achieve Year 2000 readiness by June 20, 1999.
As noted on the previous graph, the Bank is behind on
testing due to its reliance on third parties on which it
is dependent for remediated applications. Conversely,
the Bank is ahead of schedule in implementation, having
taken advantage of delays in areas such as testing and
remediation 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 $165 thousand as
shown in the graph below.
Irwin Union Bank Project Expenses
(In millions (Pre-tax))
1997--Actual $46
1998--Actual 119
1999 * 165
* Estimate as of December 31, 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 continue to be insured against loss regardless of
any Year 2000 disruption.
Contingency Plans:
The Bank's contingency planning approach identifies core
processes and corresponding critical activities to
develop alternative approaches to accomplishing the
desired outputs. The Bank has formed teams comprised of
the departmental managers and members of the IT
department to evaluate the impact of technology non-
compliance for each critical process. The IT manager of
the Bank is responsible for collecting the contingency
plans and ensuring completeness. At present, the Bank is
approximately 80% complete with completion targeted for
the second quarter of 1999.
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 personnel 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 on schedule 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 certain non-critical
software. Installation dates have been scheduled for the
remediated version of its loan origination system and
conversion to a new loan servicing system.
The progress of the IHE Year 2000 team in meeting the
requirements of its project plan to achieve Year 2000 readiness
by June 30, 1999, is shown below.
Graph: Irwin Home Equity Project Plan Status
As of December 31, 1998
(Percent Completed)
Projected Actual
Target Completion * Actual Completion Completion Date
Post-2000 Audit 0 0 During 2000 and 2001
Implementation 80 80 2Q99
Contingency Planning 10 10 On-going
Testing 70 60 1Q99
Remediation 100 80 1Q99
Assessment 100 100 Done
Awareness 100 100 Done
* Target is original plan to achieve Year 2000 readiness by June 30, 1999.
Costs:
Few direct Year 2000 costs have been expended to date,
since all software and hardware upgrades were planned as
part of the 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 $72 thousand. Those costs and
anticipated future costs for the project are displayed
on the next page.
Graph: Irwin Home Equity Project Expenses
(In millions (Pre-tax))
1997--Actual $ -
1998--Actual 72.3
1999 * 213.4
* Estimate as of December 31, 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, the closing and funding processes would be
delayed. 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 is in the early stages of its contingency planning
phase for Year 2000. It has determined that the most
likely worst case scenario would be environmental in
nature (lack of power, telephone, data center
communications). 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.
1998 Financial Statements
Irwin Financial Corporation and Subsidiaries
Management Report on Responsibility for Financial Reporting
The management of Irwin Financial Corporation and its
subsidiaries has the responsibility of preparing the
accompanying financial statements and for their integrity
and objectivity. The statements were prepared in
conformity with generally accepted accounting principles
and are not misstated due to material fraud or error. The
financial statements include amounts that are based on
management's best estimates and judgments. Management also
prepared the other information in the annual report and is
responsible for its accuracy and consistency with the
financial statements.
The Corporation's financial statements have been
audited by PricewaterhouseCoopers LLP, independent
certified public accountants elected by the shareholders.
Management has made available to PricewaterhouseCoopers
all the Corporation's financial records and related data,
as well as the minutes of stockholders' and directors'
meetings. Furthermore, management believes that all
representations made to PricewaterhouseCoopers during its
audit were valid and appropriate.
Management of the Corporation has established and
maintains a system of internal control that provides
reasonable assurance as to the integrity and reliability
of the financial statements, the protection of assets from
unauthorized use or disposition, and the prevention and
detection of fraudulent financial reporting. Assessments
of the system of internal control are based on criteria
for effective internal control over financial reporting
described in "Internal Control-Integrated Framework"
issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Management continually monitors the
system of internal control for compliance. The Corporation
maintains a strong internal auditing program that
independently assesses the effectiveness of the internal
controls and recommends possible improvements
thereto. In addition, as part of its audit of the
Corporation's financial statements, PricewaterhouseCoopers
completed an assessment of selected internal accounting
controls to establish a basis for reliance thereon in
determining the nature, timing, and extent of audit tests
to be applied. Management has considered the internal
auditor's and PricewaterhouseCoopers' recommendations
concerning the Corporation's system of internal control
and has taken actions to respond appropriately to these
recommendations that we believe are cost effective in the
circumstances. Management believes that the Corporation's
system of internal control is adequate to accomplish the
objectives discussed herein.
Management also recognizes its responsibility for
fostering a strong ethical climate so that the
Corporation's affairs are conducted according to the
highest standards of personal and corporate conduct. This
responsibility is characterized and reflected in the
Corporation's Guiding Philosopy, which is publicized
throughout the Corporation. This responsibility is also
reflected in the individual Codes of Conduct of each major
operating subsidiary of the Corporation, which are
publicized throughout each respective subsidiary. These
Codes of Conduct address, among other things, the
necessity of ensuring open communication within the
Corporation; potential conflicts of interests; compliance
with all domestic and foreign laws, including those
related to financial disclosures; and a confidentiality of
proprietary information. The Corporation maintains a
systematic program to assess compliance with these
policies.
John A. Nash, President
Thomas D. Washburn, Chief Financial Officer
Report of PricewaterhouseCoopers LLP Independent Accountants
To the Shareholders and Board of Directors
Irwin Financial Corporation
Columbus, Indiana
In our opinion, the accompanying consolidated balance
sheets and the related consolidated statements of income,
of shareholders' equity and of cash flows present fairly,
in all material respects, the financial position of Irwin
Financial Corporation and its subsidiaries (the "Company")
at December 31, 1998 and 1997, and the consolidated
results of their operations and their cash flows for each
of the three years in the period ended December 31, 1998,
in conformity with generally accepted accounting
principles. These financial statements are the
responsibility of the Company's management; our
responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of
these statements in accordance with generally accepted
auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and
significant estimates made by management, and evaluating
the overall financial statement presentation. We believe
that our audits provide a reasonable basis for the opinion
expressed above.
PricewaterhouseCoopers LLP
Cincinnati, Ohio
January 21, 1999
Consolidated Statement of Income
<TABLE>
<CAPTION>
For year ended December 31, 1998
<S> <C> <C> <C>
(In thousands, except for per share amounts) 1998 1997 1996
Interest income: Loans held for sale $65,160 $34,691 $30,943
Loans and leases 52,329 56,490 52,203
Investment securities:
Taxable 3,867 7,311 6,876
Tax-exempt 299 275 333
Federal funds sold 731 674 1,290
----------- -------- --------
Total interest income 122,386 99,441 91,645
----------- -------- --------
Interest expense: Deposits 23,340 19,963 17,732
Short-term borrowings 35,048 23,788 22,115
Long-term debt 814 831 1,778
----------- -------- --------
Total interest expense 59,202 44,582 41,625
----------- -------- --------
Net interest income 63,184 54,859 50,020
Provision for loan and lease losses - Note 5 5,995 6,238 4,553
Net interest income after provision for
loan and lease losses 57,189 48,621 45,467
----------- -------- --------
Other income: Loan origination income 60,013 41,370 43,779
Gain on sale of loans 64,074 38,610 34,248
Loan servicing fees 57,284 53,257 46,877
Gain on sale of servicing assets 43,308 32,631 16,378
Trading gains (losses) 1,366 (1,961) -
Gain from sale of leasing assets 5,241 - -
Other 12,443 8,696 8,699
----------- -------- --------
243,729 172,603 149,981
----------- -------- --------
Other expense: Salaries 120,780 86,533 79,017
Employee benefits 16,757 13,724 12,579
Office expense 12,868 10,583 10,387
Premises and equipment 20,216 16,621 13,903
Amortization of servicing assets 24,267 15,755 14,331
Marketing and development 11,789 7,697 7,365
Other 38,759 23,660 20,578
----------- -------- --------
245,436 174,573 158,160
----------- -------- --------
Income before income taxes 55,482 46,651 37,288
Income taxes 20,354 17,734 14,860
----------- -------- --------
35,128 28,917 22,428
Distribution on company-obligated
mandatorily redeemable preferred
securities of subsidiary trust - Note 15 4,625 4,473 -
----------- -------- --------
Net income available to common shareholders $30,503 $24,444 $22,428
----------- -------- --------
Earnings per Basic - Note 17 $1.40 $1.10 $0.99
share of common =========== ======== ========
stock: Diluted - Note 17 $1.38 $1.08 $0.98
=========== ======== ========
Dividends per share of common stock $0.16 $0.14 $0.12
=========== ======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Consolidated Balance Sheet
December 31, 1998 (In thousands, except for shares) 1998 1997
- ------------------------------------------------------------------------------
<S> <S> <C> <C>
Assets: Cash and due from banks $68,942 $56,524
Federal funds sold 8,580 -
----------- ----------
Cash and cash equivalents 77,522 56,524
Interest-bearing deposits with financial institutions 18,441 18,240
Trading assets 32,148 22,133
Investment securities - Note 3 48,055 55,208
Loans held for sale 936,788 528,739
Loans and leases, net of unearned income - Note 4 556,991 611,093
Less: Allowance for loan and
lease losses - Note 5 (9,888) (8,812)
547,103 602,281
Servicing assets - Note 6 117,129 83,044
Accounts receivable 71,087 54,261
Accrued interest receivable 13,071 14,779
Premises and equipment - Note 7 21,382 21,040
Other assets 63,453 40,545
----------- ----------
$1,946,179 $1,496,794
=========== ==========
Liabilities and
Shareholders' Equity:
Deposits
Noninterest-bearing $477,724 $287,556
Interest-bearing 389,516 346,012
Certificates of deposit over $100 141,971 86,028
----------- ----------
1,009,211 719,596
Short-term borrowings - Note 9 644,861 512,275
Long-term debt - Note 10 2,839 7,096
Other liabilities 96,036 81,917
----------- ----------
Total liabilities 1,752,947 1,320,884
=========== ==========
Company-obligated mandatorily redeemable preferred
securities of subsidiary trust - Note 15 47,999 47,927
Shareholders' equity
Preferred stock, no par value -
authorized 50,000 shares; none issued - -
Common stock; no par value -
authorized 40,000,000 shares; issued
23,402,080 shares in 1998 and 1997; including
1,729,324 and 1,401,280 shares in treasury in
1998 and 1997, respectively 29,965 29,965
Additional paid-in capital 2,595 780
Net unrealized gain on investment securities
net of deferred income taxes of $57 in 1998
and $31 in 1997. 85 55
Retained earnings 142,232 115,414
----------- ----------
174,877 146,214
Less treasury stock, at cost (29,644) (18,231)
Total shareholders' equity 145,233 127,983
----------- ----------
$1,946,179 $1,496,794
=========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
Consolidated Statement of Changes in Shareholders' Equity
<TABLE>
<CAPTION>
Net Unrealized
Gain (Loss) Additional
(In thousands, except share Retained on Investment Common Paid-In Treasury
and per share amounts) Total Earnings Securities Stock Capital Stock
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1996 $99,216 $74,648 $(10) $29,965 $- $(5,387)
-------- -------- ------- --------- ------ --------
Comprehensive Income: Note 1
Net income 22,428 - - - - -
Other Comprehensive Income - 66 - - - -
Total 22,494 - - - - -
Cash dividends - $.012 per share* (2,726) (2,726) - - - -
Tax benefit on exercise of
stock options 516 516
Purchase of 178,875 shares of
treasury stock* (1,931) - - - - (1,931)
Sale of 256,736 shares of
treasury stock* 1,333 (266) - - (516) 2,115
-------- -------- ------- --------- ------ --------
Balance at December 31, 1996 118,902 94,084 56 29,965 - (5,203)
======== ======== ======= ========= ====== ========
Comprehensive Income: Note 1
Net income 24,444 - - - -
Other Comprehensive Income - (1) - - -
Total 24,443 - - - - -
Cash dividends - $.014 per share* (3,114) (3,114) - - - -
Tax benefit on exercise of
stock options 576 576
Purchase of 940,082 shares of
treasury stock* (14,412) - - - - (14,412)
Sale of 204,238 shares of
treasury stock* 1,588 - - - 204 1,384
-------- -------- ------- --------- ------ --------
Balance at December 31, 1997 127,983 115,414 55 29,965 780 (18,231)
======== ======== ======= ========= ====== ========
Comprehensive Income: Note 1
Net income 30,503 - - - -
Other Comprehensive Income - 30 - -
Total 30,533 - - - - -
Cash dividends - $.016 per share* (3,473) (3,473) - - - -
Tax benefit on exercise of
stock options 1,027 1,027
Purchase of 496,455 shares of
treasury stock* (12,593) - - - - (12,593)
Sale of 168,411 shares of
treasury stock* 1,756 (212) - - 788 1,180
-------- -------- ------- --------- ------ --------
Balance at December 31, 1998 $145,233 $142,232 $85 $29,965 $2,595 $(29,644)
======== ======== ======= ========= ====== ========
</TABLE>
*Adjusted for the two-for-one stock splits December 30,1996 and May 27 ,1998.
The accompanying notes are an integral part of the consolidated financial
statements.
Consolidated Statement of Cash Flows
<TABLE>
<CAPTION>
For the year ended December 31, 1998 1998 1997 1996
- -------------------------------------------------------------------------------
Net Income $30,503 $24,444 $22,428
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Adjustments to Depreciation and amortization 5,802 3,910 5,398
reconcile net Amortization and impairment of
income to cash servicing assets 36,498 16,355 14,969
provided by Provision for loan and lease losses 5,995 6,238 4,553
operating Amortization of premiums, less accretion
activities: of discounts 3,210 1,716 1,589
Increase in loans held for sale (408,049) (81,841) (66,442)
Gain on sale of mortgage servicing (43,308) (32,631) (16,378)
Net increase in trading assets (10,015) (9,472) (12,661)
Other, net (24,773) (21,823) (9,064)
---------- --------- ----------
Net cash used by operating
activities (404,137) (93,104) (55,608)
---------- --------- ----------
Lending and Proceeds from maturities/calls of
investing activities: investment securities:
Held-to-maturity 10,645 6,542 5,045
Available-for-sale 280 7,534 29,741
Proceeds from sales of available-for-sale
securities 6,000 26,309 2,028
Purchase of investment securities:
Held-to-maturity (8,932) (3,868) (14,286)
Available-for-sale (4,051) (20,315) (36,371)
Net increase in interest-bearing
deposits with financial institutions (201) (6,897) (3,406)
Net increase in loans, excluding sales (131,632) (414,205) (258,412)
Sale of loans 175,574 331,861 139,410
Gain on sale of leasing assets 5,241 - -
Additions to servicing assets (165,910) (84,781) (81,045)
Proceeds from sale of servicing assets 138,635 90,734 65,163
Other, net (4,148) (5,930) (5,651)
---------- --------- ----------
Net cash provided (used) by lending
and investing activities 21,501 (73,016) (157,784)
---------- --------- ----------
Financing activities:Net increase in deposits 289,615 79,443 76,154
Net increase in short-term borrowings 132,586 50,409 151,604
Repayment of long-term debt (11,871) (10,563) (12,772)
Proceeds from long-term debt 7,614 - 8,840
Sale of company-obligated manditorily
redeemable preferred securities of
` subsidiary trust - -47,927 -
Purchase of treasury stock (12,593) (14,412) (1,931)
Proceeds from sale of stock for employee
benefit plans 1,756 1,588 1,332
Dividends paid (3,473) (3,114) (2,726)
---------- --------- ----------
Net cash provided by
financing activities 403,634 151,278 220,501
---------- --------- ----------
Net increase (decrease) in cash and
cash equivalents 20,998 (14,842) 7,109
Cash and cash equivalents at beginning
of year $56,524 71,366 64,257
---------- --------- ----------
Cash and cash equivalents at end of year $77,522 $56,524 $71,366
========== ========= ==========
Supplemental Cash paid during the period:
disclosures of cash Interest $58,689 $45,554 $41,248
========== ========= ==========
flow information: Income taxes $18,947 $9,912 $6,230
========== ========= ==========
The accompanying notes are an integral part of the consolidated financial
statements.
Notes to Consolidated Financial Statements
Note 1: Summary of Significant Accounting Policies
Consolidation: Irwin Financial Corporation and its
subsidiaries (the Corporation) provide financial services
throughout the United States. The Corporation is engaged in the
mortgage banking, community banking, and home equity
lending lines of business. Intercompany balances and
transactions have been eliminated in consolidation.
Use of Estimates: The preparation of financial statements
in conformity with generally accepted accounting
principles requires the Corporation to make estimates and
assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those
estimates.
Trading Assets: Trading assets are stated at fair value.
Unrealized gains and losses are included in earnings.
Gains and losses are based on the adjusted cost of the
specific asset.
Securities: Those securities which the Corporation has the
positive intent and ability to hold until maturity are
classified as "held-to-maturity" and are stated at cost
adjusted for amortization of premium and accretion of
discount. Securities that might be sold prior to maturity
are classified as "available-for-sale" and are stated at
fair value. Unrealized gains and losses, net of the future
tax impact, are reported as a separate component of
shareholders' equity until realized. Investment gains and
losses are based on the adjusted cost of the specific
security.
Loans Held for Sale: Loans held for sale are carried at
the lower of cost or market, determined on an aggregate
basis.
Loans: Loan origination fees and costs are deferred and
the net amounts are amortized as an adjustment to yield.
When loans are sold, deferred fees and costs are included
with outstanding principal balances to determine gains or
losses. Interest income on loans is computed daily based
on the principal amount of loans outstanding. The accrual
of interest income is discontinued when a loan becomes 90
days past due as to principal or interest. Management may
elect to continue the accrual of interest when the
estimated net realizable value of collateral is sufficient
to cover the principal balance and accrued interest.
Direct Financing Leases: Interest and service charges, net
of initial direct costs, are deferred and reported as
income in decreasing amounts over the life of the lease,
which averages three to four years, so as to provide an
approximate constant yield on the outstanding principal
balance.
Allowance for Loan and Lease Losses: The allowance for
loan and lease losses is maintained at a level considered
adequate to provide for future loan and lease losses and
is based on management's evaluation of expected losses in
the portfolio. Loans are considered impaired if it is
probable that the Corporation will be unable to collect
the scheduled payments of principal or interest when due
according to the contractual terms of the loan agreement.
The measurement of impaired loans is generally based on
the present value of expected future cash flows discounted
at the historical effective interest rate, except that all
collateral-dependent loans are measured for impairment
based on the fair value of the collateral.
Loan Securitizations: In 1997 the Corporation adopted
Statement of Financial Accounting Standards No 125,
"Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities" (SFAS No. 125).
This standard established the accounting treatment to be
used for the securitization of all financial assets. The
adoption of this standard did not have a material effect
on the Corporation's financial position or results of
operations in 1997.
When the Corporation securitizes loans, it retains
servicing assets and interest-only strips. SFAS No. 125
requires that a portion of the cost of originating a loan
be allocated to the servicing asset and interest-only
strip based on their fair values relative to the loan as a
whole.
To determine the fair value of the servicing assets, the
Corporation uses the market prices under comparable
servicing sale contracts, when available, or alternatively
uses a valuation model that calculates the present value
of future cash flows to determine the fair value of the
servicing assets. In using this valuation method, the
Corporation incorporates assumptions that it is believed
market participants would use in estimating future net
servicing income which include estimates of the cost of
servicing per loan, the discount rate, float value, an
inflation rate, ancillary income per loan, prepayment
speeds, and default rates. Servicing assets are amortized
over the estimated lives of the related loans, which are
grouped based on loan characteristics, in proportion to
estimated net servicing income.
Servicing assets are recorded at the lower of their cost
or fair value. In determining servicing value impairment
at the end of the year, the servicing portfolio was
disaggregated into its predominant risk characteristics.
The Corporation has determined those risk characteristics
to be interest rate, loan type and investor type. These
segments of the portfolio were valued, using market prices
under comparable servicing sale contracts, when available,
or alternatively, using the same model as was used to
originally determine the fair value at origination, using
current market assumptions. The calculated value was then
compared with the book value of each segment to determine
the required reserve for impairment. It is reasonably
possible that a change in the impairment reserve will
occur in the near term. No reasonable estimate can be made
of the range of amounts of loss or gain.
Gains and losses on the sale of servicing assets are
recognized when the related sales contracts have been
executed, an adequate down payment has been received from
the buyer, and legal title and substantially all risks and
rewards of ownership have passed to the buyer. Gains and
losses are determined as the difference between the net
sales proceeds and the carrying value of the servicing
assets.
In the fourth quarter of 1998, the Corporation adopted
Statement of Financial Accounting Standards No. 134,
"Accounting for Mortgage-Backed Securities Retained after
the Securitization of Mortgage Loans Held for Sale by a
Mortgage Banking Enterprise" (SFAS No. 134). The adoption
of this standard had no effect on the Corporation's
financial position or results of operations in 1998. Under
the provisions of SFAS No. 134, the Corporation carries
interest-only strips at fair value. To determine the fair
value, the Corporation uses a valuation model that
calculates the present value of future cash flows. In
using this valuation method, the Corporation incorporates
assumptions that it is believed market participants would
use in estimating future cash flows. Such assumptions
include estimates of credit losses, prepayment speeds,
forward yield curves, and discount rates commensurate with
risks involved. Changes in the fair value of interest-only
strips are included in the Corporation's earnings as they
occur.
Derivative Instruments: The Corporation uses derivative
instruments to offset changes in the value of servicing
assets and interest-only strips. Derivative instruments
on the Corporation's balance sheet are classified as
trading assets and carried at market value. Changes in
market value are recorded as trading gains or losses on
the income statement. The Corporation uses forward
contracts to reduce its interest rate exposure
associated with mortgage banking activities.
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" (SFAS No. 133). The
Corporation will adopt SFAS No. 133 on January 1, 2000.
SFAS No. 133 requires that all derivative instruments be
recorded on the balance sheet at their fair value.
Changes in the fair value of derivatives will be
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 does
not expect the adoption of this standard to have a
material effect on its financial position or results of
operations.
Premises and Equipment: Premises and equipment are
recorded at cost. Depreciation is determined by the
straight-line method.
Earnings Per Share: In 1997 the Corporation adopted
Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" (SFAS No. 128). Under this
standard, earnings per share are calculated as "basic"
and "diluted" based on the weighted average number of
common shares outstanding during the year. Previous year
earnings per share calculations have been restated to
reflect the adoption of SFAS No. 128.
Income Taxes: A consolidated tax return is filed for all
eligible entities. Deferred income taxes are computed
using the liability method which establishes a deferred
tax asset or liability based on temporary differences
between the tax basis of an asset and liability and the
basis recorded in the financial statements.
Rehabilitation tax credits and low-income housing tax
credits are recorded as a reduction to the provision for
federal income taxes in the year the eligible buildings
are placed in service.
Cash and Cash Equivalents Defined: For purposes of the
statement of cash flows, the Corporation considers cash
and due from banks to be cash equivalents.
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.
Reclassifications: Certain amounts in the 1997 and 1996
consolidated financial statements have been reclassified
to conform to the 1998 presentation.
Note 2: Restrictions on Cash and Interest-Bearing Deposits with
Financial Institutions
Irwin Union Bank and Trust Company is required to
maintain a reserve balance with the Federal Reserve
Bank. The amount of the reserve balance at December 31,
1998 was $149.7 thousand. Additionally, the Corporation
is required to maintain reserve funds in connection with
its loan securitization activities. Included in interest-
bearing deposits with financial institutions at December
31, 1998, is $671.6 thousand of these reserve funds.
Note 3: Investment Securities
The amortized cost, fair value, and carrying value of investments held at December 31,
1998 are as follows:
</TABLE>
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair Carrying
December 31, 1998 Cost Gains Losses Value Value
- ---------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Held-to-Maturity:
U.S. Treasury and
Government obligations $32,158 $235 $- $32,393 $32,158
Obligations of states and
political subdivisions 5,207 117 - 5,324 5,207
Mortgage-backed securities 4,424 130 - 4,554 4,424
-------- ------- ----- ------- --------
Total held-to-maturity 41,789 482 - 42,271 41,789
-------- ------- ----- ------- --------
Available-for-Sale:
U.S. Treasury and
Government obligations 2,051 46 (1) 2,096 2,096
Mortgage-backed securities 4,074 57 - 4,131 4,131
Other - 39 - 39 39
-------- ------- ----- ------- --------
Total available-for-sale 6,125 142 (1) 6,266 6,266
-------- ------- ----- ------- --------
Total investments $47,914 $624 $(1) $48,537 $48,055
======== ======= ===== ======= ========
</TABLE>
The amortized cost, fair value, and carrying value of investments held at
December 31,1997 are as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair Carrying
December 31, 1997 Cost Gains Losses Value Value
- ---------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Held-to-Maturity:
U.S. Treasury and
Government obligations $35,733 $204 $- $35,937 $35,733
Obligations of states and
political subdivisions 4,814 286 (5) 5,095 4,814
Mortgage-backed securities 5,968 202 - 6,170 5,968
------- ------ ----- -------- --------
Total held-to-maturity 46,515 692 (5) 47,202 46,515
------- ------ ----- -------- --------
Available-for-Sale:
U.S. Treasury and
Government obligations 6,010 43 - 6,053 6,053
Mortgage-backed securities 2,606 13 (1) 2,618 2,618
Other - 22 - 22 22
------- ------ ----- -------- --------
Total available-for-sale 8,616 78 (1) 8,693 8,693
------- ------ ----- -------- --------
Total investments $55,131 $770 $(6) $55,895 $55,208
======= ====== ===== ======== ========
</TABLE>
The amortized cost and estimated value of debt
securities at December 31, 1998, by contractual
maturity, are shown below. Expected maturities will
differ from contractual maturities because borrowers may
have the right to call or prepay obligations with or
without call or prepayment penalties.
Amortized Fair
(In thousands) Cost Value
- -------------------------------------------------------------------
Held-to-Maturity:
Due in one year or less $9,683 $9,814
Due after one year through five years 5,590 5,732
Due after five years through ten years 1,060 1,104
Due after ten years 21,032 21,067
-------- --------
37,365 37,717
Mortgage-backed securities 4,424 4,554
-------- --------
41,789 42,271
-------- --------
Available-for-Sale:
Due in one year or less 52 91
Due after one year through five years 1,999 2,044
-------- --------
2,051 2,135
Mortgage-backed securities 4,074 4,131
-------- --------
6,125 6,266
-------- --------
Total investments $47,914 $48,537
======== ========
Investment securities amounting to $8.0 million were
pledged as collateral for borrowings and for other
purposes on December 31, 1998. During 1998, 1997 and
1996, sales of "available for sale" investments with
proceeds of $6.0 million, $26.3 million, and $2.0
million resulted in a gross gains of $58.9 thousand and
$56.1 thousand, and gross loss of $9.0 thousand,
respectively. Additionally in 1998, 1997, and 1996,
"held-to-maturity" investments totaling $2.8 million,
$7.0 million, and $1.5 million, respectively, were
called. Calls in 1998 resulted in a gross gain of $54.3
thousand. Calls in 1997 and 1996 were at par. Gains and
losses on investment securities are recorded as other
income.
Note 4: Loans and Leases
<TABLE>
<CAPTION>
Loans and leases are summarized as follows:
December 31, 1998 1997
- ------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Commercial, financial, and agricultural $278,834 $212,095
Real estate-construction 97,253 73,279
Real estate-mortgage 123,980 222,818
Consumer 51,730 39,985
Direct financing leases 6,375 78,079
Unearned income (1,181) (15,163)
--------- ---------
Total $556,991 $611,093
========= ========
</TABLE>
Commercial loans are extended primarily to local
regional businesses and to local farming operations in
the market area of Irwin Union Bank. The Corporation
also provides consumer loans to the customers in that
market. Real estate loans and direct financing leases
are extended throughout the United States.
The Bank, in the normal course of business, makes loans
to directors, officers, and organizations and
individuals with which they are associated. Such loans
amounted to approximately $1.7 million and $1.9 million
at December 31, 1998 and 1997, respectively. During
1998, $24.3 million of new loans were made and
repayments totaled $26.5 million.
Note 5: Allowance for Loan and Lease Losses
Changes in the allowance for loan and lease losses are summarized below:
<TABLE>
<CAPTION>
December 31, 1998 1997 1996
- -------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Balance at beginning of year $8,812 $6,875 $5,033
Provision for loan and lease losses 5,995 6,238 4,553
Reduction due to sale of loans and leases (2,976) (1,694) (930)
Recoveries 559 538 593
Charge-offs (2,502) (3,145) (2,374)
-------- -------- --------
Balance at end of year $9,888 $8,812 $6,875
======== ======== ========
</TABLE>
At December 31, 1998, 1997 and 1996, the recorded
investment in loans for which impairment has been
recognized in accordance with SFAS No. 114 and SFAS No.
118 totaled $1.6 million, $2.7 million, and $4.3
million, respectively. These loans had a corresponding
valuation allowance of $0.5 million, $0.7 million and
$1.2 million determined based on the fair value of the
loans' collateral. The Corporation recognized $102.9
thousand, $155.4 thousand, and $356.9 thousand of
interest income on these loans in 1998, 1997, and 1996,
respectively.
Note 6: Servicing Assets
Included on the consolidated balance sheet at December
31,1998 and 1997 are $117.1 million and $83.0 million,
respectively, of capitalized servicing assets. These
amounts relate to the principal balances of loans
serviced by the Corporation for investors which
totaled $11.8 billion, $11.1 billion, and $11.0 billion
at December 31, 1998, 1997, and 1996, respectively.
The estimated fair value of servicing assets was $121.7
million at December 31, 1998. Carrying value
approximated fair value at December 31, 1997.
The Corporation has established a valuation allowance to
record servicing assets at their fair market value.
Changes in the allowance are summarized below:
<TABLE>
<CAPTION>
December 31, 1998 1997 1996
- ------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Balance at beginning of year $600 $- $909
Valuation changes during the period 11,120 600 (255)
Reductions due to sales of servicing assets - - (654)
--------- ------- -------
Balance at end of year $11,720 $600 $-
========= ======= ======
</TABLE>
Note 7: Premises and Equipment
Premises and equipment are summarized as follows:
<TABLE>
<CAPTION>
December 31, 1998 1997 Useful lives
- -------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <S>
Land $1,734 $1,651 n/a
Building and leasehold improvements 13,231 13,375 7-40 years
Furniture and equipment 29,693 27,368 3-10 years
-------- --------
44,658 42,394
Less accumulated depreciation (23,276) (21,354)
-------- --------
Total $21,382 $21,040
======== ========
</TABLE>
Note 8: Lease Obligations
At December 31, 1998, the Corporation and its
subsidiaries leased certain branch locations and office
equipment used in its operations.
Operating lease rental expense was $13.7 million in
1998, $11.2 million in 1997, and $8.7 million in 1996.
The future minimum rental payments required under
noncancellable operating leases with initial or
remaining terms of one year or more are summarized as
follows:
Year ended December 31 (In thousands):
1999 $7,301
2000 6,258
2001 4,894
2002 2,486
2003 483
Thereafter 254
--------
Total minimum rental payments $21,676
========
Note 9: Short-Term Borrowings
Short-term borrowings are summarized as follows:
<TABLE>
<CAPTION>
December 31, 1998 1997
- ------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Repurchase agreements and drafts payable related to
mortgage loan closings $172,126 $240,659
Commercial paper 26,617 16,375
Federal funds 266,000 142,650
Lines of credit 180,118 112,591
--------- ---------
Total $644,861 $512,275
========= =========
Weighted average interest rate 5.34% 6.17%
</TABLE>
Repurchase agreements at December 31, 1998 and 1997
include $29.8 million and $141.9 million in mortgages
sold under agreements to repurchase, which are used to
fund mortgages prior to sale in the secondary market.
These repurchase agreements are collateralized by
mortgage loans held for sale.
Drafts payable related to mortgage loan closings totaled
$142.3 million and $93.6 million at December 31, 1998
and 1997. These borrowings are related to mortgage
closings at the end of December which have not been
presented to the banks for payment. When presented for
payment, these borrowings will be funded internally or
by borrowing from the lines of credit.
Commercial paper includes $18.8 million and $10.8
million at December 31, 1998 and 1997, respectively,
payable to a company owned by a significant shareholder
and director of the Corporation.
The Corporation has lines of credit available of $312.8
million to fund loan originations and operations.
Interest on the lines of credit is payable monthly or
quarterly with rates ranging from 4.82% to 8.06%.
Note 10: Long-Term Debt
Long-term debt at December 31, 1998 consists of a note
payable with a variable interest rate averaging 7.94%
and maturing on July 1, 2002. Long-term debt as of
December 31, 1997 of $7.1 million consisted of various
notes payable at annual interest rates ranging from 6.3%
to 9.6% and maturity dates through April 3o, 2002.
Maturities of long-term debt are as follows:
(In thousands)
1999 $730
2000 788
2001 853
2002 468
-------
Total $2,839
=======
Note 11 : Commitments and Contingencies
In the normal course of business, Irwin Financial
Corporation and its subsidiaries are subject to various
claims and other pending and possible legal actions.
As of December 31, 1998, Irwin Mortgage Corporation
(IMC) was a defendant to 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 December 31, 1998, Irwin Leasing Corporation (ILC)
and Irwin Financial Corporation were defendants in a
class action lawsuit alleging misrepresentations by a
manufacturer of certain equipment financed by ILC.
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 exposure with respect to the litigation.
Note 12: Financial Instruments with Off-Balance Sheet Risk
The Corporation is party to certain financial
instruments with off-balance sheet risk in the normal
course of business to meet the financial needs of its
customers and to reduce its own exposure to fluctuations
in interest rates. These financial instruments include
loan commitments, standby letters of credit, and forward
commitments relating to mortgage banking activities.
Those instruments involve, to varying degrees, elements
of credit and interest rate risk in excess of the
amounts recognized in the consolidated balance sheet.
The Corporation's exposure to credit loss, in the event
of nonperformance by the other party to the financial
instrument for commitments to extend credit and standby
letters of credit, is represented by the contractual
amount of those instruments. The collateral pledged for
standby letters of credit and commitments varies but may
include accounts receivable, inventory, property, plant,
and equipment, and residential real estate. Total
outstanding commitments to extend credit at December 31,
1998, were $394.8 million. These loan commitments
include $126.1 million of floating rate loan commitments
and $268.7 million of fixed rate loan commitments
related to commercial and mortgage banking activities.
The Corporation had approximately $14.2 million and
$15.1 million in irrevocable standby letters of credit
outstanding at December 31, 1998 and 1997, respectively.
Forward commitments are used in mortgage banking
activities to offset the interest rate risk associated
with mortgage loan commitments and loans held for sale.
The contract amount for forward contracts does not
represent exposure to credit loss. Forward commitments
related to mortgage banking activities were $810.5
million and $407.9 million at December 31, 1998 and
1997, respectively.
Derivative instruments are used to offset changes in the
value of servicing assets against the effects of
increased prepayment activity that generally results
from declining interest rates. To the extent that
interest rates increase, the value of servicing assets
increases while the value of these instruments declines.
The Corporation's servicing asset derivative instruments
consist entirely of long and short call options on U.S.
Treasury futures. At December 31, 1998, the carrying
value of these options was $4.8 million and the net
notional amount was $0, consisting of $750.0 million of
long positions and $750.0 million of short positions,
all of which related to 1998 additions and no
dispositions.
Derivative instruments are also used to offset changes
in the value of interest-only strips. Interest rate caps
are used when interest is received on fixed rate
securitized loans and the resulting security pays
interest at a variable rate. As interest rates change,
the values of the interest-only strips and interest rate
caps move in opposite directions. At December 31, 1998,
the carrying value of the interest rate caps was $540.1
thousand and the notional amount was $65.6 million, all
of which related to 1998 additions and no dispositions.
In 1998 the Corporation recorded $4.2 million of net
trading gains related to derivative instruments. The
Corporation is not exposed to loss on derivative
instruments beyond its initial outlay to acquire them.
There can be no assurance that the Corporation's
derivative instruments will generate gains in the
future.
Note 13: Regulatory Matters
The Corporation and its bank subsidiary, Irwin Union
Bank (IUB), are subject to various regulatory capital
requirements administered by the federal and state
banking agencies. Under capital adequacy guidelines, the
Corporation and IUB must meet specific capital
guidelines that involve quantitative measures of their
assets, liabilities, and certain off-balance sheet items
as calculated under regulatory accounting practices. The
Corporation's and IUB's capital amounts and
classification are also subject to qualitative
judgements by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to
ensure capital adequacy require the Corporation to
maintain minimum amounts and ratios (set forth in the
table below) of total and Tier 1 capital (as defined in
the regulations) to risk-weighted assets (as defined),
and Tier 1 capital to average assets (as defined).
Management believes, as of December 31, 1998, that the
Corporation and IUB meet all capital adequacy
requirements to which they are subject.
As of December 31, 1998 the Corporation and IUB were
categorized as well capitalized under the regulatory
framework for prompt corrective action. To be
categorized as well capitalized the Corporation and IUB
must significantly exceed minimum total risk-based, Tier
1 risk-based, and Tier 1 capital to average assets
ratios. There have been no conditions or events that
management believes have changed this category.
The Corporation's and IUB's actual capital amounts and
ratios are presented in the following table:
<TABLE>
<CAPTION>
Adequately Well
Actual Capitalized Capitalized
(In thousands) Amount Ratio Amount Ratio Amount Ratio
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1998:
Total Capital (to Risk-
Weighted Assets)
Irwin Financial Corporation $203,311 12.3% $132,742 8.0% $165,927 10.0%
Irwin Union Bank 111,935 10.1 88,712 8.0 110,890 10.0
Tier 1 Capital (to Risk-
Weighted Assets)
Irwin Financial Corporation 191,806 11.6 66,371 4.0 99,556 6.0
Irwin Union Bank 105,215 9.5 44,356 4.0 66,534 6.0
Tier 1 Capital (to
Average Assets)
Irwin Financial Corporation 191,806 10.5 73,032 4.0 91,290 5.0
Irwin Union Bank 105,215 7.9 53,162 4.0 66,452 5.0
Adequately Well
Actual Capitalized Capitalized
(In thousands) Amount Ratio Amount Ratio Amount Ratio
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
As of December 31, 1997:
<S> <C> <C> <C> <C> <C> <C>
Total Capital (to Risk-
Weighted Assets)
Irwin Financial Corporation $185,536 14.9% $99,951 8.0% $124,939 10.0%
Irwin Union Bank 72,150 10.3 55,949 8.0 69,936 10.0
Tier 1 Capital (to Risk-
Weighted Assets)
Irwin Financial Corporation 169,366 13.6 49,975 4.0 74,963 6.0
Irwin Union Bank 65,549 9.4 27,974 4.0 41,961 6.0
Tier 1 Capital (to
Average Assets)
Irwin Financial Corporation 169,366 12.1 56,192 4.0 70,240 5.0
Irwin Union Bank 65,549 7.3 36,088 4.0 45,110 5.0
As of December 31, 1996:
Total Capital (to Risk-
Weighted Assets)
Irwin Financial Corporation $124,010 12.9% $76,997 8.0% $96,246 10.0%
Irwin Union Bank 62,479 11.0 45,842 8.0 57,302 10.0
Tier 1 Capital (to Risk-
Weighted Assets)
Irwin Financial Corporation 117,416 12.2 38,498 4.0 57,748 6.0
Irwin Union Bank 56,697 10.0 22,921 4.0 34,381 6.0
Tier 1 Capital (to
Average Assets)
Irwin Financial Corporation 117,416 9.8 47,741 4.0 59,676 5.0
Irwin Union Bank 56,697 6.9 31,775 4.0 39,719 5.0
</TABLE>
Note 14: Fair Value of Financial Instruments
Fair value estimates, methods and assumptions are set
forth below for the Corporation's financial instruments:
Cash and cash equivalents: The carrying amounts reported
in the balance sheet for cash and cash equivalents
approximate those assets' fair values.
Interest-bearing deposits with financial institutions:
The carrying amounts reported in the balance sheet for
interest-bearing deposits with financial institutions
approximate those assets' fair values.
Trading assets: The carrying amounts reported in the
balance sheet for trading assets approximate those
assets' fair values.
Investment securities: Fair values for investment
securities were based on quoted market prices when
available. For securities which had no quoted market
prices, fair values were estimated by discounting future
cash flows using current rates on similar securities.
Loans: For variable rate loans that reprice frequently
and with no significant change in credit risk, fair
values were based on carrying values. The fair values of
commercial, consumer, real estate-mortgage, and real
estate-construction loans were estimated using
discounted cash flow analyses, using interest rates
currently being offered for loans with similar terms to
borrowers with similar credit quality and for the same
remaining maturities.
Deposit liabilities: The fair value of demand deposits,
including interest and non-interest checking, passbook
savings, and certain types of money market accounts,
were assumed to be equal to the amount payable on demand
at the reporting date. The carrying amounts for variable-
rate money market accounts and certificates of deposit
approximate their fair values at the reporting date.
Fair values for fixed-rate certificates of deposit were
estimated using a discounted cash flow calculation that
applies interest rates currently being offered on
certificates with similar remaining maturities.
Short-term borrowings: For variable-rate short-term
borrowings that reprice frequently, fair values were
based on carrying values.
Long-term debt: The fair values of variable-rate long-
term debt, which reprices frequently, were based on
carrying values. For fixed-rate long-term debt, fair
values were estimated using discounted cash flow
analyses, based on current incremental borrowing rates
for similar types of borrowing arrangements.
Company-obligated mandatorily redeemable preferred
securities of subsidiary trust: Fair values were
estimated by discounting future cash flows using the
current rate offered on similar securities.
Forward contract commitments: The unrealized gains and
losses of forward contract commitments is based on the
difference between the settlement values of those
commitments and the quoted market values of the
underlying securities.
The estimated fair values of the Corporation's financial
instruments at December 31 are as follows:
<TABLE>
<CAPTION>
1998 1997
Carrying Estimated Carrying Estimated
(In thousands) Amount Fair Value Amount Fair Value
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $77,522 $77,522 $56,524 $56,524
Interest-bearing deposits with
financial institutions 18,441 18,441 18,240 18,240
Trading assets 32,148 32,148 22,133 22,133
Investment securities 48,055 48,537 55,208 55,895
Loans held for sale 936,788 959,300 528,739 530,207
Loans, net of allowance for
loan losses $542,509 $542,631 $539,931 $540,785
</TABLE>
<TABLE>
<CAPTION>
1998 1997
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
- ----------------------------------------------------------------------------------------------
Financial liabilities:
<S> <C> <C> <C> <C>
Deposits $1,009,211 $1,009,349 $719,596 $719,669
Short-term borrowings 644,861 644,861 512,275 512,275
Long-term debt 2,839 2,839 7,096 7,138
Company-obligated mandatorily
redeemable preferred securities
of subsidiary trust 50,000 57,757 50,000 55,038
Forward contract commitments $- $(551) $- $(396)
</TABLE>
The fair value estimates consider relevant market
information when available. Because no market exists for
a significant portion of the Corporation's financial
instruments, fair value estimates are determined
judgmentally and consider various factors, including
current economic conditions and risk characteristics of
certain financial instruments. Changes in factors, or
the weight assumed for the various factors, could
significantly affect the estimated values.
The fair value estimates are presented for existing on-
and off-balance sheet financial instruments without
attempting to estimate the value of the Corporation's
long-term relationships with depositors and the benefit
that results from the low cost funding provided by
deposit liabilities. In addition, significant assets
which were not considered financial instruments and were
therefore not a part of the fair value estimates include
lease receivables, servicing assets, and premises and
equipment.
Note 15: Company-Obligated Mandatorily Redeemable Preferred Securities of
Subsidiary Trust
In January 1997, the Corporation issued $50.0 million 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 $51.5 million, an interest rate of
9.25% and an initial maturity of 30 years with a 19-year
extension option.
Note 16: Shareholders' Equity
The board of directors of the Corporation approved a two-
for-one stock split May 27, 1998 and December 30, 1996.
Previously reported shares and per share data have been
changed to reflect these splits. The shareholders of the
Corporation previously approved an increase in common
shares authorized from 7,500,000 to 40,000,000 as of
April 30, 1996.
The Corporation has a stock plan to compensate directors
of the Corporation with the Corporation's common stock,
if so elected, in lieu of cash for their annual retainer
fee and meeting fees. The number of shares issued under
the plan is based on the current market value of the
Corporation's common stock. The Corporation also has an
employee stock purchase plan for all qualified
employees. The plan provides for employees to purchase
common stock through payroll deduction at approximately
85% of the current market value.
The Corporation has three stock option plans
(established in 1997, 1992, and 1986) which provide for
the issuance of 4,280,000 shares of non-qualified and
incentive stock options. The exercise price of each
option, which has a ten year life and a vesting period
of four years beginning the year granted, is equal to
the market price of the Corporation's stock on the grant
date. Vested outstanding stock options have been
considered as common stock equivalents in the
computation of diluted earnings per share.
Activity in the above plans for 1998, 1997 and 1996 is
summarized as follows (adjusted for the two-for-one
stock splits on December 30, 1996 and May 27, 1998):
<TABLE>
<CAPTION>
1998 1997 1996
Weighted Weighted Weighted
average average average
Number exercise Number exercise Number exercise
of shares price of shares price of shares price
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at the
beginning of
the year 1,231,220 $7.40 1,246,600 $5.83 1,237,600 $4.60
Granted 133,710 27.23 178,220 13.69 209,400 10.66
Exercised (103,880) 4.74 (187,400) 2.89 (175,896) 2.51
Cancelled (4,000) 15.92 (6,200) 9.62 (24,504) 8.93
----------- --------- ----------
Outstanding at the
end of year 1,257,050 9.71 1,231,220 7.40 1,246,600 5.83
=========== ========= ==========
Exercisable at the
end of year 1,014,420 $7.48 948,506 $6.16 922,600 $4.82
=========== ========= ==========
Available for
future grants 1,560,878 1,694,588 472,808
=========== ========= ==========
</TABLE>
The Corporation has not recognized compensation cost for
the three non-qualified and incentive stock option plans
or the employee stock purchase plan. Had compensation
cost been determined based on the fair value at the
grant dates, the Corporation's net income and earnings
per share would have been reduced to the pro forma
amounts indicated as follows:
<TABLE>
<CAPTION>
(In thousands, except per share amounts)
1998 1997 1996
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income
As reported $30,503 $24,444 $22,428
Pro forma 29,746 23,913 22,071
Basic earnings per share
As reported $1.40 $1.10 $0.99
Pro forma 1.37 1.07 0.97
Diluted earnings per share
As reported $1.38 $1.08 $0.98
Pro forma 1.34 1.06 0.97
</TABLE>
- -------------------------------------------------------------------------------
The fair value of each option was estimated to be
$12.25, $6.35 and $4.57 on the date of the grant using
the binomial option-pricing model with the following
assumptions for 1998, 1997 and 1996, respectively: risk
free interest rates of 5.85%, 6.89% and 6.75%; dividend
yield of 1.00% for 1998 and 1997, and 1.25% for 1996;
and volatility of 0.250 for 1998 and 1997, and 0.228 for
1996. As of December 31, 1998, 1,253,050 options were
outstanding under these plans with exercise prices that
range between $1.26 and $28.56 and a remaining weighted
average contractual life of 5.83 years.
Note 17 : Earnings Per Share
Earnings per share calculations are summarized as follows:
<TABLE>
<CAPTION>
Basic Earnings Effects of Diluted Earnings
(In thousands, except per share amounts) Per Share Stock Options Per Share
- ---------------------------------------------------------------------------------------------------
1998:
<S> <C> <C> <C>
Net income $30,503 $- $30,503
Shares 21,732 407 22,139
--------- --------- --------
Per-Share Amount $1.40 $(0.02) $1.38
========= ========= ========
1997:
Net income $24,444 $- $24,444
Shares 22,326 396 22,722
--------- --------- --------
Per-Share Amount $1.09 $(0.01) $1.08
========= ========= ========
1996:
Net income $22,428 $- $22,428
Shares 22,716 314 23,030
--------- --------- --------
Per-Share Amount $0.99 $(0.02) $0.97
========= ========= ========
</TABLE>
The Board of Directors of the Corporation approved a two-
for-one stock split effective May 27, 1998 and December
30, 1996. Previously reported per share data have been
adjusted to reflect these splits.
Note 18 : Income Taxes
Income tax expense is summarized as follows:
(In thousands) 1998 1997 1996
- ---------------------------------------------------------------------------
Current:
Federal $6,963 $8,086 $4,980
State 2,048 2,268 1,574
------- -------- --------
9,011 10,354 6,554
------- -------- --------
Deferred:
Federal 9,256 6,162 6,750
State 2,087 1,218 1,555
------- -------- --------
11,343 7,380 8,305
------- -------- --------
Income tax expense:
Federal 16,219 14,248 11,730
State 4,135 3,486 3,130
------- -------- --------
$20,354 $17,734 $14,860
======= ======== ========
The Corporation's net deferred tax liability, which is
included in other liabilities on the consolidated
balance sheet, consisted of the following:
December 31, 1998 1997
- --------------------------------------------------------------------------
(In thousands)
Mortgage servicing $(13,170) $(31,025)
Lease financing income 3,188 (5,654)
Deferred securitization income (2,664) (555)
Loan and lease loss reserve 1,625 6,313
Deferred origination fees and costs (2,274) (1,454)
Deferred compensation 596 2,626
Fixed assets (46) (1,085)
Other, net (36) (978)
---------- ----------
Net deferred tax liability $(12,781) $(31,812)
========== ==========
A reconciliation of income tax expense to the amount
computed by applying the statutory income tax rate to
income before income taxes is summarized as follows:
<TABLE>
<CAPTION>
(In thousands) 1998 1997 1996
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income taxes computed at the statutory rate $17,800 $14,762 $12,864
Increase (decrease) resulting from:
Nontaxable interest from investment
securities and loans (484) (198) (231)
State franchise tax, net of federal benefit 2,810 2,330 2,076
Change in deferred tax asset or liability
resulting from tax rate change - 292 191
Other items - net 228 548 (40)
-------- -------- --------
$20,354 $17,734 $14,860
======== ======== ========
</TABLE>
Note 19: Employee Retirement Plan
The Corporation has a defined benefit plan covering
eligible employees of adopting subsidiaries. The
benefits are based on years of service and the
employees' compensation during their employment.
Contributions are intended to provide not only for
benefits attributed to service to date but also for
those expected to be earned in the future.
Plan assets are primarily invested in corporate and U.S.
bonds, mutual funds, and cash equivalents. The mutual
funds are invested primarily in common stocks and bonds.
The following table sets forth amounts recognized in the
Corporation's balance sheet:
December 31, 1998 1997
- --------------------------------------------------------------------------
(In thousands)
Funded status $31 $68
Unrecognized prior service cost 136 155
Unrecognized net actuarial loss 164 455
------ -------
Prepaid pension cost $331 $678
====== =======
Weighted average assumptions:
Discount rate 6.75% 7.00%
Return on plan assets 9.00% 9.00%
Rate of compensation increase 3.75% 4.00%
A reconciliation of the change in projected benefit
obligation and plan assets is presented below:
1998 1997
- -------------------------------------------------------------------------
(In thousands)
Benefit obligation at January 1, $9,046 $7,748
Service cost 568 475
Interest cost 622 566
Actuarial loss 192 493
Benefits paid (245) (236)
------- -------
Benefit obligation at December 31, $10,183 $9,046
======= =======
Fair value of plan assets at January 1, $9,114 $8,161
Return on plan assets 1,345 974
Employer contributions - 215
Benefits paid (245) (236)
------ -------
Fair value of plan assets at December 31, $10,214 $9,114
======= =======
The net pension cost for 1998, 1997, and 1996 included
the following components:
<TABLE>
<CAPTION>
1998 1997 1996
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost $568 $475 $444
Interest cost 622 566 519
Return on plan assets (863) (745) (631)
Amortization of transition obligation - (83) (130)
Amortization of prior service cost 20 20 20
Amortization of actuarial loss - - 20
------- ------- -------
Net pension cost $347 $233 $242
======= ======= =======
</TABLE>
Note 20: Irwin Financial Corporation (Parent Only) Financial Information
The condensed financial statements of the parent
company as of December 31, 1998 and 1997, and for the
three years ended December 31, 1998 are presented
below:
Condensed Balance Sheet
(In thousands)
December 31, 1998 1997
- --------------------------------------------------------------------------------
Assets:
Cash and short-term investments $799 $744
Investment in bank subsidiary 105,807 65,673
Investments in non-bank subsidiaries 81,308 69,901
Loans to non-bank subsidiaries 60,221 97,688
Other assets 16,305 2,615
--------- ---------
$264,440 $236,621
========= =========
Liabilities:
Short-term borrowings $118,513 $103,722
Other liabilities 694 4,916
--------- ---------
119,207 108,638
--------- ---------
Shareholders' equity:
Common stock 29,965 29,965
Other shareholders' equity 115,268 98,018
--------- ---------
145,233 127,983
--------- ---------
$264,440 $236,621
<TABLE>
<CAPTION>
Condensed Statement of Income
(In thousands)
For the year ended December 31, 1998 1997 1996
- -----------------------------------------------------------------------------------------------
<S> <S> <C> <C> <C>
Income: Cash dividends from non-bank
subsidiaries $18,331 $10,062 $10,053
Cash dividends from bank subsidiary 1,000 4,750 2,000
Interest income 5,348 5,666 2,376
Other 3,002 2,219 2,507
-------- -------- -------
27,681 22,697 16,936
-------- -------- -------
Expenses: Interest expense 7,825 7,210 2,065
Salaries and benefits 4,548 4,009 3,429
Other 2,056 1,799 1,963
-------- -------- -------
14,429 13,018 7,457
-------- -------- -------
Income before income taxes and equity in
undistributed income of subsidiaries 13,252 9,679 9,479
Income taxes (credits), less amounts
charged to subsidiaries (14,079) (2,590) (2,666)
-------- -------- -------
27,331 12,269 12,145
Equity in undistributed income of
subsidiaries 3,172 12,175 10,283
-------- -------- -------
Net income $30,503 $24,444 $22,428
======== ======== =======
</TABLE>
<TABLE>
<CAPTION>
Condensed Statement of Cash Flows
(In thousands)
For the year ended December 31, 1998 1997 1996
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income $30,503 $24,444 $22,428
Adjustments to reconcile Equity in undistributed income of
net income to cash provided subsidiaries (3,172) (12,175) (10,283)
by operating activities: Depreciation and amortization 209 160 89
Increase (decrease) in taxes payable (17,244) 1,046 315
Increase (decrease) in interest receivable 217 (314) (39)
Increase (decrease) in interest payable (4) 146 164
Net change in other assets and other
liabilities 1,529 (2,321) 1,393
-------- -------- --------
Net cash provided by operating activities 12,038 10,986 14,067
-------- -------- --------
Lending and investing Net decrease (increase) in loans to
activities: subsidiaries 37,467 (51,571) (8,603)
Investments in subsidiaries (48,550) (5,858) (11,500)
Net additions to premises and equipment (1,381) (42) (22)
-------- -------- --------
Net cash used by lending and
investing activities (12,464) (57,471) (20,125)
-------- -------- --------
Financing activities: Net increase in borrowings 14,791 62,547 9,732
Payments to acquire treasury stock (12,593) (14,411) (1,931)
Proceeds from sale for employee
benefit plans 1,756 1,588 1,332
Dividends paid (3,473) (3,114) (2,726)
-------- -------- --------
Net cash provided by financing
activities 481 46,610 6,407
-------- -------- --------
Net increase in cash and cash equivalents 55 125 349
Cash and cash equivalents at beginning
of year 744 619 270
-------- -------- --------
Cash and cash equivalents at end of year $799 $744 $619
======== ======== ========
Supplemental disclosures Cash paid during the year:
of cash flow information: Interest $7,503 $7,064 $1,900
======== ======== ========
Income taxes $18,947 $9,912 $6,230
======== ======== ========
</TABLE>
Note 21: Industry Segment Information
The Corporation has three principal segments that
provide a broad range of financial services throughout
the United States. The mortgage banking line of
business originates, sells and services residential
first mortgage loans. The community banking line of
business provides local banking services. The home
equity lending line of business originates and services
home equity loans via direct mail and telemarketing.The
Corporation's other segments include equipment leasing
and the parent company. The accounting policies of each
segment are the same as those described in the "Summary
of Significant Accounting Policies."
Below is a summary of each segment's revenues, net income, and assets for 1998,
1997, and 1996:
<TABLE>
<CAPTION>
Mortgage Community Home Equity
(In thousands) Banking Banking Lending Other Consolidated
- ---------------------------------------------------------------------------------------------------
1998:
<S> <C> <C> <C> <C> <C>
Net interest income $37,088 $13,797 $(3,260) $9,564 $57,189
Intersegment interest (12,565) 9,482 7,527 (4,444) -
Other revenue 205,487 12,063 19,151 1,787 238,488
Gain on sale of leases - - - 5,241 5,241
Intersegment revenues 230 155 1,255 (1,640) -
-------- -------- -------- -------- ----------
Total net revenues 230,240 35,497 24,673 10,508 300,918
Other expense 180,384 22,820 27,896 14,336 245,436
Intersegment expenses 1,810 2,201 3,445 (7,456) -
-------- -------- -------- -------- ----------
Net income before taxes 48,046 10,476 (6,668) 3,628 55,482
Taxes 19,193 3,967 - (2,806) 20,354
-------- -------- -------- -------- --------
Net income 28,853 6,509 (6,668) 6,434 35,128
Distribution on preferred
securities - - - 4,625 4,625
-------- -------- -------- -------- --------
Net income $28,853 $6,509 $(6,668) $1,809 $30,503
-------- -------- -------- -------- ----------
Assets at December 31, $877,904 $607,992 $311,974 $148,309 $1,946,179
======== ======== ======== ======== ==========
1997:
Net interest income $19,325 $19,678 $7,379 $2,239 $48,621
Intersegment interest (3,131) 116 (1,654) 4,669 -
Other revenue 146,655 9,076 16,386 486 172,603
Intersegment revenues 51 358 - (409) -
-------- -------- -------- ------- ---------
Total net revenues 162,900 29,228 22,111 6,985 221,224
Other expense 125,005 19,674 20,372 9,522 174,573
Intersegment expenses 1,605 698 29 (2,332) -
-------- -------- -------- ------- -----------
Net income before taxes 36,290 8,856 1,710 (205) 46,651
Taxes 14,990 3,269 - (525) 17,734
-------- -------- -------- ------- ---------
Net income 21,300 5,587 1,710 320 28,917
Distribution on preferred
securities - - - 4,473 4,473
-------- -------- -------- ------- -----------
Net income $21,300 $5,587 $1,710 $(4,153) $24,444
======== ======== ======== ======== ==========
Assets at December 31, $698,391 $539,233 $165,242 $93,928 $1,496,794
======== ======== ======== ======== ==========
1996:
Net interest income $18,164 $17,400 $7,340 $2,563 $45,467
Intersegment interest (1,441) 53 (568) 1,956 -
Other revenue 131,749 9,250 8,648 334 149,981
Intersegment revenues 97 134 - (231) -
-------- -------- -------- -------- ----------
Total net revenues 148,569 26,837 15,420 4,622 195,448
Other expense 112,447 19,678 16,236 9,799 158,160
Intersegment expenses 2,027 633 - (2,660) -
-------- -------- -------- ------- -----------
Net income before taxes 34,095 6,526 (816) (2,517) 37,288
Taxes 13,673 2,272 - (1,085) 14,860
-------- -------- -------- -------- ----------
Net income $20,422 $4,254 $(816) $(1,432) $22,428
======== ======== ======== ======== ==========
Assets at December 31, $555,486 $503,507 $145,113 $96,016 $1,300,122
======== ======== ======== ======= ===========
</TABLE>
Irwin Financial Corporation
Directors
Sally Abrams Dean Consultant,
Retired Senior Vice President,
Dillon, Read &Co. Inc.
David W. Goodrich President-Indianapolis Operations
Colliers Turley Martin Tucker
John T. Hackett Managing General Partner,
CID Equity Partners, L.P.
William H. Kling President,
Minnesota Public Radio
Brenda J. Lauderback Former President,
Footwear Wholesale Group,
Nine West Group
John C. McGinty, Jr. President,
Peregrine Associates, Inc.
Irwin Miller Former Chairman,
Cummins Engine Company, Inc.
William I. Miller Chairman,
Irwin Financial Corporation
John A. Nash President,
Irwin Financial Corporation
Lance R. Odden President and Headmaster,
The Taft School
Theodore M. Solso President and Chief Operating Officer,
Cummins Engine Company, Inc.
Irwin Financial Corporation
Senior Officers
William I. Miller Chairman
John A. Nash President
Thomas D. Washburn Senior Vice President and Chief Financial Officer
Marie S. Ameis Vice President and Controller
Gregory F. Ehlinger Vice President and Treasurer
Jose M. Gonzalez Vice President--Internal Audit
Theresa L. Hall Vice President--Human Resources
Ellen Z. Mufson Vice President--Legal
Michael F. Ryan Vice President--Community Development
Matthew F. Souza Vice President and Secretary
EXHIBIT 21(a). SUBSIDIARIES OF THE REGISTRANT
State of
Name Organization
Irwin Union Bank and Trust Company Indiana
Irwin Union Collateral, Inc. Indiana
Irwin Union Realty Corporation Indiana
Irwin Union Insurance, Inc. Indiana
Irwin Union Securities, Inc. Indiana
Irwin Funding Corp. Delaware
Irwin Union Advisory Services, Inc. Indiana
Irwin Reinsurance Corporation Vermont
IFC Mortgage Corporation Indiana
Irwin Mortgage Corporation Indiana
Irwin Union Investor Services, Inc. Indiana
Irwin Home Equity Corporation Indiana
IHE Funding Corp. Delaware
Irwin Equipment Finance Corp. Indiana
Irwin Leasing Corporation
(formerly Affiliated Capital Corp.) Illinois
Irwin Union Credit Insurance Corporation Arizona
White River Capital Corporation Indiana
IFC Capital Trust I Delaware
Consent of Independent Public Accountants
We consent to the incorporation by reference in
Registration Statement No. 33-8506 on Form S-8
effective September 25, 1986; in Registration
Statement No. 33-25931 on Form S-8 effective
December 28, 1988; in Registration Statement No. 33-
6880 on Form S-8 as amended by Post-Effective
Amendment No. 1 effective December 22, 1989; in
Registration Statement No. 33-32783 on Form S-8
effective January 11, 1990; in Registration
Statement No. 2-72249 on Form S-3 as amended by Post-
Effective Amendment No. 3 to Form S-16 effective
January 17, 1990; in PostEffective Amendment No. 2
to Registration Statement No. 33-6880 on Form S-8
effective April 9, 1990; in Registration Statement
No. 33-32783 on Form S-8 as amended by Post-
Effective Amendment
No. 1 effective April 9, 1990; in Registration
Statement No. 33-47680 on Form S-8 effective May 5,
1992 in Registration Statement No. 2-72249 on Form S-
3 as amended by Post-Effective Amendment No. 4 to
Form S-16 effective April 7, 1994; in Registration
Statement No. 33-29493 on Form S-8 as amended by
Post-Effective Amendment No. 2 effective September
27, 1994; in Registration Statement No. 33-62671 on
Form S-8 effective September 15, 1995; in
Registration Statement No. 33-62669 on Form S-8
effective September 15, 1995; and in Registration
Statement No. 333-26197 on Form S-8 effective April
30, 1997 by Irwin Financial Corporation of our
report, dated January 21, 1999, on our audits of the
consolidated financial statements of Irwin Financial
Corporation as of December 31, 1998 and 1997
and for each of the three years in the period
ended December 31, 1998, which report is incorporated
by reference in this Annual Report on Form 10-K.
/s/ PricewaterhouseCoopers LLP
Cincinnati, Ohio
March 26, 1999
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000052617
<NAME> IRWIN FINANCIAL CORPORATION
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 68,942
<INT-BEARING-DEPOSITS> 18,441
<FED-FUNDS-SOLD> 8,850
<TRADING-ASSETS> 32,148
<INVESTMENTS-HELD-FOR-SALE> 6,266
<INVESTMENTS-CARRYING> 48,055
<INVESTMENTS-MARKET> 48,537
<LOANS> 556,991
<ALLOWANCE> 9,888
<TOTAL-ASSETS> 1,946,179
<DEPOSITS> 1,009,211
<SHORT-TERM> 644,861
<LIABILITIES-OTHER> 96,036
<LONG-TERM> 2,839
47,999
0
<COMMON> 29,965
<OTHER-SE> 115,268
<TOTAL-LIABILITIES-AND-EQUITY> 1,946,179
<INTEREST-LOAN> 52,329
<INTEREST-INVEST> 4,166
<INTEREST-OTHER> 65,891
<INTEREST-TOTAL> 122,386
<INTEREST-DEPOSIT> 23,340
<INTEREST-EXPENSE> 59,202
<INTEREST-INCOME-NET> 63,184
<LOAN-LOSSES> 5,995
<SECURITIES-GAINS> 113
<EXPENSE-OTHER> 245,436
<INCOME-PRETAX> 55,482
<INCOME-PRE-EXTRAORDINARY> 55,482
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 30,503
<EPS-PRIMARY> 1.40<F1>
<EPS-DILUTED> 1.38<F1>
<YIELD-ACTUAL> .04<F2>
<LOANS-NON> 11,222
<LOANS-PAST> 632
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 8,812
<CHARGE-OFFS> 2,502
<RECOVERIES> 559
<ALLOWANCE-CLOSE> 9,888
<ALLOWANCE-DOMESTIC> 9,888
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 3,935
<FN>
<F1>Information not in 1,000 and earnings per share reported in basic and
diluted.
<F2>Information not in 1,000
</FN>
</TABLE>
