INDIANA 35-1286807
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
500 WASHINGTON STREET COLUMBUS, INDIANA 47201
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(812) 376-1909 WWW.IRWINFINANCIAL.COM
(CORPORATION'S TELEPHONE NUMBER, INCLUDING AREA (WEB SITE)
CODE)
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TITLE OF CLASS: COMMON STOCK*
TITLE OF CLASS: 9.25% CUMULATIVE TRUST PREFERRED SECURITIES ISSUED BY IFC
CAPITAL TRUST I AND THE GUARANTEE WITH RESPECT THERETO.
TITLE OF CLASS: 10.50% CUMULATIVE TRUST PREFERRED SECURITIES ISSUED BY IFC
CAPITAL TRUST II AND THE GUARANTEE WITH RESPECT THERETO.
TITLE OF CLASS: 8.75% CUMULATIVE CONVERTIBLE TRUST PREFERRED SECURITIES
ISSUED BY IFC CAPITAL TRUST III AND THE GUARANTEE WITH
RESPECT THERETO.
TITLE OF CLASS 8.70% CUMULATIVE TRUST PREFERRED SECURITIES ISSUED BY IFC
CAPITAL TRUST VI AND THE GUARANTEE WITH RESPECT THERETO.
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Corporation'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]
Indicate by check mark whether the Corporation is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes [X] No [ ]
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant, based on the closing price for the registrant's common stock on the New York Stock Exchange on June 30, 2002, was approximately $332,375,690.
The aggregate market value of the voting stock held by non-affiliates of the Corporation was $292,339,062 as of March 10, 2003. As of March 10, 2003, there were outstanding 27,824,897 common shares of the Corporation.
* Includes associated rights.
SELECTED PORTIONS OF THE FOLLOWING DOCUMENTS PART OF FORM 10-K INTO WHICH INCORPORATED -------------------------------------------- ----------------------------------------- DEFINITIVE PROXY STATEMENT FOR ANNUAL MEETING PART III OF SHAREHOLDERS TO BE HELD APRIL 24, 2003 EXHIBIT INDEX ON PAGES 108 THROUGH 110 |
Part I
Item 1 -- Business.................................................... 2
Item 2 -- Properties.................................................. 15
Item 3 -- Legal Proceedings........................................... 15
Item 4 -- Submission of Matters to a Vote of Security Holders......... 18
Part II
Item 5 -- Market for Corporation's Common Equity and Related
Stockholder Matters......................................... 19
Item 6 -- Selected Financial Data..................................... 20
Item 7 -- Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 22
Item 7A -- Quantitative and Qualitative Disclosures about Market
Risk........................................................ 70
Item 8 -- Financial Statements and Supplementary Data................. 70
Item 9 -- Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 105
Part III
Item 10 -- Directors and Executive Officers of the Corporation......... 106
Item 11 -- Executive Compensation...................................... 106
Item 12 -- Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters.................. 106
Item 13 -- Certain Relationships and Related Transactions.............. 107
Item 14 -- Controls and Procedures..................................... 107
Part IV
Item 15 -- Exhibits, Financial Statement Schedules, and Reports on Form
8-K......................................................... 108
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ITEM 1. BUSINESS
GENERAL
We are a diversified financial services company headquartered in Columbus, Indiana with $4.9 billion in assets at December 31, 2002. We focus primarily on the extension of credit to consumers and small businesses as well as providing the ongoing servicing of those customer accounts. We currently operate five major lines of business through our direct and indirect subsidiaries. Our major lines of business are: mortgage banking, commercial banking, home equity lending, commercial finance and venture capital.
We are a regulated bank holding company and we conduct our consumer and commercial lending businesses through various operating subsidiaries. Our banking subsidiary, Irwin Union Bank and Trust Company, was organized in 1871 and we formed the holding company in 1972. Our direct and indirect major subsidiaries include Irwin Union Bank and Trust, a commercial bank, which together with Irwin Union Bank, F.S.B., a federal savings bank, conduct our commercial banking activities; Irwin Mortgage Corporation, a mortgage banking company; Irwin Home Equity Corporation, a consumer home equity lending company; Irwin Commercial Finance Corporation, a commercial finance subsidiary; and Irwin Ventures LLC, a venture capital company.
At the parent level, we work actively to add value to our lines of business by interacting with the management teams, capitalizing on interrelationships, providing centralized services and coordinating overall organizational decisions. Under this organizational structure, our mortgage banking, home equity and commercial finance lines of business operate as direct and indirect subsidiaries of Irwin Union Bank and Trust. This structure provides additional liquidity and results in regulatory oversight of our business.
Our Internet address is http://www.irwinfinancial.com.
We make available free of charge through our Internet website our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports as soon as reasonably practicable after we electronically file the material with the Securities and Exchange Commission (SEC). Our internet website and the information contained or incorporated in it are not intended to be incorporated into this Annual Report on Form 10-K.
MAJOR LINES OF BUSINESS
Mortgage Banking
We established our mortgage banking line of business when we acquired our subsidiary, Irwin Mortgage Corporation, formerly Inland Mortgage Corporation, in 1981. Irwin Mortgage became a subsidiary of Irwin Union Bank and Trust in October, 2002. In this line of business, Irwin Mortgage originates, purchases, sells, and services conventional and government agency-backed residential mortgage loans throughout the United States. Most of our mortgage originations either are insured or guaranteed by an agency of the federal government, such as the Federal Housing Authority (FHA) or the Veterans Administration (VA) or, in the case of conventional mortgages, meet requirements for resale to the Federal National Mortgage Association (FNMA) or the Federal Home Loan Mortgage Corporation (FHLMC). We originate mortgage loans through retail offices, direct marketing and our Internet website. We also purchase mortgage loans through mortgage brokers. Our relationships with realtors, homebuilders and brokers help us identify potential borrowers. Irwin Mortgage also engages in the mortgage reinsurance business through its subsidiary, Irwin Reinsurance Corporation, a Vermont corporation. In October 2002, we began originating mortgage loans through our new correspondent lending channel. We sell mortgage loans to institutional and private investors but may retain servicing rights to the loans we originate or purchase 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.
Commercial Banking
Our commercial banking line of business provides credit, cash management and personal banking products primarily to small businesses and business owners. We offer a full line of consumer, mortgage and commercial loans, as well as personal and commercial checking accounts, savings and time deposit accounts, personal and business loans, credit card services, money transfer services, financial counseling, property, casualty, life and health insurance agency services, trust services, securities brokerage and safe deposit facilities.
We offer commercial banking services through our banking subsidiaries, Irwin Union Bank and Trust, an Indiana state-chartered commercial bank, and Irwin Union Bank, F.S.B., a federal savings bank.
- Irwin Union Bank and Trust Company -- headquartered in Columbus, Indiana and organized in 1871, is a full service Indiana state-chartered commercial bank with offices currently located throughout nine counties in central and southern Indiana, as well as in Kalamazoo, Grandville (near Grand Rapids), Traverse City and Lansing, Michigan, and Carson City, Nevada; and
- Irwin Union Bank, F.S.B. -- headquartered in Louisville, Kentucky, is a full-service federal savings bank that began operations in December 2000. Currently we have offices located in Brentwood, Missouri (near St. Louis); Louisville, Kentucky; Salt Lake City, Utah; Las Vegas, Nevada; and Phoenix, Arizona. We anticipate pursuing the conversion of our Las Vegas and Salt Lake City branches of Irwin Union Bank, F.S.B. to branches of Irwin Union Bank and Trust Company.
We discuss this line of business further in the Commercial Banking section of the MD&A of this report.
Home Equity Lending
We established this line of business when we formed Irwin Home Equity Corporation as our subsidiary in 1994, headquartered in San Ramon, California. Irwin Home Equity became a subsidiary of Irwin Union Bank and Trust in 2001. In conjunction with Irwin Union Bank and Trust, Irwin Home Equity originates, purchases, securitizes and services home equity loans and lines of credit and first mortgages nationwide. Our target customers are principally credit worthy, home owning consumers who are active, unsecured credit card debt users. We market our home equity products (with loan to value ratios up to 125%) and first mortgage refinance programs (with loan to value ratios up to 100%) through direct mail, telemarketing, mortgage brokers and correspondent lenders nationwide and through the Internet. Irwin Home Equity's core competencies are credit risk management and analysis, risk assessment, and specialized home loan servicing, with particular expertise in test management and database analysis.
We discuss this line of business further in the Home Equity Lending section of the MD&A of this report.
Commercial Finance
Established in 1999, our commercial finance line of business (formerly called our equipment leasing line of business) originates small-ticket equipment leases through an established North American network of vendors and brokers and provides finance for franchisees of selected quick service restaurant concepts in the United States. The majority of our leases are full payout (no residual), small-ticket assets secured by commercial equipment. We finance a variety of commercial and office equipment types and try to limit the industry and geographic concentrations in our lease portfolio. Loans and leases to franchisees sometimes involve the financing of real estate as well as equipment.
In July 2000, the commercial finance line of business acquired an ownership of approximately 78% in Onset Capital Corporation, a Canadian small-ticket equipment leasing company headquartered in Vancouver, British Columbia. In December 2001, Onset Capital established Onset Alberta Ltd. as a subsidiary to facilitate its leasing business. In October 2001, we formed Irwin Franchise Capital Corporation to conduct our franchise leasing business. We established Irwin Commercial Finance (formerly, Irwin Capital Holdings) in April 2001 as a subsidiary of Irwin Union Bank and Trust to serve as the parent company for both our United States and Canadian commercial finance companies.
We discuss this line of business further in the Commercial Finance section of the MD&A of this report.
Venture Capital
We established this line of business when we formed Irwin Ventures Incorporated in August 1999. In our venture capital line of business, we make minority investments in early stage companies in the financial services industry and related fields that intend to use technology as a key component of their competitive strategy. We provide Irwin Ventures' portfolio companies the benefit of our management experience in the financial services industry. In addition, we expect that contacts made through venture activities may benefit management of our other lines of business through the sharing of technologies and market opportunities.
In August 1999, Irwin Ventures established a subsidiary, Irwin Ventures Incorporated-SBIC, which received a small business investment company license from the Small Business Administration. In December 2000, Irwin Ventures and Irwin Ventures-SBIC became Delaware limited liability companies. To date, the primary geographic focus of this line of business and each of our investments has been on the corridors of the east and west coasts between Washington, D.C. and Boston, and Palo Alto and Seattle.
Other Subsidiaries
Irwin Union Credit Insurance Corporation has its home office in Columbus, Indiana and provides credit life insurance to consumer loan customers of Irwin Union Bank.
We established Irwin Residual Holdings Corporation and Irwin Residual Holdings Corporation II in 2002 to hold residual interests that Irwin Union Bank and Trust Company transferred to Irwin Financial Corporation. The residual interests were created as a result of securitizations in our home equity line of business.
We continue to hold certain small-ticket equipment leases in our subsidiary, Irwin Leasing Corporation (the former Affiliated Capital Corp.). The leases were not part of the 1998 sale of substantially all of the assets of Affiliated Capital to DVI Financial Services, Inc. Irwin Leasing and its parent, Irwin Equipment Finance Corporation, are inactive except for the leases.
No single part of our business 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 our business.
COMPETITION
In our mortgage banking business we compete for mortgage loans with other national, and regional mortgage banking companies, as well as commercial banks, savings banks, credit unions and savings and loan associations.
In our commercial banking business, we compete with commercial banks, savings banks, thrifts and credit unions for deposits and loans in and around the counties surrounding our branch offices, and with a number of nonbank companies located throughout the United States, including insurance companies, retailers, securities firms, companies offering money market accounts, and national credit card companies.
In our home equity lending business, our primary competitors for our home equity loans and lines of credit include banks, mortgage banks, large securities firms, credit unions, thrifts, credit card issuers, finance companies, and other home equity and mortgage lenders with operations that are either national, regional, local or web-enabled in scope. Competition can take many forms, including convenience in obtaining loans, customer service, marketing and distribution channels, terms provided and interest rates charged to borrowers.
In our venture capital line of business, we compete primarily with other venture capital firms that invest in start-up companies.
Some of our competitors are not subject to the same degree of regulation as that imposed on bank holding companies, state banking organizations and federal saving banks. In addition, many larger banking organizations, mortgage companies, mortgage banks, insurance companies and securities firms have significantly greater resources than we do. As a result, some of our competitors have advantages over us in name recognition and market penetration.
GENERAL
The financial services business is highly regulated, primarily for the protection of depositors and other customers. The following is a summary of several applicable statutes and regulations that apply to us and to our subsidiaries. These summaries are not complete, and you should refer to the statutes and regulations for more information. Also, these statutes and regulations may change in the future, and we cannot predict what effect these changes, if made, will have on our operations.
BANK HOLDING COMPANY REGULATION
We are registered as a bank holding company with the Board of Governors of the Federal Reserve System under the Bank Holding Company Act of 1956, as amended and the related regulations, referred to as the BHC Act. We are subject to regulation, supervision and examination by the Federal Reserve, and as part of this process, we must file reports and additional information with the Federal Reserve.
Minimum Capital Requirements
The Federal Reserve has adopted risk-based capital guidelines for assessing bank holding company capital adequacy. These standards define capital and establish minimum capital ratios in relation to assets, both on an aggregate basis and as adjusted for credit risks and off-balance sheet exposures. Under the Federal Reserve's risk-based guidelines applicable to us, capital is classified into two categories for bank holding companies:
Tier 1 capital, or core capital, consists of:
- common stockholder's equity;
- qualifying noncumulative perpetual preferred stock;
- qualifying cumulative perpetual preferred stock (subject to some limitations, and including our Trust Preferred securities, of which $118 million qualified as Tier 1 capital as of December 31, 2002); and
- minority interests in the common equity accounts of consolidated subsidiaries;
less
- goodwill;
- credit-enhancing interest-only strips (certain amounts only); and
- specified intangible assets.
Tier 2 capital, or supplementary capital, consists of:
- allowance for loan and lease losses;
- perpetual preferred stock and related surplus;
- hybrid capital instruments;
- unrealized holding gains on equity securities;
- perpetual debt and mandatory convertible debt securities;
- term subordinated debt, including related surplus; and
- intermediate-term preferred stock, including related securities.
The Federal Reserve's capital adequacy guidelines require bank holding companies to maintain a minimum ratio of qualifying total capital to risk-weighted assets of 8 percent, at least 4 percent of which must be in the form of Tier 1 capital. Risk-weighted assets include assets and credit equivalent amounts of off-balance sheet items of bank holding companies that are assigned to one of several risk categories, based on the obligor or the nature of the collateral. The Federal Reserve has established a minimum ratio of Tier 1 capital (less any intangible capital items) to total assets (less any intangible assets), or leverage ratio, of 3 percent for strong bank holding companies (those rated a composite "1" under the Federal Reserve's rating system). For all other bank holding companies, the minimum ratio of Tier 1 capital to total assets is 4 percent. Also, the Federal Reserve continues to consider the Tier 1 leverage ratio in evaluating proposals for expansion or new activities.
In its capital adequacy guidelines, the Federal Reserve emphasizes that the standards discussed above are minimums and that banking organizations generally are expected to operate well above these minimum levels. These guidelines also state that banking organizations experiencing growth, whether internally or through acquisitions or other expansionary initiatives, are expected to maintain strong capital positions substantially above the minimum levels.
As of December 31, 2002, we had regulatory capital in excess of all the Federal Reserve's minimum levels and our internal minimum target of 11% for risk-adjusted capital. Our ratio of total capital to risk weighted assets at December 31, 2002 was 13.2% and our Tier 1 leverage ratio was 9.3%.
Residual Interests. On November 29, 2001, the four federal banking agencies jointly adopted revised regulatory capital standards regarding the treatment of certain recourse obligations, direct credit substitutes, residual interests in assets securitizations, and other securitized transactions that expose financial institutions primarily to credit risk. The agencies had previously published guidelines on securitization activities in December, 1999 (the "Securitization Guidance") which dealt with the risk management and regulatory oversight issues involved with asset securitizations and residual interests.
Residual interests generally include any on-balance sheet asset created by the sale of financial assets that results in the retention of any credit risks, directly or indirectly, associated with the transfer of assets, where the retained risk exceeds a pro rata share of the organization's claim on the assets, whether through subordination provisions or other credit enhancement techniques.
The revised rules (the "New Rules") became effective January 1, 2002 for residual interests related to any transaction that settles on or after that date. For transactions that settled prior to the effective date of the New Rules, capital treatment prescribed by the application of the New Rules was delayed until December 31, 2002.
Capital Treatment of Residual Interests. The New Rules imposed a concentration limit on credit-enhancing interest-only strips (CEIOS), a subset of residual interests, and a dollar-for-dollar capital requirement on residual interests not deducted from Tier 1 capital.
CEIOS are, generally, assets created from the excess interest on assets transferred (after reduction for administrative expenses, investor interest payments, servicing fees, and credit losses on investors' interests in these assets) that serve as credit enhancements for the investors. CEIOS are the residual interests most often resulting from asset securitizations such as our prior securitizations of home equity loans, in which the seller of loans accounts for the transaction using gain-on-sale accounting treatment. Under the New Rules, CEIOS are limited to 25% of Tier 1 capital, with the excess deducted from Tier 1 capital. At December 31, 2002, our CEIOS represented 17% of Tier 1 capital.
The New Rules reflect the policy in the existing Securitization Guidance that imposes more frequent supervisory review, limitations on residual interest holdings, more stringent capital requirements, or other supervisory constraints on banking organizations found by the regulatory agencies to be lacking effective risk management programs or engaging in practices that present safety and soundness concerns. The Securitization Guidance provides that a bank's failure to understand the risks inherent in the securitization activities and to incorporate them into risk management systems and internal capital allocations may constitute an unsafe or unsound banking practice and may result in the down-grading of an organization's regulatory ratings.
Expansion
The BHC Act requires prior Federal Reserve approval for certain activities, such as the acquisition by a bank holding company of control of another bank or bank holding company. Under the BHC Act, a bank holding company may engage in activities that the Federal Reserve has determined to be so closely related to banking or managing or controlling banks as to be a proper incident to those banking activities, such as operating a mortgage bank or a savings association, conducting leasing and venture capital investment activities, performing trust company functions, or acting as an investment or financial advisor. See the section on "Interstate Banking and Branching Legislation" below.
Dividends
The Federal Reserve has policies on the payment of cash dividends by bank holding companies. The Federal Reserve believes that a bank holding company experiencing earnings weaknesses should not pay cash dividends (1) exceeding its net income or (2) which only could be funded in ways that would weaken a bank holding company's financial health, such as by borrowing. Also, the Federal Reserve possesses enforcement powers over bank holding companies and their non-bank subsidiaries to prevent or remedy unsafe or unsound practices or violations of applicable statutes and regulations. Among these powers is the ability to prohibit or limit the payment of dividends by banks and bank holding companies.
The Federal Reserve expects us to act as a source of financial strength to our banking subsidiaries and to commit resources to support them. In implementing this policy, the Federal Reserve could require us to provide financial support when we otherwise would not consider ourselves able to do so.
In addition to the restrictions on fundamental corporate actions such as acquisitions and dividends imposed by the Federal Reserve, Indiana law also places limitations on our authority with respect to such activities.
BANK AND THRIFT REGULATION
Indiana law subjects Irwin Union Bank and Trust and its subsidiaries to supervision and examination by the Indiana Department of Financial Institutions (DFI). Irwin Union Bank and Trust is a member of the Federal Reserve System and, along with its subsidiaries, is also subject to regulation, examination and supervision by the Federal Reserve. These subsidiaries include Irwin Mortgage, Irwin Home Equity and Irwin Commercial Finance. Irwin Union Bank, F.S.B. is a federally chartered savings bank. Accordingly, it is governed by and subject to regulation, examination and supervision by the Office of Thrift Supervision (OTS), and is required to comply with the rules and regulations of the OTS under the Home Owners' Loan Act (HOLA).
The Federal Reserve also supervises Irwin Union Bank and Trust's compliance with federal law and regulations that restrict loans by member banks to their directors, executive officers, and other controlling persons.
The deposits of Irwin Union Bank and Trust are insured by the Bank Insurance Fund (BIF) and the deposits of Irwin Union Bank, F.S.B. are insured by the Savings Association Insurance Fund (SAIF) under the provisions of the Federal Deposit Insurance Act (FDIA). As a result, Irwin Union Bank and Trust and Irwin Union Bank, F.S.B. also are subject to supervision and examination by the Federal Deposit Insurance Corporation (FDIC). The regulatory scheme applicable to Irwin Union Bank and Trust is comparable to that imposed on Irwin Union Bank, F.S.B. by the OTS.
Mortgage Banking and Residential Lending Regulation
The residential lending activities of Irwin Union Bank and Trust, the mortgage banking activities of Irwin Mortgage, and the home equity lending business of Irwin Home Equity are regulated by the Federal Reserve. The Federal Reserve has broad authority to oversee the banking activities of Irwin Union Bank and Trust, as the primary federal regulator of the bank pursuant to the FDIA, and the nonbanking subsidiaries of both Irwin Financial Corporation and Irwin Union Bank and Trust, pursuant to the BHC Act. Federal Reserve regulations, such as restrictions on affiliate transactions, asset quality and earnings performance, apply to our residential lending activities. The DFI has comparable supervisory and examination authority over Irwin Mortgage, Irwin Home Equity and Irwin Commercial Finance due to their status as subsidiaries of Irwin Union Bank and Trust.
Capital Requirements
The Federal Reserve has published regulations applicable to state member banks such as Irwin Union Bank and Trust regarding the maintenance of adequate capital. While retaining the authority to set capital ratios for individual banks, these regulations group banks into categories based upon total risk-based capital, Tier 1 risk-based capital and a leverage ratio (Tier 1 capital divided by average total assets). These categories, and the applicable capital ratios, are as follows:
The Federal Reserve requires banks to hold capital commensurate with the level and nature of all of the risks, including the volume and severity of problem loans, to which they are exposed. The Federal Reserve requires all state member banks to meet a minimum ratio of qualifying total capital to weighted risk assets of 8 percent, of which at least 4 percent should be in the form of Tier 1 capital. For purposes of this ratio, Tier 1 capital is defined as the sum of core capital elements less goodwill and other intangible assets.
The minimum ratio of Tier 1 capital to total assets for strong banking institutions (rated composite "1" under the uniform rating system of banks) is 3 percent. For all other institutions, the minimum ratio of Tier 1 capital to total assets is 4 percent. Banking institutions with supervisory, financial, operational, or managerial weaknesses are expected to maintain capital ratios well above the minimum levels, as are institutions with high or inordinate levels of risk. Banks experiencing or anticipating significant growth are also expected to maintain capital, including tangible capital positions, well above the minimum levels. For example, most such institutions generally have operated at capital levels ranging from 1 to 2 percent above the stated minimums. Higher capital ratios could be required if warranted by the particular circumstances to risk profiles of individual banks. The standards set forth above specify minimum supervisory ratios based primarily on broad credit risk considerations. The risk-based ratio does not take explicit account of the quality of individual asset portfolios or the range of other types of risks to which banks may be exposed, such as interest rate, liquidity, market or operational risks. For this reason, banks are generally expected to operate with capital positions above the minimum ratios.
At December 31, 2002, Irwin Union Bank and Trust had a total risk-based capital ratio of 12.4%, a Tier 1 capital ratio of 10.4%, and a leverage ratio of 9.8% and was considered well-capitalized. See "Bank Holding Company Regulation -- Minimum Capital Requirements -- Residual Interests" earlier in this section for a discussion of the impact of the new regulatory capital treatment rules. We transferred our residual assets held at Irwin Union Bank and Trust to our holding company in the form of dividends during the fourth quarter of 2001 and the first quarter of 2002. Because of the amount of the residuals, we sought and received regulatory approval of these dividends as required. In connection with our decision in the fourth quarter of 2001 to dividend these residual assets out of Irwin Union Bank and Trust and after discussions with our regulators as well as consideration of the risk profile of our organization, our Board of Directors adopted resolutions regarding maintenance of capital levels above the well-capitalized minimum requirements beginning March 31, 2002. The benchmark levels we established are 12% total capital to risk-weighted assets at Irwin Union Bank and Trust, and 11% total capital to risk-weighted assets at Irwin Financial. Although the dividends of the residual assets did not have a meaningful impact on our consolidated capital ratios calculated under the New Rules, the dividends had the effect of increasing regulatory capital ratios at Irwin Union Bank and Trust.
The Federal Reserve, the OTS, the FDIC and other federal banking agencies also adopted a rule modifying the risk-based capital standards to provide for consideration of interest rate risk when assessing capital adequacy of a bank or savings association. Under this rule, the Federal Reserve, the OTS and the FDIC must explicitly include a bank or savings association's exposure to declines in the economic value of their capital due to changes in interest rates as a factor in evaluating capital adequacy of a bank or savings association. The Federal Reserve, the OTS, the FDIC and other federal banking agencies also adopted a joint agency policy statement providing guidance for managing interest rate risk. The policy statement emphasizes the importance of adequate management oversight and a sound risk management process. This assessment of interest rate risk management made by the banks' examiners will be incorporated into the banks' overall risk management rating and used to determine management's effectiveness.
Insurance of Deposit Accounts
Under the Federal Deposit Insurance Corporation Improvements Act of 1991 (FDICIA), as FDIC-insured institutions, Irwin Union Bank and Trust and Irwin Union Bank, F.S.B. are required to pay deposit insurance premiums based on the risk they pose to BIF and SAIF, respectively. The FDIC also has authority to raise or lower assessment rates on insured deposits to achieve the statutorily required reserve ratios in insurance funds and to impose special additional assessments. Each depository institution is assigned to one of three capital groups: "well capitalized," "adequately capitalized" or "undercapitalized." An institution is considered well capitalized if it has a total risk-based capital ratio of 10% or greater, has a Tier 1 risk-based capital ratio of 6% or greater, has a leverage ratio of 5% or greater and is not subject to any order or written directive to meet and maintain a specific capital level. An "adequately capitalized" institution has a total risk-based capital ratio of 8% or greater, has a Tier 1 risk-based capital ratio of 4% or greater, has a leverage ratio of 4% or greater and does not meet the definition of a well capitalized bank. An institution is considered "undercapitalized" if it does not meet the definition of "well capitalized" or "adequately capitalized." Within each capital group, institutions are assigned to one of three supervisory subgroups: "A" (institutions with few minor weaknesses), "B" (institutions that demonstrate weaknesses which, if not corrected, could result in significant deterioration of the institution and increased risk of loss to the insurance funds), and "C" (institutions that pose a substantial probability of loss to the insurance funds unless effective corrective action is taken). There are nine combinations of capital groups and supervisory subgroups to which varying assessment rates may apply. An institution's assessment rate depends on the capital category and supervisory category to which it is assigned.
Dividend Limitations
As a state member bank, Irwin Union Bank and Trust may not, without the approval of the Federal Reserve, declare a dividend if the total of all dividends declared in a calendar year, including the proposed dividend, exceeds the total of its net income for that year, combined with its retained net income of the preceding two years, less any required transfers to the surplus account. Under Indiana law, certain dividends require notice to, or approval by, the DFI, and Irwin Union Bank and Trust may not pay dividends in an amount greater than its net profits then available, after deducting losses and bad debts. The amount of the residual assets transferred to the holding company as a dividend from the bank exceeded the amount that could have been dividended by the bank to the bank holding company without regulatory approval as described above and, as a result, we sought and obtained regulatory approval for the dividend. Due to the limitations described above, we must now obtain prior approval from the DFI and the Federal Reserve Bank of Chicago before Irwin Union Bank and Trust can pay additional dividends to us until such time as net income for the year, combined with retained net income of the preceding two years, less any required transfers to the surplus account, exceeds the amount to be dividended.
Our ability and the ability of Irwin Union Bank and Trust and Irwin Union Bank, F.S.B. to pay dividends also may be affected by the various capital requirements and the capital and noncapital standards established under the FDICIA, as described above. Our rights and the rights of our shareholders and our creditors to participate in any distribution of the assets or earnings of our subsidiaries also is subject to the prior claims of creditors of our subsidiaries including the depositors of a bank subsidiary.
Interstate Banking and Branching Legislation
Under the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the Interstate Banking Act), banks are permitted, subject to being adequately or better capitalized, in compliance with Community Reinvestment Act requirements and in compliance with state law requirements (such as age-of-bank limits and deposit caps), to merge with one another across state lines and to create a main bank with branches in separate states. After establishing branches in a state through an interstate merger transaction, a bank may establish and acquire additional branches at any location in the state where any bank involved in the interstate merger could have established or acquired branches under applicable federal and state law.
Although Irwin Union Bank, F.S.B. has a different primary federal regulator from Irwin Union Bank and Trust, most, if not all, of the federal statutes and regulations applicable to Irwin Union Bank also apply to Irwin Union Bank, F.S.B. However, as a federally chartered savings bank, Irwin Union Bank, F.S.B. has greater flexibility in pursuing interstate branching than an Indiana state bank. A federal savings association may establish or operate a branch in any state outside the state of its home office if the association meets certain statutory requirements. These requirements do not apply if the law of the state where the branch is to be located offers reciprocal branching privileges with the state where the savings association has its home office located. As Irwin Union Bank and Trust does with its supervisory regulatory agencies, Irwin Union Bank, F.S.B. must file reports with the OTS and the FDIC concerning its activities and financial condition in addition to obtaining regulatory approvals before establishing branches or entering into certain transactions such as mergers with, or acquisitions of, other financial institutions.
Community Reinvestment
Under the Community Reinvestment Act (CRA), a financial institution has a continuing and affirmative obligation, consistent with its safe and sound operation, to help meet the credit needs of its entire community, including low- and moderate-income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions, or limit an institution's discretion to develop the types of products and services that it believes are best suited to its particular community that are consistent with the CRA. Institutions are rated on their performance in meeting the needs of their communities. Performance is tested in three areas: (a) lending, which evaluates the institution's record of making loans in its assessment areas; (b) investment, which evaluates the institution's record of investing in community development projects, affordable housing and programs benefiting low or moderate income individuals and business; and (c) service, which evaluates the institution's delivery of services through its branches, ATMs and other offices. The CRA requires each federal banking agency, in connection with its examination of a financial institution, to assess and assign one of four ratings to the institution's record of meeting the credit needs of its community and to take this record into account in evaluating certain applications by the institution, including applications for charters, branches and other deposit facilities, relocations, mergers, consolidations, acquisitions of assets or assumptions of liabilities, and savings and loan holding company acquisitions. The CRA also requires that all institutions publicly disclose their CRA ratings. Both Irwin Union Bank and Trust and Irwin Union Bank, F.S.B. received a "satisfactory" rating on their most recent CRA performance evaluations.
Brokered deposits include funds obtained, directly or indirectly, by or through a deposit broker for deposit into one or more deposit accounts. Well-capitalized institutions are not subject to limitations on brokered deposits, while an adequately capitalized institution is able to accept, renew or rollover brokered deposits only with a waiver from the FDIC and subject to certain restrictions on the yield paid on such deposits. Undercapitalized institutions are not permitted to accept brokered deposits. Irwin Union Bank and Trust and Irwin Union Bank, F.S.B. are permitted to accept brokered deposits.
Gramm-Leach-Bliley Act
On November 12, 1999, the Gramm-Leach-Bliley Act (the GLB Act) was enacted, which amended or repealed certain provisions of the Glass-Steagall Act and other legislation that restricted the ability of bank holding companies, securities firms and insurance companies to affiliate with one another. The GLB Act established a comprehensive framework to permit affiliations among commercial banks, insurance companies and securities firms. The GLB Act contains provisions intended to safeguard consumer financial information in the hands of financial service providers by, among other things, requiring these entities to share their privacy policies to their customers and allowing customers to "opt out" of having their financial service providers disclose their confidential financial information with non-affiliated third parties, subject to certain exceptions. Financial privacy regulations implementing the GLB provisions became effective during 2001. Similar to most other consumer-oriented laws, the regulations contain some specific prohibitions and require timely disclosure of certain information. We do not anticipate that the GLB Act will have a material adverse effect on our operations or prospects or those of our subsidiaries. However, to the extent the GLB Act permits banks, securities firms and insurance companies to affiliate, the financial services industry may experience further consolidation. This consolidation could result in a growing number of larger financial institutions that offer a wider variety of financial services than we currently offer and that can aggressively compete in the markets we currently serve.
COMPLIANCE WITH CONSUMER PROTECTION LAWS
Our subsidiaries also are subject to many federal and state consumer protection statutes and regulations including the Equal Credit Opportunity Act, the Fair Housing Act, the Truth in Lending Act, the Truth in Savings Act, the Real Estate Settlement Procedures Act and the Home Mortgage Disclosure Act. Among other things, these acts:
- require lenders to disclose credit terms in meaningful and consistent ways;
- prohibit discrimination against an applicant in any consumer or business credit transaction;
- prohibit discrimination in housing-related lending activities;
- require certain lenders to collect and report applicant and borrower data regarding loans for home purchases or improvement projects;
- require lenders to provide borrowers with information regarding the nature and cost of real estate settlements;
- prohibit certain lending practices and limit escrow account amounts with respect to real estate transactions; and
- prescribe possible penalties for violations of the requirements of consumer protection statutes and regulations.
Equal Credit Opportunity Act
The federal Equal Credit Opportunity Act prohibits discrimination against an applicant in any credit transaction, whether for consumer or business purposes, on the basis of race, color, religion, national origin, sex, marital status, age (except in limited circumstances), receipt of income from public assistance programs or good faith exercise of any rights under the Consumer Credit Protection Act. In addition to prohibiting outright discrimination on any of the impermissible bases listed above, an effects test has been applied to determine whether a violation of the act has occurred. This means that if a creditor's actions have had the effect of discriminating, the creditor may be held liable, even when there is no intent to discriminate. In addition to actual damages, the Equal Credit Opportunity Act permits regulatory agencies to take enforcement action and provides for punitive damages. Successful complainants also may be entitled to an award of court costs and attorneys' fees.
Fair Housing Act
The federal Fair Housing Act regulates many lending practices, including prohibiting discrimination in a lender's housing-related lending activities against any person because of race, color, religion, national origin, sex, handicap or familial status. The Fair Housing Act is broadly written and has been broadly interpreted by the courts. A number of lending practices have been found to be, or may be considered, illegal under the Fair Housing Act, including some that are not specifically mentioned in the act itself. Among those practices that have been found to be, or may be considered, illegal under the Fair Housing Act are declining a loan for the purposes of racial discrimination, making excessively low appraisals of property based on racial considerations and pressuring, discouraging, or denying applications for credit on a prohibited basis.
The Fair Housing Act allows a person who believes that he or she has been discriminated against to file a complaint with the Department of Housing and Urban Development (HUD). Aggrieved persons also may initiate a civil action. The Fair Housing Act also permits the Attorney General of the United States to commence a civil action if there is reasonable cause to believe that a person has been discriminated against in violation of the Fair Housing Act. Penalties for violation of the Fair Housing Act include actual damages suffered by the aggrieved person and injunctive or other equitable relief. The courts also may assess civil penalties.
Home Mortgage Disclosure Act
The federal Home Mortgage Disclosure Act grew out of public concern over credit shortages in certain urban neighborhoods. One purpose of the Home Mortgage Disclosure Act is to provide public information that will help show whether financial institutions are serving the housing credit needs of the neighborhoods and communities in which they are located. The Home Mortgage Disclosure Act also includes a "fair lending" aspect that requires the collection and disclosure of data about applicant and borrower characteristics as a way of identifying possible discriminatory lending patterns and enforcing anti-discrimination statutes. The Home Mortgage Disclosure Act requires institutions to report data regarding applications for loans for the purchase or improvement of one-to-four family and multifamily dwellings, as well as information concerning originations and purchases of such loans. Federal bank regulators rely, in part, upon data provided under the Home Mortgage Disclosure Act to determine whether depository institutions engage in discriminatory lending practices.
The appropriate federal banking agency (that is, the Federal Reserve for Irwin Union Bank and Trust and the OTS for Irwin Union Bank, F.S.B.), or in some cases, HUD, enforces compliance with the Home Mortgage Disclosure Act and implements its regulations. Administrative sanctions, including civil money penalties, may be imposed by supervisory agencies for violations of this act.
Real Estate Settlement Procedures Act
The federal Real Estate Settlement Procedures Act (RESPA), requires lenders to provide borrowers with disclosures regarding the nature and cost of real estate settlements. RESPA also prohibits certain abusive practices, such as kickbacks, and places limitations on the amount of escrow accounts. Violations of RESPA may result in imposition of penalties, including: (1) civil liability equal to three times the amount of any charge paid for the settlement services or civil liability of up to $1,000 per claimant, depending on the violation; (2) awards of court costs and attorneys' fees; and (3) fines of not more than $10,000 or imprisonment for not more than one year, or both. A significant number of individual claims and purported consumer class action claims have been commenced against financial institutions and other mortgage lending companies, including Irwin Mortgage, alleging violations of the prohibition against kickbacks and seeking civil damages, court costs and attorneys' fees. See the "Legal Proceedings" section of this report.
Truth in Lending Act
The federal Truth in Lending Act is designed to ensure that credit terms are disclosed in a meaningful way so that consumers may compare credit terms more readily and knowledgeably. As a result of the act, all creditors must use the same credit terminology and expressions of rates, the annual percentage rate, the finance charge, the amount financed, the total of payments and the payment schedule.
Violations of the Truth in Lending Act may result in regulatory sanctions and in the imposition of both civil and, in the case of willful violations, criminal penalties. Under certain circumstances, the Truth in Lending Act and Federal Reserve Regulation Z also provide a consumer with a right of rescission, which relieves the consumer of the obligation to pay amounts to the creditor or to a third party in connection with the offending transaction, including finance charges, application fee, commitment fees, title search fees and appraisal fees. Consumers may also seek actual and punitive damages for violations in the Truth in Lending Act. See the "Legal Proceedings" section of this report.
State Consumer Protection Laws
In addition to the federal consumer protection laws discussed above, our subsidiaries are also subject to state consumer protection laws that regulate the mortgage origination and lending businesses of these subsidiaries. As part of the home equity line of business in conjunction with its subsidiary, Irwin Home Equity, Irwin Union Bank and Trust originates home equity loans through its branch in Nevada. Irwin Union Bank and Trust uses interest rates and loan terms in its home equity loans and lines of credit that are authorized by Nevada law, but might not be authorized by the laws of the states in which the borrowers are located. As a FDIC-insured, state member bank, Irwin Union Bank and Trust is authorized by Section 27 of the FDIA to charge interest at rates allowed by the laws of the state where the bank is located regardless of any inconsistent state law, and to apply these rates to loans to borrowers in other states. The FDIC has opined that a state bank with branches outside of the state in which it is chartered may also be located in a state in which it maintains an interstate branch. Irwin Union Bank and Trust relies on Section 27 of the FDIA and the FDIC opinion in conducting its home equity lending business described above. From time to time, state regulators have questioned the application of Section 27 of the FDIA to credit practices affecting citizens of their states. Any change in Section 27 of the FDIA or in the FDIC's interpretation of this provision, or any successful challenge as to the permissibility of these activities, could require that we change the terms of some of our loans or the manner in which we conduct our home equity line of business.
EMPLOYEES AND LABOR RELATIONS
At January 31, 2003, we and our subsidiaries had a total of 3,288 employees, including full-time and part-time employees. We continue a commitment of equal employment opportunity for all job applicants and staff members, and management regards its relations with its employees as satisfactory.
EXECUTIVE OFFICERS
Our executive officers are elected annually by the Board of Directors and serve for a term of one year or until their successors are elected and qualified. In addition to our Chairman, Mr. Miller, and President, Mr. Nash, both of whom also serve as directors, our executive officers are listed below.
Claude E. Davis (42) has been President of Irwin Union Bank and Trust since January 1996. He has been an officer since 1988.
Elena Delgado (47) has been President and Chief Executive Officer of Irwin Home Equity since September 1994.
Paul D. Freudenthaler (38) joined us as Vice President -- Financial Risk Management in December 2001. From September 2000 through November 2001, he was Corporate Controller for America Online Latin America, an Internet service provider. From July 2000 to August 2000 he served as Senior Vice President -- Treasurer of Telscape International, Inc., a development stage telecommunications company. Prior thereto, he held the position of Chief Accounting Officer of Telscape from July 1999 until June 2000. Subsequent to his departure from Telscape, Telscape filed a voluntary petition for relief under Chapter 11 of the U.S. Bankruptcy Code on April 27, 2001. From February 1999 through June 1999, he was Director -- International of Bank United, F.S.B. From January 1994 through January 1999, he was Director -- International of Irwin Mortgage Corporation, our subsidiary.
Jose M. Gonzalez (44) has been our Vice President -- Internal Audit since October 1995. In 2001, he was also appointed as Vice President -- Operational Risk Management.
Robert H. Griffith (45) has been President and Chief Executive Officer of Irwin Mortgage since January 2001. He has been an officer of Irwin Mortgage since 1993.
Theresa L. Hall (50) has been our Vice President -- Human Resources since 1988 and has been one of our officers since 1980.
Bradley J. Kime (42) has been President of Irwin Union Bank F.S.B. since December 2000, and is also Chief Operating Officer and Executive Vice President of Irwin Union Bank and Trust. He has been an officer of Irwin Union Bank and Trust since 1987, and one of our officers since 1986.
Joseph R. LaLeggia (41) has been our President of Irwin Commercial Finance Corporation since July of 2002. From April 1998 to July of 2002 he was president and chief executive officer of Onset Capital Corporation. From January 1997 until April of 1998 he was President of AT&T Capital Canada Inc. He held various executive positions with AT&T Capital Canada since 1992, including Chief Financial Officer.
Jody A. Littrell (35) has been our Vice President and Controller since March 2000. He was employed with Arthur Andersen LLP from September 1990 to March 2000.
Ellen Z. Mufson (54) has been our Vice President -- Legal and Assistant Secretary since September 1997. She was Vice President -- Legal Counsel of Irwin Union Bank and Trust from July 1996 through August 1997, and our Corporate Counsel from January 1995 through June 1996.
Nancy Roth (46) has been our Vice President -- Assistant General Auditor since May of 2002. She was employed by Bank One Corp. from May of 1995 through May of 2002, becoming a Vice President and Accounting Manager with them in February of 1996.
Steven R. Schultz (37) joined us as Vice President -- Legal in January 2002. From August 1999 through December 2001 he was an attorney in the London office of Fried, Frank, Harris, Shriver & Jacobson, focusing primarily on mergers and acquisitions, capital markets financings and private equity transactions. From August 1993 until July 1999 he practiced corporate and securities law at Barnes & Thornburg in Indianapolis, Indiana.
Matthew F. Souza (46) has been our Senior Vice President -- Ethics since August 1999 and our Secretary since 1986. He has been one of our officers since 1986.
Thomas D. Washburn (56) has been our Executive Vice President since August 1999 and has been one of our officers since 1976. From 1981 to August 1999 he served as our Senior Vice President and Chief Financial Officer.
Brett R. Vanderkolk (37) has been our Vice President -- Treasurer since September 2000. From August 1996, to September 2000, he served as Manager, Corporate Finance for Arvin Industries, Inc. (manufacturer of automotive products).
Our main office and the main offices of Irwin Ventures LLC and Irwin Union Credit Insurance Corporation are located at 500 Washington Street, Columbus, Indiana, in space leased from Irwin Union Bank and Trust. The location and general character of our other materially important physical properties as of January 31, 2003 are as follows:
IRWIN MORTGAGE
The main office, where administrative and servicing activities are centered, is located at 10500 Kincaid Drive, Fishers, Indiana, and is leased. Loan production and satellite offices, which are leased, are operated from approximately 153 locations in 34 states.
IRWIN UNION BANK AND TRUST
The main office is located in four connected buildings at 500, 520 and 526 Washington Street, Columbus, Indiana. Irwin Union Realty Corporation, a wholly-owned subsidiary of Irwin Union Bank and Trust, owns these buildings in fee and leases them to Irwin Union Bank and Trust. One or the other of Irwin Union Bank and Trust or Irwin Union Realty owns the branch properties in fee at 5 locations in Columbus and Southern Indiana. These properties have no major encumbrances. Irwin Union Bank and Trust leases 11 other branch offices in Central and Southern Indiana, 4 offices in Michigan and 1 office in Nevada.
IRWIN UNION BANK, F.S.B.
The main office is located at 9300 Shelbyville Road, Louisville, Kentucky. Irwin Union Bank, F.S.B. leases 4 branch offices located in Arizona, Missouri, Nevada and Utah.
IRWIN HOME EQUITY
The main office is located at 12677 Alcosta Boulevard, Suite 500, San Ramon, California. Irwin Home Equity also occupies two other offices in San Ramon, California and a processing center in Carson City, Nevada. Irwin Home Equity leases all of its offices.
IRWIN COMMERCIAL FINANCE CORPORATION
The main office of Irwin Commercial Finance Corporation is located at 500 Washington Street, Columbus, Indiana. The office location is leased. The office of our United States commercial finance subsidiary, Irwin Business Finance, is located in Bellevue, Washington and is leased. Our Canadian commercial finance subsidiary, Onset Capital Corporation, has its main office in Vancouver, British Columbia, Canada, and operates 8 other offices, including a subsidiary, in 4 Canadian provinces. All of these offices are leased. The main office of our franchise leasing subsidiary, Irwin Franchise Capital Corporation, is located in Purchase, New York and is leased. Irwin Franchise Capital owns the building that houses its telemarketing center in Columbus, Nebraska, and has 8 other locations in 6 states, all of which are leased.
ITEM 3. LEGAL PROCEEDINGS
Culpepper and related cases.
Irwin Mortgage (formerly, Inland Mortgage), our indirect subsidiary, is a defendant in Culpepper v. Inland Mortgage Corporation, filed in April 1996, in the United States District Court for the Northern District of Alabama by borrowers purporting to represent a nationwide class. The lawsuit alleges that Irwin Mortgage violated the federal Real Estate Settlement Procedures Act (RESPA) in connection with certain payments made to mortgage brokers. A second lawsuit alleging similar violations was consolidated with Culpepper. In June 2001, the Court of Appeals for the 11th Circuit upheld the district court's certification of a plaintiff class and the case was remanded for further proceedings in the federal district court.
On October 18, 2001, the Department of Housing and Urban Development (HUD), the agency responsible for interpreting and implementing RESPA, issued a clarifying Policy Statement that explicitly disagreed with the ruling of the Court of Appeals for the 11(th) Circuit in Culpepper and with the court's interpretation of RESPA in connection with the types of payments at issue in Culpepper.
In response to the district court's order, the parties in Culpepper filed supplemental briefs analyzing the import of the new HUD policy statement on November 14, 2001. In addition to responding to the district court's order, Irwin Mortgage filed a petition for certiorari with the United States Supreme Court seeking review of the 11(th) Circuit's ruling, and on December 28, 2001, also filed a motion in the district court seeking a stay of further proceedings until the 11(th) Circuit rendered decisions in the other three RESPA cases pending in that court. On January 22, 2002, the Supreme Court denied Irwin Mortgage's petition for certiorari. On March 8, 2002, the district court granted Irwin Mortgage's motion to stay proceedings in Culpepper until the 11(th) Circuit decided the other RESPA cases pending in that court. The Beggs case was similarly stayed.
The 11(th) Circuit has now rendered decisions in all three of the RESPA
cases originally argued before it with Culpepper. On September 18, 2002, the
11(th) Circuit issued the first of these decisions in Heimmermann v. First Union
Mortgage Corp., ruling that the trial court abused its discretion in certifying
a class action under RESPA. In Heimmermann, the court expressly recognized that
it was, in effect, overruling its previous decision in Culpepper. On January 24,
2003, the 11(th) Circuit affirmed the denial of class certification by the
district courts in the remaining two RESPA cases.
On February 20, 2003, the parties in Culpepper filed a joint motion for a proposed scheduling order with the district court, which contemplates that Irwin Mortgage will file a motion to decertify the class and the plaintiffs will file a renewed motion for summary judgment.
If the class is not decertified and the district court finds that Irwin Mortgage violated RESPA, Irwin Mortgage could be liable for damages equal to three times the amount of that portion of payments made to the mortgage brokers that is ruled unlawful. Based on notices sent by the Culpepper plaintiffs to date to potential class members and additional notices that might be sent, we believe the Culpepper class is not likely to exceed 32,000 borrowers who meet the class specifications.
In addition to Culpepper and Beggs, there are three lawsuits, filed against Irwin Mortgage in 2002 in the Circuit Court of Calhoun County, Alabama (Cook v Irwin Mortgage, Ford v. Irwin Mortgage, and Hill v. Irwin Mortgage). These cases seek class action status and allege claims based on payments similar to those at issue in Culpepper. Another case, Gorman v. Irwin Mortgage, filed in 2002 in the United States District Court for the Northern District of Alabama, alleges RESPA violations both similar to and different from those in Culpepper in connection with payments made to mortgage brokers. Before Irwin Mortgage filed an answer in Gorman, the District Court granted plaintiff's motion to intervene in the Beggs case.
Irwin Mortgage intends to defend these lawsuits vigorously and believes it has numerous defenses to the alleged RESPA and similar violations. Irwin Mortgage further believes that the 11(th) Circuit's recent RESPA decisions provide grounds for reversal of the class certification by the district court in Culpepper. We have no assurance, however, that Irwin Mortgage will be successful in defeating class certification in Culpepper or ultimately prevailing on the merits in that case or the others. We have not established a reserve for this or the related cases. We are unable at this stage of the litigation to determine a reasonable estimate of potential loss Irwin Mortgage could suffer, but an adverse outcome in Culpepper or the other lawsuits could subject Irwin Mortgage to substantial monetary damages that could be material to our financial position.
In January, 2001, we, Irwin Leasing Corporation (formerly Affiliated Capital Corp.), our indirect subsidiary, and Irwin Equipment Finance Corporation, our direct subsidiary (the Irwin companies) were served as defendants in an action filed in the United States District Court for the Middle District of Pennsylvania. The suit alleges that a manufacturer/importer of certain medical devices (Matrix Biokinetics, Inc., and others) made misrepresentations to health care professionals and to government officials to improperly obtain Medicare reimbursement for treatments using the devices, and that the Irwin companies, through Affiliated Capital's financing activities, aided in making the alleged misrepresentations. The Irwin companies filed a motion to dismiss on February 12, 2001. On August 10, 2001, the court granted in part the motion of the Irwin companies by dismissing Irwin Financial and Irwin Equipment Finance as defendants in the suit. Irwin Leasing remains a defendant. We have not established any reserves for this case. Because the case is in the early stages of litigation, management is unable at this time to form a reasonable estimate of the amount of potential loss, if any, that Irwin Leasing could suffer. The company intends to defend this lawsuit vigorously.
McIntosh v. Irwin Home Equity Corporation.
Our subsidiary, Irwin Union Bank and Trust Company, is a defendant in a purported class action lawsuit filed in the U.S. District Court in Massachusetts in July 2001. The case involves loans purchased by Irwin Union Bank from FirstPlus, an unaffiliated third-party lender, and alleges a failure to comply with certain truth in lending disclosure requirements in making second mortgage home equity loans to the plaintiff borrowers. The complaint seeks rescission of the loans and other damages.
On September 30, 2002, the court granted plaintiffs' motion for certification of a class, subject to certain limitations. On October 15, 2002, we filed a motion for reconsideration with the district court and a petition for permission to appeal the class certification decision with the Court of Appeals for the 1st Circuit. The court of appeals has deferred taking action on the class certification issue until the district court rules on the motion for reconsideration.
If the class is ultimately upheld, the actual number of plaintiff borrowers will be determined only after a review of loan files. As specified, the plaintiff class is limited to those borrowers who obtained a mortgage loan originated with prepayment penalty provisions by FirstPlus during the three-year period prior to the filing of the suit. Only high-rate loans that are subject to the provisions of the Home Ownership and Equity Protection Act of 1994 would be included in the class. Although discovery has not yet commenced, we believe that out of approximately 200 loans acquired directly from FirstPlus through our correspondent lending channel and approximately 7,800 loans acquired from other parties in certain bulk acquisitions that may include FirstPlus originations, only a portion of these loans will satisfy all of the criteria for inclusion in the class.
We believe we have available numerous defenses to the allegations and intend to vigorously defend this lawsuit. Because this case is in the early stages of litigation, we are unable to form a reasonable estimate of potential loss, if any, and have not established any reserves related to this case.
Stamper v. A Home of Your Own, Inc.
On January 25, 2002, a jury in this case awarded the plaintiffs damages of $1.434 million, jointly and severally, against defendants, including our indirect subsidiary, Irwin Mortgage Corporation. The case was filed in August, 1998 in the Baltimore, Maryland, City Circuit Court. The nine plaintiff borrowers alleged that A Home of Your Own, Inc. and its principal, Robert Beeman, defrauded the plaintiffs by selling them defective homes at inflated prices and that Irwin Mortgage participated in the fraud. We have reserved for this case based upon advice of our legal counsel. Irwin Mortgage filed an appeal with the Maryland Court of Special Appeals, and oral argument was held on January 7, 2003. Although we believe Irwin Mortgage has justifiable grounds for appeal, we cannot predict at this time whether the appeal will ultimately be successful.
We and our subsidiaries are from time to time engaged in various matters of litigation including the matters described above, other assertions of improper or fraudulent loan practices or lending violations, and other matters, and we have a number of unresolved claims pending. In addition, as part of the ordinary course of business, we and our subsidiaries 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 our regular business activities. While the ultimate liability with respect to these other litigation matters and claims cannot be determined at this time, we believe that damages, if any, and other amounts relating to pending matters are not likely to be material to our consolidated financial position or results of operations, except as described above. Reserves have been established for these various matters of litigation, when appropriate, based upon the advice of legal counsel.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of 2002, no matters were submitted to a vote of
our security holders, through the solicitation of proxies or otherwise.
ITEM 5. MARKET FOR CORPORATION'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Until September 20, 2001, our common shares were quoted on the Nasdaq National Market under the symbol "IRWN." Our common shares were approved for listing on the New York Stock Exchange on September 5, 2001, and began trading under the symbol "IFC" on September 21, 2001. The following table sets forth certain information regarding trading in, and cash dividends paid with respect to, the shares of our common stock in each quarter of the two most recent calendar years. The approximate number of shareholders of record on March 10, 2003, was 1,856.
STOCK PRICES AND DIVIDENDS:
PRICE RANGE TOTAL
--------------- QUARTER CASH DIVIDENDS
HIGH LOW END DIVIDENDS FOR YEAR
------ ------ ------- --------- ---------
2001
First quarter................................... $24.88 $19.31 $21.13 $0.065
Second quarter.................................. 25.25 18.69 25.15 0.065
Third quarter................................... 27.70 16.00 20.90 0.065
Fourth quarter.................................. 22.08 14.49 17.00 0.065 $0.26
2002
First quarter................................... $19.15 $14.40 $16.49 $0.0675
Second quarter.................................. 20.66 17.65 20.10 0.0675
Third quarter................................... 20.05 14.50 17.00 0.0675
Fourth quarter.................................. 17.80 13.20 16.50 0.0675 $0.27
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We expect to continue our 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 26, 2003, our Board of Directors approved an increase in the first quarter dividend to $0.07 per share, payable in March 2003. Dividends paid by Irwin Union Bank and Irwin Union Bank, F.S.B. to the Corporation are restricted by banking law.
SALES OF UNREGISTERED SECURITIES:
In 2002, we issued 6,360 shares of common stock pursuant to elections made by six of our outside directors to receive board compensation under the 1999 Outside Director Restricted Stock Compensation Plan in lieu of cash fees. All of these shares were issued in reliance on the private placement exemption from registration provided in Section 4(2) of the Securities Act.
AT OR FOR YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------
2002 2001 2000 1999 1998
----------- ----------- ----------- ----------- -----------
(IN THOUSANDS EXCEPT PER SHARE DATA)
FOR THE YEAR:
Net revenues................... $ 427,084 $ 400,937 $ 297,507 $ 266,748 $ 272,063
Noninterest expense............ 340,853 326,737 237,976 214,111 221,206
----------- ----------- ----------- ----------- -----------
Income before income taxes..... 86,231 74,200 59,531 52,637 50,857
Provision for income taxes..... 33,398 28,859 23,865 19,481 20,354
Income before cumulative effect
of change in accounting
principle................... 52,833 45,341 35,666 33,156 30,503
Cumulative effect of change in
accounting principle, net of
tax......................... 495 175 -- -- --
----------- ----------- ----------- ----------- -----------
Net income..................... $ 53,328 $ 45,516 $ 35,666 $ 33,156 $ 30,503
=========== =========== =========== =========== ===========
Mortgage loan originations..... $11,411,875 $ 9,225,991 $ 4,091,573 $ 5,876,750 $ 8,944,615
Home equity loan
originations................ 1,067,227 1,149,410 1,225,955 439,507 389,673
COMMON SHARE DATA:
Earnings per share:(1)
Basic....................... $ 1.99 $ 2.15 $ 1.70 $ 1.54 $ 1.40
Diluted..................... 1.89 2.00 1.67 1.51 1.38
Cash dividends per share....... 0.27 0.26 0.24 0.20 0.16
Book value per share........... 12.98 10.81 8.92 7.55 6.70
Dividend payout ratio.......... 14.01% 12.13% 14.13% 12.93% 11.39%
Weighted average
shares -- basic............. 26,829 21,175 20,973 21,530 21,732
Weighted average
shares -- diluted........... 29,675 24,173 21,593 21,886 22,139
Shares outstanding -- end of
period...................... 27,771 21,305 21,026 21,105 21,673
AT YEAR END:
Assets......................... $ 4,884,722 $ 3,446,602 $ 2,425,690 $ 1,682,992 $ 1,948,180
Trading assets................. 157,514 199,071 152,614 59,025 32,148
Loans held for sale............ 1,314,849 502,086 579,788 508,997 936,788
Loans and leases............... 2,815,276 2,137,822 1,234,922 733,424 556,991
Allowance for loan and lease
losses...................... 50,936 22,283 13,129 8,555 9,888
Servicing assets............... 174,935 228,624 130,627 138,500 117,129
Deposits....................... 2,694,344 2,308,962 1,442,589 870,318 1,009,211
Short-term borrowings.......... 993,124 487,963 476,928 473,103 644,861
Long-term and collateralized
debt........................ 421,495 30,000 30,000 30,000 2,839
Trust preferred securities..... 233,000 198,500 153,500 50,000 50,000
Shareholders' equity........... 360,555 231,665 188,870 159,296 145,233
Managed first mortgage
servicing portfolio......... 16,792,669 12,875,532 9,196,513 10,488,112 11,242,470
Managed home equity
portfolio................... 1,830,339 2,064,542 1,625,719 777,934 581,241
SELECTED FINANCIAL RATIOS:
Performance Ratios:
Return on average assets....... 1.33% 1.45% 1.76% 2.01% 1.85%
Return on average equity....... 16.66 21.82 20.83 21.51 22.84
Net interest margin(2)(3)...... 6.02 5.36 5.38 5.03 4.33
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AT OR FOR YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------
2002 2001 2000 1999 1998
----------- ----------- ----------- ----------- -----------
(IN THOUSANDS EXCEPT PER SHARE DATA)
Noninterest income to
revenues(4)................. 54.7% 64.8% 69.9% 75.3% 78.7%
Efficiency ratio(5)............ 72.4 78.1 78.6 79.0 79.6
Loans and leases to
deposits(6)................. 89.9 79.1 85.6 84.3 55.2
Average interest-earning assets
to average interest-bearing
liabilities................. 121.7 117.2 113.5 127.4 121.0
Asset Quality Ratios:
Allowance for loan and lease
losses to:
Total loans and leases...... 1.8% 1.0% 1.1% 1.1% 1.8%
Non-performing loans and
leases.................... 163.6 116.3 181.8 189.9 82.4
Net charge-offs to average
loans and leases............ 0.7 0.7 0.3 0.3 0.3
Net home equity charge-offs to
managed home equity
portfolio................... 2.9 1.6 0.6 0.4 0.4
Non-performing assets to total
assets...................... 0.8 0.7 0.4 0.5 0.8
Non-performing assets to total
loans and leases and other
real estate owned........... 1.3 1.1 0.8 1.1 2.8
Ratio of Earnings to Fixed
Charges:
Including deposit interest..... 1.9x 1.6x 1.6x 1.9x 1.8x
Excluding deposit interest..... 3.0 2.5 2.5 2.5 2.3
Capital Ratios:
Average shareholders' equity to
average assets.............. 8.0% 6.7% 8.5% 9.4% 8.1%
Tier 1 capital ratio........... 9.3 6.8 8.9 11.4 11.6
Tier 1 leverage ratio.......... 9.7 9.4 12.4 12.8 10.5
Total risk-based capital
ratio....................... 13.2 10.8 13.6 13.5 12.3
|
(1) Earnings per share of common stock before cumulative effect of change in accounting principle related to SFAS 142, "Goodwill and Other Intangible Assets," for the year ended December 31, 2002 was $1.97 basic and $1.87 diluted. Earnings per share of common stock before cumulative effect of change in accounting principle related to SFAS 133, "Accounting for Derivative Instruments and Hedging Activities," for the year ended December 31, 2001 was $2.14 basic and $1.99 diluted.
(2) Net interest income divided by average interest-earning assets.
(3) Calculated on a tax-equivalent basis.
(4) Revenues consist of net interest income plus noninterest income.
(5) Noninterest expense divided by net interest income plus noninterest income.
(6) Excludes loans to be sold or securitized.
ABOUT FORWARD-LOOKING STATEMENTS
You should read the following discussion in conjunction with our consolidated financial statements, footnotes, and tables. This discussion and other sections of this report contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and are including this statement for purposes of invoking these safe harbor provisions. Words such as "anticipate," "approximation," "assume," "assumptions," "attempt," "believe," "continue," "continuing," "could," "estimate," "expect," "expectation," "forecast," "future," "intend," "judgment," "likely," "may," "plan," "possibility," "probable," "project," "projections," "seek," "strategy," "resume," "unlikely," "will," "would," and similar expressions are intended to identify forward-looking statements, which may include, among other things:
- statements and assumptions relating to projected growth, earnings, earnings per share, and other financial performance measures as well as management's short-term and long-term performance goals;
- statements relating to the anticipated effects on results of operations or financial condition from recent and expected developments or events;
- statements relating to our business and growth strategies, including potential acquisitions; and
- any other statements, projections or assumptions that are not historical facts.
Forward-looking statements involve known and unknown risks, uncertainties and other important factors that could cause our actual results, performance or achievements, or industry results, to differ materially from our expectations of future results, performance or achievements expressed or implied by these forward-looking statements. In addition, our past results of operations do not necessarily indicate our future results. Actual future results may differ materially from what is projected due to a variety of factors, including, but not limited to, potential changes in interest rates, which may affect consumer demand for our products and the valuation of our servicing portfolio; staffing fluctuations in response to product demand; the relative profitability of our lending operations, including our correspondent mortgage loan originations; management of our servicing portfolios, including short-term swings in valuation of such portfolios due to quarter-end secondary market interest rates, which are inherently volatile; borrowers' refinancing opportunities, which may affect the prepayment assumptions used in our valuation estimates; unanticipated deterioration in the credit quality of our assets; difficulties in delivering products to the secondary market as planned or in securitizing our products as planned; difficulties in expanding our businesses or raising capital and other funding sources as needed; competition from other financial service providers for experienced managers as well as for customers; changes in the value of companies in which we invest; changes in variable compensation plans related to the performance and valuation of lines of business where we tie compensation systems to line-of-business performance; legislative or regulatory changes, including changes in the interpretation of regulatory capital rules; disclosure or consumer lending rules or rules affecting corporate governance; changes in applicable accounting policies or principles or their application to our business; or governmental changes in monetary or fiscal policies. Further, geopolitical uncertainty may negatively impact the financial services industry or cause changes in or exaggerate the effects of the factors described above. We undertake no obligation to update publicly any of these statements in light of future events, except as required in subsequent periodic reports we file with the Securities and Exchange Commission (SEC).
2002 % CHANGE 2001 % CHANGE 2000
------ -------- ------ -------- ------
Net income (millions).......................... $ 53.3 17.2% $ 45.5 27.6% $ 35.7
Basic earnings per share(1).................... 1.99 (7.4) 2.15 26.5 1.70
Diluted earnings per share(1).................. 1.89 (5.5) 2.00 19.8 1.67
Return on average equity....................... 16.66% -- 21.82% -- 20.83%
Return on average assets....................... 1.33 -- 1.45 -- 1.76
|
(1) Earnings per share of common stock before cumulative effect of change in accounting principle related to SFAS 142, "Goodwill and Other Intangible Assets," for the year ended December 31, 2002 was $1.97 basic and $1.87 diluted. Earnings per share of common stock before cumulative effect of change in accounting principle related to SFAS 133, "Accounting for Derivative Instruments and Hedging Activities," for the year ended December 31, 2001 was $2.14 basic and $1.99 diluted.
We recorded net income of $53.3 million for the year ended December 31, 2002, up 17.2% from the $45.5 million for the year ended in 2001. Net income per share (diluted) was $1.89 for the year ended December 31, 2002, down from $2.00 per share in 2001 and up from $1.67 per share in 2000. Return on equity was 16.66% for the year ended December 31, 2002, 21.82% in 2001 and 20.83% in 2000.
Strategy
Our strategy is to maintain a diverse and balanced revenue stream by focusing on niches in financial services where we believe we can optimize the productivity of our capital and where our experience and expertise can provide a competitive advantage. Our operational objectives are premised on simultaneously achieving three goals: creditworthiness, profitability and growth. We believe we must continually balance these goals in order to deliver long-term value to all of our stakeholders. We have developed a four-part business plan to meet these goals:
- Identify underserved niches. We focus on product or market niches in financial services that we believe are underserved and where we believe customers are willing to pay a premium for value-added services. We don't believe it is necessary to be the largest or leading market share company in any of our product lines, but we do believe it is important that we are viewed as a preferred provider in niche segments of those product offerings.
- Hire exceptional management with niche expertise. We enter niches only when we have attracted senior managers who have proven track records in the niche for which they are responsible. Each line of our five lines of business has a separate management team that operates its niche as a separate business unit responsible for performance goals specific to that particular line of business. Our structure allows the senior managers of each line of business to focus their efforts on understanding their customers and meeting the needs of the markets they serve. This structure also promotes accountability among managers of each enterprise. The senior managers at each of our lines of business and at the parent company have significant experience with us and in their respective industries. We attempt to create a mix of short-term and long-term incentives (including, in some instances, minority interests in the line of business) that provide these managers with the incentive to achieve creditworthy, profitable growth over the long term.
- Diversify capital and earnings risk. We diversify our revenues and allocate our capital across complementary lines of business as a key part of our risk management. Our lines of business are cyclical, but when combined in an appropriate mix, we believe they provide sources of diversification and opportunities for growth in a variety of economic conditions. For example, both the origination and servicing of residential mortgage loans are very cyclical businesses, tied to changes in interest rates. We believe our participation in these markets has been profitable over time due to our dedication to participating in both segments of the mortgage banking business, rather than one or the other, which would otherwise leave us more susceptible to swings in interest rates.
We believe our historical growth and profitability is the result of our endeavors to pursue complementary consumer and commercial lending niches through our bank holding company structure, our experienced management, our diverse product and geographic markets, and our willingness and ability to align the compensation structure of each of our lines of business with the interests of our stakeholders. Through various economic environments and cycles, we have had a relatively stable revenue and earnings stream on a consolidated basis generated primarily through internal growth rather than acquisitions.
CONSOLIDATED INCOME STATEMENT ANALYSIS
Net Income
We recorded net income of $53.3 million for the year ended December 31, 2002, up 17.2% from net income of $45.5 million for the year ended December 31, 2001, and compared to $35.7 million in 2000. Net income per share (diluted) was $1.89 for the year ended December 31, 2002, down from $2.00 per share in 2001 and up from $1.67 per share in 2000. Return on equity was 16.66% for the year ended December 31, 2002, 21.82% in 2001 and 20.83% in 2000. The effective income tax rate for 2002 was 39%, compared to 39% and 40% in 2001 and 2000, respectively. Net income per share reflects dilution from our February 2002 common stock offering.
Net interest income for the year ended December 31, 2002 totaled $213.6 million, up 45.1% from 2001 net interest income of $147.2 million and up 134.1% from 2000. Net interest margin for the year ended December 31, 2002 was 6.02% compared to 5.36% in 2001 and 5.38% in 2000. The improvement in margin from 2001 to 2002 was primarily due to lower rate funding sources. The following tables show our daily average consolidated balance sheet, interest rates and interest differential at the dates indicated:
DECEMBER 31,
--------------------------------------------------------------------------------------------------
2002 2001 2000
-------------------------------- ------------------------------ ------------------------------
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
------------ -------- ------ ---------- -------- ------ ---------- -------- ------
(DOLLARS IN THOUSANDS)
ASSETS
Interest-earning
assets:
Interest-bearing
deposits with
banks.............. $ 25,859 $ 311 1.20% $ 64,290 $ 2,230 3.47% $ 31,654 $ 1,522 4.81%
Federal funds sold... 12,582 104 0.83 17,973 257 1.43 2,265 143 6.31
Trading assets....... 186,947 34,164 18.27 188,166 32,029 17.02 91,334 15,898 17.41
Taxable investment
securities......... 35,479 2,583 7.28 30,523 2,678 8.77 32,068 2,594 8.09
Tax-exempt investment
securities(1)...... 4,444 342 7.70 4,794 374 7.80 4,974 378 7.60
Loans held for
sale............... 668,522 55,336 8.28 911,949 102,383 11.23 578,758 71,141 12.29
Loans and leases, net
of unearned
income(1)(2)....... 2,620,428 218,805 8.35 1,533,261 128,557 8.38 960,848 93,349 9.72
---------- -------- ----- ---------- -------- ----- ---------- -------- -----
Total interest-
earning
assets......... $3,554,261 $311,645 8.77% $2,750,956 $268,508 9.76% $1,701,901 $185,025 10.87%
---------- -------- ----- ---------- -------- ----- ---------- -------- -----
Noninterest-earning
assets:
Cash and due from
banks.............. $ 100,259 $ 85,242 $ 47,752
Premises and
equipment, net..... 34,041 32,727 27,412
Other assets......... 354,296 281,904 256,807
Less allowance for
loan and lease
losses............. (37,054) (15,587) (10,892)
---------- ---------- ----------
Total assets..... $4,005,803 $3,135,242 $2,022,980
========== ========== ==========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest-bearing
liabilities:
Money market
checking........... $ 132,351 $ 664 0.50% $ 105,564 $ 1,283 1.22% $ 96,028 $ 1,334 1.39%
Money market
savings............ 648,706 10,253 1.58 388,432 13,209 3.40 6,428 201 3.13
Regular savings...... 58,204 1,586 2.72 52,650 1,996 3.79 207,823 10,665 5.13
Time deposits........ 1,027,045 41,858 4.08 1,015,105 56,852 5.60 629,179 40,620 6.46
Short-term
borrowings......... 600,821 15,003 2.50 594,831 29,656 4.99 465,353 31,528 6.78
Long-term and
collateralized
debt............... 247,113 8,631 3.49 25,517 2,320 9.09 29,629 3,430 11.58
Trust preferred
securities
distribution....... 205,400 19,800 9.64 165,500 15,767 9.53 64,885 5,761 8.88
---------- -------- ----- ---------- -------- ----- ---------- -------- -----
Total interest-
bearing
liabilities.... $2,919,640 $ 97,795 3.35% $2,347,599 $121,083 5.16% $1,499,325 $ 93,539 6.24%
---------- -------- ----- ---------- -------- ----- ---------- -------- -----
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DECEMBER 31,
--------------------------------------------------------------------------------------------------
2002 2001 2000
-------------------------------- ------------------------------ ------------------------------
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
------------ -------- ------ ---------- -------- ------ ---------- -------- ------
(DOLLARS IN THOUSANDS)
Noninterest-bearing
liabilities:
Demand deposits...... $ 577,409 $ 419,512 $ 260,348
Other liabilities.... 188,738 159,553 92,111
Shareholders' equity... 320,016 208,578 171,196
---------- ---------- ----------
Total liabilities
and
shareholders'
equity......... $4,005,803 $3,135,242 $2,022,980
========== ========== ==========
Net interest
income............. $213,850 $147,425 $ 91,486
======== ======== ========
Net interest income
to average
interest-earning
assets............. 6.02% 5.36% 5.38%
===== ===== =====
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(1) Interest is reported on a fully taxable equivalent basis using a federal income tax rate of 35%.
(2) For purposes of these computations, nonaccrual loans are included in daily average loan amounts outstanding.
The following table sets forth, for the periods indicated, a summary of the changes in interest earned and interest paid resulting from changes in volume and rates for the major components of interest-earning assets and interest-bearing liabilities on a fully taxable equivalent basis:
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------
2002 OVER 2001 2001 OVER 2000
-------------------------------- -------------------------------
VOLUME RATE TOTAL VOLUME RATE TOTAL
-------- -------- -------- -------- -------- -------
(IN THOUSANDS)
INTEREST INCOME
Loans and leases........ $ 91,154 $ (906) $ 90,248 $ 55,611 $(20,403) $35,208
Mortgage loans held for
sale................. (27,329) (19,718) (47,047) 40,956 (9,714) 31,242
Taxable investment
securities........... 435 (530) (95) (125) 209 84
Tax-exempt securities... (27) (5) (32) (14) 10 (4)
Trading assets.......... (207) 2,342 2,135 16,855 (724) 16,131
Interest-bearing
deposits with
financial
institutions......... (1,333) (586) (1,919) 1,569 (861) 708
Federal funds sold...... (77) (76) (153) 992 (878) 114
-------- -------- -------- -------- -------- -------
Total................ 62,616 (19,479) 43,137 115,844 (32,361) 83,483
-------- -------- -------- -------- -------- -------
INTEREST EXPENSE
Money market checking... 326 (945) (619) 132 (183) (51)
Money market savings.... 8,851 (11,807) (2,956) 11,945 1,063 13,008
Regular savings......... 211 (621) (410) (7,963) (706) (8,669)
Time deposits........... 669 (15,663) (14,994) 24,916 (8,684) 16,232
Short-term borrowings... 299 (14,952) (14,653) 8,772 (10,644) (1,872)
Long-term debt.......... 20,147 (13,836) 6,311 (476) (634) (1,110)
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FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------
2002 OVER 2001 2001 OVER 2000
-------------------------------- -------------------------------
VOLUME RATE TOTAL VOLUME RATE TOTAL
-------- -------- -------- -------- -------- -------
(IN THOUSANDS)
Trust preferred
securities
distribution......... 3,801 232 4,033 8,933 1,073 10,006
-------- -------- -------- -------- -------- -------
Total................ 34,304 (57,592) (23,288) 46,259 (18,715) 27,544
-------- -------- -------- -------- -------- -------
Net interest income..... $ 28,312 $ 38,113 $ 66,425 $ 69,585 $(13,646) $55,939
======== ======== ======== ======== ======== =======
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The variance not due solely to rate or volume has been allocated on the basis of the absolute relationship between volume and rate variances.
Provision for Loan and Lease Losses
The consolidated provision for loan and lease losses for the year 2002 was $44.0 million, compared to $17.5 million and $5.4 million in 2001 and 2000, respectively. More information on this subject is contained in the section on credit risk.
Noninterest Income
Noninterest income during the year 2002 totaled $257.4 million, compared to $271.2 million for 2001 and $211.6 million in 2000. The decrease in 2002 versus 2001 was primarily a result of decreased gain from sale of loans at the home equity lending line of business related to the transition away from securitization structures accounted for using gain-on-sale accounting treatment under SFAS 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." Also contributing to the decrease is the higher amortization and impairment expense related to mortgage servicing rights as a result of declining interest rates.
Noninterest Expense
Noninterest expenses for the year ended December 31, 2002 totaled $340.9 million, compared to $326.7 million and $238.0 million in 2001 and 2000, respectively. The increase in consolidated other expense in 2002 and 2001 is primarily related to our mortgage banking line of business.
CONSOLIDATED BALANCE SHEET ANALYSIS
Total assets at December 31, 2002 were $4.9 billion, up 41.7% from December 31, 2001. However, we believe that 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 for 2002 were $4.0 billion up 27.8% from December 31, 2001, and up 98.0% from December 31, 2000. The growth in the consolidated balance sheet reflects increases in portfolio loans and leases at the commercial banking, home equity lending and commercial finance lines of business. Also, there was significant growth in loans held for sale at the mortgage banking line of business at December 31, 2002.
Loans
Our commercial loans are extended primarily to Midwest and Rocky Mountain regional businesses and our leases are originated throughout the United States and Canada. We also extend credit to consumers nationally through mortgages, 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. As of December 31, 2001, $342.6 million of loans held for sale at the home equity lending line of business were reclassified to loans held for investment. These loans are included in the real estate mortgage category in the tables below. This reclassification was the result of a management decision during 2001 to eliminate securitization structures that require gain on sale accounting treatment under SFAS No. 140. Loans by major category for the periods presented were as follows:
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
2002 2001 2000 1999 1998
---------- ---------- ---------- -------- --------
(IN THOUSANDS)
Commercial, financial
and agricultural...... $1,347,962 $1,055,307 $ 677,066 $443,985 $278,834
Real estate
construction.......... 314,851 287,228 220,485 121,803 97,253
Real estate mortgage.... 777,865 490,186 122,301 115,265 123,980
Consumer................ 27,857 38,489 56,785 48,936 51,730
Direct lease financing:
Domestic.............. 291,711 232,527 116,867 3,890 6,375
Canadian.............. 133,784 91,816 72,864 -- --
Unearned income:
Domestic.............. (59,287) (44,183) (21,570) (455) (1,181)
Canadian.............. (19,467) (13,548) (9,876) -- --
---------- ---------- ---------- -------- --------
Total.............. $2,815,276 $2,137,822 $1,234,922 $733,424 $556,991
========== ========== ========== ======== ========
|
The following table shows our contractual maturity distribution of loans at December 31, 2002. Actual principal payments may differ depending on customer prepayments:
AFTER ONE
WITHIN BUT WITHIN AFTER FIVE
ONE YEAR FIVE YEARS YEARS TOTAL
-------- ---------- ---------- ----------
(IN THOUSANDS)
Commercial, financial and
agricultural...................... $394,945 $564,015 $ 389,002 $1,347,962
Real estate construction............ 220,793 65,382 28,676 314,851
Real estate mortgage................ 15,670 35,676 726,519 777,865
Consumer loans...................... 2,519 17,119 8,219 27,857
Direct lease financing:
Domestic.......................... 10,829 168,842 112,040 291,711
Canadian.......................... 4,481 117,516 11,787 133,784
-------- -------- ---------- ----------
Total.......................... $649,237 $968,550 $1,276,243 $2,894,030
======== ======== ========== ==========
Loans due after one year with:
Fixed interest rates.............. 888,710
Variable interest rates........... 1,356,083
----------
Total.......................... $2,244,793
==========
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Investment Securities
The following table shows the composition of our investment securities at the dates indicated:
DECEMBER 31,
-----------------------------
2002 2001 2000
------- ------- -------
(IN THOUSANDS)
U.S. Treasury and government obligations.............. $60,868 $29,329 $25,999
Obligations of states and political subdivisions...... 4,210 4,425 4,586
Mortgage-backed securities............................ 1,738 4,224 5,152
Other................................................. 1,132 818 1,358
------- ------- -------
Total............................................... $67,948 $38,796 $37,095
======= ======= =======
|
The following table shows maturity distribution of our investment securities at December 31, 2002:
AFTER ONE
WITHIN ONE BUT WITHIN FIVE TO AFTER TEN
YEAR FIVE YEARS TEN YEARS YEARS TOTAL
---------- ---------- --------- --------- -------
(DOLLARS IN THOUSANDS)
U.S. Treasury and government
obligations................ $14,992 $ -- $ -- $45,876 $60,868
Obligations of states and
political subdivisions..... 335 890 1,305 1,680 4,210
Mortgage-backed securities... 297 866 566 9 1,738
Other........................ 1,132 -- -- -- 1,132
------- ------ ------ ------- -------
Total................... $16,756 $1,756 $1,871 $47,565 $67,948
======= ====== ====== ======= =======
Weighted average yield:
Held-to-maturity........... 1.49% 8.57% 8.88% 9.57%
Available-for-sale......... -- 5.50% -- --
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Average yield represents the weighted average yield to maturity computed based on average historical cost balances. The yield information on available-for-sale securities does not give effect to changes in fair value that are reflected as a component of shareholders' equity. The yield on state and municipal obligations has been calculated on a fully taxable equivalent basis, assuming a 35% tax rate. 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.
Deposits
Total deposits as of December 31, 2002 averaged $2.4 billion compared to average deposits in 2001 of $2.0 billion, and average deposits in 2000 of $1.2 billion. Demand deposits at December 31, 2002 averaged $577.4 million, a 37.6% increase over the December 31, 2001 balance. Demand deposits in 2001 were up 61.1% on average, or $159.2 million, from 2000. A significant portion of demand deposits is related to deposits at Irwin Union Bank and Trust, which are associated with escrow accounts held on loans in the servicing portfolio at the mortgage banking line of business. During 2002, these escrow accounts averaged $409.4 million compared to a 2001 average of $294.8 million, and a 2000 average of $175.8 million. Irwin Union Bank and Trust utilizes institutional broker-sourced deposits as funding from time to time to supplement deposits solicited through branches and other wholesale funding sources. At December 31, 2002, institutional broker-sourced deposits totaled $337.4 million compared to a balance of $577.3 million at December 31, 2001. The decline in brokered deposits in 2002 reflects our reduced reliance on these higher-rate funding sources.
The following table shows maturities of certificates of deposit of $100,000 or more, and brokered deposits and core deposits at the dates indicated:
DECEMBER 31,
------------------------------------
2002 2001 2000
---------- ---------- --------
(IN THOUSANDS)
Under 3 months.................................. $ 241,722 $ 335,420 $133,804
3 to 6 months................................... 116,119 151,924 164,904
6 to 12 months.................................. 63,742 260,184 120,476
After 12 months................................. 280,287 138,059 243,860
---------- ---------- --------
Total CDs..................................... $ 701,870 $ 885,587 $663,044
========== ========== ========
Brokered deposits............................... $ 337,431 $ 577,297 $494,316
========== ========== ========
Core Deposits................................... $1,516,812 $1,135,870 $688,110
========== ========== ========
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SHORT-TERM BORROWINGS
Short-term borrowings during 2002 averaged $600.8 million compared to an average of $594.8 million in 2001, and $465.4 million in 2000. The increase in 2001 relates to the growth at the home equity lending line of business and the increased production at the mortgage banking line of business. In 2002, average short-term borrowings rose slightly as a result of increased production at the mortgage line of business that was partially offset by whole loan sales and securitized borrowings at the home equity lending line of business. The securitized borrowings are treated as long-term debt on our balance sheet.
The following table shows the distribution of our short-term borrowings and the weighted average rates at the dates shown. Also provided are the maximum amount of borrowings and the average amounts of borrowings as well as weighted average interest rates.
2002 2001 2000
---------------- ---------------- ----------------
AMOUNT RATE AMOUNT RATE AMOUNT RATE
-------- ---- -------- ---- -------- ----
(DOLLARS IN THOUSANDS)
Lines of Credit and other Borrowings:
At December 31..................... $221,302 2.36% $ 75,483 2.95% $226,599 7.19%
Weighted average during the year... 133,382 2.95 130,901 5.30 227,564 6.95
Maximum month-end balance during
the year........................ 333,927 335,223 293,100
Federal Home Loan Bank Borrowings:
At December 31..................... $527,000 1.49% $212,000 2.15% $153,000 6.27%
Weighted average during the year... 238,629 1.95 205,657 4.07 130,037 6.51
Maximum month-end balance during
the year........................ 692,000 409,000 230,000
Federal Funds:
At December 31..................... $ 30,000 1.99% $ 35,200 3.40% $ 20,000 6.32%
Weighted average during the year... 38,885 2.31 25,462 3.86 18,938 6.95
Maximum month-end balance during
the year........................ 56,000 46,400 20,000
Drafts Payable Related to Mortgage
Loan Closings:
At December 31..................... $200,701 n/a $154,157 n/a $ 64,557 n/a
Weighted average during the year... 173,708 n/a 216,442 n/a 68,028 n/a
Maximum month-end balance during
the year........................ 258,911 497,655 95,094
Commercial Paper:
At December 31..................... $ 14,121 1.59% $ 11,123 2.59% $ 11,346 6.85%
Weighted average during the year... 16,217 2.00 17,609 4.65 20,786 6.60
Maximum month-end balance during
the year........................ 18,972 27,965 31,774
|
LONG-TERM DEBT AND COLLATERALIZED BORROWINGS
Long-term debt totaled $30.1 million at December 31, 2002 compared to $30.0 million at December 31, 2001. Collateralized borrowings totaled $391.4 million at December 31, 2002 relating to the change we made in 2002 at the home equity lending line of business away from securitization structures requiring gain-on-sale accounting. The new securitization structures result in loans remaining as assets and collateralized borrowings being recorded as long-term debt on the balance sheet. This securitization debt represents match-term funding for our home equity loans.
Shareholders' equity averaged $320.0 million during 2002, up 53.4% compared to 2001, and up 86.9% from 2000. Shareholders' equity balance of $360.6 million at December 31, 2002 represented $12.98 per common share, compared to $10.81 per common share at December 31, 2001, and compared to $8.92 per common share at year-end 2000. We paid an aggregate of $7.5 million in dividends during 2002, compared to $5.5 million during 2001 and $5.0 million during 2000.
The following table sets forth our capital and capital ratios at the dates indicated:
DECEMBER 31,
--------------------------------------
2002 2001 2000
---------- ---------- ----------
(IN THOUSANDS)
Tier 1 capital................................. $ 462,064 $ 295,021 $ 250,825
Tier 2 capital................................. 196,092 173,316 133,319
---------- ---------- ----------
Total risk-based capital.................. $ 658,156 $ 468,337 $ 384,144
========== ========== ==========
Risk-weighted assets........................... $4,996,891 $4,329,973 $2,979,376
Risk-based ratios:
Tier 1 capital............................... 9.2% 6.8% 8.4%
Total capital............................. 13.2 10.8 12.9
Tier 1 leverage ratio.......................... 9.7 9.4 12.4
Ending shareholders' equity to assets.......... 7.4 6.7 7.8
Average shareholders' equity to assets......... 8.0 6.7 8.5
|
At December 31, 2002, our total risk-adjusted capital ratio was 13.2% compared to the 10.0% required to be considered "well-capitalized" by the regulators and our internal minimum target of 11.0%. At year-end 2001, our total risk-adjusted capital ratio was 10.8%. We were below the 11.0% target at year-end 2001, just prior to our issuance of common stock in early 2002. Our ending equity to assets ratio at December 31, 2002 was 7.4% compared to 6.7% at December 31, 2001. However, as previously discussed, temporary conditions that existed at year end make the average balance sheet ratio a more accurate measure of capital. Our average equity to assets for the y